As we turn the page on another rewarding year for our investors, we note that the S&P 500 Index is set to outpace the S&P/TSX Composite Index both in Canadian and U.S.-dollar terms for a fourth straight year. The U.S. economy has continued to show resilience led by a strengthening consumer base while corporations have continued to increase earnings, helping to lift stock prices. In Canada, energy companies have been hurt by plummeting oil prices. This was caused by weakening global demand and rising supply led by increasing U.S. energy production and reluctance by Saudi Arabia to curtail its own production to support prices. While oil producers are facing serious headwinds, the consumer sector is benefiting from lower energy costs. Our diversified positioning allows investors to benefit because of an underweight allocation to energy in our Canadian equity pools and exposure to the U.S. consumer sector through a large allocation to U.S. equities.
In bonds, passive investors who relied on a “set it and forget it” approach had an easy time this year. Government bond yields across the world declined to record levels in many countries due largely to economic stimulus policies. Bond values, in our opinion, went from being expensive to very expensive. In 2013, the opposite was true as yields spiked and the majority of bond managers in Canada incurred losses in their portfolios, according to Morningstar Canada. In each of our most conservative portfolios, we generated positive performance in both rising and declining yield environments due to our active management and use of multiple strategies. In 2013, we added value by reducing government bond exposure when valuations were stretched and increasing exposure after bonds re-priced to more attractive levels. This year, we accumulated U.S. dollars at an attractive rate to use as a hedge and sold them at higher levels during the equity market correction in October. During the correction, we also took advantage of bargains in the corporate credit market and took some profits in our government bond positions.