Many risks remain for fund investors in 2016

For Canadian investors broadly diversified domestically, 2015 will go down as a poor year, given that the S& P/ TSX Composite index, give or take a few basis points, is ending the year down in the high single digits.

But if investors were heavily exposed to energy, materials and base metals, all of which sustained painful declines of 20 per cent or more, it was abysmal.

Scanning through a list of the top and bottom Blackrock Canada’s iShares ETF performers, a few additional items bear pointing out.

Investing internationally and with a minimum- volatility tilt paid off handsomely, particularly on an unhedged basis. Notables on that front include iShares’ MSCI EAFE Minimum Volatility and MSCI USA Minimum Volatility ETFs. As for the S& P500 ETF, a flailing Canadian dollar sizably boosted returns to the order of 20 per cent or so.

In terms of other factors, Canadian dividend ETFs (yield) didn’t enjoy their traditional sweet spot and experienced declines of more than 10 per cent. Not surprisingly, Canadian- dollar- hedged U. S. dividend ETFs outperformed them handily.

The commodity debacle hurt Canada as well as some of the other big producers, including Brazil and Russia. Goldman Sachs Group Inc., the firm that coined the BRIC acronym (Brazil, Russia, India and China) abandoned ship, closing down its BRIC fund after significant redemptions.

The possible impeachment of Brazil’s president could well be a 2016 headline, capping a corruption scandal that’s taken the country’s state- owned energy company Petróleo Brasileiro S.A. shares to a 12-year low.

Value plays in Canada also underperformed both their broad market counterpart and growth- oriented alternatives.

So much for 2015, but 2016 could present a lot of hangover effects for investors.

Risks are omnipresent, and even more volatility, which has been rising since the summer, may be around the corner.

Investors need to prepare f or that eventuality, both mentally and from an asset allocation perspective, real- izing that the after effects of the U. S. Federal Reserve’s initial rate normalization in December will take some time to take full effect.

As a result, emerging markets, while expected to bottom in 2016, might still remain out of favour initially.

Quantitative easing still rules in Europe, but massive amounts of European bonds are trading at negative yields. Imagine buying bonds with the certainty of losses. How is that for an investment?

But investors need not abandon bonds. On this side of t he Atlantic, U. S. yields are moving up, albeit modestly.

All else being equal, Canadian bonds, which fared well in 2015, aren’t exactly the ticket to riches given that the paltry yield minus fees, taxes and inflation equals not much, if anything.

And then there’s oil. Even after oil dropped to US$ 50 from US$ 100, US$ 20 seemed far- fetched. But now that oil is way south of US$ 50, and with little sign of imminent pricing and supply discipline on the horizon, who knows how low it could go.

But keep one key f act straight: our loonie’s decline, while already pronounced, will continue to follow the path of oil. That isn’t helpful to the Canadian economy overall, and a logical corollary to that means investors should continue to look internationally to try to immunize their portfolios from further damage.

Overall, it will be interesting to see if value regains some relative ground in 2016, and whether minimum or low volatility strategies find themselves at some point in the spot currently occupied by out-of-favour dividend ETFs. Could the latter, in a world of puny yields, possibly regain some of their mojo?

That’s a lot of things for investors to consider so don’t expect the new year to be any less challenging than the old one.