Markets, investing and what matters most:
Quarter in review Q1, 2022
By ATB Wealth 19 April 2022 6 min read
Written by Roger Lydiatt, CFA, CFP, co-authored by Tyler Simms, CFA, CFP on behalf of Private Investment Counsel (PIC), ATB Wealth’s discretionary portfolio management team. PIC specializes in working with ATB’s high-net-worth private clients and institutions.
Quick take on the quarter
The first quarter of 2022 presented a sober reality for investors after a nearly two-year party for markets propelled by low interest rates, strong corporate earnings and healthy household balance sheets. Investors faced the prospect of increasing interest rates climbing back to normal levels to prevent overheating in the economy. As a result, both bond and equity markets stirred materially for the first time since early 2020. Later in the quarter, the Russian invasion of Ukraine shocked the world and added another layer of uncertainty to a global economy cautiously emerging from the pandemic and facing inflationary pressures stemming from supply chain abnormalities. The quarter ended with markets having recouped some of their losses and, in hindsight, provided a useful reminder to both rookie and veteran investors alike that a well-diversified portfolio is essential to protecting and growing capital over the long term.
Headlines that mattered this quarter
- Russian invasion of Ukraine: The Feb. 24 invasion kicked off the largest humanitarian crisis since the Second World War. Global investors began to process the implications of the war and what cutting Russia off from the world economy would mean for globalization, global security and the energy supply chain.
- Inflation: CPI inflation hit 5.7% in February, well above the 1 to 3% target range established by the Bank of Canada.
- Interest rates: In an effort to address mounting inflation without stalling the economy, both Canadian (March 2) and American (March 16) central banks raised interest rates by 0.25%. More rate increases are expected throughout 2022.
- COVID-19: Many countries began to lift restrictions, while new waves of the virus caused countries such as China to commit to strict new lockdowns.
- Equities: Stocks were broadly negative in the first quarter, with the S&P 500 down -5.7% and the international MSCI EAFE index down -7%. Technology and other high-growth companies were especially hit by looming interest rate increases. The commodity-heavy Canadian S&P/TSX was one of the notable exceptions, gaining 3.8% in the quarter.
- Fixed income: The bond market in Canada was down -7% in the quarter as the yield on the 10-year Canada bond rose by 0.98% during the period.
- Commodities: The prices of oil, wheat and corn all surged more than 30% in the quarter. The price of gold was up 8% in the period after a paradoxically weak showing in 2021. The S&P GSCI Commodity Spot Index was the leading asset class in Q1, climbing 33%.
Chart of the quarter
Investment-grade index yields - US and Canada
The silver lining to the negative performance in the bond markets is that yields are moving up and are at the highest we have seen in the last decade. As of March 31, the average yield within the fixed income of our funds is around 4%.
The Compass Portfolios and ATBIS Fixed Income Pool have been holding less interest-rate-sensitive (shorter maturity) bonds in anticipation of higher interest rates. Last year was already a challenging year for bonds, but our shorter duration helped significantly.
In the Compass Portfolios, taking advantage of the relative strength within Canadian equities and bonds, we trimmed both and added to international equities at the beginning of March. We subsequently rebalanced back into bonds later in the month as international markets rebounded roughly 10% from mid-month lows after digesting the situation in eastern Europe.
At the start of this year, we don’t believe many, including us, expected the speed and magnitude of rate increases that we saw. Rates moved up 1.14%, and once again we were happy to have less duration at roughly five years compared to the broader universe at eight years. As a result, fixed income in the funds declined by 4.87%1 compared to the FTSE Canada Universe Bond Index, down 7% for the quarter. During the first quarter of 2022 we continued improving bond credit quality, adding to high-quality liquid positions so that we have the ability to be opportunistic again should a larger credit event occur.
Overall, US equities in the Compass Portfolios and ATBIS pools lagged the S&P 500 Index. However, through the quarter the funds experienced positive attribution in technology, communication, and consumer discretionary sectors, and were offset negatively by selection in commodity-focused cyclicals, which were among the best performers—namely energy and materials.
Within international equities, we lagged from less exposure to cyclicals, like energy, which did well, as well as selection in a few higher-valuation companies. Companies like professional publisher Wolters Kluwer, and specialty chemicals manufacturer Sika, for example, have performed very well over recent years, but moved down in tandem with the broader growth sell-off in January. We continue to position the funds with a slight overweight to international stocks, as valuations in overseas markets remain attractive.
Canadian equities have weathered the turbulent markets well this year, being one of the only developed markets that is positive year to date. This is largely due to prominent financial, energy and materials sectors, which saw positive performance. The funds’ relative higher weight—when compared to the S&P/TSX Composite Index—in financials coupled with an on-par energy exposure, helped cushion negative returns.
For more details on our fund performance during the quarter, read our quarterly Portfolio Managers’ Commentary.
Compass Portfolios and ATBIS Pools performance - Series O
The first three months of 2022 saw the return of volatility that has been largely absent over the past two years. The combination of geopolitical tensions and inflationary headwinds has caused turbulence for both stocks and bonds simultaneously for the first time in memory. While this current phenomenon is unsettling for any investor, we are comforted by the fact that all of our clients have a written portfolio blueprint in place. It's designed to be an ‘all-weather’ plan, establishing target allocations for stocks and bonds to help guide us not just when times are good, but also when they are challenging.
Our information diet:
Article: Why you should stop reading the news by Farnam Street
With most of us surely feeling news fatigue after the past few years, our team thought this appropriately-titled and timely article was excellent.
Podcast: What wooden pallets have to do with the Russian invasion - Odd Lots podcast
We are big fans of the ‘Odd Lots’ podcast, which often features guests and ‘behind the scenes’ stories. This one was a particular favorite, diving into the role of the humble wooden pallet in military operations and its impact on the war in Ukraine.
Book: Prisoners of Geography: Our World Explained in 12 Simple Maps (Illustrated Young Readers Edition) by Tim Marshall
I recently stumbled on this great book and I’m now reading it to my 11- and 9-year-old sons. It gives a very entertaining explanation of how simple geography has impacted world events over the centuries. I was stunned at how timely the section on Russia and Europe was; it helped answer a few questions that my boys had on the current conflict. I would highly recommend it to parents with kids in the same age range and there’s even the original non-illustrated edition written for adults.
ATBIS Fixed Income Series O 2022 YTD through March 31 total return
This document and all of the content has been compiled by ATB Investment Management Inc. (“ATBIM”) which manages the Compass Portfolios and ATBIS Pools. ATBIM, ATB Securities Inc. (“ATBSI”), and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and are individually licensed users of the registered trademark for ATB Wealth. ATBSI is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.
The mutual fund performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Unit values of mutual funds will fluctuate and past performance may not be repeated. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATB Securities Inc., ATB Investment Management Inc., ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read fund disclosure documents before investing. The Compass Portfolios includes investments in other mutual funds. Information on these mutual funds, including the prospectus, is available on the internet at sedar.com.
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