Birch Leaf Investments

Performance Summary of Asset Classes for 2010

I have included a list of the various asset classes and their performance over varying time periods.  Just because an asset class is underperforming or leading the pack does not mean you should put all of your eggs in one basket.  It all depends on your Investment objectives and your risk profile.  Here are some thoughts and things to keep in mind when making the best decision for you.

Treasury Bills have been a safe place to be over time, but with the safety level, returns are the lowest from a historical perspective.  Over the last year, cash was a poor place to have your money invested.  With an annual return of 0.39% and fees to be deducted, the returns on a net basis left very little for the investor.

Canadian Fixed Income returns have been strong historically, but in the fourth quarter, returns dipped into negative territory.  As interest rates have started to head higher, the outlook for the bond market still looks awful.  Investment in this asset class should be kept at your minimum operating level.

Canadian stocks had a solid year in 2010, up 17.61%, despite a number of missteps during the period.  Long term performance is continuing to move higher and for the patient investor, they have been rewarded with some solid returns for most periods.

Investments in U.S. stocks were up 9.45% over the one year time frame in Canadian dollar terms.  U.S stocks have proven to be a poor investment over the last 10 year period, with a return of -2.67%.  Over longer periods of time, returns were positive.  As the economic recovery in the United States continues to take hold, one may wonder whether 2011 may be the year for investing in U.S. stocks as the economy continues to recover from a deep recession.

Arguments for global diversification seem to fall apart as one looks at the returns of Global and European investments over the short and mid terms.  For 2010, investments in European stocks posted a negative 0.96%, the worst performing asset class.  Some of the mid term performance also appears weak against other asset classes. Global markets modestly outperformed fixed income investments over the one year period. Over the 15 and 20 year periods, European and Global stocks showed some decent returns.  Investors in Canadian stocks show up as the winners over most periods.

Where do we go from here?

I still believe that the cash portion of your portfolio should be kept to a minimum or should be used as a place to park money while awaiting further opportunities in the marketplace.

Bonds should have a tough year against the backdrop of improving economic fundamentals and a rising interest rate environment.

Canadian stocks should have a reasonable year, although volatility in markets will not go away.  High yielding stocks will become the preferred vehicle over bonds as the year progresses.  U.S. investments could have a decent year as the economy slowly comes back to life and corporate earnings continue to improve.

Global investing in stocks will be a more chaotic environment as some foreign countries continue to slow their growth outlook through tightening monetary policy. Other countries continue to rebuild from the damage of the last recession.  Country selection will be the key to outperformance.

Some portfolio managers may have performance that varies dramatically from the performance of the indexes shown.  One must determine how the performance has been achieved and how they have managed in strong as well as weak markets over longer periods of time.

Remember, where you invest your cash all depends on your Investment objectives and your risk profile. 

Good investing for 2011.  Rewards lie with the patient long term investor!

Robert Floyd, CFA, is Lead Manager for BirchLeaf Investments (www.birchleafinvestments.com)