A Good Year Despite Fears

Given the current environment, we’re expecting Q4 to be a bumpy ride and have adjusted equity weightings to support positive performance.

01.29.2020 - Scott Guitard, Vice President, Portfolio Manager

Global equities ended 2019 on a high note as fears of slowing economic growth worldwide moderated. Such being the case, global bond yields rose (prices fell) on the assumption that central banks may not need to loosen their policies as aggressively in the near term. Although we are not expecting a repeat of double-digit global equity returns, we remain cautiously optimistic moving into 2020.

Money Market/Cash Equivalents

The Bank of Canada held the policy rate steady in Q4, opting to focus on economic bright spots. Conversely, the US Federal Reserve (the Fed) cut its policy rate once again by 0.25%.[1] We reduced our tactical cash overweight to take advantage of higher bond yields. Given the Q4 strength of global equities, our remaining cash position—slightly overweight to the portfolio’s benchmark—weighed on performance.

Fixed Income

Bucking 2019’s trend, global bond yields rose in Q4 as recession concerns dwindled and geopolitical risks were overlooked. Investors were relieved as the spread between short-term bonds and long-term bonds climbed, moving further away from the dreaded “inverted yield curve.” The portfolio’s lower duration (with less sensitivity to interest rate changes), overweight allocation to Canadian investment grade corporate bonds, and International bond allocation added relative value in Q4.


Our modest underweight to this asset class hurt relative performance as equities significantly outpaced fixed income and cash during the fourth quarter. Within equity holdings, we added value by being underweight Canadian stocks. Our equities allocation remained constant in Q4 as we are comfortable with our conservative tilt heading into the early months of 2020.

Fixed Income Sectors
Canadian Investment Grade Corporate Bonds

Our bias to Canadian investment grade corporate bonds added value throughout 2019. The portfolio’s overweight to Energy sector bonds, as well as security selection within the sector, lifted Q4 performance. While we reallocated some profits from our corporate investment grade bond exposure, we remain dedicated to our structural overweight in this component.

Government Bonds

Long-term government bond yields moved lower in Q3. We believe bond yields will trade in a tighter range for the remainder of 2019, as we don’t see the Bank of Canada adjusting the policy rate in the near term. Longer-term Government bond yields inched higher in Q4. We think Canadian government bond yields will continue trading in a tight range, with a bias to moving lower if there are any setbacks in economic data over the next few quarters.

Global Bonds 

In Q4, the Templeton Global Bond Fund was the strongest performing strategy in the fixed income component on a relative and absolute basis. Argentinian and Brazilian bonds recuperated some losses from the previous quarter, boosting revenues. The strategy continues to demonstrate diversification benefits for the portfolio, with low correlations to Canadian bonds and global equities.

Equity Markets

Canadian Equities

On an absolute return basis, it was another strong quarter for Canadian equities, aided by higher commodity prices. Our holdings, however, slightly underperformed the S&P/TSX Composite Index. The overweight to Consumer Staples and underweight to Materials were the largest detractors. We remain cautious about Canada’s economy, and paired with the recent run-up in equity prices, we believe a modest underweight remains warranted.

US Equities

US equities hit new all-time highs in Q4 as the United States and China signalled progress in trade negotiations and the Fed cut its policy rate. Meanwhile, flat economic data was viewed as a win, given built-up recession fears. The portfolio’s underweight to Information Technology stocks weighed heavily on relative performance, as investors plowed back into growth stocks after a single-quarter pause. We remain committed to our value bias with the style trading at all-time discounts to growth and momentum.

International Equities

Stronger eurozone economic data pushed European stocks higher in Q4. Emerging market equities outperformed due to optimism relating to US-China trade talks. Easing trade tensions particularly benefited Eastern Asia (i.e., China, South Korea), which is a region where the portfolio is overweight, thus leading to relative outperformance. We remain neutral on International equities, balancing attractive relative valuations against geopolitical and economic uncertainty.

Asset Allocation Process

Asset allocation decisions result from ongoing discussions within our Private Client Investment Strategy Committee. We begin by making strategic investment decisions against an internal benchmark—for example, the Balanced Growth Benchmark Portfolio—that’s based on a neutral asset mix and stable market conditions.[2] The difference between our investment strategy and the benchmark portfolio reflects our active commitment to effectively managing risk and generating superior long-term returns. In updating our investment strategy, we review our investment portfolio and benchmark and complete any required trades.






1. Board of Governors of the Federal Reserve System, “Open Market Operations,” November 20, 2019,

2. The Balanced Growth Benchmark Portfolio is comprised of 40% fixed income assets and 60% equity assets.


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