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Financials outperform in first quarter
9/21/2014 6:07:18 PM
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The Analyst’s Desk
Informative and authoritative articles on the world of investment funds from Fundata’s Investment Analytics and Research team.



By Brian Bridger  | Wednesday, April 18, 2012


 
THE ANALYST'S DESK

The performance of the big U.S. equity indexes left Canadian indexes in the dust in the first quarter. But, as always, the story is a bit more complicated than it first appears, especially when you start looking at key sectors, categories, and individual fund performance. And that’s where exposure to the financial sector – whether Canadian or American – would have really paid off.

Looking at the big indexes, as of March 31, 2012, the S&P 500 Composite Index was up close to 11%, while the S&P/TSX Composite Index had gained only 3.7%. If we compare both indexes in Canadian dollars and include dividends, the gap narrows slightly, but the S&P 500 is still up 10.5%, while the S&P/TSX Composite sits at just 4.4%.

Shifting to fund performance, as you would expect, the trend is very similar. Year-to-date (YTD), U.S. Equity funds are up an average of 11.1%, while Canadian Equity funds have increased by an average of only 4.6%.

The Apple effect

So what exactly has caused the broad Canadian equity market to lag its U.S. counterparts by such a wide margin? We can look first to the composition of the two indexes and the sectors that have rallied so far this year. The technology sector is the largest component of the S&P 500, representing over 20% of the index. The constituent company with the largest market capitalization, and therefore the most heavily weighted in the index, is Apple Inc. (NASDAQ: AAPL), which currently represents over 4% of the index. Considering that Apple was up 48% in the first quarter, this stock alone would have added more than 1.5% to the return of the S&P 500. Looking at the entire sector, with tech stocks having gained over 20% in the first quarter, this contributed a total of close to 4% of the return YTD for the index.

Contrast this to some of the most heavily-weighted sectors in the S&P/TSX Composite, Energy, which represents around 25% of the index. The Energy sector lost 1.2% in the first quarter, while Basic Materials, which make up another 20% of the index, were essentially flat.

The top performing sector in the S&P/TSX was Health Care, gaining over 15% by the end of March. Unfortunately, Health Care equities make up only 1.5% of the index, so the overall contribution is minimal.

One sector that drove returns for both the Canadian and U.S. indexes were the financials. Canadian financials were up close to 10% in the first quarter, while south of the border, financials gained over 20%. Considering financial stocks make up over 30% of the S&P/TSX Composite and 15% of the S&P 500, this strong performance would have added around 3% to both indexes. With this in mind, let’s turn our attention back to investment funds.

Financial Services outperformance

It should be no surprise that Financial Services Equity funds have been a top performer so far in 2012. In fact, they have the highest category average return in the first quarter, gaining 15.6%.

The category is fairly small, containing only about 14 main funds. Of this, about half are mutual funds and half are ETFs and closed end funds. The funds that focused on the U.S. financials were the clear winners in the first quarter. The two top performers were the BMO Equal Weight U.S. Banks Hedged to CAD Index ETF (TSX: ZUB) and the Manulife American Advantage Fund. In the first three months of 2012 these funds gained 26.8% and 21%, respectively.

Within the category there are a handful funds that focus either primarily or exclusively on the Canadian financial services sector. While this group has underperformed both the U.S. and globally-focused funds in the first quarter of 2012, their returns are still very impressive. Dynamic Financial Services Fund and CIBC Financial Companies Fund, both actively managed mutual funds, were up more than 12% at the end of March.

A few ETFs focusing on the Canadian market are also worth noting. The iShares Equal Weight Banc & Lifeco Fund (TSX: CEW) led the Canadian contingent in the first quarter, gaining 14.2%. Longer-term performance is also strong, posting a 3-year compound return of 18.2%.

The BMO S&P/TSX Equal Weight Banks Index ETF (TSX: ZEB) is a relatively new fund, having been around for just over two years. Yet this fund has the highest 2-year compound return in the category at 8.7%, helping it earn the FundGrade "A" Grade every month since it was first eligible in October of last year.

Lastly, the iShares S&P/TSX Capped Financials Index Fund (TSX: XFN) has the most impressive long-term risk-adjusted performance of the bunch. It boasts a 3-year compound return of 20.8%, a 10-year compound return of 7.3%, and below average volatility for the Financial Services Equity category. This ETF was a recipient of the Fundata FundGrade A+ Rating for 2011.


Fund YTD 1-Year 3-Year 5-Year 10-Year FundGrade
BMO Equal Weight US Banks Hedged to CAD Index ETF 26.81 -4.65      –      –      –         –
Manulife American Advantage Fund 21.03 -2.47 17.45 -10.41 -6.00 C
Manulife Global Advantage Fund 19.43 5.21 22.05 -15.15 -8.32 B
Investors Global Financial Services Fund 17.45 -12.93 7.48 -15.39 -4.55 D
Fidelity Global Financial Services Fund 14.67 -4.42 8.30 -10.40 -1.47 C
iShares Equal Weight Banc & Lifeco Fund 14.24 -6.99 18.17      –      – C
Dynamic Financial Services Fund Series A 12.78 -4.61 11.41 -4.83 3.02 C
CIBC Financial Companies Fund 12.39 -7.60 13.52 -7.08 0.77

D

iShares S&P/TSX Capped Financials Index Fund 11.18 -2.67 20.79 0.03 7.30 A
BMO S&P/TSX Equal Weight Banks Index ETF 9.56 -1.11      –       –       – A

Brian Bridger, CFA, FRM, is Manager of Analytics and Data Operations at Fundata Canada Inc. and is a member of the Canadian Investment Funds Standards Committee.

Notes and Disclaimers

© 2012 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

 
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