Pay Yourself with Ivy Foreign Equity
Daniel Arsenault, CFA, FRM, MBA
Investment Director, Equities
- When drawing income from investments, using higher risk funds in a portfolio can lead to lower levels of capital over time compared with lower risk funds, even if the returns are slightly better for the high risk fund.
- Downside protection is critical to improving investment outcomes of clients who need to draw down income from their investments.
- The Mackenzie Ivy Foreign Equity Fund has experienced better-than-market returns and downside protection over the long term.
For investors who draw regular cash flow from their investments, capital preservation is equally important as growth, if not more so. Due to Mackenzie Ivy Team’s focus on protecting capital, Mackenzie Ivy Foreign Equity has experienced outperformance with better-than-market downside protection over the long term. For those who draw cash flow from their portfolio, the downside protection also ensures that investors keep more of their money – even when compared against options that generate better buy-and-hold returns.
Why does downside protection matter?
If a fund always goes up, then downside protection does not matter. Cash flow to investors would come out of gains partially. The rest can be return of the investor’s own capital, which is as they left it. However, we know that all markets move down as well as up, and the income needs do not usually go down with markets. Investors end up taking money out when the investments are down, which leads to lower levels of compounding over time.
To illustrate the effects of improved downside protection, we chose a review period to be at the peak of the most recent market cycle for this market, starting at the market peak in February 2007 and ending April 30, 2019.
Take the example below. We selected two actual funds in the Morningstar Global Equity universe, called Fund A and Fund B. Fund A and B have roughly the same return over the review period; fund A slightly outperformed Fund B but did so with more volatility. These funds belong to the same global equity peer group.
To illustrate the effects of taking regular cash flow from an investment, we have set up automatic monthly withdraws for each fund of $4,000 from an initial portfolio value of $1,000,000. Fund A has a slightly higher rate of return when the portfolio is untouched. But the lower risk of portfolio B means that the withdrawals have a less negative impact on future value. At the end of the review period, Fund B has about $83,700 more due to its more modest risk profile.
The Mackenzie Ivy Foreign Equity Fund aims for through-the-cycle growth with an emphasis on specifically managing downside risk. We believe this focus benefits the clients who are seeking to draw regular cash flow, and allows the funds to last longer.
Using Mackenzie Ivy Foreign Equity, we present the same $1,000,000 portfolio using a hypothetical example where an investor withdrew $4,000 on a monthly basis during this review period. In this simulation, the benefits of downside protection would have meant better capital protection and lower overall risk. Plus, better through-the-cycle performance produces a better overall client experience for investors who start to take that much deserved cash flow out of their investments.
Downside capture ratio is the % of market returns the fund achieves when the market benchmark declines. If the benchmark declines 10% and the fund declines 9%, then the downside capture ratio is 90%. In the graph below, the Mackenzie Ivy Foreign Equity Fund’s downside capture ratio % is shown against two example funds, as well as the peer group average. Mackenzie Ivy Foreign Equity Fund has lower downside capture.
At the end of the review period and after $4,000 monthly income, the $1,000,000 portfolio has grown to $1,207,486, or about $445,000 more than the average competitor global equity fund. The fund has outperformed the Morningstar Global Equity peer group and MSCI World index over the review period by significant amounts, despite lagging the latter on a buy-and-hold basis.
The Mackenzie Ivy Foreign Equity Fund has outperformed the Morningstar Global Equity peer group over long time horizons and with lower downside risk than the overall market and competitor funds average. We believe this combination of characteristics makes the strategy ideally positioned as a long run core position in which investors can keep their money invested and use it to draw cash flow.
To give you a better idea, a $1 million portfolio invested in this strategy over the review period could have generated $48,000 in gross annual income, and an additional $265,401 net income growth compared to the benchmark. What’s more, it could have generated an additional $445,064 compared to the Morningstar Global Equity Category average, thereby potentially increasing the longevity of investors’ capital.