How Canada trumped the rest of the world

Domestic funds topped 15-year returns

For most of the past 15 years, there’s been no place like home for Canadian investors. Notwithstanding the importance of diversification geographically as well as by sector and asset class, most of us would have been much better rewarded by simply forgetting about the rest of the world and plowing all our savings into domestic offerings. Indeed, Financial Post mutual fund statistics for the 15-year period ended Dec. 31, 2014 reveal a striking difference between fund yields from Canada and those from the rest of the world.

Canadian equity funds overall averaged an annual compound return of 6.2% from January 2000 through December 2014, while U.S. equities overall averaged 1.3%, and foreign equities overall averaged 0.7%. Canadian fixed income funds overall yielded an average annual compound return of 4.3% for the 15 years through December 2014, while global fixed income funds averaged just 2.6%. Balanced funds of all types had a similar skew, if to a somewhat lesser extent.

The disparity also applies to individual funds. Of the 10 top-performing funds (see accompanying table), four are Canadian small-/midcap equity funds, two are Canadian dividend and income equity funds, and the remaining four — which at first glance seem to have a broader focus — turn out to be heavily Canadian-weighted. The portfolio of the RBC Global Precious Metals Fund, for example, contains 86% Canadian equities, while the Front Street Special Opportunities Fund’s portfolio is 92% Canadian content.

The two biggest factors: the enormous Asia-driven natural resource boom and the soaring Canadian dollar. “There was a huge underinvestment in resources during the 1990s,” says Eric Bushell, chief investment officer at Signature Global Asset Management (a division of CI Investments Inc.) in Toronto. “Then in the 2000s, China started growing at an impressive rate, and that led to a boom in resources of all kinds.

“That’s the basis of what has happened in the past 15 years — underinvestment and then a surge in demand,” Mr. Bushell says. “The starting point of the current 15-year cycle was 1999, when there was the Asian crisis and collapse in growth. Commodities were really weak, and the market went from that low level to a boom.”

That transition has been key for Canada, says Mark Raes, head of product at BMO Global Asset Management in Toronto.

“When you look at that 15-year time frame, you’re looking at a commodity supercycle,” he says. “[Canada has] had strong demand from emerging countries like China and India, even from developed countries. Resource demand has been a key driver for the Canadian market because of our national bias towards energy and materials.”

Tony Elavia, executive vicepresident and chief investment officer at Mackenzie Financial Corp. in Toronto, cites a third significant factor behind the Canadian market’s outperformance: “During the financial crisis, banking systems in the rest of the world fell apart, especially in the U.S. and Europe. The Canadian system did well, and a large part of the Canadian stock market is financials.”

“Certainly the strong Canadian dollar has had a tremendous effect,” adds Martin Ferguson at Mawer Investment Management Ltd. in Calgary, co-manager, with Jeff Mo, of the top-ranked (see table) Mawer New Canada Fund. “We saw the dollar rise from US62¢ [in January 2002] to $US1.10 [in November 2007], but that’s just one thing.

“A lot of other things have happened in the past 15 years too. We’ve been through 9/11, the financial crisis, the Asian contagion, we’ve seen gold spike, and oil has been all over the board. There have been a huge number of factors involved.”

All these elements created a perfect storm favouring Canadian equity markets. Of course, not all good things last forever.

“We’re now seeing a reversal of the forces that propelled Canadian markets over the past 15 years, or at least the first 10 of those 15 years,” says Mackenzie Financial’s Mr. Elavia. “There’s been a slowdown in the consumption of natural resources globally, and that has had a negative effect on the Canadian dollar and on Canadian markets. The U.S. has taken its medicine, and its fortunes have now reversed. And Canadian banks no longer have a competitive advantage — valuations are rich and, as we’ve seen, they’ve taken quite a tumble in recent months.”

Eric Lascelles, chief economist at RBC Global Asset Management in Toronto, concurs: “Canada has certainly had a remarkable 15-year run, with the obvious reasons being the resource boom paired with a strong Canadian dollar, which made other markets look poor by comparison.... But now many of the tailwinds that supported Canada have become headwinds.”

It’s a shift that could be cause for concern, but Mr. Ferguson says he has no intention of changing the Mawer New Canada Fund or his methods.

“We have a diversified portfolio and we’ve always been underweighted in materials, and almost always underweighted in energy,” he says. “Energy and commodities have not been drivers of our growth.”

Resource demand has been a key driver for the Canadian market