MBA, CIMTM, Fin. Pl.
Investment Specialist, Products Knowledge
Portfolios in motion
In previous articles, we discussed the benefits of an investment portfolio that is actively managed. However, as an investor, it can be difficult for you to assess the full extent of the moves that are made in your portfolio.
What is going on under the surface?
Make no mistake: just like a duck that glides gracefully over a pond but whose legs “pedal” madly under the water to be able to move forward, a portfolio whose performance is superior to that of other funds in the same category takes advantage of a multitude of frequent adjustments, made by informed managers who know the markets very well.
Today we invite you to dive with us to find out what actions have been taken under the surface of our investment products since the start of 2020.
Bonds that exceed expectations
Let’s begin our overview with Canadian bonds. The fixed-income component of your investment portfolio is often taken for granted because it is more predictable and less subject to market turbulence. Or at least that’s what people think. However, our FDP Canadian Bond Portfolio currently has a year-to-date return as at October 1, 2020 of 8.01%. In fact, this is our best performing fund since January 1, 2020! Much of the credit for this performance goes to our manager, whose experience and skills have lifted the fund to the 36th percentile in its category.
Changes in our bond holdings
- If we look at the composition of the fund in terms of so-called governments, we notice that the percentage of federal bonds has been gradually reduced by almost half, to make way for provincial and municipal bonds which offer a more attractive coupon rate.
- As for corporate bonds, which make up nearly 45% of the portfolio, our manager has changed the sector composition. At the start of 2020, financial sector issues made up about 20% of the total portfolio; that weighting is now around 25%. The reason is that the Canadian banking system is one of the best in the world and it would be very surprising if there were any defaults in this sector. On the other hand, the weightings of the real estate and energy sectors have been reduced considerably since the beginning of the year.
Changes in our equity holdings
As for stocks, let’s now look at the moves that have occurred in our FDP Canadian Equity Portfolio, which is offered in both our Series A mutual funds and in our Private Management.
- Exposure to energy sector issues has been reduced by 50%.
- Unlike bonds, the weighting of financial sector stocks has been reduced relative to their weighting in the Canadian S&P/TSX Index. The financial sector is struggling to make a comeback at the moment. Our managers therefore increased the fund’s underweighting of this sector.
- The technology sector is definitely the one everyone has been talking about for months. Our fund started the year with a weighting of 7.71% in this sector, an overweight position compared to the S&P/ TSX Index, where its weighting was 5.66% at the time. Our managers have maintained this overweighting throughout the year, going so far as to hold 3.14% more than the index in this sector.
- Other sectors experienced two-fold moves. For example, industrial stocks were reduced in the Portfolio at the height of the crisis but were added when our managers observed the rapid improvement in the sector. Our Canadian equity fund is currently overweight industrials.
Like a duck on a pond
The FDP Canadian Equity Portfolio comprises approximately 130 different stocks. In March alone, no fewer than 18 issues were removed from the portfolio and replaced by 11 others, as well as cash. The purpose of these numerous trades was to protect investors’ capital in a very unstable period.
In April, our managers positioned the portfolio to take advantage of the economic recovery. They traded (additions or sales of complete positions) 34 different stocks, or more than 25% of the portfolio, in addition to redeploying the cash that had been accumulated the previous month. All of this activity is only a tiny fraction of the total moves made by our managers in our Canadian equity fund. Their vigilance and their proactivity have enabled us to outperform 94% of our competitors in this category. The fund’s year-to-date return as at October 1 is 1.67%, versus -6.62% for the median in this fund category.
A matter of balance
As for our FDP Balanced Portfolios or our Private Management portfolios, the trades are multiplied by the number of funds or private portfolios that compose them. In Private Management, our investment team also makes other types of trades, for example, within the asset allocation.
- In our Income and Dynamic approaches in Private Management, the weighting of Canadian equities was reduced by 5% in early February 2020, before the crisis hit. In May, the economic outlook following the first wave prompted us to strategically reduce Canadian equities by another 5% in the Income approach.
- We also made an adjustment in the global equity funds in our Growth and Income approaches. These moves aim to take advantage of the superior performance of growth stocks in today’s markets.
Active management externally too
- As for the external managers of our funds, we hold quarterly video conferences with each of them. In discussions over the first three quarters of 2020, we noted a general increase in the fund turnover rate. This level of activity tells us that our managers repositioned the portfolios during the crisis and took advantage of the investment opportunities that arose in a context of highly volatile markets.
- We also terminated the mandate of some of our managers. We replaced one of the three managers of the FDP Canadian Dividend Equity Portfolio because its approach no longer aligned with our strategy. As this fund currently ranks near the first quartile in its category, this proactive decision was aimed at maintaining high quality standards.
Back to the surface
Obviously, we neither want to, nor can we, mention all the trades made in each of our funds and portfolios. However, with this overview of some of the moves of the past few months, you can see that behind the results appearing on your statement of account is constant proactivity on the part of our internal and external managers. This ability to anticipate and react quickly has one goal: to generate superior results for our investors and to protect your investment portfolio.
If this article raises any questions, feel free to contact your advisor, who is always your key contact for all matters relating to the management of your investments and your financial plan.
Stéphane Girard, MBA, CIMTM,Fin.Pl.
Investment Specialist, Products Knowledge
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.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns net of fees and expenses payable by the fund including changes in security value and reinvestment of all dividends/distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
The Morningstar Risk Adjusted Return (MRARs), commonly referred to as the Star Rating, relate the risk-adjusted performance of a fund to its peers with the same CIFSC (Canadian Investment Fund Standards Committee) Fund category for the period ended as noted and are subject to change monthly. The ratings are an objective, quantitative measure of a fund’s historical risk-adjusted performance relative to other funds in its category. Only funds with at least a three-year track record are considered. The overall star rating for a fund is a weighted combination calculated from a fund’s 3-, 5- and 10-year returns, as available, measured against the 91-day treasury bill and peer group returns. A fund can only be rated if there are a sufficient number of funds in its peer group to allow comparison for at least three years. To determine a fund’s rating, the fund and its peer are ranked by their MRARs. If a fund scores in the top 10% of its category, it receives five stars (High); if it falls in the next 22.5% , it receives four stars (Above Average); the next 35% earns a fund three stars(Neutral or Average); those in the next 22.5% received two stars (Below Average); and the lowest 10% received one star (Low). For greater detail, see morningstar.ca.
For the period ended on October 1, 2020, the returns of the FDP Canadian Bond Portfolio (Series A) are as follows: 8.01% (1 year – 524 funds), 5.49% (3 years – 451 funds), 3.69% (5 years – 344 funds), 3.45% (10 years – 161 funds) and 7.51% (since inception – March 31, 1978).
For the period ended on October 1, 2020, the returns of the FDP Canadian Equity Portfolio (Series A) are as follows: 1.67% (1 year – 680 funds), 5.58% (3 years – 591 funds), 6.74% (5 years – 415 funds), 6.34% (10 years – 220 funds) and 7.46% (since inception – December 31, 1987).
© 2020 Morningstar Research Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is not a guarantee of future results. Source: Morningstar Direct and Professionals’ Financial, as at October 1, 2020.