Finding Balance: A Global Approach

08 April 2024 by National Bank

Small stones placed one on top of the other on the bank of a lake

The story isn’t new. Many investors feel satisfaction during periods of sustained growth when investing passively in certain indices like the S&P 500 or likewise with a simple S&P/TSX Composite tracking ETF. However, during market turbulence, the sentiment often loses its luster when the portfolio consists only of these passive index funds. FOMO sets in when missed returns arise from other opportunities and it can cause many investors to act irrationally with their portfolios or even their investment goals. These periods of uncertainty shouldn’t be the only time investors seek more defensive, actively managed strategies amid equity and fixed income, helping to mitigate risks.

The Magnificent 7 versus the rest

As with the current equity market in the U.S., more specifically with the S&P500, there is a strong case for the companies that are part of the exclusive club called the Magnificent 7. Last year, they produced roughly 99% in terms of price return versus the overall S&P 500 index at 36%, largely due to their high-quality factor - positive fundamentals, strong cash generation, cost discipline, and edge towards investing in research and development.

Performance of the Magnificent 7 versus the S&P 500

(Graph: Price return since January 2023)
Source: CIO Office

Risks however can also be seen with elevated investor expectations, especially after strong earnings in an uncertain economic environment. Additionally, regulatory and antitrust questions from world governments pose further challenges as well as lingering impacts from geopolitical tensions.

Ultimately, rather than timing the market and chasing the latest stock trend, investors need to look beyond the inevitable short-term fluctuations. Alternatively, investors can focus on a global balanced approach where projections remain largely positive with increased downside protection over the long term.

Graph of the expected annualized return and uncertainty based on investment horizon.

(Graph: Expected annualized return and uncertainty based on investment horizon)
Source: CIO Office Long-Term Market Expectations – Overview CIO Office (Data via Refinitiv). 1. For illustrative purposes only; subejct to change without notice; no guarantee of future performance. 2. Equity benchmark: 35% S&P TSX, 35% S&P 500, 20% MSCI EAFE, 10% MSCI EM, all in CAD. 3. Balanced portfolio: 21% S&P/TSX, 21% S&P 500, 12% MSCI EAFE, 6% MSCI Emerging Markets and 40% Canada Bond Universe, all in CAD. 4. Based on the historical interquartile range of returns since 1950.

A high-quality global balanced approach

Nevertheless, investors want to consider having exposure to these names, and having access is key. Access to these companies and a broader global set of stocks is good. Access to opportunities in other asset classes like high-quality fixed income, to help diversify, is even better. And access to seasoned active managers that can act quickly during challenging periods, can help to mitigate potential risks. Rather than focusing on potential biases or just the latest hyped company, having a focused view with an actively managed global balanced portfolio can lead to steady growth and help achieve long-term investment goals.

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