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With pandemic lockdowns recently being eased in Canada, the return to normality seems near. Last year, the major broad market indexes closed the year at all-time highs, rallying from the earlier pullback in the early days of the global pandemic. So how is this affecting currency weights and cash balances in investment funds?
The U.S. dollar weight is nearing all-time lows since the launch of this report (Chart 1). Note of the sequential declines in almost all major geographic locations, with an interesting drop in the Eurozone, which had been shifted from many portfolios due to severe uncertainty. It is also important to note that the last time U.S. dollar deployment dropped to this level, we had entered a short pullback period. There is no indication that this will repeat, but there are a few risks that investors should continue to keep on their dashboards.
First, consider the recent surge in consumer price inflation. With the massive amount of debt issued to keep the economy afloat in the past year, price levels for everything from daily necessities to real estate have climbed to new highs. Prices in certain commodity groups, such as livestock, industrial metals, and energy, have all seen significant increases. Precious metals have been an outlier, with negative performance year to date, a phenomenon that has drawn quite a bit of conflicting opinions from economists and analysts.
The pro argument for a bull run in gold and other precious metals builds on the inflation hedge argument, with many portfolio managers buying gold for the first time. The argument against a gold price increase rests on the current hawkish stance by the U.S. Federal Reserve Board, suggesting a tapering of quantitative easing and policy rate increase coming sooner than markets had anticipated, along with the potential for climbing bond yields, which normally have a negative correlation with gold.
Finally, the U.S. has continued its effective vaccination rollout to full vaccination and complete reopening of the economy, far outperforming Canada’s pace. It is evident that Canada, and particularly Ontario, have lagged the U.S. in this respect, but with new infections falling to historic lows, we might finally be able to put this particular difficult period behind us.
In the course of the past year, Canada has accumulated a large amount of debt to fund pandemic relief and stimulus spendnig, holding several bond auctions. That debt will eventually have to be repaid through higher taxes, future spending cuts, or both.
Markets overall have done well in the first quarter in all regions, and we continue to see rising demand in the services and leisure sectors, and is likely to be reflected in such specialized funds as the Harvest Travel and Leisure Index ETF (TSX: TRVL).
Our analysis focuses on the Canadian investment fund industry, and how portfolio managers are allocating capital in major currencies. The currency analysis excludes all cash equivalents, such as bonds with less than one year to maturity and collateral cash held to fulfill debt covenants. We believe by excluding these items, we can home in on the deployable cash in investment funds and assess the streets market sentiment. We then further analyze the liquidity of investment funds on a cash and cash-equivalents basis categorized by sector to help us understand which verticals portfolio managers are currently overweighting and underweighting.
Table 1 illustrates the month-over-month growth rates for the world’s major currencies.
Average portfolio weights for world currencies
Chart 1 illustrates the mean cash percentage in investment funds for nine major currencies in sequential order from January 2021 to March 2021.
Chart 2 illustrates the mean cash dollar value in sequential order from January 2021 to March 2021. The United States dollar had a net position of $2,980,526,008 for March 2021. The Canadian dollar had a net position of $3,494,234,164 for March 2021.
The Investment Fund Liquidity Ratio is calculated as the amount of cash in a fund relative to its total assets. It is important to assess this ratio when analyzing investments and allocating capital. It has the power to give deep insight into the overall flow of capital into specific verticals and the bullish or bearish sentiment in these investment categories. Table 2 lists the top and bottom 10 out of applicable sectors based on the mean ratio of over 3,000 investment funds with a mandate to invest in the corresponding sectors. The table lists the most bearish to most bullish sectors in descending order.
Red shading highlights the sectors with the highest ratio, which translates into underweighting their respective indexes. This could mean that portfolio managers are expecting negative performance in these categories.
Green shading highlights the sectors with the lowest ratio, which translates into overweighting their respective indexes. This could mean that portfolio managers are expecting positive returns in these categories, in the short term.
Some interesting insights can be drawn from the change in weighting for the CIFSC categories listed in the table above. For the most bearish groups, credit continues to be a challenging area. Bond portfolio managers have gone so far as tilting portfolios to equities to chase yields. Real Estate equity is looking favourable for the future, with house prices on steadily increasing, and large private debt and private equity funds taking this opportunity to buy beat down commercial real estate.
We now see real estate funds across all global, Canadian, and developed markets deploying cash. The cash balance of 4.82% is fairly low, suggesting that managers are putting cash to use in this sector. The commodity sector has also seen an even lower weighting, as managers may be looking for a continued run in the space. Financial services equities, mostly the big banks, have all posted stellar results, and we could see that continue as balance sheets are loaded with cash ready for deployment.
Notes and Disclaimers
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Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently, and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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