SUMMARY
- 2018 was a topsy-turvy year for global equity markets, and Canadian equities were no exception. After trade wars weighed on sentiment, sustained low unemployment and strong job creation initially drove a Canadian recovery. But YTD gains were wiped off many Canadian equity benchmarks in Q4 2018; renewed pessimism over the economy and declining oil prices provided headwinds.
- The S&P/TSX Composite (-8.89%) was led lower by smaller-cap names as the S&P/TSX Completion (-12.85%) declined. Both indices finished 2018 with their worst calendar-year performance since 2008. Canada’s largest companies fared slightly better, but the S&P/TSX 60 (-7.58%) still fell.
- Amid the market gyrations, more than 75% of Canadian active equity managers underperformed their benchmarks across all categories in 2018. This highlights the fact that heightened market volatility does not necessarily lead to outperformance by active managers.
- Canadian Small-/Mid-Cap Equity fund managers found it particularly difficult to navigate 2018’s market turbulence, as 80% of all small- and mid-cap managers lagged the S&P/TSX Completion’s plunge.
- Overall, roughly three in four Canadian Equity managers underperformed the S&P/TSX Composite; the potential to select among Canadian large-cap stocks did not significantly improve relative performance figures.
- 2018 was a tough year for Canadian Dividend & Income Equity funds. After the majority outperformed in 2017, 65.22% lagged the S&P/TSX Canadian Dividend Aristocrats® (-8.29%) in 2018. With long-term Canadian yields remaining below their long-term average, income-seeking investors may want to remember the long-term underperformance of active equity income funds as they formulate strategic asset allocation.
- For the second consecutive year, Canadian Focused Equity funds posted the worst relative performance; 83.12% lagged the blended benchmark, which comprises the S&P/TSX Composite (50%), the S&P 500® (25%), and the S&P EPAC LargeMidCap (25%).
- International Equity funds provided the best relative performance over the 12-month period ending Dec. 31, 2018; 44.44% of fund managers beat the S&P EPAC LargeMidCap, 18 percentage points higher than in 2017. However, the long-term picture remained largely unchanged; 95.24% lagged over the 10-year horizon.
- U.S. equities continued to be a challenging asset class for managers to outperform; 78.57% of them underperformed the S&P 500 (CAD)’s 4.23% gain. A depreciation in the Canadian dollar helped the benchmark to overcome declines in U.S. equities.
- Larger funds appeared to have greater difficulty beating their benchmarks; the asset-weighted returns were typically lower than the corresponding equal-weight returns. Canadian Dividend & Income Equity and U.S. Equity funds offered the exceptions across all time horizons.
- The longer-term results continued to show that active equity funds found it difficult to beat their respective benchmarks. More than 9 in every 10 funds underperformed their respective benchmark over the 10-year period, and a similar story was evident over the five-year horizon.
- Fund survivorship (or the lack of) played a large role in the long-term figures; more than half of all funds in the eligible universe 10 years ago have since been liquidated or merged.
