Since 2004, our SPIVA® Canada Scorecards have shown that a majority of actively managed Canadian equity funds typically underperform the S&P/TSX Composite Index. However, according to the recently published SPIVA Canada Year-End 2022 Scorecard, the annual underperformance rate dropped to the best result we have seen since 2015: just 52% of Canadian Equity managers lagged the S&P/TSX Composite Index in 2022.
We can gain a deeper understanding of the drivers behind these relatively better results by analyzing the market through a country, currency and concentration lens.
Exhibit 1 shows that, historically, fewer Canadian managers tended to underperform in years when U.S. equities outperformed the Canadian market; 2013 and 2015 are two prime examples, being the only two years in our database in which a majority of Canadian managers outperformed, and coinciding with significant U.S. outperformance relative to Canada.
Although the S&P 500 (CAD) underperformed the S&P/TSX 60 by 6% in 2022, the strengthening of the U.S. dollar versus the Canadian dollar last year may have provided an alternate tailwind for managers that did not hedge their foreign exposures. This is typically not the case, as U.S. equity underperformance typically coincided with U.S dollar weakness, of which 2022 was an outlier (see Exhibit 2).
Another potentially beneficial trend was weakness among large caps, most prominently of which was a sharp decline in the valuation of online retailer Shopify, the largest constituent of the S&P/TSX 60 as of Dec. 31, 2021,1 after a meteoric rise in the two years prior. Canadian managers who bypassed Shopify’s precipitous fall would have been well rewarded in relative terms, and there is evidence to suggest that many Canadian investors did exactly that in early 2022.
Concentration within large caps declined concurrently, as shown in Exhibit 3 via the Herfindahl-Hirschman Index (HHI) of the benchmark. History suggests that there is a relationship between concentration and the relative performance of equal weighting: after peaks in S&P 500 concentration, the S&P 500 Equal Weight Index tended outperform. As a result, it is not surprising that the S&P/TSX 60 Equal Weight Index outperformed the S&P/TSX 60 by 4% last year, perhaps implying greater potential success for large-cap managers whose holdings were more diversified.
A mixed set of headwinds and tailwinds may have led to a mixed set of results. While losses across asset classes in Canada and in the U.S. buffeted manager performance, a strengthening U.S. dollar along with the underperformance of mega caps could have provided a much-needed buffer, resulting in underperformance equivalent to a little more than a coin flip. While the country and currency themes outlined above are unique to Canada, the concentration context applies to active managers in the U.S. as well. Find out more about how active managers in the U.S. and across regions fared here.
1 As of Dec. 31, 2021, Shopify was the largest weight in the S&P/TSX 60, at 8%. Over the course of 2022, this stock had a total return of -73% and ended with a 2.5% weight in the S&P/TSX 60.The posts on this blog are opinions, not advice. Please read our Disclaimers.