Highlighting our Large Cap Equity Investments
In our November 2022 Market Commentary, we highlighted our Small Cap Equity Investments managed by Laurus Investment Counsel since 2014. This month, we focus on our Large Cap Equity Investments and some exciting changes to the WealthCo Asset Management Core Equity Fund.
We posed a few questions to Dave Makarchuk, WealthCo’s Chief Investment Officer, regarding the fund.
Q: How would you describe the mandate of WealthCo’s Core Equity Fund?
A: Our Core Equity Fund offers institutional exposure to a diversified portfolio of global public equities. For most of our investors, this fund represents either their largest or second-largest allocation, so its performance and risk profile are crucial.
As stated in its Investment Policy, WealthCo’s Core Equity Fund aims to generate long-term capital appreciation and dividend income by investing in Large, Mid, and Small Cap public equities, including stocks trading in Canada, the US, and international markets. To reduce volatility, the portfolio is diversified by geographic region, industry sector, capitalization, investment manager, and security.
Q: What kind of returns do you expect from the fund?
A: In simple terms, I expect the fund to generate returns that meet or exceed those of comparable diversified public equity portfolios. We measure the performance of the fund against the Morgan Stanley Capital International (MSCI) All Country World Index over the long term.
Q: So the fund invests all around the world?
A: Yes, the fund has a global mandate. While it has a modest target allocation of 10% to Canadian equities, most of the fund is invested outside of Canada.
Q: The global diversification trend has been strong. Why has that been the case?
A: Whether we consider academic theory, historical performance, or the future outlook, all signs point to global diversification. Expanding WealthCo’s equity portfolio outside Canada significantly broadens its opportunity set, providing exposure to companies that don’t exist locally. This enhances return opportunities and reduces overall portfolio risk by increasing the number of underlying companies.
Q: Who manages the Large Cap Canadian Equity Allocation?
A: Effective February 2023, MFS Investment Management is responsible for the 10% target Canadian equity allocation for the fund. MFS is an established institutional investment manager known for its fundamental research, discipline, and risk management. The MFS Canadian Equity Fund has over 40 years of history and has consistently added value during market downturns while posting overall returns that exceed its benchmark over the mid to long term.
Q: Who manages the Large Cap Global Equity Allocation?
A: Effective February 2023, the Large Cap Global Equity Allocation is split equally between MFS Investment Management and T. Rowe Price. Like MFS, T. Rowe Price is an established institutional investment manager focused on fundamental research and public equity solutions.
Q: Why are there now two managers for large cap Global Equities?
A: We believe that MFS and T. Rowe Price are among the best institutional investment managers for global equity mandates. More importantly, their investment philosophies and styles complement each other, adding further diversification to the fund and, over the long term, improving returns.
Q: How are the MFS and T. Rowe Price global equity mandates similar? How are they complementary?
A: Both managers invest in large cap public equities worldwide and employ broad, deep research teams searching for high-quality companies with strong growth prospects and reasonable valuations. MFS tends to take a longer-term view (5+ years) in its risk and return assessments, while T. Rowe Price evaluates companies over a shorter time horizon (1-2 years). This combination makes a lot of sense for our investors.
Q: Which public equity markets matter most for the fund?
A: The fund continues to have its largest exposure to the United States, with over 60% of its total exposure. Approximately 20% of the fund’s exposure is to Europe, Australasia, and the Far East, with a 10% allocation to Canadian equities and a small allocation to Emerging Markets. While we expect each of T. Rowe Price, MFS, and Laurus (who manage the small cap portfolio) to dynamically manage their mandates based on their assessment of each company and overall market conditions, we don’t expect their country allocations to change significantly from quarter to quarter.
Q: Public equity market returns are off to a quick start so far in 2023. What lies ahead?
A: Yes, equity markets got off to a fast start in 2023! The MSCI All Country World Index, measured in Canadian dollars, increased by 5.5%, while our WealthCo Core Equity portfolio outperformed, posting a 7.2% return for the month.
What lies ahead? Well, broad public equity markets are now approximately 15% higher than their early October lows, and market sentiment appears stronger than in late 2022. Investors seem confident that inflation is under control and that central banks will soon end their interest rate hikes. While I see reasons to support that premise, it’s possible that inflation remains stubbornly high due to labor shortages in North America and globally. I expect public market volatility to remain high for several months. However, the recent returns remind us that volatility can be both good and bad. Remaining fully invested on a diversified basis with half of one’s portfolio in alternatives and half in public markets remains a prudent investment strategy.
About the Author | Dave Makarchuk
This Market Commentary is written by WealthCo Asset Management's Chief Investment Officer, Dave Makarchuk. Dave brings over 20 years of institutional investment experience to the WealthCo team, along with several credentials including CFA, FCIA, and FSA designations.
When he’s not using his critical thinking and problem-solving skills to enhance WealthCo’s investment portfolios and improve investor outcomes, you’ll find Coach Dave on the ice, training the next generation of Canadian hockey players.
NOTE: The WealthCo Core Equity Fund is the public equity allocation for our diversified investors. The legal name of the fund is the WealthCo Core Growth & Income Fund.
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