Robert’s Blog September 2013

It is interesting to note that for the month of August, retail investors continued to maintain positive fund flows into US, Global, and international equity products, ($473 million) but pulled funds from Canadian equities ($400 million).

What is interesting about this flow of funds is that it coincides with increases in the US equity markets and short term pullbacks in the Canadian equity markets

This reinforces the fact that investors continue to chase returns based on previous short term performance.

We remain dedicated to achieving the highest possible upside returns, while reducing overall volatility in the portfolios to a level considerably lower than the index or benchmarks.

While certain asset classes, (notably International equities and US equities) outperform in the short term, we will not “chase” these returns by changing our asset allocation strategies.

Our current targets are below:


Asset Allocations Growth Income Conservative
Canadian Equity 12 12 10
International Equity 25 18 20
US Equity 25 18 12
Emerging Markets 3 3 0
Private Placements      
Preferred Shares 3 5 9
Real Estate 5 5 7.50
Utilities/infrastructure 5 5 7.50
Mortgages 5 11 0
absolute return     10
Fixed Income 14 20 19
Cash 3 3 5
  100 100 100

Notes from the FED minutes and thoughts:

Overall Theme – Tapering Delayed until Further Improvement in the Economy

Why is the FED funded asset re-purchase program not tapering?

  • The FED is not satisfied with the level of improvement in the labour market
  • Current unemployment rate of 7.3% deemed as unacceptable
  • Downside risk to growth has diminished somewhat – the situation is somewhat better inEurope
  • However tightening financial conditions in recent months could slow economic improvement
  • A declining participation rate in the labour market is understating the unemployment rate which could be as high as 10%
  • Inflation running below the committee’s objective (no near term concern)

Expectations for economic growth (Bernanke):

  • Moderate economic growth going forward
  • Growth of 2.0%-2.3% seen for FY 2013
  • Unemployment rate to decline in 2014, closer to normal levels
  • Fed funds rate of 0.0% – 0.25% can’t be lowered from the current historical lows

Outlook for the labour market (Bernanke):

  • Meaningful progress has been made in the labour market  
  • Unemployment has fallen from 8.1% to 7.3%  
  • Economic headwinds continue to pose challenges to the labour market

When will tapering occur (Bernanke)?

  • FED chairman Ben Bernanke has stated there is no fixed calendar schedule
  • Looking to reduce purchases later this year and throughout 2014 but will wait until economic improvement is sustained (wait and see approach)
  • Criterion for ending of asset purchases hinges on a lower unemployment rate and an overall improvement in the labour market

FED funds rate forward guidance

  • Currently 0 – 25 bps (appropriate for levels above a 6.5% unemployment rate)
  • No increases until below this 6.5% rate
  • Majority expect an increase in 2015
  • FED funds rate to rise slowly: expectations of a 1.0% level in 2015, and 2.0% level in 2016


The lack of any tapering and the feds comments (and growth downgrade) were a surprise to the markets.  Overall expectations were that tapering in the order of $10-15 billion would occur, only centered on Treasuries due to the recent reduction in mortgage demand seen since yields increased in the second quarter.  There was no taper.

Economic  sensitivity to rising yields is the dominant theme at work here from the Federal reserve.

In the short term, theUSstock market and US bond markets have all reacted favorably. Prices are up (yields are lower).  It is possible yields remain in their current range as the Fed is signaling it is uncomfortable letting them rise.  On the other hand, a dramatic decrease in yields will only occur if we continue to see slowing growth fromUShousing and the economy, or there is an event (Emerging Market growth concerns, peripheral Euro zone instability, equity market pullback) that creates a flight to quality.

*Source: Mutual Funds Monthly: September 2013 – James Gauthier, CFA