Portfolio Review Fourth Quarter 2017 Q4
Portfolio Review Fourth Quarter 2017 as at December 31, 2017 Portfolio Performance (Class F) 1 Month 3 Months 6 Months 1 Year 3 Years 5 Years 10 Years Since Inception (December 2001) -0.6% 2.4% 2.5% 6.1% 5.4% 8.3% 5.8% 5.2% Asset Allocation Overview and Activity Different types of investments will respond differently to the markets, reinforcing the importance of a multi-level diversification strategy. A balanced asset mix ensures that investors are not dependent on any one asset class or security type to provide returns. CI Multi-Asset Management combines its portfolio construction expertise with ongoing comprehensive research and recommendations from State Street Global Advisors, a world leader in asset allocation, to create portfolios designed to capture evolving opportunities in the various asset classes. This report is designed to provide you with an up-to-date portfolio overview of the Portfolio Series Conservative Balanced Fund, including the allocations across asset class, geographic region, equity sector and market capitalization. The arrows indicate whether the allocation for each category has increased or decreased since the previous quarter-end. Asset Class Geographic Regions 25.0% 20.2% 17.7% 16.6% 7.5% 6.6% 3.0% 1.9% 1.5% Canadian bond Foreign bond U.S. equity Canadian equity Cash European equity Asian equity Other equity Emerging markets equity 41.5% 29.8% 14.8% 3.2% 3.1% 2.5% 1.5% 1.5% 1.3% 0.8% Canada U.S. Cash and other countries Emerging markets U.K. Japan Switzerland Italy Bermuda Ireland Equity Market Cap Equity Industry Sector 90.5% 7.5% 2.0% Large-cap Mid-cap Small-cap 23.8% 12.0% 10.6% 10.5% 8.9% 8.3% 8.2% 6.7% 4.5% 4.4% 2.1% Financial services Information technology Industrials Energy Consumer staples Consumer discretionary Materials Health care Real estate Utilities Telecommunication services 11
Portfolio Review Fourth Quarter 2017 as at December 31, 2017 Underlying Fund Allocations Signature Canadian Bond Fund 14.8% Signature Global Bond Fund 12.4% Signature Corporate Bond Fund 11.7% Synergy Canadian Corporate Class 6.8% Cambridge Canadian Equity Corporate Class 5.5% CI Income Fund 5.4% CI Canadian Dividend Growth Fund 5.2% First Asset MSCI World Low Risk Weighted ETF 4.7% CI American Managers Corporate Class 4.4% CI International Value Corporate Class 4.2% Signature Select Canadian Fund 4.2% CI Canadian Investment Fund 3.8% Cambridge Global Equity Corporate Class 3.7% Harbour Fund 2.8% Signature Tactical Bond Pool 2.3% Signature Diversified Yield II Fund 2.0% CI American Value Corporate Class 1.7% CI US Income $US Pool 1.4% Signature Emerging Markets Corporate Class 0.9% Black Creek International Equity Fund 0.9% Cash 1.2% Top Ten Holdings Ontario Province 2.85% 02Jun23 1.1% Canadian Natural Resources Ltd. 1.0% Ontario Province 3.5% 02Jun24 1.0% Canada Gov t Bond 1% 01Sep22 1.0% Ontario Province 2.4% 02Jun26 0.9% Italy Buoni Poliennali Del 1.2% 01Apr22 0.8% Walgreens Boots Alliance Inc. 0.8% Royal Bank of Canada 0.8% Ontario Province 2.6% 02Jun25 0.8% Toronto-Dominion Bank 0.8% 12
Portfolio Review Fourth Quarter 2017 as at December 31, 2017 Portfolio Commentary The portfolio gained 2.4% during the quarter, underperforming its benchmark (25% S&P/TSX Composite Index, 50% FTSE TMX Canada Universe Bond Index, 25% MSCI World Index, C$), which rose 3.7%. Long-term government bonds made a positive contribution to relative performance. Exposure to high-yield corporate bonds and global government bonds detracted from value. Within the equity portion, Signature s stock selection in the Canadian energy and financials sectors, as well as an allocation to emerging markets, added relative value. Overall, the equity portfolio contributed to relative underperformance. Global equity markets produced healthy returns, capping off a strong year as investors were motivated by encouraging economic data, historically low interest rates, tepid inflation and expanding corporate activity. The S&P/TSX Composite Index rebounded during the quarter, propelled by the financial services sector and a recovery of prices for oil and other commodities. However, Canada lagged global markets, weighed down by its underrepresentation in sectors that outperformed, such as technology. Central banks worldwide continued to weigh options for scaling back monetary policies designed to stimulate the economy. The U.S. Federal Reserve Board announced a quarter-point increase in its benchmark interest rate in mid-december to 1.5%, citing a strong labour market and healthy economic activity. This followed three rate hikes during the year. The Bank of Canada, however, opted to keep its overnight lending rate unchanged at 1%, following two previous increases. Central banks in Europe and Japan also maintained accommodative monetary policies. Government bond yields in many countries rose modestly during the quarter, reflecting the expectation of higher interest rates. As 2018 begins, we expect the stock rally to continue, despite high valuations, a tight credit spread, rising interest rates and a shrinking money supply. The recent tax cuts in the United States were a positive factor for equities. We are mindful that insufficient market exposure could result in underperformance. Yet the potential downside is increasing across all asset classes, due to a high degree of correlation. Inflation could return temporarily to trigger lower bond prices, as the yield curve steepens. These factors emphasize the potential for extreme investment performance in either direction. Fixed-income markets were generally more volatile, as investors debated the consequences of the rate hikes. The prospect of higher inflation made investors overly sensitive to economic news. Short-term interest rates rose in response to the Fed s hikes. However, rising rates increased concerns about weaker economic growth going forward, causing long-term rates to fall and the yield curve to flatten. We introduced new strategies and added new asset classes to the portfolio, including gold bullion, which has been out of favour for years. We are building this position in anticipation of higher gold prices as market conditions change. Our credit exposure was decreased, as the premium is too small to justify the risk. Our portfolio s duration (a measurement of interestrate sensitivity) is less than that of the benchmark, and is diversified with assets that generally are negatively correlated to rate movements. The portfolio s ability to recover does not rely on a single factor or a rebound of any one asset class. We have tools to manage interestrate, currency and equity risk. These will be deployed on a proactive basis, as needed. During the fourth quarter, we used derivatives to enhance the upside and downside characteristics of the sovereign bond portion. Selling covered call options can produce additional income. From time to time, we may take a long position in lieu of direct bond investment, or own put options to limit any downside for our positions. We remain prepared for any inflation shocks. The global addiction to leverage remains a concern. Debt expansion has created an artificial demand for assets and this, in turn, has inflated prices. We are at a late stage of the economic cycle, which means debt levels have limited room to grow without negative consequences for investors. In our view, the Fed s plan to shrink its balance sheet is prudent, and will result in tighter lending conditions. While this could slow the economy, it will add sustainability for future growth. We favour asset classes such as gold and long-term bonds that are expected to provide a negative correlation to the current rising trend in equities. We expect the yield curve to flatten further, and will continue to monitor this actively, under the assumption that inflation may return temporarily. Market volatility has been depressed due to money flows and should increase amid tighter monetary conditions. Our portfolios will benefit from volatility spikes, and put options provide protection. We do not believe our decision to hedge part of the portfolio, including the putoption strategy, will result in significant performance drag if the markets continue to reward risk. These strategies allow us to enhance the upside and downside characteristics and, hence, our risk-adjusted return. 13
Portfolio Review Fourth Quarter 2017 as at December 31, 2017 Our equity allocation is more diversified than that of the Canadian economy and the S&P/TSX Composite Index. We had overweight exposure to defensive sectors, such as health care and consumer staples, and were underweight cyclical and interest rate-sensitive sectors, such as energy and telecommunications. The Canadian equity portion underperformed its benchmark, the S&P/TSX Composite Index. The portfolio has underweight allocations to the resources and financials sectors, and overweight positions in other areas such as utilities, information technology and consumer staples positioning that we believe enhances risk-adjusted return potential. Cambridge Canadian Equity Corporate Class s holdings in the financials sector and its high cash position detracted from relative value. The U.S. equity portion outperformed its benchmark, the S&P 500 Index. The portfolio favours areas of the market that are tied to economic growth, while maintaining underweight positions in defensive sectors. CI American Managers Corporate Class s holdings in financials and its high cash position detracted from value. The international equity portion underperformed the MSCI EAFE Index. The factor allocation to low-volatility investments made a positive contribution to relative value, as did its exposure to emerging markets. CI International Value Fund s holdings in consumer discretionary and industrials detracted from value. This portion had overweight allocations to information technology and consumer discretionary, with underweight positions in consumer staples, telecommunications services and energy. Geographically, we had overweight exposure to emerging markets, mainly in Asia and Latin America, and significantly underweight Australia and Japan. Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer Yoonjai Shin, CFA, Vice-President and Portfolio Manager Marchello Holditch, CFA, Director Milica Stojanovic, Associate Director Byron Monaghan, CFA, CIPM, Senior Analyst Desta Tadesse, Analyst Zoe Li, Junior Analyst 14
Portfolio Management Teams In the Portfolio Series program CI Investments Sub-advisors
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