indicatorPortfolio Managers' Commentary

Portfolio Manager's Commentary, March 2021

By ATB Investment Management Inc. 8 April 2021 5 min read

Finishing off the first quarter of 2021 stock prices rose continuing their trend from 2020. The economic backdrop remains accommodating both from a fiscal and monetary standpoint. Expectations of higher growth and inflation have resulted in rising bond yields which have depressed overall fixed income returns for the quarter offset by rising equity markets.


Global daily doses of the vaccine have ramped up quickly since the start of year contributing positively to the global growth outlook. The start of the year had about 1 million per day being distributed, but that has now climbed to over 15 million1 per day. Federal and provincial governments are working to have everyone who wants a vaccine able to receive it by the end of September. Early data from those countries that are ahead in vaccination progress point to a flattened curve, which gives optimism to a full reopening by year end. Before we get ahead of ourselves though, it is worth keeping an eye on the variant strains that spread faster. The cases have increased enough in Europe to bring about a third round of lockdowns and are ticking up again in Canada as well.

In anticipation of the reopening, central banks expect 2021 to show a pickup in headline inflation  due to factors such as higher energy prices and supply constraints. The consensus is that this will be transitory, and core inflation excluding volatile items such as energy may remain below target for 2021. By and large, central banks don’t see core inflation hitting consistently at or above target until 2023.

Looking at employment, US and Canadian unemployment figures are still on the mend, recovering jobs that were lost as a result of the shutdowns. The Statistics Canada Labour Force Survey, indicates just under 3.0 million jobs were lost from February 2020 to April 20202. To the end of February this year, 2.4 million of those have been recovered, or about 80%. Jobs recovered were broad based across all sectors for the most part, but accommodations and food services that were hit the most have only recovered roughly half the jobs that were initially lost.

Canada job losses and recoveries

Source: StatsCan

Governments worldwide continue to support the economy from a fiscal standpoint. A widely anticipated US stimulus package was signed into law mid-March, injecting a record $1.9 trillion into the US economy. The Canadian government also extended various supports such as the Canada Recovery Benefit (CRB) and expanded EI payment periods, as well as the government signalling spending up to 3-4% of GDP post pandemic to support growth.

Financial markets

Bond yields for the year moved up quickly in a move not seen since the “taper tantrum” in 2013. The yield on the 10 year Canada bond has risen from 0.43% at the start of August to 1.5% with the bulk of that move happening this year. There is a lingering concern that equity prices will be impacted as bond yields increasingly look more attractive. By many valuation measures, equities are looking expensive in historical context; but so are bonds and cash. The price paid for a company's future earnings should always be anchored to an investors opportunity set for other potential sources of return, bonds being the primary alternative. It is true that bonds look more attractive today than they did three months ago but the forward earnings yield of equities at roughly 4.8% for global developed stocks3 still well outpaces a 10 year Canadian government bond yield at 1.5%. On a relative basis in terms of expected earnings yields, long term returns still look the most attractive with equities, then bonds, then cash respectively. In fact, many fixed income options continue to offer a negative expected real return for investors when taking 2% inflation into account.

Moving to commodities—lumber, base metals, oil—all are seeing significant price increases when compared to 2020. The US Census Bureau tracks retail spending on building material and garden supplies which has increased 20% from the end of 2019. Sitting at home, coupled with record low borrowing rates and less spending, has home improvement projects at the top of mind for many. When everyone wants the same thing at the same time, no surprise, prices increase. One item oddly absent from the recent commodity rally is gold which has retraced more than 15% since last summer. Typically inflation expectations and a weakening US dollar are both assumed to impact gold prices positively, but last year was anything but typical.

Broad equity index and Canadian bond total returns (CAD)

Source: Bloomberg

S&P 500 earnings yield versus 10-year US Government bond yield

Source: Bloomberg

CompassTM Portfolios and ATBIS Pools

All Compass Portfolios and ATBIS Pools had positive returns for the quarter with the exception of the ATBIS Fixed Income Pool. The headwind of rising yields pushed bond returns negative, although the higher corporate bond exposure and short duration relative to the benchmark led to meaningful relative outperformance keeping overall fixed income returns close to flat. Equities on balance across the 3 geographical regions were positive for the quarter and performing slightly ahead of benchmarks.

Compass Portfolios returns - Series A
Year-to-date to March 31, 2021

Source: ATBIM

ATBIS Pools returns - Series F1
Year-to-date to March 31, 2021

Source: ATBIM

The Canadian large cap equity component of the funds were mostly flat relative to the index as financials and energy led the charge amid rising oil prices, with the Canadian small cap component falling behind, as energy stocks (a sector the component is underweight) charged ahead, gaining more than 36% compared to the small cap index gaining ‘only’ 9.7%. Financials added to performance as one of the best performing sectors in all regions, and a sector we are typically overweight.

The negative impact from an underweight in energy was mostly offset by the underweight in materials (one of the worst performing sectors in Canada). US Small cap equities continued the trend from Q4 last year outperforming their large-cap peers. The Compass funds and ATBIS Pools relative passive overweight more than offset the relative underperformance of our large active US component. Internationally, weakness in particular European industrial and financial holdings contributed to overall relative underperformance for the international components.


There is a lot of optimism surrounding the reopening which has contributed to global stocks recovering at a record pace. With that however, there has been no shortage of attention grabbing localized bubbles. It is important to remember that these do not represent the broader market and none are needed to achieve long term goals for a portfolio. Borrowing a quote from Mark Twain, “there are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.” As we always have, we take a longer term view knowing that these short-term headlines fade and are most often irrelevant. A well diversified portfolio focused on profit-producing companies and value oriented bonds has served us well including last year. We remain steadfast in that approach.

1 Bloomberg Covid-19 Vaccine Tracker Global Distribution
2 Statistics Canada. Table 14-10-0287-01 Labour force characteristics, monthly, seasonally adjusted
3 Forward 2021 earnings yield (inverse P/E ratio) of the MSCI World Index as of March 31, 2021

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