The S&P/TSX Composite Index has been touching record highs in recent days, but its performance isn’t fooling money managers who suggest that when its returns are properly placed in context, they’re still “pathetic.”
Since recovering from a rocky end to 2018, the index is up almost 17 per cent year-to-date and has reached new intraday highs in each of its last three trading sessions.
On Monday, a spike in oil prices following drone strikes on key Saudi Arabian production facilities boosted the TSX to a second consecutive record close, this time at 16,751.
But the day’s gain of just 68 points — despite an 18 per cent surge in the price of Western Canadian Select and double-digit increases for energy stocks such as Encana Corp. and Baytex Energy Corp. — seemed to underscore the long-term weakness beneath the index’s surface.
The S&P/TSX is trading at just 11 per cent above the high in May 2008 before global markets were spun into a recession. In comparison, the S&P500 in the U.S. has more than doubled in the same period and is up more than 114 per cent. Over the past five years specifically, investors in the S&P500 have been treated to 7.87 per cent compound annual returns while those buying the S&P/TSX have made a measly 1.20 per cent.
The staggering difference in performance comes down to the composition of the indexes, money managers say. The S&P500 is made up of growth stocks in the booming technology and healthcare sectors, while the S&P/TSX is made up of value stocks, with 60 per cent of the index comprised of three sectors — financials, energy and materials — that have been underperforming for years.
“The TSX is just a terrible index,” said Baskin Wealth Management portfolio manager Barry Schwartz. “It’s very narrow in terms of exposures; there’s a big chunk in banking, a big chunk in oil, a big chunk in materials and a big chunk in telcos.”
From the remaining names on the index, investors are still hard-pressed to find a homegrown winner, Schwartz said. Before the financial crisis, BlackBerry Ltd., then known as RIM, and Nutrien Ltd., which is comprised of the remnants of Potash Corp., were two of the only high growth names on the index but could not sustain their high levels. Next came Valeant, which was rebranded as Bausch Health Companies Inc. after its collapse.
Cannabis stocks appeared ready to take the mantle before stalling, so Shopify Inc. may be the lone high-growth stock on the TSX.
(The TSX is) not full of growth stocks and that’s not going to change in any hurry, if ever.
Norman Levine, managing director, Portfolio Management Corp.
“There aren’t a lot of public opportunities to invest in growth in Canada and that shows in the index,” said Portfolio Management Corp. managing director Norman Levine. “It’s not full of growth stocks and that’s not going to change in any hurry, if ever.”
Alone, Shopify Inc. makes up for half of the TSX’s exposure to the information and technology sector — a symptom of Canada’s lagging development in the space, according to Scotia Wealth Management director and portfolio manager Mike Newton.
Canada’s information and technology sector was already weak 20 years ago, but instead of catching up and carving a space for itself within the sector, they’ve lost further ground to the oligopolies that dominate Canadian markets, Newton said. The banks, railways, telecoms and big grocers that made up 15 per cent of the index at that time have since grown to represent about a third of it, he added, leading the index to become more narrow.
“This is why my portfolios over many decades have been heavily weighted toward the U.S.,” Newton said. “We’re still regarded by most people as the Home Depot of the world — where they go and buy their materials.”‘
For the stocks remaining in Newton’s portfolio that are Canadian, the key, he said, is for investors to identify companies that have a global trajectory, such as Shopify, Alimentation Couche-Tard Inc. and Brookfield Asset Management Inc. Schwartz has been actively slashing his clients’ exposure to the TSX but still holds positions in Brookfield Asset Management, National Bank of Canada and Rogers Communications Inc., he said, marvelling that Canadian investors are still keeping high exposures to the TSX.
“For whatever reason, they have oil stocks, they have gold stocks, they have all these things that are garbage and they won’t let go,” said Schwartz. “You could probably count on your fingers the number of stocks working in the TSX and that’s embarrassing.”