Fund Insights: Fund Insights: Pay Yourself with Ivy Foreign Equity | Mackenzie Investments

Fund Insights: Pay Yourself with Ivy Foreign Equity


Key Takeaways

  • 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.

Growth of $1 Million since peak

Source: Mackenzie, Morningstar. As of April 30, 2019.

Risk-Return

Source: Mackenzie, Morningstar. As of April 30, 2019.

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.

Growth of $1 million with $4,000 monthly withdrawals

Source: Mackenzie, Morningstar. As of April 30, 2019.

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.

Growth of $1 Million since peak

Source: Mackenzie, Morningstar. As of April 30, 2019.

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.

Downside Capture Ratio & Return

Source: Mackenzie, Morningstar. As of April 30, 2019.

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.

Growth of $1 million with $4,000 monthly withdrawals

Source: Mackenzie, Morningstar. As of April 30, 2019.

Summary

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.

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Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of April 30, 2019 including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund.

Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index.

Standard deviation is a measure of historical risk; future risk may be different. Annualized Standard Deviation: A measure of how widely returns varied over a period. A lower standard deviation means the returns of the fund have historically been less volatile and vice-versa. Standard deviation is a measure of historical risk; future risk may be different.

The content of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

©2018 Morningstar Research Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.