2017 Year In Review

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

Image Credit:Yurlick/Shutterstock.com

At the beginning of every month, I brief members on how MoneyGeek's Regular portfolios have performed and comment on the state of the financial markets. In this update, Ill also perform an in depth analysis of the performance of the MoneyGeek's portfolios.

December Performance of Regular Portfolios

The performance of MoneyGeek's Regular portfolios for the month of December 2017 were as follows:

I've chosen to list below the performance of some of our competitors. For the sake of brevity, I've decided to show only those portfolios that have a similar risk profile to MoneyGeek's Regular Slightly Aggressive portfolio.

In contrast to our competitors, MoneyGeeks Regular portfolios employ stocks/ETFs that follow the value investing strategy (QVAL, IVAL and BRK-B), and also allocate a larger percentage of the portfolios toward Canadian oil and gas stocks (XEG.TO) and gold (CGL-C.TO). If you would like to take a look at our portfolios, I invite you to sign up for our free membership.

Regular portfolios outperformed their competitors in December. This was largely thanks to XEG.TO, which rose along with global oil prices. QVAL and BRK-B also had good months in relation to the rest of the U.S. stock market.

December was a relatively peaceful month for the stock market. Republicans signed the new tax bill into law, lowering the corporate tax rate from 35% to 21% starting January 1, 2018. Although the impact of this lower tax rate will be huge for many corporations, the stock market hardly moved because it had already anticipated the passage of the bill in November.

Now that 2017 has ended, its time to look back at the year and analyze the performance of MoneyGeeks portfolios. I will devote the rest of this article to that subject.

Performance of Regular Portfolios in 2017

Lets first talk about how MoneyGeeks Regular portfolios performed compared to their competitors. Quite simply, they didnt do great.

The Regular slightly aggressive portfolio gained 11.5% in the year, whereas comparable mutual funds from RBC, TD and CIBC gained 11.4% on average - a virtual tie. However, its less convenient to follow MoneyGeeks portfolios than just buying and holding bank mutual funds, since you wouldnt need to rebalance the portfolios yourself. Therefore, there would be no point in following the Regular portfolios if you can expect very similar performances from buying bank mutual funds. Because of this, Im somewhat disappointed by the 2017 performance.

Thankfully, the long term track record still favours the Regular portfolios. Since its inception in April 2013, the Regular slightly aggressive portfolio has outperformed comparable bank mutual funds by nearly 30%, or more in some cases.

MoneyGeeks Regular portfolios also did poorly compared to another popular ETF portfolio managed by the Canadian Couch Potato (CCP). CCPs aggressive portfolio notched 12.6% in 2017, 1.1% better than the Regular slightly aggressive portfolios record. If you expect CCPs portfolios to continue to outperform in the future, there would be no point in sticking with MoneyGeeks Regular portfolios.

Thankfully, the long term track record still favours MoneyGeeks Regular portfolios. CCPs current set of portfolios came out in 2015, so they dont have records that date back to April 2013. But since 2015, CCPs aggressive portfolio gained 33.5%, while the Regular slightly aggressive gained 42.5%.

So why did MoneyGeeks portfolios have a relatively poor year in 2017? Let me answer this by analyzing the components of the Regular portfolios.

BRK-B: In 2017, Berkshire Hathaway gained 13.8% in Canadian dollar terms. This compares to 13.9% gained by the U.S. stock market overall. Berkshire is a conglomerate that tends to own boring but stable companies such as those in the utilities and insurance industries.

2017 saw exciting growth companies outperform boring stable companies in general, and the last time this happened (in the late 90s during the internet bubble), Berkshire underperformed the stock market significantly. Therefore, Berkshire actually did well in 2017, all things considered.

CGL-C.TO: I first introduced the gold bullion ETF to the Regular portfolios in March of 2017. Since its introduction until the end of the year, the ETF lost 2.2%, and its one of the major reasons the Regular portfolios disappointed in 2017.

However, I dont regret including gold in the Regular portfolios. I see gold as a partial insurance policy against a stock market crash. When you buy fire insurance on your home and your home doesnt burn down, you dont rue the money you lost insuring your home. I feel the same way towards gold.

IVAL: This international value ETF went up by 21.3% in Canadian dollar terms, outperforming competing international stock ETFs such as CWI by a few percentage points. I believe the value investing algorithm behind IVAL continues to prove its worth, and I have high hopes that we will continue to see good results from IVAL.

QVAL: This U.S. value ETF went up by 17.0% in 2017, outperforming the rest of the U.S. stock market by over 3%. The algorithms underpinning QVAL are substantially the same as the algorithms used for IVAL. But despite that, QVAL had a disappointing performance for much of the year as investors preferred to invest in exciting growth stocks like Amazon.

However, QVAL made a big jump in November as optimism around the Republican tax bill grew. It was clear to investors that many of the stocks that constitute the ETF would benefit substantially from the bill. The jump was enough to turn the fortunes of the ETF around in the end.

XEG.TO: This Canadian oil & gas stock ETF declined by 11.3% in 2017. This is the biggest reason the Regular portfolios disappointed for the year.

Curiously, XEG.TO declined even as oil prices gained during the year. There are some rational reasons for the decline; for example, natural gas prices in Alberta are depressed, and pipeline constraints are forcing Canadian companies to sell their oil for cheaper than theyd like. But these are generally temporary phenomena, and I believe there is an irrational factor that has contributed to XEG.TOs decline.

XSB.TO: The short term bond ETF lost 0.1% in 2017, with the decline in the ETFs price nearly matching the interest payments made by the ETF. As you may know from reading my free book, bond prices are affected by interest rates, and short term interest rates roughly doubled from under 1% per year, to close to 2% per year. As with CGL-C.TO, XSB.TO provides safety in case the stock market falters.

In summary, the Regular portfolios value investing ETFs performed admirably, but gold bullion and oil and gas stocks had a poor showing.

Performance of MoneyGeeks Other Portfolios

Now that Ive explained the performance of the Regular portfolios, let me now briefly comment on MoneyGeeks other portfolios. I will limit my discussion to the most aggressive versions of those portfolios, since the conservative versions dont tend to perform too differently from that of the Regular portfolios.

All Canadian: The All Canadian slightly aggressive portfolio gained 9.3% in 2017, underperforming both the Regular portfolio and our competitors. These portfolios hold both CGL-C.TO and XEG.TO, which were drags on the Regular portfolios performance as weve discussed. Meanwhile, the All Canadian portfolios didnt have the benefit of the value investing components of the Regular portfolios, since those ETFs are listed in the U.S.

Shariah: The Shariah slightly aggressive portfolio gained 8.1% in 2017, underperforming both the Regular portfolio and our competitors. The Shariah portfolios take a rather different approach from that of our other portfolios. Instead of having a few geographically differentiated ETFs, the Shariah portfolios consist of ETFs from different industries so as to exclude stocks that are problematic from the viewpoint of Shariah law.

The weights among the Shariahs ETFs are not spread evenly, but are weighted according to their risk profiles. The more volatile the ETF, the lower the weight assigned to it. Since tech stocks are the most volatile, Shariah portfolios assign the lowest weight to them. Unfortunately, tech stocks had a banner year in 2017, and so the Shariah portfolios didnt benefit as much from them as our competitors have.

Ethical: The Ethical slightly aggressive portfolio gained 11.2% in 2017, slightly underperforming the Regular portfolios and our competitors. Although the portfolio contains CGL-C.TO, it doesnt contain XEG.TO and its absence helped the Ethical portfolio as compared to the Regular portfolios. However, the Ethical portfolios also dont contain any value investing ETFs, and their absence also hurt the portfolios performance.

Optionable: The Optionable slightly aggressive portfolio gained 9.1% in 2017, underperforming the Regular portfolios, as well as our competitors. As with the Regular portfolios, the Optionable portfolios contain both CGL-C.TO and XEG.TO. At the same time, its missing some value investing ETFs like QVAL and IVAL, since meaningful options markets for those ETFs dont exist.

In summary, all of MoneyGeeks other portfolios underperformed our flagship Regular portfolios in 2017, mostly because they tended to lack the value investing components. I expect this to be the case in future years as well. However, I would also expect these other portfolios to perform roughly in line with that of our competitors in future years.

Disclosure: Dr. Jin Choi currently owns BRK-B, and plans to buy BRK-B, IVAL and QVAL in the next few days

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.