Where’s my 14% Return?

October 1, 2017

Yes, just over 14% is what the S&P 500 (U.S. equities) returned for the first 3 quarters of 2017. Over the past nine months you’ve probably seen many headlines touting these double digit returns and continual new record highs for equity markets.

Is your portfolio’s return in line with this? Probably not, but with good reason due to:

  • Currency effect of foreign investments, and
  • Not having 100% of your portfolio invested in U.S. equities.

In writing a news story, what’s important is a headline that will grab a reader’s attention (I.e. “Where’s my 14% Return”). Have you ever read an eye-catching headline only to discover that the news story didn’t reflect full information? Here’s an example. Earlier this year, a well known Canadian news source published details regarding a study by the Canadian Paediatric Society with regards to the impact of guns on youth. The headline read “One child or youth suffers a gunshot injury almost every day in Ontario, study finds.” What’s misleading about the headline and article is the fact that the study statistics also included injury due to Nerf and paintball guns.

Just as you would be wise to read more than the headline of any news story, in evaluating your portfolio’s performance you need to look beyond the financial news headlines. It’s important to understand what headline investment returns are based on and how they translate into comparable information relative to your portfolio.

Equity Market Performance

Equity Market Performance Return Currency Q3 2017 YTD Q3 2017
Canadian Equities Large Cap (S&P/TSX Index) CAD 3.7% 4.4%
U.S. Equities Large Cap (S&P 500 Index) USD 4.5% 14.2%
International Equities Large Cap (MSCI EAFE) USD 5.5% 20.5%

This past quarter (and most of 2017) was marked with countless headlines about record setting equity market returns for U.S. equity markets and to a slightly lesser degree, international equity markets. The Canadian equity market had lower relative returns given its dependence on the resource sector which has not enjoyed the same returns as other equity market sectors.

Canadian investors, however, need to translate their foreign currency denominated investment holdings into Canadian dollar equivalent returns.

As can be seen above, the Canadian dollar relative to the U.S. dollar has appreciated approximately 10% since the middle of June, 2017. The strength in the Canadian dollar reflects the two interest rate increases made by the Bank of Canada this past quarter (July and September). A strengthening Canadian dollar negatively affects foreign currency denominated investment returns for Canadians. In other words, foreign currency holdings translate into less Canadian dollars than they would have at the beginning of the year.

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