History has shown that surpassing benchmark performance – or even beating
the market rate of return – is becoming increasingly difficult.
As world economies become more interconnected, capital markets continue to
move towards the strong market hypothesis theorem. Looking back at 2017, we
see that several events occurred in global financial and political markets
fueled one of the strongest bull runs in market history.
Among the most important events was the election of Donald Trump as 45 th President of the United States. Capital markets took a
particular liking to this, as the “priced-in” result of the election had
Hillary Clinton as the favourite. At the time, healthcare sector stocks and
broad equities alike were pummeled. But markets revived on Trump’s
relatively laid back stance on corporate tax cuts and a promise to spend a
massive $1 trillion on infrastructure, having a halo effect in Canada and
other regions of the world.
Canada had quite the year in terms of economic developments during 2017.
With inflation at near all-time highs during 2016 and early 2017, Bank of
Canada Governor Stephen Poloz finally began to unwind the decade-long
stimulation of low interest rates that followed the financial crisis of
2008. The timing of the rate hikes was critical, as Canadian house price
indexes had soared along with the flow of easy money to higher credit-risk
After a couple of rate hikes, the Canadian target overnight bank rate now
sits at 1.25%, which along with other measures like special forms of local
taxation on foreign buyers and mortgage stress tests, has helped bring
sky-high real estate valuations back to earth, taking some of the steam out
of real-estate-bubble alarmism.
The year also proved to be an important one for many other countries. A
particular catalyst to Asian capital markets came with the appointment of
China’s Premier Xi Jinping to a second (and probably perpetual) five-year
term in office. Other noteworthy events included the accession of a new
“modern-capitalist” heir to Saudi Arabia’s throne, Mohammad bin Salman,
whose views closely align with those of President Trump. Bin Salman has
also proposed taking state-owned Saudi Aramco public, a move that would
trigger some portfolio rebalancing for our energy sector professionals
Meanwhile, British Prime Minister Theresa May continues to negotiate
towards a soft exit (Brexit) from the European Union (EU) by triggering
Article 50 of the EU agreement and extending negotiations to March 29,
2019. As a result, geopolitical uncertainty remains, while volatility has
ramped up in U.K. and European markets.
Using Fundata’s proprietary database and investment fund information, we
extrapolated the return of different investment vehicles on an aggregated
basis, mimicking the larger Canadian, U.S. and global equity markets.
The graph shows the mean and median returns for Canadian Equity, U.S.
Equity, and Global Equity vehicles using a universe of approximately 1,000
mutual funds and ETFs.
In some types of equity funds, index-based funds outperformed
actively-managed funds in 2017. In other cases, it was a wash or nearly so.
It is noteworthy that investment funds with global mandates outperformed
their indexing peers in both the mutual fund and ETF categories. To
understand why this occurred in this category specifically, we analyzed
holdings data and concluded that the bulk of these global mandate funds
held U.S.-based securities; hence, they benefitted from the optimistic
sentiment driving capital markets south of the border during 2017.
During a recent conference call, portfolio manager Jeremy Yeung of CI
Investments, who co-manages the
CI Signature Global Science & Technology Fund, weighed in on the performance of equity markets during 2017: “The
Canadian market is highly concentrated. If you look at the top-10 names in
Canada, they hover around oil and financials,” he said. “The United States
is a very tech-centric market, with nearly a 20% makeup for S&P coming
from information technology. If you were not overweight technology in 2017,
you would have an underperforming fund,” he added.
“The technology sector was the underlying driver to the U.S. market boom in
2017, and the majority of managers do not understand the business model or
valuation,” said Yeung, adding, “Digital disruption continues to be the
driver of capital market expansion in the United States and China. We
continue to welcome the fundamental shift from offline to online in the
So does passive management (indexing) prevail as a choice of style? Not
necessarily. As always, it depends on your personal investment goals. Some
active mutual funds and ETFs posted stellar results, including Yeung’s
Signature Global Science and Technology Fund, with a calendar return of
33.46% in 2017.
It is always important to perform all your due diligence when selecting an
investment fund, taking into account the competency of the managers, their
access to company management, and overall investment style. Whether you are
an indexer or active investor, doing macro-level research can translate to
a fairly large difference in your ultimate investment return.
Nash Swamy is Junior Analyst, Analytics & Data, at Fundata Canada Inc., a leading
source for investment fund information.
Notes and Disclaimers
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Commissions, trailing commissions, management fees and expenses all may be
associated with fund investments. Please read the simplified prospectus
before investing. Investment 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
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