Our November 2022 Market Commentary highlighted our Small Cap Equity Investments which have been managed by Laurus Investment Counsel since 2014. This month’s Market Commentary highlights our Large Cap Equity Investments and some exciting new changes to that portion of the WealthCo Asset Management Core Equity Fund.
We posed a few questions to Dave Makarchuk, WealthCo’s Chief Investment Officer, regarding the fund.
Q: How would you describe the mandate of WealthCo’s Core Equity Fund?
A: From my perspective, our Core Equity fund provides institutional exposure to a diversified portfolio of global public equities. For most of our investors, the Core Equity fund is either their largest or second largest allocation within their portfolio, so obviously its performance and risk profile is very important.
As stated in its Investment Policy, WealthCo’s Core Equity fund seeks to generate long-term capital appreciation and dividend income by investing in Large, Mid, and Small Cap public equities, including stocks trading in Canada, the US, and international markets. To reduce volatility, the portfolio will be diversified by geographic region, industry sector, capitalization, investment manager, and by security.
Q: What kind of returns do you expect from the fund?
A: In simple terms, I expect the fund to generate returns which meet or exceed those of comparable diversified public equity portfolios. We measure the performance of the fund against the Morgan Stanley Capital International (MSCI) All Country World Index over the long term.
Q: So the fund invests all around the world?
A: Yes, the fund definitely has a global mandate. While the fund has a modest target allocation (10%) to Canadian equities, most of the fund is invested outside of Canada.
Q: The global diversification trend has been strong. Why has that been the case?
A: Whether we are considering academic theory, historical performance, or the future outlook, all signs are pointing global! Expanding WealthCo’s equity portfolio outside of Canada significantly expands its opportunity set by giving investors exposure to companies that simply don’t exist locally. Not only does that enhance return opportunities, it reduces the overall risk of the portfolio by increasing the number of underlying companies.
Q: Who manages the Large Cap Canadian Equity Allocation?
A: Effective February 2023, MFS Investment Management is responsible for the 10% target Canadian equity allocation for the fund. MFS is an established institutional investment manager with emphasis on fundamental research, discipline, and risk management. The MFS Canadian Equity Fund has over 40 years of history and has consistently demonstrated an ability to add value during market downturns while posting overall returns that exceed its benchmark over the mid to long term.
Q: Who manages the Large Cap Global Equity Allocation?
A: Effective February 2023, the Large Cap Global Equity Allocation is split equally between MFS Investment Management as well as T. Rowe Price. Like MFS, T. Rowe Price is also an established institutional investment manager with emphasis on fundamental research and public equity solutions.
Q: Why are there now two managers for large cap Global Equities?
A: We believe that both MFS and T. Rowe Price are amongst the best institutional investment managers with regard to global equity mandates of this type. But more importantly, we believe that their investment philosophies and styles are complementary to each other which we expect adds further to the diversification of the fund and, over the long term, improves returns.
Q: How are the MFS and T. Rowe Price global equity mandates similar? How are they complementary?
A: The mandates for each manager are similar in that they both invest in large cap public equities around the world. They each employ broad and deep research teams who are searching high quality companies with strong growth prospects and reasonable valuations. MFS tends to take a longer-term view (5+ years) in its assessments of risk and return while T. Rowe Price evaluates companies over a shorter time horizon (1-2 years). From our perspective, this combination makes a lot of sense for our investors.
Q: Which public equity markets matter most for the fund?
A: The fund continues to have its largest exposure to the United States with over 60% of its total exposure. Approximately 20% of the fund’s exposure is to Europe, Australasia, and the Far East, with a 10% allocation to Canadian equities and a small allocation to Emerging Markets. While we expect each of T. Rowe Price, MFS, and Laurus (who manage the small cap portfolio) to dynamically manage their mandates based on their assessment of each company and overall market conditions, we don’t expect their country allocations to change significantly from quarter to quarter.
Q: Public equity market returns are off to a quick start so far in 2023. What lies ahead?
A: Yes, equity markets got off to a fast start in 2023! The MSCI All Country World Index measured in Canadian dollars increased by 5.5% while our WealthCo Core Equity portfolio outperformed during the month in posting a 7.2% return.
What lies ahead? Well, broad public equity markets are now approximately 15% higher than their early October lows and market sentiment certainly appears to be stronger than it was in late 2022. Collectively investors seem confident that inflation has come under control and that central banks will end their interest rate hikes soon (if they haven’t already). While I certainly see reasons to support that premise, I think it’s also possible that inflation remains stubbornly high for quite some time given labour shortages both in North America and around the world. I expect that public market volatility will remain high for several months to come…but the returns of the last few months reminds us that volatility can be both good and bad…and that remaining fully invested on a diversified basis with half of one’s portfolio in alternatives and half in public markets remains a prudent investment strategy.
NOTE: The WealthCo Core Equity Fund is the public equity allocation for our diversified investors. The legal name of the fund is the WealthCo Core Growth & Income Fund.