- Twelve month sectoral results for 2016
- Twelve month sectoral results for 2015
- Twelve month sectoral results for 2014
- Twelve month sectoral results for 2013
- Twelve month sectoral results for 2012
- Twelve month sectoral results to 31-Jan-2011
- 1st Qtr 2010
- 3rd Qtr 2009
- Calendar year 2008
- Calendar year 2007
- Year ending October 31, 2006
- Year ending October 31, 2005
- Sector story in 2004
- A Global Sector Approach To Buying Stocks
- Sector analysis for clients
- Portfolio Diversification (Trendlines: 1986 to 2000)
The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2016 (Annual historical comparatives on sector data can be found on our website). These are price returns, which means they include the price appreciation (or decline) year-over-year, but exclude the dividend income. The Canadian results are reported in our domestic currency. The US S&P returns are reflected in USD rather than our currency, so that the foreign exchange movement does not contaminate a comparison. Global returns of course reflect a myriad of the world’s currencies, which here are consolidated in USD; thus, there is some foreign exchange element to that data. The “whole index” return data result from applying sector weightings to the sector returns. These weightings are different in the three regions. In the small capital market of Canada, the breadth (number) of players in a particular sector can be quite thin. Thus, the results of the few can significantly impact that sector’s return. This is particularly true in Canada for consumers, health and tech.
Canada has returned to the limelight, with 17.5% overall. The related energy and materials sectors carried the lion’s share of the TSX index return, recovering from the –20%+ returns last year. Canada’s thinness in technology and health was evident. The US fared well, too. Globally, energy and materials mirrored Canada, though less amplified. All other sector performances largely mirrored across the globe. The global health sector lit up in 2014 and was the only negative-return sector in 2016.
Throughout the year 2016, we were actively monitoring these sectoral movements and chose to realize the appreciations in those leading sectors.
The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2015 (Annual historical comparatives on sector data can be found on our website). These are price returns, which means they include the price appreciation (or decline) year-over-year, but exclude the dividend income. The Canadian results are reported in our domestic currency. The US S&P returns are reflected in USD rather than our currency, so that the foreign exchange movement does not contaminate a comparison. Global returns of course reflect a myriad of the world’s currencies, which here are consolidated in USD; thus, there is some foreign exchange element to that data. The “whole index” return data result from applying sector weightings to the sector returns. These weightings are different in the three regions. In the small capital market of Canada, the breadth (number) of players in a particular sector can be quite thin. Thus, the results of the few can significantly impact that sector’s return. This is particularly true in Canada for consumers, health and tech.
Canada has taken a turn in the negative limelight, with –11.1% overall. All sectors contributed to this negative return, except for technology and consumer staples. Of course, the biggest hits were in energy and related materials. The US fared poorly, too, with fewer lows and lower highs. Only four sectors yielded positive, though moderate, returns: health, tech and both consumers. Globally, energy and materials mirrored Canada. The global positive sectors were the same as the US, and in similar scale.
Throughout the year 2015, we were actively monitoring these sectoral movements and chose to realize the appreciations in those leading sectors.
The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2014 (Annual historical comparatives on sector data can be found on our website). These are “total” returns, which means they include the dividend income and the price appreciation (or decline) year-over-year. The Canadian results are reported in our domestic currency. The US S&P returns are reflected in USD rather than our currency, so that the foreign exchange movement does not contaminate a comparison. Global returns of course reflect a myriad of the world’s currencies, which here are consolidated in USD; thus, there is some foreign exchange element to that data. The “whole index” return data result from applying sector weightings to the sector returns. These weightings are different in the three regions. In the small capital market of Canada, the breadth (number) of players in a particular sector can be quite thin. Thus, the results of the few can significantly impact that sector’s return. This is particularly true in Canada for consum- ers, health and tech.
The North American zone of the US and Canada performed significantly better than the globe. Healthcare, tech and utilities led the way in the US. Those did well in Canada, too, but were trumped by very healthy consumer sectors and industrials. Only two sectors performed poorly in the US-energy and telecom. In Canada, only energy and materials performed poorly.
On the global scene, tech, health and utilities performed well, with all of the other sectors performing either poorly or modestly.
Throughout the year 2014, we were actively monitoring these sectoral movements and chose to realize the appreciations in those leading sectors.
One can see in the sector chart below that almost all sectors provided very healthy global returns, except materials. Similarly, all US equity market sectors had the same experience, except materials also fared well. Energy, telecom and utilities all bounced back from last year. The Canadian whole index was significantly lower than the rest of the world, but it also had strong sectoral results across the board, except in energy, materials and utilities. These three sectors, along with financials, make up a large proportion of the Canadian index and, thus, their under-performance drove the overall Canadian result.
One can see in the sector chart below that almost all sectors provided very healthy global returns, except energy, telecom and utilities.. The US equity market had the same experience, except telecoms fared well and consumer staples not so well. The Canadian equity market also had similar experience, except here, telecoms and healthcare fared very poorly and Canadians favoured staples over discretionary items. Healthcare has finally shown ’healthy’ growth in back-to-back years, except in Canada. Energy experienced a second year of poor world-wide returns. The Financial sector finally turned around across the globe and still pays good dividends.
Overall Positive Sector Returns:
All has been rosy across almost all industrial sectors throughout the world, based on annualized returns to Jan. 31st. Sector returns are relatively consistent across Canada, the US and the globe; however, Canada’s tech and utility sectors did not follow the rest of the world. Canada’s health sector was skewed by its few offerings. We continue to constantly monitor all of our clients’ portfolio sector weightings.
All has been rosy across all industrial sectors throughout the world based on annualized returns as of Jan. 31st. It appears that the sectors with the biggest downturns during the recession had the greatest turnarounds, eg. Consumer Discretionary and Financials. It is inevitable that momentum has to slow down. We continue to constantly monitor all of our clients’ portfolio sector weightings.
Standard & Poor’s Broad Market Global Index: There has been a huge rally since the March lows in global equity sectors. The 12-month total return is now in positive territory for most sectors, with the exception of energy, utilities and financials.
At Trivest, we focus a lot on international industry sector diversification, and we have sophisticated proprietary systems to manage that for every client. The principle here is similar to international geographic diversification, and perhaps even stronger. In the economic cycle, different sectors tend to take their turns in the limelight, as either leading or lagging economic performers. The next leadership position is not “broadcast” in the markets, and thus prudent sectoral diversification should guarantee “being there” when that turn comes. The following chart shows 2008 sectoral returns in Canada, the U.S. and the World for a Canadian investor.
In the global context, the Canadian stock market is quite thin—and heavily tilted to energy, materials and banks. As those sectors go, so largely goes the Canadian stock market. Those sectors enjoyed a run before 2008, thus previously giving Canada its turn in the limelight. Globally, the current downdraft is giving the health and consumer staples sectors their turn in the limelight. Domestically, the health sector is not a strong suit in Canada. The thinness of the Canadian market in many sectors underscores the need to invest internationally (incurring along the way the afore-mentioned currency ride!) in order to diversify well across all of the industry sectors.
At the TD Ameritrade conference, Larry Puglia, lead US Large-Cap portfolio manager for T. Rowe Price Group, a large US investment management firm, pointed out how the poor performance of financials had eroded market values and that the decline in earnings growth was not as severe if you take ‘financials’ out of the mix. Historically, he pointed out, financials tend to under-perform going into a downturn but outperform when the economy bottoms out.
The following table shows the overall global and Canadian indices price returns for the calendar year 2007, along with the individual sector returns. As you can see in the far left column, the global financial sector was a drag for Canadian investment portfolios, given its 10.6% decline, and this was further compounded by the large weighting of the financial sector (around 23%) in the global index. This significantly impacted the foreign equity component of many Canadian portfolios. Likewise, the Canadian financial sector, with a 31% weighting in the Canadian equity component of portfolios, also damaged overall 2007 returns by dropping 3.8%.
Solace was found globally in the healthy returns in almost all other sectors, except health and consumer discretionary. However, the 15.2% depreciation of the US dollar against the loonie in 2007 was the biggest story for Canadian portfolios (see middle column below).
Most Canadian sectors performed respectably, too, with the exception of consumers and health (far right column below).
Despite the positive stimulus of falling interest rates, markets throughout the world continue to grapple with the turmoil in the credit markets. Any positive news on this front has resulted in equity markets edging higher from their January lows, yet most analysts sense another couple of quarters still to come of potentially bad news from large financials. It will be difficult to have a sustained rally until there is a return to sound credit markets. As you can see below, the financial sector is a major chunk of the global stock market and its profitability is an essential ingredient for rising broad market indices for most countries. This is especially true for the Canadian market.
Equity investors throughout the world have been rewarded amply in the last year. The TSX has produced a superior total return of 21.7% (“total return” includes price appreciation plus cash dividends received) for the 12 months ended October 31st, 2006, and the majority of this return was thanks to its heavy 30.8% weighting in the top Canadian performing ‘Financials’ sector. The ‘World Market’, as represented by the S&P/Citigroup Broad Market Index (BMI), also had a sizeable total return of 16.1% (in Canadian dollars) over the same period.
The Canadian and world returns were actually fairly equal pre-currency as the strong Canadian dollar took approx 6% away from international returns. The Broad Market Index is a good ‘sector weighting’ proxy for the global investor, as it covers 26 Developed World Markets’ and 26 Emerging Markets’ countries. It includes all listed shares of companies with available market capitalization of at least the local equivalent of US$100 million. At present there are over 9,000 companies represented in the BMI.
Internationally, both the Developed and Emerging markets posted returns in strong double-digits. All sectors in the BMI enjoyed healthy gains, with exceptionally high returns for the Materials (31.5%) and Utilities (24.9%) sectors.
At this point in time, it is crucially important for Canadian investors to broaden their horizons and think ‘globally’, even though their recent high returns have been reaped primarily from the Canadian marketplace. Having a large portion of their assets invested in Canada may be exposing portfolios to overweight positions in the ‘Financials’, ‘Energy’ and ‘Materials’ sectors, that in combination make up approx. 75% of the TSX Composite Index. What may be lacking in their portfolios are decent weightings in the Health and Information Technology sectors that have lagged other sectors. It is wise to take some profits in sectors that have out-performed and spread the wealth to sectors that align your portfolio more in line with the world sectors’ weightings in the table above. This may require allocating more of the equity component of your portfolio outside of Canada.
The Devil is in the details! While the TSX Composite has ripped a healthy 17.9% total return for the year ending October 31st, the heavy lifting has been done by certain industry sectors, most notably energy, utilities and telecommunications. Meanwhile, the world markets returned 14%, with strong returns in almost every sector.
The energy sector now has had back-to-back big years in Canada. By comparison, among last year’s other big winners (Materials, Financials, Consumer Discretionary and Technology), technology and materials performed poorly. This year’s other big winners (Utilities and Communications) performed dismally last year and the health sector now has had back-to-back poor years.
By international comparison, the Canadian sectors of energy, communications and utilities have soundly outperformed the world, while materials, health and technology have performed very poorly. The returns on Canadian industrials and financials were about at par with the World’s comparable sectors.
The lesson is that sectoral portfolio management needs to acknowledge the strengths and weaknesses of the different global markets. For instance, Canadian investors have to invest outside of our country to gain decent exposure to sectors like technology and health.
THE SECTOR STORY IN 2004
The broad world market, as measured by the S&P 1200 Index* (in US dollars), was up 9.3% year-to-date to November 30th, with one month remaining in 2004 to bring in the year’s final performance. Below, a review of the Index’s individual sector returns year-to-date shows that the Energy sector was the outstanding winner, followed by Utilities. The Information Technology sector, that led all sectors last year, returned essentially zero since the beginning of 2004. Health Care retreated and, so far, has had a negative return for 2004.
*The S&P Global 1200 is a composite index, comprised of seven regional and country headline indices, many of which are the accepted leaders in their local markets – S&P 500, S&P Europe 350, S&P/TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX 50 (Australia), S&P Asia 50 and S&P Latin America 40.
Canada’s TSX Composite Index is up 9.6% year-to-date. Our Energy Sector, with a significant 18.7% weight in the TSX Composite Index, echoed the global sector’s performance with a year-to-date change of 28.0%. Financials were next with a 11.8% gain, and this sector represents a grand 32.5% of the Index. Continuing positive returns for these two sectors in 2005 should bode well for our overall market as these two sectors represent just over half of the TSX Composite Index.
iSHARES FTSE/XINHUA CHINA 25 INDEX FUND
The much anticipated iShares FTS/Xinhua China 25 Index Fund (symbol: FXI) has finally been launched. This ‘exchange-traded fund’ (ETF) holds shares in 25 of the largest and most-liquid Chinese companies and is denominated in US dollars. It is the first mainland China ETF available to us. Its expense ratio is 0.74% as compared to mutual fund vehicles that have significantly higher fees.
Investing in China is appealing not only for its continuing high growth prospects but also for a potential increase in the value of its currency. It is believed that the Chinese currency, the ‘renminbi’, is undervalued by at least 20%. Chinese Premier Wen Jiabao recently announced that the move toward a more flexible exchange rate for the renminbi would be a long-term project. Despite international pressure, China is not going to be rushed into a currency change as it recognizes it needs time to develop its banking and financial systems.
THE CURRENCY STORY IN 2004
From a ‘global’ investing perspective, the volatile currency markets since the beginning of 2004 have led to differing returns depending on which country’s soil you live on. Assuming that you wish to convert to your own country’s currency, the following ‘total returns’ are what you would have obtained if you invested in the major indexes from January 1 to November 30, 2004:
*Bold returns represent the home country
From a Canadian perspective, given that our Canadian dollar has appreciated against the US dollar, Euro and Yen year-to-date, our foreign returns converted back into Canadian dollars were lowered respectively. Foreign investors made ample returns by investing in Canada, augmented by currency gains. Conversely, foreign investors had disappointing results from their US currency holdings.
Re: A GLOBAL SECTOR APPROACH TO BUYING STOCKS
Now that you have managed to make an RRSP contribution with your hard-earned after-tax dollars, the next challenging task is to decide which stocks to buy for the planned equity portion of your portfolio.
Picking stocks is both an art and a science. The art part comes with experience and the synthesis of a ton of information that only the human mind can intuitively put together. The science part is more approachable and one can begin with “sector” analysis. You start by dividing the stocks that are currently in your portfolio into the various industrial global sectors. The sectors that you can use are those that form the Global Industry Classification Standard, the GICS. The GICS was developed by Standard & Poor’s and Morgan Stanley Capital International to provide for a consistent set of industry classes that can be used by investors worldwide. You simply total the market value of your stocks in each of the sectors and see what percentage each sector represents of your total equity portfolio. Let’s say you have found that your stocks are weighted as follows: 10% Energy, 5% Materials, 8% Industrials, 0% Consumer Discretionary, 6% Consumer Staples, 0% Health Care, 40% Financials, 4% Information Technology, 15% Telecommunication Services and 12% Utilities. Right away, you can see that you hold no investments in the Consumer Discretionary and Health Care sectors and you should consider investing in these sectors to provide for more diversification in your stock mix. The next step would be to see which companies fall within these sectors, and then narrow your search using company fundamentals such as price/earnings ratios, price/earnings to growth ratios, return on equity and debt to equity ratios.
Various internet sites can provide all of these fundamental ratios and returns. Sometimes individual investors lose sight of just how much they have invested in any one sector. This can be seen in the example portfolio in that the Financial sector is over-weighted (40%), calling for the sale of a portion of financial stocks. The sector approach can provide for a disciplined approach to selling off stocks when a sector becomes over-weighted. For example, a sell signal in the Information Technology sector would have been set off when those technology stocks were at their dizzy highs.
Soon, the Toronto Stock Exchange will be using these various sectors for their newly revised index, allowing investors to compare relative performances of the sectors on a global basis.
Investing is now evolving to a global sector approach.
Re: Sector analysis for clients
We have been initiating more formalized sector analyses for Trivest clients who have direct holdings of stocks in their portfolios. Our sector groupings are similar to the new TSE groupings and are as follows: resource, utilities, industrial/transportation, consumer, communications, finance, health, and technology. We look at your current diversification by seeing what percentage of your portfolio is in the various sectors, establish a percentage target for each of the sectors, and then analyze what is necessary in terms of buys and sells of individual stock holdings in order to achieve the sector target. This is a disciplined approach and when a sector becomes over-weighted (ie, having too high a percentage in a particular sector), the strategy would highlight the need to sell part of your holdings of stocks in this sector, and redistribute the funds to different sectors…..
The key to reducing your portfolio’s level of risk
The term “volatility” refers to investment risk, or how much the value of your investments fluctuates up and down over time. Through sufficient portfolio diversification, you can reduce the amount of investment risk and avoid wide swings in your portfolio’s value. So, how do you achieve sufficient diversification? Well, most investors are aware of reducing risk by holding different “asset classes” – fixed income (including bonds, mortgages, preferred shares and fixed income mutual funds), and equities (common shares and equity mutual funds).
The following graph charts the 15 year trend lines from 1986-2000 for three kinds of portfolios. The top line represents a 100% equity portfolio diversified with 60% Canadian equity and 40% international equity. The bottom line represents a 100% fixed income portfolio, invested in short-term bonds. The middle line represents a balanced portfolio with 50% invested in short-term bonds and 50% in a diversified equity portfolio. You will see the significant upward and downward trends of the two fully-weighted portfolios. You will also see the steadiness (reduced volatility) of the balanced portfolio, trending only approx 1% over the fifteen years, while still yielding double digit returns.
|However, portfolio risk can be reduced not only by investing in different asset classes but also through investing in the different industrial sectors. Currently, the Toronto Stock Exchange has 14 industrial sectors. It has been recognized that these sector groupings do not reflect the changes in the structure of Canadian businesses. For example, technology companies are grouped in with utilities. So, the TSE is going to revise its industrial sector groupings and the new groupings will be: energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunications services and utilities. This will also allow investors to compare the performance of any given Canadian sector with its counterpart in another area of the world, as world markets are moving to “global industry classification”. In fact, more global investors are now allocating their equity portfolios by sector rather than by geography.|
|Exchange traded funds” (ETFs) are similar to mutual funds but trade like stocks on the American exchanges. There are a number of ETFs that are based on the sector indices and new ETFs are expected to be launched shortly on the Toronto Stock Exchange for the energy, technology, precious metals and financial sectors. The major advantage to ETFs is their relatively low Management Expense Ratios compared with mutual funds. A disadvantage is that ETFs are not actively managed, in other words, individual stocks cannot be added or deleted from the mix in an attempt to outperform the index. Remember: an ETF will not outperform the index since it is the index!|