A Balanced Approach – A Good Choice for Troubling Times and All Time

Q1 | March 2022

Topic: Investments

James E. Houston, CIM, FCSI

March 16, 2022

Image used with permission: iStock/peterschreiber.media


Print & Share

Print

A Balanced Approach – A Good Choice for Troubling Times and All Time

Q1 | March 2022

Mercifully, there have only been a handful of occasions in my adult life when I have repetitively awoken to the task of discovering what sorts of horrors may have occurred around the world overnight. But we’re in the midst of one of those periods now.

In the here and now, the Russian invasion of Ukraine is overwhelming and soul-destroying. Connecting its immediate horrific impact on Ukraine to its longer-term impact on the geo-political balance and the state of the global economy is incredibly difficult.

Supply chain disruptions, which were starting to show some improvement after two years of the COVID-19 pandemic, are now exacerbated by global trade uncertainty and broad sanctions imposed on Russia. These new disruptions have caused a spike in most commodity prices and record high prices for gas at the pumps. Inflation was already increasing at rates not seen for decades, and we appear to be at the start of a series of interest rate hikes being instituted by global central banks.

It’s at times like these that investors often feel that they need to “do something” in their portfolio to address the quickly changing and uncertain environment. However, if you are a long-term investor with a balanced portfolio of quality equity and fixed income securities, you probably shouldn’t do anything. There are plenty of other things to worry about, if you have the peace of mind that your investments are strategically designed to achieve your long-term objectives.

For years, interest rates have been mired in the low single digits, causing many people to question the benefits of fixed income in a portfolio. After taxes and inflation, the real return of bonds has been low or negative for some time, and dividend yields on broad equity market indices have been higher than those of most bonds. However, it is in tumultuous times such as today that the bonds in a portfolio rise in psychological value, even if they decline somewhat in nominal value. Behaviourally, not having one’s portfolio fully subjected to the higher volatility associated with equities makes it easier to “stay the course”, and to avoid regrettable trades, which are often a result of strong human emotions that cause people to “sell low” and “buy high”.

There is little question that over the long run, equities have outperformed bonds. From January 1, 1928 to December 31, 2021 the compound annual return of the S&P 500 (including dividends) was 9.6% (this and the following returns are based on US$ values).(1) The annual return on U.S. Treasury Bonds over the same period was 4.7%. Thankfully, the resilience of equities after major negative world events has been proven time and time again. More recently, from December 31, 1940 to December 31, 2021, the S&P 500 rose at an annual rate of 11.0%.(1) Over this period, we experienced the attack on Pearl Harbour, JFK’s assassination, the Crash of ’87, the 9/11 terrorist attacks, the Great Financial Crisis of 2008/09, and the COVID-19 outbreak. If one looks now at a logarithmic scale chart of equity returns, these events are almost indiscernible wobbles in the big picture of long-term returns.

So, why would you ever own bonds if they might be a drag on long term performance? Because the relative stability of bonds dampens portfolio volatility, making it more likely that an investor will maintain their equity exposure and sleep better at night.

The Nexus North American Balanced Fund is designed to manage this issue. The Fund is managed to a 65% equity target. The balance of the portfolio is held in investment-grade bonds, with a small allocation to cash. The equities are comprised of approximately 40 North American equities managed in-house by the Nexus investment team, as well as an allocation to two global equity funds managed on our behalf by JP Morgan in London, U.K.

The active management of both the equities and fixed income components has yielded superior returns for the Fund compared to its passive benchmark (5% Canada T-bills, 30% FTSE Canada Universe Bond Index, 40% S&P/TSX Composite, 25% S&P 500 in C$). The Fund has also performed very well relative to its peers. In the most recent survey by Global Manager Research (GMR), of 126 Canadian-managed balanced funds, the Nexus North American Balanced Fund performed in the first quartile for each of the one-, three-, five- and ten-year periods ending January 31, 2022 (see chart).

The Fund established its first ten-year return number in August 2007 (the fund’s inception date was August 1997). At that time, the Fund’s 10-Year annual return was 7.2% annualized. At that rate of growth, a portfolio’s value doubles approximately every 10 years. With the subsequent passage of each month since August 2007, a new month of performance was added to the ten-year total, and one dropped off from the back end. The average of the “rolling” annualized ten-year returns of the Fund from August 2007 to January 2022 is 7.6%. At its worst (lowest return) point, in January 2009 in the midst of the Great Financial Crisis, the Fund’s annualized ten-year return was still 4.5% per year. This was comfortably ahead of the Fund’s benchmark 10-year return at that same point of 2.9% per year.

At Nexus, the majority of our clients embrace a balanced approach to their portfolios. In many cases, we utilize a combination of our Equity and Income funds to best meet their specific personal and tax circumstances (and this combination of funds results in a portfolio that is substantially the same as our Balanced Fund). However, the Balanced Fund remains a simple and convenient way to save and invest for the long term. Not having to think about investment decisions frees up time to focus on other things. Let’s hope the other things become less troubling soon.

(1) Source: Historical Returns on Stocks, Bonds and Bills: 1928-2021.

(2) Nexus returns are shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results.

(3) Balanced Fund market benchmark is 5% FTSE Canada 91 Day T-Bill Index, 30% FTSE Canada Universe Bond Index, 40% S&P/TSX, and 25% S&P 500 (in C$); rebalanced monthly.

(4) GMR Median returns are shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results. Results from Global Manager Research Institutional Performance Report.

(5) Quartile information ranks the Nexus Balanced Fund return within the range of returns for the Global Manager Research’s Balanced Universe.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Human Interest
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

More Like This...

See another Investments blog post that may be of interest to you.

The Demise of FTX and Sam Bankman-Fried

Topic:
Investments
Excerpt:
At the beginning of November 2022, Sam Bankman-Fried was crypto-currency’s “White Knight”. The flip-flop and t-shirt-wearing 30-year-old was the found

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Living to 100

Topic:
Wealth Planning, Living to 100
Excerpt:
“You’re going to live to 100!” For some, this may sound like a fantastic, welcome prognosis. They imagine gazing at sunsets every evening at the

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

Lessons From the Art World and Beyond

Topic:
Investments
Excerpt:
“Exactitude is not truth.”

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: What’s My Age Again?

Topic:
Wealth Planning, Living to 100
Excerpt:
How old are you? It’s a simple question, one we readily know the answer to, although some of us might not want to talk about it. And why do we know