The Market
The fourth quarter provided a wild ride for investors with swings as high as 5% per day. Unfortunately, our positive market gains for the first nine months eroded as demonstrated by the Q4 2018 returns listed below. For global securities, some of the negative impact was offset by the weakening Canadian dollar.
The table below shows the market performance as of December 31st, 2018 in Canadian dollar terms.
Market Indices ($Cdn)as of 31-Dec-2018 |
Year 2017 |
Year 2018 |
Q4 2018 |
| TSX (Canadian market) | 9 % | -9 % | -11 % |
| S&P500 (US mkt) | 14 % | 3 % | -9 % |
| Nasdaq (mainly tech.) | 20 % | 8 % | -11 % |
| MSCI World | 15 % | -0.5 % | -8 % |
| MSCI EAFE (Int’l) | 18 % | -7 % | -8 % |
| iShares Cdn Short Bond | -0.1% | 1.8 % | 1.3 % |
| US$ relative to Cdn$ | -7 % | 8 % | 6 % |
Performance
A significant contributor to the Q4 2018 portfolio decline was the twelve percent plus drop in rate-reset preferred share prices. These securities can be volatile because they are generally held by retail investors who tend to be fickle. Presently, the rate-reset preferred shares held in portfolios have a 5% – 7% plus tax-advantaged current yield. We fully expect these share prices to recover when markets stabilize.
The YouFirst Growth composite nearly matched the FPX Growth benchmark on a year-to-date basis, -2.8% versus -2.7%.
The YouFirst Conservative Growth composite had a year-to-date return of -2.9% trailing the FPX Growth benchmark of -2.7% and the FPX Balanced benchmark at -1.3%. Looking back at 2017, rate-reset preferred share strength helped the YouFirst Conservative Growth composite outperform the FPX Growth and FPX Balanced benchmarks by 2.4% and 5.3% respectively.
Portfolio Activity
During the quarter, the decline in convertible debenture prices provided the opportunity to add Innergex (INE.DB.B – TSX) 4.75% 30-Jun-2025 and Morguard North American Residential REIT 4.5% 31-Mar-2023 convertible debentures to portfolios. These were purchased below par (< $100) and will mature at par ($100) on their maturity dates. These securities were discussed in earlier portfolio reviews.
Fortis (FTS – TSX) was introduced to portfolios where there was minimal utility exposure. Fortis is a leader in the North American utility industry with assets of $50 billion and 2017 revenue of $8.3 billion. Their more than 8,500 employees serve utility customers in five Canadian provinces, nine U.S. states and three Caribbean countries.
Holding some US dollars was beneficial in the quarter as the Canadian dollar fell by 6% relative to the US dollar. We hold large US dollar balances in a Manulife Investment Savings vehicle which presently yields 1.95%.
We sold our holdings of Artis REIT (AX.UN – TSX) after they cut their monthly distribution. We had been patiently waiting for several years for a distribution increase. Given this disappointment, it is time to move on.
Outlook
We are anticipating that economic growth will slow within an eighteen month timeframe. Any additional evidence of this occurring will cause the markets to correct so we are maintaining portfolios at the lower end of the equity allocation range for now.
If you have any questions or comments regarding items discussed in this newsletter please let us know.
Reminders
The new year is a good time to top up your Tax Free Savings Account. The annual contribution limit for TFSAs has increased to $6,000 for 2019.
The RRSP contribution deadline for 2018 is March 1st, 2019. To ensure arrival in RRSP accounts before the deadline, online bill payments should be made by February 25th. The 2018 contribution limit is 18% of earned income reported on your 2017 return, up to a maximum of $26,230.
Doug Garner, P.Eng., CFA
President, Portfolio Manager
Jane Garner, BA, EPC
VP Operations and Client Experience
Simon Chun, P.Eng., CFA Level III Candidate
Investment Analyst