Finding Alpha
Where to Look for Returns?
With the market now firmly in bear territory, investors will have to look harder for strong risk-adjusted returns in the coming years.
Employing global strategies at the core of the portfolio can help investors generate the returns they need by broadening the available opportunity set and providing flexibility to allocate capital to the best performing markets.
At a country level, the best performing equity market in almost every year can be found outside North America.
Top Five Market Indexes by Annual Return, 2014-2019
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|
| Israel 37.64% |
Hungary 51.96% |
Egypt 104.84% |
Argentina 73.46% |
Qatar 30.68% |
Greece 45.79% |
| Egypt 33.08% |
Denmark 38.89% |
Peru 55.61% |
China 55.04% |
Saudi Arabia 19.16% |
Ireland 40.00% |
| Saudi Arabia 31.37% |
Ireland 29.76% |
Pakistan 39.93% |
Turkey 49.91% |
Russia 16.69% |
Russia 37.54% |
| Turkey 29.56% |
Belgium 24.87% |
Brazil 36.76% |
Austria 39.05% |
Brazil 16.27% |
New Zealand 37.36% |
| Indonesia 29.46% |
Russia 21.96% |
Hungary 36.27% |
Peru 38.39% |
U.S. 3.51% |
Netherlands 34.28% |
Source: Morningstar Direct. Annual Country returns represented by MSCI Country Indexes in CAD. Top 5 countries as represented in MSCI ACWI. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 26 Emerging Markets (EM) countries. For Illustrative Purposes Only. You cannot invest directly into an index.
There is evidence that in a globally diversified portfolio, country selection provides a significant source of alpha generation, even though economic integration and globalization have reshaped the global economy.
Proportion of returns explained by country, sector and company effects within MSCI Emerging Markets Index
Source: Internal Research, AGF Investments Inc./Highstreet Asset Management Inc., as of October 31, 2019. Based on rolling 12-month average returns.
And with signs of globalization peaking, markets will increasingly decouple from one another, and returns between global markets will diverge further. This means that a well-diversified global portfolio could be a solution to finding returns in all market environments.
3-year Rolling Correlations to S&P/TSX
Source: Morningstar, as of March 31, 2020.
A global approach can also be beneficial to investors who wish to employ a fundamental high-conviction strategy alongside their diversified core. Market-leading companies are increasingly found all over the world, with leadership determined by innovation and the macro environment.
Going Global for Income
A global approach can help investors who are searching for income, as well as those seeking capital growth.
In the fixed income markets, generating yield from developed market holdings continues to be a challenge, meaning investors must look further in to global markets, including emerging markets, for income:
10-year Government Bond Yields, 2010 – 2020
Source: Bloomberg, as of March 31, 2020.
Following the recent downturn, it is likely that interest rates, especially in developed markets, will remain lower for longer. To maximize yield potential in this environment, an active, globally diversified approach to fixed income taking in multiple sectors may be increasingly necessary.
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|---|---|---|---|
| Real Return 11.09% |
Real Return 18.35% |
Global HY Bonds 16.96% |
Conv. Bonds 24.70% |
U.S. Bonds 15.52% |
Conv. Bonds 21.58% |
Global HY Bonds 10.32% |
Conv. Bonds 8.43% |
FR Loans 9.49% |
CAN Corp. Bonds 08.05% |
| Global HY Bonds 8.83% |
U.S. Bonds 10.51% |
EM Bonds 15.33% |
Global HY Bonds 14.53% |
EM Bonds 14.20% |
EM Bonds 21.47% |
FR Loans 6.35% |
CAN Corp. Bonds 3.38% |
U.S. Bonds 9.02% |
Real Return 8.02 |
| CAN Corp. Bonds 7.34% |
CAN Gov't Bonds 10.20% |
Conv. Bonds 10.06% |
FR Loans 12.35% |
Real Return 13.18% |
U.S. Bonds 20.59% |
EM Bonds 6.08% |
Global HY Bonds 3.18% |
DM Bonds 8.73% |
Conv. Bonds 7.91% |
| EM Bonds 6.95% |
EM Bonds 9.62% |
FR Loans 7.23% |
U.S. Bonds 4.55% |
Conv. Bonds 12.96% |
FR Loans 19.11% |
CAN Corp. Bonds 3.73% |
CAN Gov't Bonds 2.18% |
Conv. Bonds 7.75% |
EM Bonds 7.39% |
| CAN Gov't Bonds 6.51% |
CAN Corp. Bonds 8.24% |
CAN Corp. Bonds 6.22% |
EM Bonds 2.31% |
FR Loans 10.75% |
Global HY Bonds 16.67% |
Conv. Bonds 3.49% |
EM Bonds 1.06% |
EM Bonds 6.33% |
Global HY Bonds 6.87% |
Source: Morningstar, as of March 31, 2020. All returns in CAD Based on calendar year returns. For Illustrative Purposes Only. You cannot invest directly into an index.