Good Relative Returns, Despite a Broad Equity Sell-Off
Amidst the recent broad sell-off in global equities, the Canadian equity market declined 6.3% in October 2018, its worst month since September 2011. Similarly, the S&P 500 declined 6.8% in U.S. dollars, also its worst month since September 2011. The bond market fared better as the general rise in interest rates took a pause in October. The Dividend Income strategy delivered favourable relative performance in this weak environment (declined only 3.6%).
While relative performance in its Canadian sleeve was meaningful, the U.S. performance was particularly noteworthy. Although the strategy's U.S. equities were not completely immune, the overall decline of the U.S. sleeve was a small fraction of the decline of the benchmark, representing exceptional relative performance. Long-standing exposure to more defensive sectors has been a headwind for relative performance of the portfolio through the course of this bull market (especially in the U.S.). Its Canadian holdings benefitted from a significant weight in Communication Services and Utilities, as well as its emphasis on Energy Infrastructure within the Energy sector and underweight in Materials and Industrials. In the U.S., outsized weightings in Consumer Staples, Health Care and Utilities provided some welcome stability and downside protection. As in the past, the U.S. continues to provide a natural complement to the Canadian component, rounding out some of the more concentrated sector exposures that are a structural feature of the Canadian equity market.