The investments for the times

Take a look back at past downturns to see how each asset type fared when the going got tough with Morningstar's Director of Investment Research, Ian Tam, CFA

Ian Tam, CFA 21 May, 2020 | 1:43AM
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Ian Tam: Even though Canadian equity markets have rebounded from their March lows, economic worries continue to plague headlines as street analysts continue to be bearish on domestic companies. Although no one can tell the future, sometimes the past can help us understand the types of investments that fare well in market sell-offs and subsequent recoveries. Let's look at the three most recent market corrections in Canada and how various asset classes performed.

Between April and August of 1998, the S&P/TSX Composite fell by 27% before recovering back to peak levels in November of 1999. This period is also known as the Asian currency crisis. During this time, funds that had exposure to Asian equities fell the hardest, performed well during the recovery. Opposite to this near the bottom right you will see global fixed income funds that showed a slight positive return during the crash but negative returns during the recovery.

The second chart shows performance of fund categories during the tech bubble. During this time, TSX Composite fell 43% between August 2000 and September 2002 before recovering back to peak values in July 2005. Several equity categories didn't fall at all during this time, particularly those that invested in materials and energy sectors. Also, notice again that the global fixed income category appearing near the bottom right of the chart, this time rising in value during the correction but really not doing very much during the recovery period.

Finally, let's look at the financial crisis of 2008. During the Global Financial Crisis, the TSX fell by 43% between May '08 and February 2009. It took two years to recover back to peak levels. During this time, precious metal funds fell on average less than most other equity-oriented fund categories and performed exceptionally well during the recovery. Also, notice that yet again global fixed income funds appeared near the bottom right of the chart.

So, what does all this tell us? First, it's a reminder that over the last three decades we've seen three major market corrections. So, perhaps, the correction accompanying this pandemic is not as unprecedented as we think or care to remember. The second is that during all three market corrections most fixed income funds appeared near the bottom right of the chart I just showed which tell us that they fell less but also didn't participate on the recovery. On the flipside, equity or stock funds tend to show – they show up near the upper left of the charts which means that they showed deeper drawdowns but also good performance during recovery periods. Allocation funds which are those that have a mix of stocks and bonds appeared somewhere in the middle. So, this speaks directly to the fact that you can't gain returns without also taking on risk. So, having an asset allocation that is appropriate for the level of risk that you can comfortably take on financially and emotionally is imperative to help navigate extreme market correction scenarios like the one that we're finding ourselves in today.

For Morningstar, I'm Ian Tam.

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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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