indicatorPortfolio Managers' Commentary

Portfolio Managers' Commentary, December 2021

By ATB Investment Management Inc. 7 January 2022 6 min read


  • Economy: COVID-19, higher inflation, and the pace of economic growth dominated the headlines these past 12 months. COVID-19 vaccines provided a ray of light at the start of the year, and many economies around the world gradually re-opened by summer. New variants of the virus (Delta and Omicron), however, emerged in the second half of the year, leading to surges in cases and the return of restrictions. As a result of the pent-up consumer demand due to pandemic lockdowns, inflation grew faster than what central banks forecasted. Supply chain issues, such as computer chip shortages, also contributed to the rise in prices. While initially thought to be more transitory in nature, there is evidence this higher inflation may remain for longer than expected. Central banks are now showing more concern about how sustained the recent elevated levels of inflation will be, and have signalled that the timetable for rate hikes will likely be brought forward. Meanwhile, economic growth in Canada and the US remains positive, with jobs recovering to pre-pandemic levels in Canada and the US also closing the gap.
  • Markets: Global equity markets advanced in 2021 by nearly 18%1 backed by strong earnings growth. Yields overall moved up .72% leaving bond returns down 2.5%—their worst calendar year total return since 19942.
  • CompassTM Portfolios and ATBIS Pools: All Compass funds and ATBIS Pools saw positive performance over the year despite volatility in both equity and bond markets. The funds’ active-fixed income holdings focused on shorter-duration and higher-yielding corporate bonds, which fared especially well—ending the year on a positive note despite the Canada bond universe index losing value.


The last quarter saw the emergence of new COVID-19 variant Omicron near the end of November. Data to date suggests higher transmissibility, but less severe outcomes when compared to prior strains. Restrictions have been put back in place, particularly around travel and social gatherings. Businesses have also been impacted, although less than lockdowns from early waves and from disruptions surrounding isolation requirements as opposed to operating restrictions. Vaccine uptake continues to improve with the addition of 5- to11-year-old children becoming eligible for the vaccine in November. Canadians with at least one vaccine accounted for 83% of the population in December, a 3% increase from November.3

As COVID-19 persists, so do the economic imbalances caused by the pandemic—such as inflation, which has risen to levels not seen for decades. Job loss and business disruption from outbreaks have lessened the supply of goods. However, fewer job losses in higher-paying positions, and government relief programs for those who did lose their jobs, have left individuals in a better financial position overall compared to a typical recession. In turn, this has increased demand for goods.4 Fewer goods available coupled with higher demand have led to inflation—an increase in prices—for many goods and services. In Canada, the last print for 2021 showed the year-over-year level at 4.7%, the highest since 2003. The US was even higher at 6.8%. Central banks on average still forecast these levels to dissipate into 2022 as imbalances between supply and demand move back to equilibrium. In support of that outlook, retail sales seem to have leveled off over the last two quarters (in inflation-adjusted terms). Increases in energy prices when compared to 2020 levels have been an inordinately large contributor to inflation. Prices for both natural gas and crude oil peaked in October, which should help temper inflation in the coming months.

Inflation in 2021 resulted from a rebound in energy prices
and demand for consumer goods

Sources: Via Bloomberg - Adjusted US Retail Sales Total SA, US CPI Urban Consumers (ATBIM calculation for ex energy and non-food goods), US Crude Oil WTI Cushing Oklahoma spot.

Turning to labour markets, Canada has now seen a full recovery of the jobs lost due to the pandemic, and that includes Alberta. The US still has roughly four million jobs to make up, but has been gaining roughly 500,000 per month. Areas of employment impacted continue to be pandemic-related such as food, leisure, and office administration. Looking abroad, employment wasn’t impacted as much, but also improved through 2021 and is nearing a full recovery back to pre-pandemic levels.

Total employed relative to the end of 2019

Source: Via Bloomberg - STCA Canada Labor Force Employment SA, US Employment Total in Labor Force SA, ECB Eurozone Employment SA, UK Labor Force Total Employment SA, Japan Labor Force Employment SA.


The equity markets had an outstanding year overall supported by easy fiscal and monetary policy, which boosted investor confidence, and strong consumer demand that drove earnings growth. In spite of the dip of March 2020, equities over the last two years provided a total return of about 34.3%5 between price increases and dividends. Overall we are left with equity valuations only slightly elevated from the end of 2019, at a roughly 21 times price-to-earnings ratio. This gives an earnings yield of 5%, which, when coupled with real earnings growth of 1-2%, can still give a forecasted return of 6-7% for stocks over the medium to long term. Equities remain a good value when compared to other assets such as bonds with yields of around 2%.

Bond markets saw mid- to long-term yields rise earlier in the year in anticipation of growth and potential long-term inflation. The rest of the year saw some volatility, especially as inflation picked up in Q3, but sentiment from central banks worldwide shifted to potentially being more aggressive in stamping out inflation. The Bank of England was the first developed central bank to raise interest rates in December. Despite the shift in central bank positioning and uncertainty surrounding the new COVID-19 variant, corporate bond spreads in Canada were largely unchanged throughout the year. Although rates in general fell through December—helping to boost returns—bonds overall are still down roughly 3% for 2021, becoming the worst year for bonds since 1994.

Broad equity & Canadian bond total returns 2021 (all in CAD terms)

Sources: Bloomberg

Compass Portfolios and ATBIS Pools

Despite volatile equities and weakness in fixed-income markets towards the end of 2021, the Compass Portfolios and ATBIS Pools all saw positive returns for the year. The fixed-income portion as represented by the Fixed Income Pool returned 2.38% for the year, compared to the benchmark6, dropping 2.45%. The shorter duration, higher yield and focus on opportunities within credit markets added significant value for the year allowing the funds’ fixed-income investments to earn a positive return on an absolute and relative basis.

Equities within the funds on aggregate also performed well on an absolute basis, earning double-digit returns and drifting towards the maximum weights within the funds. This is in line with our view that equities will continue to outperform low-yielding bonds over the medium term, supported by consumer spending, job creation, and continued accomodative monetary and fiscal policy. That being said, equities as a whole within the funds as represented by Compass Maximum Growth lagged the blended benchmark7 during the year. ATB Investment Management 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

2021 saw outsized equity returns that we don’t anticipate will be repeated in the coming year. Central banks including Canada are positioning to normalize interest rates starting next year as labour markets return to full employment. Rate increases typically moderate growth, but consumers are in a relatively good position, having accumulated savings8 throughout the pandemic. In our view, this could support earnings growth and equities for several more years. Rising interest rates and higher-than-average inflation—although lower than today’s levels—are likely for the coming years. We maintain that short duration and a tilt toward corporate bonds will continue to provide increased value for investors.

1MSCI All Country World Index Total Return (CAD) for 2021 up 17.9%
2ICE Bank of America Canada Broad Market Index calendar year total returns
3Source: Our World in Data, share of people vaccinated against Covid-19.
4US Adjusted Retail Sales & Food Services Sales up 21.7% in nominal terms from February 2020 to November 2021. Source: US Census Bureau
5Source: MSCI All Country World Index Net Total Return (CAD) from Dec 31, 2019 to December 31, 2021.
6FTSE Canada Universe Index
7As 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)
8Bank of Canada. Monetary Policy Report - October 2021. “Accumulated savings are expected to support consumption growth” (Chart 11)

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