MBA, CIMTM, Fin. Pl.
Product Manager, Professional Practice
Equal or not?
In investment, the search for superior returns is an ongoing quest. The different sectors that can generate such returns are subject to economic and political events, and to changes in the industry itself. Depending on the circumstances, some sectors may emerge as leaders and steal the spotlight in terms of returns, monopolizing the attention of investors.
An unpredictable year
We’re already almost in mid-September and the first eight months of 2020 have admittedly been turbulent! As far as the stock market is concerned, the year got off to a strong start, followed by a staggering drop in the U.S. market of close to 34% in the space of just 33 days, from February 19 to March 23.
A pivotal date, March 23, 2020 marked the start of a “V” rally, which saw an impressive rise of 49.3% for the S&P/TSX Canadian stock index, 56.8% for the S&P 500 Index (United States) in U.S. dollars and 70.5% for the technology-heavy NASDAQ Index, again in U.S. dollars.
It should be noted, however, that this rally was very binary, with some sectors doing very well, while others are still lagging behind. For their part, the “magnificent five” benefited from the situation, turning in an eye-popping performance!
The five winning companies are known by the acronym FAAMG, which stands for the Web giants Facebook, Amazon, Apple, Microsoft and Google. Netflix is also often included in this elite group.
The stocks of these companies were the key drivers of the rally. Since the market bottom of March 23, they have generated respective returns of 131.6% (Apple), 98.0% (Facebook), 54.6% (Google), 81.4% (Amazon) and 66.7% (Microsoft). At the end of August, they alone represented 25.9% of the total market cap of the S&P 500.
Taking advantage of the momentum
It would be quite natural to ask yourself the following questions:
- Has my portfolio benefited from this upsurge?
- Is there still time to invest in these companies or sectors?
The answer to the first question is: absolutely. Our investment team has been very active during this period. Many of our products have been adjusted to allow for greater exposure of the portfolios to the U.S. market and, more specifically, to the NASDAQ. Judging by the year-to-date performance of our funds, the asset allocation decisions of our investment team were very sound. In fact, 10 of our 11 Series A mutual funds are outperforming the median of their respective category.
As for the second question, let’s say caution is in order. The last few days have been particularly difficult for the FAAMG stocks. In fact, between September 2 and 8, these issues fell by 14.1% (Apple), 10.4% (Facebook), 11.28% (Google), 10.81% (Amazon) and 12.51% (Microsoft). The NASDAQ lost 8.7% during this period.
Reacting at the right time
Is what we are witnessing here just a temporary correction, or is this the start of a sector or style rotation in investing? In any case, our managers reacted by putting in place a strategy to crystallize the gains generated, combined with a reinvestment plan to take advantage of a possible rebound in these stocks. They also reduced the portfolios’ exposure to Canadian equities, which are less technology-heavy, in favour of increased exposure to global equities, which are more so, in particular because of their large U.S. equity component.
We should point out that our various FDP Portfolios include technology issues in proportion to their benchmark index. Their weighting may vary according to the benchmark index established in the investment policy, for example the MSCI World Growth, MSCI World Value, or MSCI World Small Cap. Note, however, that the dividend income funds will favour technology stocks that pay dividends, which is not the case for all the FAAMG stocks.
Note as well that the construction of your portfolio, established when setting up your investment policy, will determine its level of exposure to the technology sector.
Yesterday and today
One thing is certain: in the long run, diversification will always be the best option, because yesterday’s winners may not be tomorrow’s. Could you name the five companies considered the most important in the S&P 500 Index ten years ago? They were, in order, Exxon Mobil, Walmart, Procter & Gamble, Microsoft and Johnson & Johnson, which at the time totalled about 16% of the market capitalization of this 500-company index. It just goes to show that no one can predict the future, but a good investment policy stands the test of cycles and of time!
Have questions about your investment portfolio? Talk to your advisor: he is available and ready to share his financial intelligence with you!
Stéphane Girard, MBA, CIM®, Fin. Pl.
Product Manager, Professional Practice
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.