indicatorPortfolio Managers' Commentary

Portfolio Managers' Commentary, September 2021

By ATB Investment Management Inc. 8 October 2021 6 min read


  • Economy: By the end of September, more than six billion COVID-19 vaccinations had been administered, with Delta now the dominant strain of the virus. Proof of vaccination requirements are helping businesses to remain open. Inflation remains elevated, but is still being viewed as transitory. Employment numbers continue to improve.
  • Markets: Global equity markets are up over 3% for the quarter (as of Sept. 27). Bonds were down slightly over Q3 as yields picked up towards quarter end.
  • CompassTM Portfolios and ATBIS Pools: Markets finished the quarter on a volatile note, but all funds finished the quarter in positive return territory. 2021 continues to see above average performance for funds with higher equity weights.


Over the last quarter, the COVID-19 Delta variant went from potential threat to a full-blown fourth wave. The impacts on the health care system have been pronounced, especially here in Alberta. As of the time of this writing, it appears that case loads may have started to peak. Thankfully, vaccines through this wave have proven effective. Another three billion doses were administered globally in the third quarter of 2021 bringing the total to about 6.25 billion1. Roughly two-thirds of the world remain not fully vaccinated, but the numbers are heading in the right direction.

Focusing on the economic impact, vaccine efficacy has allowed for the relaxing of some business-related restrictions, starting this summer and carrying on into the fourth wave. “Proof of vaccination” is now the ticket for many to move past restrictions and return to a semblance of normalcy.

Government-sponsored pandemic relief programs are beginning to wind down; this includes the Canada Emergency Response Benefit, (CERB), which is expected to wind down by mid-October. Vaccines, fewer lockdowns, and less relief are all playing their part in supporting the positive employment trend. As of August 2021, Canada has recovered nearly all jobs lost since February 2020. It’s a similar story in the US and overseas, with many countries seeing upticks in employment trending towards pre-pandemic highs. That said, there is room for improvement; Canadian unemployment in August sits at 7.1%, which is still elevated from the sub 6% held through 2019.

For inflation, the US is the highest, so we’ll focus there. The core PCE (personal consumption expenditures) index—the inflation gauge used by the U.S. Federal Reserve (Fed) to conduct monetary policy—rose to an annual rate of 3.62% at the end of August 2021, the highest 12-month figure since 1991. Still, with the Fed’s new “flexible average inflation targeting” (FAIT) framework, the Fed can hold off on any near-term inflation-taming moves, depending on what it views as “average.” The following chart shows the growth in the core PCE since December 1999, compared with a 2% annual trend. It’s clear that over the last decade, the core PCE has been under 2%, with room to move higher.

US core PCE and Canada core CPI versus 2% growth of $100

Sources:Can CPI: Statcan, USE PCE: BEA, 2%: Math

As the economic landscape slowly shifts from recovery, growth will begin to normalize, and likely inflation with it. In terms of the labour market, the Bank of Canada (BoC) said on Sept. 8 that it “judges that the Canadian economy still has considerable excess capacity.” The BoC kept steady in its tapering of monetary stimulus, as well as its forecast for a first rate hike in the second half of 2022. The Fed and European Central Bank (ECB) are also looking to reduce stimulus, although at a slower rate. The Fed is looking to start tapering by December and expects to start raising rates in early 2023, whereas the ECB has only signaled intention to trim emergency supports for the time being.


Developed country equity markets including Canada saw positive performance for the third quarter advancing roughly 4%2. Emerging markets were more eventful. China’s regulatory crackdowns, which impacted a variety of sectors and businesses—the latest being Evergrande—brought the overall Chinese equity market down 17%3 for the quarter. The Compass Portfolios’ and ATBIS Pools’ exposure to China is minimal at under 2% on average.

Despite inflation rising to multi-decade highs, the response from the bond markets remains muted, reinforcing the belief that the recent inflation is transitory. Bond markets saw little movement over the summer until the latter half of September. A combination of the regulatory crackdown leading to the Evergrande turmoil coupled with uncertainty around the US debt ceiling saw the Canadian 10-year bond rise nearly 30 basis points towards the end of the month. Credit spreads on the other hand continued to narrow, indicative of the market’s confidence in corporate balance sheets strengthening as economies manage pandemic outcomes. Canadian bonds overall were initially up over the quarter, but tipped downwards near the end of September as rates rose.

Broad equity and Canadian bonds total returns (all in CAD terms)
2021 year-to-date

Source: Bloomberg, FTSE Russell

Compass Portfolios and ATBIS Pools

It was a choppy end to the quarter with both stocks and bonds losing some ground, but all funds still ended the three-month period in positive territory. The higher yield from corporate bonds along with shorter duration continued to add value for the quarter. Year-to-date fixed income returns, as represented by the ATBIS Fixed Income Pool, is up about 1.7% compared to -4% for the benchmark4. Holdings and weights for the pool are very similar to the Compass Portfolios, leading to similar outperformance for the fixed income component of those funds.

The equity portion of the portfolios was positive for the quarter as well, and had a strong showing year-to-date—double-digits in aggregate represented by the Compass Maximum Growth Portfolio which holds 100% equity. That said, equities overall are still lagging behind the blended benchmark by roughly 1%5. ATBIM has always favoured owning stocks with a higher chance of resilience in down markets to avoid loss. This is a trade-off as investing in these resilient companies can sometimes lead to underperformance when equity markets are exuberant. We know a stable approach to investing will reward investors over the long term.

Compass Portfolios returns - Series A

Source: ATBIM

ATBIS Pools returns - Series F1

Source: ATBIM

Looking forward

Two US legislative events with economic implications are currently unresolved and dominating the headlines. The first is the debt ceiling, which needs to be raised by Oct. 18 to prevent default6. The second is with regards to two separate spending bills—one on infrastructure, the second on social programs—totalling US$4.5 trillion. If passed, these bills would represent further injections of stimulus to an already caffeinated economy.

With respect to inflation, a higher-than-typical rate is not necessarily a headwind, as it can also be an indicator of economic growth. Inflation is elevated, yes, but economic growth has also been strong. Many countries have experienced positive growth since Q2 2020 (which was the first full quarter to feel the brunt of COVID-induced lockdowns). For example, the US saw year-on-year (yoy) real GDP—a figure that is net of inflation—growth of 12.2% at the end of Q2 2021, while for Canada, the yoy growth in real GDP was 12.7%.

12 month % change in earnings, US CPI and US GDP

Sources: ACWI Earnings: MSCI, CPI: BLS, GDP: BEA

Overall we see strong economic and earnings growth, central banks that remain accommodative, and labour markets that continue to recover. The ingredients exist for continued expansion. Equity valuations appear high by historical standards, but attractive given the continued low-rate environment. COVID-19 may yet surprise us with some unforeseen development, but with vaccinations still ongoing, and the increased understanding of the virus almost two years in, the pandemic’s economic impact is becoming less of a headline. We believe our portfolios remain well-positioned as we enter the final quarter of 2021.

1Our World In Data - COVID-19 vaccine doses administered, world cumulative ending September 30, 2021.
2MSCI World (CAD) Total Return Index- a developed world market equity index
3MSCI China (CAD) Total Return Index
4FTSE Canada Universe Index
5As represented by Compass Maximum Growth Series A. Benchmarks for the fund are 32% S&P/TSX Composite TR, 35% S&P 500 (CAD) TR, and 33% MSCI EAFE Net TR (CAD)
6As of October 7th the Senate was nearing agreement to raise the ceiling by $480B. This covers spending for a couple months until early December.

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