How Canadian Bear Markets Influence Fund Performance

Are funds reacting similarly during the coronavirus pandemic?

Ian Tam, CFA 8 June, 2020 | 1:29AM
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Bear sitting

Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

A Look at Fund Category Performance Over Past Market Corrections
There have been three major market corrections in Canada in just as many decades, if we exclude the recent pandemic. This article shows the relative performance of Canadian fund categories during each drawdown and recovery period in dollar terms to help illustrate the behavior of investable vehicles by Morningstar Category.

Key Takeaways

  • Through the past three corrections and subsequent recovery-to-peak values, broad investable asset classes behaved largely as financial literature would expect. Equity funds declined the most during market corrections, and many surpassed peak values after the recovery period. Fixed-income funds fell less but did not participate as strongly during recovery. Allocation funds fell somewhere in between.
  • The "flight to safety" behavior of Canadian investors in precious-metals funds proved successful during the tech bubble, financial crisis, and so far during the pandemic, but not during the Asian currency crisis.
  • Global fixed-income funds showed particular resilience. As a group, these funds did not exhibit losses during the drawdown periods and maintained value during the recovery. 


Bears in Canada
Despite the exceedingly common use of the word "unprecedented" in the financial media as of late, seasoned investors will remember times in the past where markets saw deep drawdowns that were inevitably followed by recoveries in Canada. These "black turkeys," as Morningstar's Paul Kaplan calls them in a recent article, happen more frequently than investors care to remember. Although today's market conditions are unique both in cause and the subsequent reaction from central banks, it can be argued that so too were the conditions during each major market correction in the past. Nevertheless, a look at the behavior of various investable asset classes (expressed in this article through Canadian fund category averages) during prior corrections will offer insights that the firehose of today's news may have painted over in investors' minds. 

In this article, we leverage Kaplan's observations of bear markets in Canada and focus on the three most recent, which include the Asian currency crisis, the technology bubble, and the global financial crisis. The time frame of the decline and recovery are defined by price action on the S&P/TSX Composite Index and are outlined in Exhibit 1. 

Exhibit 1

To clearly understand the behavior of the various fund categories in Canada during both drawdown and recovery periods of past bear markets, the below exhibits plot the value of a theoretical CAD 100 investment at the peak of the market in each category. The horizontal axis measures the value of that same investment at the bottom of the market, and the vertical axis plots the value of the investment at the time recovery of the S&P/TSX Composite Index. Categories that appear to the far left of the plot lost the most value during the decline, and categories that appear below the horizontal axis failed to recover before the index did. The supplementary data behind these charts can be found in the appendix of this article.

Exhibit 2

During the Asian currency crisis, as expected, fund categories with direct exposures to the region fell sharply but also provided returns in excess of the index during the recovery period. Also notice that the flight-to-safety behavior often seen during volatile times did not prove fruitful as precious-metals funds fell harder than the main benchmark and did not recover by the time the index reached the peak again. Real estate funds similarly fared poorly. On the contrary, global fixed-income funds moved in the positive direction during the drawdown and maintained value during the recovery. 

Exhibit 3


The technology bubble in the United States founded the beginnings of "the lost decade." Recall that after the initial drawdown from the dot-com bubble, the S&P 500 did not recover fully until after the financial crisis. This period also serves as a sore reminder for many Canadians that at the peak of the market, Nortel Networks was worth 35% of the S&P/TSX Composite before falling 92% in value in the subsequent 12 months. It can be seen above that this had a significant impact on the index itself as most equity categories did not suffer as much as the index, perhaps alluding to stock-specific risk in the index itself.

That said, during this time period not only did commodity funds move in the opposite direction of the index, they also provided spectacular returns during the recovery. Consistent with the Asian currency crisis was the performance of global fixed-income funds, again moving opposite to the index and holding their value during the recovery.

Exhibit 4

The global financial crisis held some resemblance to the Asian currency crisis, in that the majority of equity funds saw sharp losses. Notably, precious metals (gold funds) recovered substantially past their peak by the time the index recovered. Global fixed-income funds again showed resilience through the financial crisis. Notice also the significant performance of the U.S. dollar relative to the Canadian dollar as expressed through the returns of U.S. money market funds. 

Exhibit 5

As the pandemic continues to unfold, initial market reactions show most equity funds falling less than the index, but with energy and natural resources underperforming broad equities during the known recovery period (March 24, 2020, onward). Despite the sharp rate decrease over this time period, global fixed-income funds fell marginally but have since recovered to near-peak values. The flight-to-safety behavior of investors is a possible reason that Canadian-domiciled precious-metals funds have skyrocketed, making it the only category of equity funds so far to exceed pre-pandemic portfolio value. The U.S. dollar also strengthened against the Canadian dollar during the initial drawdown period as highlighted through the performance of U.S. money market funds.

Despite the turbulent nature of markets during the pandemic, one constant is that broad asset classes are performing as we would expect them to on a relative basis, even during extreme market conditions. Like the past three bear markets in Canada, most equity funds seem to be doing worse than allocation funds, which are doing worse than pure fixed-income funds. Looking only at the above data, one might also observe that Canadian-domiciled global fixed-income funds seem to be resilient during turbulent times. Additionally, it is noted that all categories of allocation funds (those that hold a mix of equities and fixed income) recovered to peak levels by the time the index recovered. The above hopes to echo the fact that a focus on risk appetite and appropriate asset allocation is paramount if investors are to navigate through the pandemic successfully.


Appendix A


Appendix B


Appendix C


Appendix D

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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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