A positive fourth quarter was not enough to offset the losses early on in 2022, capping off a year most investors would probably like to forget. There were plenty of reasons for markets to go down, including a pandemic that just won’t go away, a war causing havoc in the global energy supply, and stock prices at record levels after several years of well-above-average returns. But no factor was more impactful than the rapid increase in interest rates which reversed the stimulative efforts of central banks implemented in years prior, deflating both bond and stock markets.
To recap the year, U.S. equities suffered the biggest decline, down more than 18% in local currency terms or just over 12% in Canadian dollar terms, bonds turned in the worst calendar performance in modern history dropping by 11.69%, international equities fell by 8.29%, and Canadian equity was the top performing asset class by slipping a more modest 5.84%. Needless to say, all Justwealth portfolios finished the year with negative returns, but as we are reminded periodically in investing, you have to take the bad with the good!
As we showed graphically in our second quarter market commentary, extreme performance over short-term time periods (good or bad) is almost unnoticeable over long time periods as annualized returns converge to a very predictable and stable range. Many investors refer to this concept as “mean reversion”, and it provides a powerful argument for investors to continue to stay invested the way that they are currently invested. The longer your time horizon for investing, the more powerful the argument becomes. Too often, however, investors are overcome by either fear or greed and stray from their investment strategy, taking on too little or too much risk to optimize their investment returns.
Although we preach patience to our clients at Justwealth, we do not suggest completely naïve investing (i.e., invest on auto-pilot). All of our portfolios are constructed with a long-term view and have investment strategies, or policies, in place that we believe will deliver very competitive returns for the level of risk deemed appropriate for each specific portfolio. Because future market returns are unknown, we do not focus on achieving a certain annual rate of return, like 6% for example, rather, we attempt to generate the highest after-fee return amongst all of our competitors for a given risk category. Having low fees helps, but it is not enough. There are many low-fee options available to Canadians and some have proven to be below-average performers. That’s scary!
Justwealth is very proud to have been identified in late 2022 as the top-performing robo-advisor by the Globe and Mail over multiple time periods for the second year in a row! Furthermore, our comparisons to Canadian banks’ managed portfolios (as per Morningstar data) show that we also deliver top performance across all risk categories versus traditional investment options. So, although markets delivered disappointing returns in 2022 (which we cannot control), we at least feel like we delivered the type of competitive performance that we expect of ourselves.
For the first time since Justwealth began offering its services to Canadian investors in 2016, changes were made in a large number of our 70+ portfolios in 2022. In most cases, changes were made to reflect the rapid increase in interest rates in the fixed-income component of portfolios. At all risk levels, Justwealth was positioned to have lower-than-market interest rate sensitivity within fixed income. After interest rates rose to significantly higher levels, that positioning was brought closer to a more neutral level, effectively locking in the performance advantage that was realized. With significantly higher yields now available in fixed income compared to prior years, we have raised our expectation for future long-term returns, but recognize that returns may be volatile for a bit longer until inflation has officially been tamed.
Speaking of inflation, we believe that it will continue to be the primary driver of performance in 2023. Although inflation and interest rates are two different things, inflation will be the most influential factor in determining the near-term path of future interest rates. Data has confirmed that inflation has clearly peaked and is headed down in both Canada and the United States, but it is still unacceptably high. Central banks will continue to be vigilant in their fight against inflation, and both bond and equity markets may stay muted until investors are certain that the vigilance is near an end. At this point, it is not a question of “if”, but rather “when”. As we often state, nobody knows the answer to “when” so don’t listen to anyone who offers an opinion on the subject! Once inflation is under control, central banks can return their focus back on helping economic growth which will undoubtedly suffer from high interest rates….meaning….rates will come back down, likely providing a boost to both bond and equity markets.
Lastly, we want to remind all of our clients that we are here for you to answer questions, provide guidance, explain risks and talk about all things related to investing at any time. Financial advice is a very important and distinct aspect of the service that we provide – it is not just about the returns, and we take it seriously!
Wishing you all the best for 2023!
Here is a recap of market performance as of December 31, 2022*
|Asset Class||Market Index||Quarter||1 Year||3 Years||5 Years||10 Years|
|Fixed Income||FTSE TMX Canada Universe Bond||0.10%||-11.69%||-2.20%||0.27%||1.63%|
|Canadian Equity||S&P/TSX Capped Composite||5.96||-5.84||7.54||6.85||7.74|
|U.S. Equity||S&P 500 ($Cdn)||6.07||-12.16||9.25||11.15||16.08|
|Int’l Equity||MSCI EAFE ($Cdn)||15.71||-8.23||2.35||3.14||7.95|
* Source: Morningstar. Performance annualized for periods greater than 1 year.