August was a negative month for most global equity markets, with the exception of the US. The latest report on active managers showed the underperformance continues.
August 2018 Market Performance
All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.
*Absolute change in yield, not the return from holding the security.
The S&P/TSX Composite was down -0.8% in August, and is up +2.3% for 2018. In the US, the S&P500 was up +3.3%, and is up +9.9% for 2018 when measured in USD. European stocks were down -2.6% in August, bringing its YTD performance to -2.0%. German and British stocks were down -3.4% and -4.1%, respectively. Aside from US stocks, Japanese stocks were one of the few bright spots in August at +1.4%. Emerging market stocks were down -0.7% in local currency and are down -3.5% YTD. REITs had another strong month at +2.6%, bringing the YTD to +10.2%.
On the bond side, the broad index of Canadian bonds, FTSE TMX Universe Bond Index was up +0.8%, turning the YTD positive at +0.6%. The FTSE TMX Short Term Bond Index was also positive for the month at +0.3%, and +0.7% YTD. Most of the Merrill Lynch US bond indexes were up about +0.4% for August. Emerging market bonds were down -1.6% in August, turning the YTD negative at -0.6%.
Oil was up +1.5% in August, and is up +15.5% YTD. Gold was down -1.9% and is down -8.3% for 2018. The broad Bloomberg Commodity Index was also down -1.9% in August and is down -5.0% for 2018.
The Canadian Dollar’s performance was mixed in August, losing -0.3% against the US Dollar and gaining +0.5% against the Euro.
Every year S&P Dow Jones puts out a report on the effectiveness of active management in many countries with developed equity markets including Canada, US, Australia, Europe, Japan, and South Africa. With the exception of Japan and India, over the last 5 years between 70% and 95% of active managers underperformed their country’s main benchmark stock market index. Chile was the worst with 93.5% of active managers underperforming, followed by South Africa at 93.2%. India and Japan saw the majority of active managers outperform; both countries saw about 45% of their active managers underperform their respective country’s benchmark stock market index.
Focusing on Canada, 82% of active managers underperformed for the 5 years ending in 2017, right on average for the last fourteen 5 year reports. Over the last 10 years, only 8% of Canadian equity funds outperformed the benchmark S&P/TSX Composite Index. US equity funds managed by Canadian managers did much worse, with 98% of them underperforming the S&P500 over the last 5 and 10 years.
If actively managed funds rarely outperform, why do investors continue to invest in actively managed funds? A recent survey of US investors may shed some light. 51% of those surveyed who owned an actively managed fund believed that it would produce higher average returns than a passive fund. If you buy into all of the marketing that mutual fund companies put out, then this belief is not hard to come by. 27% of those surveyed believed that during a stock market crash or recession, actively managed funds would perform better than passively managed funds. Or as the marketers would frame it, active management protects the downside better than passive management. Interestingly, the SPIVA reports don’t show that. If you look at any of the 5 year periods that included the 2008-2009 financial crisis, such as the 5 year periods ending in 2009, 2010, 2011 and 2012, 10% or less of the active Canadian equity managers outperformed the S&P/TSX Composite.
For the pro-active management crowd, the fact that the percentage that outperformed is greater than zero is a win. To them it means that there is a chance that active management works. And that is what active managers are selling: the chance to outperform the index and they charge handsomely for it. And therein lies the problem: active management can work, but the fee charged for a chance of outperforming is just too high. So much so that in aggregate the fees charged by active managers often erases any incremental performance gains.
That is why the use of index funds has grown around the world; you don’t have to hope that you’ve picked a fund that will outperform, you’re investing in a diversified portfolio designed to track the market at a very reasonable cost.
August 2018 Economic Indicator Recap
Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.
Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.
A Closer Look at the Canadian Economy
Canada’s unemployment rate returned to 5.8% in July after a month at 6.0%. 82,000 part time jobs were added while 28,000 full time jobs were lost. 61,000 jobs were created in Ontario, 11,000 in BC, 2,400 in Newfoundland, with smaller gains in the other provinces.
Housing prices across Canada were up +0.8% in July with gains posted in 10 of 11 metropolitan areas. The largest gainers were Ottawa (+2.3%), Winnipeg (+1.9%), and Montreal (+1.3%). Calgary was the only city that didn’t experience a gain and was flat for the month.
The level of new housing starts declined -17.0% in July to 206K, following a spike in June, while the value of building permits issued in June declined -2.3%.
The inflation rate for July was +0.5%, and +3.0% on an annual basis – 0.5% above expectations, the highest rate since September 2011! All eight components of measure rose. Gasoline, fuel, air transportation and travel tours were the largest contributors. Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was +1.6%.
Retail sales were down -0.2% in June; compared to a year ago, retail sales were up +3.8%.
Canada’s GDP growth was 0.0% for June. The goods-producing sectors contracted -0.2%, manufacturing gained +0.3% helping to offset declines in oil & gas extraction, construction, and utilities. The services sector gained +0.1%.
The Bank of Canada raised interest rates 0.25% to 1.5% in July as expected by many. Inflation expectations of 2.5% for the remainder of 2018 drove the need to raise rates.