Tested, Now Moving On

Investors are all too aware of Q1 volatility, and you’re right to be sensing it was a record-setting period on various fronts.

04.24.2020 - Scott Guitard, Vice President, Portfolio Manager

Tested, Now Moving On

By Scott Guitard,

Investors are all too aware of Q1 volatility, and you’re right to be sensing it was a record-setting period on various fronts. For instance, government bond yields in North America hit all-time lows, equity markets moved into bear market territory in record time, and unparalleled monetary and fiscal stimulus programs were introduced. We expect things to remain rocky in Q2 as we navigate through COVID-19 uncertainty. Here’s our view through the rear-view mirror and how we’re planning to move ahead.

Money Market/Cash Equivalents

In Q1, the Bank of Canada and US Federal Reserve cut policy rates twice in an effort to get ahead of looming economic turbulence. Our overweight in cash helped relative performance. Late in the period, we used cash to purchase equities pummelled as a result of the pandemic. We enter Q2 slightly above neutral on cash; however, we may draw on cash again to opportunistically purchase equities.

Fixed Income

The portfolio’s lower duration (i.e., less sensitivity to interest rate changes) and overweight allocation to Canadian investment grade corporate bonds, weighed on relative value in Q1. Conversely, the portfolio’s exposure to the Templeton Global Bond Fund bolstered relative performance during the period.


Our underweight in equities boosted relative performance as this asset class significantly underperformed fixed income and cash during Q1. We didn’t predict a global pandemic. However, we have recognized for some time that—given the slowing economic growth backdrop and somewhat stretched valuations—it would take little to spark a pullback. While we added to equities in Q1, due to this asset class’s underperformance, we’re maintaining our underweight position. We’ll be patient, carefully moving back to neutral or beyond.

Fixed Income Sectors

Canadian Investment Grade Corporate Bonds

Canadian investment corporate grade bonds weighed on Q1 performance. During most of the sell-down, credit markets faced a lack of liquidity, making it tough to find buyers. The portfolio’s overweight to Energy sector bonds also detracted from performance. We believe spreads will improve along with liquidity in coming quarters.

Government Bonds
Federally issued long-term bonds were the biggest benefactors of recent central bank rate cuts and the Q1 rush to safety. We were underweight in this component going into the downturn, which hurt relative performance. However, the current environment has strengthened our conviction in the underweight position. We don’t foresee much value in these bonds over the long term at today’s yield levels. For now, we’ll hold some as a hedge against further equity weakness.

Global Bonds

In Q1, the Templeton Global Bond Fund was the strongest performing strategy in the fixed income component on a relative and absolute basis. The US dollar’s strong appreciation relative to the Canadian dollar was the biggest driver.

Equity Markets

Canadian Equities

Our underweight allocation to Canadian stocks added value to portfolio performance in Q1. In addition, our underlying Canadian portfolio manager’s defensive positioning and overweight in Consumer Staples led to positive relative performance versus the S&P/TSX Composite Index. We remain committed to our underweight position in Canadian equities, as a recovery will be more difficult for a resources-based economy.

US Equities

On an absolute return basis, US equities were the best performing component. The underlying portfolio manager’s lighter allocation to Information Technology stocks weighed on relative performance. During the lockdown period, demand for such products and services isn’t expected to dip as much as other consumer segments. We remain committed to our value bias with the style trading at all-time discounts to growth and momentum.

International Equities

Security selection within European equities led to underperformance in the International component. The pandemic has dealt the already fragile European economy another blow. Massive monetary and fiscal stimulus programs should help, but we expect Europe’s recovery to take longer. However, we believe valuations generally reflect this and so are neutral on this asset class.

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.1 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 The Balanced Growth Benchmark Portfolio is comprised of40% fixed income assets and 60% equity assets.



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