Some good news for active management

On the Contrary

The benefits of diversification and active management are finally beginning to reveal themselves, once again.

Not only have there been clear winners and losers in the market recently, but the gap between them in some circumstances has widened significantly, with investors herding into and out of positions.

This makes it quite challenging for the average person to manage their portfolio as a concentrated position in the wrong sector or stock could prove costly. The same could even for be said for those who primarily utilize ETFs as their investment vehicle of choice.

The S&P TSX, one of the most over-weighted markets for Canadians, has gained a healthy 12.4 per cent over the past 12 months but has underperformed global markets, with the S&P 500 and MSCI EAFE index up 18.3 per cent and 19.1 per cent, respectively.

The problem with the TSX is that it has become a two-trick pony meaning it is overly dependent on the oil and real estate (financials) sectors. Thankfully it has been a good 12 months for our housing market with the Capped Financials Index up 15.1 per cent offsetting the 1.2 per cent loss in the Capped Energy Index.

More recently, however, things have deteriorated. So far in 2017, financials appear to have stalled-out and are down 0.4 per cent, while It has been a terrible year for energy stocks, with the sector getting walloped 16.7 per cent.

WTI oil prices are also down 4.9 per cent over the past year and 9.9 per cent in 2017 which is not helping. Interestingly, investors have reacted differently within the sector by herding into a few names while crushing others.

Specifically, take a look at Cenovus Energy and Crescent Point Energy, which are down 42.5 per cent and 45.2 per cent over the past 12 months and are now tracking back at January 2016 levels when oil was near $26 a barrel.

On the other hand, you have companies like Canadian Natural Resources and Suncor Energy that are up 4.6 per cent and 21.4 per cent over the same period. This goes to show that value of a barrel of oil can vary dramatically depending on where that barrel is stored.

The Canadian dollar has also been affected by weaker oil prices, selling off 2.9 per cent against the U.S. dollar and 4.0 per cent against the Euro over the past year. As a result, it has been the weakest performer in the G10 despite Canada’s rather impressive recent 3.7 per cent annualized GDP print in the first quarter.

Looking ahead, it isn’t uncommon to see pundits who are bullish on the loonie disregard the connection to oil and instead focus on the debt-fuelled housing rally that has become our nation’s primary economic growth engine.

For those invested south of the boarder there have been some large winners and losers as well.

In particular, the “FANG” stocks have delivered outstanding performance over the past 12 months, all dwarfing the S&P 500’s 18.3 per cent return with Facebook up 29.2 per cent, Amazon up 38.2 per cent, Netflix up 63.1 per cent and Google up 33.8 per cent.

You also have companies like Tesla Motors that have rocketed 55.2 per cent higher compared to Ford Motor Company, which is down 8.2 per cent. Tesla’s market capitalization is now at US$55.6 billion which is larger than Ford’s US$44.9 billion with approximately 76,000 cars sold last year versus Ford’s 6.65 million. For fun, Tesla’s market capitalization per car is US$729,000 compared to Ford’s US$6,700.

Talk about an electrifying premium.

In the retail sector, investors are positioning such that the traditional retail store is fast becoming a thing of the past. Take a look at Macy’s Inc., and J.C. Penney which are down 27.6 per cent, and 41.5 per cent compared to online retailers Wayfair, eBay and Amazon, which are up 64.3 per cent, 45.6 per cent and 38.2 per cent, respectively. That’s quite the move in a short period of time, something not seen since the days of the late 1990s tech boom. That said, our contrarian side has us wondering if shopping malls are really in as precipitous a decline as investors seem to believe.

In conclusion, as you can see even with markets at new highs and record low volatility, not everyone is a winner. Rather, the market has left plenty of room and opportunities for good old fashioned active investment management.