Influenced by the events of 2022 – including the Russian invasion of Ukraine, high inflation, rapidly rising interest rates, and poor investment returns for both stocks and bonds – the general consensus at the start of 2023 was for another difficult year ahead and the inevitability of a global recession. However, despite central banks continuing to hike interest rates throughout the first half of the year, the failure of multiple U.S. banks, and increasing geopolitical conflicts, capital markets surprised many by performing remarkably well in 2023. As is often the case, when all the experts and forecasts agree — something else is going to happen.”

Read on for a recap of capital market performance in 2023 and our thoughts on what might lie ahead for investors in 2024.

2023 Performance

Given our passive investment management philosophy, we don’t spend much time analyzing the economic cycle or forecasting short-term returns for individual securities, sectors, or countries. Instead, we focus on long-term return assumptions for broad asset classes and construct model portfolios that we expect will generate efficient returns for our clients in the context of modern portfolio theory.

Despite this long-term focus, monitoring the performance of capital markets over shorter time frames can be useful as an assessment of whether investment returns are tracking consistent with our long-term assumptions. Chart 1 outlines the returns for various benchmarks in 2023 while Chart 2 demonstrates how combining those benchmark returns in different proportions – our model portfolios – impacted results last year:

As demonstrated in Chart 1, the past year was quite rewarding for investors, with the majority of asset classes experiencing impressive returns. Unlike 2022 – where stocks and bonds declined in tandem – investors were well-compensated for holding almost any type of financial asset in 2023, be that cash, bonds, stocks, or gold. For more details on why this was the case, click/tap below to expand our commentary on 2023 capital markets performance:

  • Inflation (+3.1%) remained one of the biggest economic stories of 2023 as it finally began to moderate from the elevated levels experienced in 2021 (+4.7%) and 2022 (+6.8%). While inflation remains above the Bank of Canada’s inflation-control target of 2% – the midpoint of a 1% to 3% target range – the downward trajectory over the past year has been encouraging. There is much debate about how quickly inflation will return to the 2% target, but the Bank of Canada’s latest Monetary Policy Report (October 2023) forecasts slow progress going forward, with inflation falling to 2.5% by the end of 2024 and to 2.1% by the end of 2025. Higher interest rates have already had a clear impact on some sectors but we believe the full impact of rate hikes has yet to be felt across the broader economy. As the impact broadens, downward pressure on inflation should continue and we therefore expect the Bank of Canada to begin cutting interest rates in 2024.
  • The U.S. Dollar (-2.3%) weakened somewhat against the Canadian dollar in 2023, partially offsetting the positive investment return of assets denominated in U.S. dollars. A weaker U.S. dollar decreases the value of U.S. investments in a Canadian investor’s portfolio once those assets are converted back to the investor’s home currency (i.e. Canadian dollars). Historically, the U.S. dollar strengthens against the Canadian dollar during periods of economic turmoil, and for this reason we avoid hedging the currency of foreign equity investments in our model portfolios. Maintaining exposure to the U.S. dollar is expected to reduce the price volatility of U.S. dollar-denominated assets over the long term, with 2022 and 2023 being good examples of the theory in action.
  • Cash (+4.8%) provided a compelling return in 2023 especially given that it is a “risk-free” investment vehicle. The return on cash is tied to short-term interest rates which have increased dramatically since the start of 2022. While cash provided a compelling return last year, the results might be little consolation for any investors that retreated from holding stocks or bonds to the safety of cash at the beginning of 2023 and subsequently missed out on even better returns from the riskier asset classes.
  • Short-term Bonds (+4.9%) experienced a positive return in 2023 after two consecutive years of declines in 2021 (-0.9%) and 2022 (-3.8%). Due to higher interest rates, the yield on Short-term Bonds is now substantially higher than it was at the start of 2021, providing investors with more attractive return prospects going forward. If interest rates eventually start to decline, bond prices will increase, providing additional returns in the form of capital gains.
  • Universe Bonds (+6.6%) experienced a positive return in 2023 after two consecutive years of declines in 2021 (-2.5%) and 2022 (-11.2%). Due to higher interest rates, the yield on Universe Bonds – which include short-, medium-, and long-term bonds issued by Canadian governments and large corporations – is now substantially higher than at the start of 2021, providing investors with more attractive return prospects going forward. If interest rates eventually start to decline, bond prices will increase, providing additional returns in the form of capital gains.
  • U.S. High Yield Bonds (+11.9%) performed very well in 2023. While we report the return for the full year, it is important to note that this asset class was only introduced into our model portfolios for the first time in late 2023 and clients therefore did not have exposure to the asset class for the majority of the year.
  • Canada Equity (+11.8%) performed well last year in absolute terms although lagged behind other equity asset classes. Given that Canada Equity outperformed other equity asset classes in 2022 a reversal of fortunes wasn’t too surprising. The best performing sectors in 2023 were Information Technology (+56.5%), Health Care (+25.8%), and Financials (+13.9%); the worst performing sectors were Utilities (0.2%), Materials (-1.3%), and Telecommunication Services (-2.6%).
  • U.S. Equity (+23.0%) was by far the best performing asset class in 2023, driven by a large weighting to the Technology sector and the so-called “Magnificent 7” – Apple, Alphabet, Microsoft, Amazon.com, Meta Platforms, Tesla, and Nvidia. The declining U.S. dollar offset a small portion of the gains for Canadian investors; without accounting for U.S. dollar weakness, U.S. Equity performance would have been +26.0% in 2023.
  • International Equity (+14.4%) was the second best performing asset class in 2023. The best performing geographies for the year were Italy (+32.2%), Spain (+26.9%), and Denmark (+25.7%); the worst performing geographies were New Zealand (0.7%), Finland (-5.0%), and Hong Kong (-16.4%).
  • Emerging Markets Equity (+7.0%) provided a positive return in 2023 but continued a recent streak of underperformance relative to other equity asset classes. Performance in 2023 was again influenced by a large exposure to Chinese stocks which had another disappointing year (-14.2%). This asset class has the highest long-term expected return but it is also associated with the highest expected level of risk (i.e. price variation), as demonstrated by lacklustre results over the past few years.
  • Global Low Volatility Equity (+4.8%) was the worst performing equity asset class in 2023. The objective of Global Low Volatility Equity is to track the investment results of companies that, in aggregate, have lower volatility (i.e. price variation) characteristics relative to the broader market. In a period where most equities are increasing substantially, the Global Low Volatility Equity asset class typically underperforms, as was the case in 2023.
  • Gold (+11.1%) provided impressive returns in 2023, albeit after a fairly volatile year for the commodity. Uncertainty in the U.S. banking sector and geopolitical conflicts resulted in demand for the safe-haven asset in spite of offsetting factors like high interest rates. Purchases of the commodity by central banks throughout the year also likely contributed to the positive results.

Chart 2 demonstrates that the performance of our model portfolios in 2023 obeyed the typical relationship between portfolio risk level and portfolio return, with higher risk portfolios experiencing better returns for the year than lower risk portfolios. While this relationship does not always hold year-to-year, investors willing to take on more investment risk are expected to be rewarded with higher returns over the long term.

5-Year Performance

We encourage investors to largely discount the year-to-year swings of capital markets and to instead focus on longer-term results. Charts 3 and 4 therefore present annualized capital market and hypothetical model portfolio performance over the past 5 years:

Given the impressive returns experienced in 2023, the majority of the benchmark returns presented in Chart 3 improved for the 5-year period ending December 31, 2023 compared to the 5-year period ending in 2022. Many of the 5-year benchmark returns are tracking in line (i.e. +/- 2%) with our long-term capital market assumptions (represented by vertical blue lines in Chart 3), but there are some notable exceptions:

  • Short-term Bonds (+1.6%) experienced back-to-back years of negative returns in 2021/2022 as a result of rising inflation and actions by the Bank of Canada to aggressively raise interest rates. While 2023 was a much better year (+4.9%), the net result is an annualized return of just 1.6% over the past five years, which is substantially lower than our long-term return assumption of 4.1%. The good news is that Short-term Bonds now provide a much higher yield compared to the start of 2022 – currently around 4% – so the asset class is likely to produce better returns in the years ahead.
  • Universe Bonds (+1.3%) experienced back-to-back years of negative returns in 2021/2022 as a result of rising inflation and actions by the Bank of Canada to aggressively raise interest rates. While 2023 was a much better year (+6.6%), the net result is an annualized return of just 1.3% over the past five years, which is substantially lower than our long-term return assumption of 4.0%. The good news is that Universe Bonds now provide a much higher yield compared to the start of 2022 – currently around 4% – so the asset class is likely to produce better returns in the years ahead.
  • U.S. High Yield Bonds (+4.0%) experienced an annualized return of just 4.0% over the past five years, which is substantially lower than our long-term return assumption of 6.8%. Like Canadian Short-term and Universe bonds, this asset class has performed poorly in recent years as a result of rising inflation and actions by central banks to aggressively raise interest rates. The good news is that U.S. High Yield Bonds now provide an attractive yield – currently around 8% – so the asset class is well-positioned to provide better returns in the years ahead. It is important to note that this asset class was only introduced into our model portfolios for the first time in late 2023 and clients therefore only had exposure to the asset class more recently.
  • Canada Equity (+11.3%) experienced an impressive annualized return of 11.3% over the past five years, which is considerably higher than our long-term return assumption of 7.9%. We would therefore expect Canada equity returns to be more moderate going forward.
  • U.S. Equity (+14.2%) experienced a truly incredible annualized return of 14.2% over the past five years, even despite a poor result in 2022 (-14.0%). A continuation of returns of this magnitude – nearly double our long-term return assumption of 7.6% – seems unlikely and we therefore expect U.S. equity returns to be much more moderate going forward.
  • Emerging Markets Equity (+3.0%) was the worst performing equity asset class over the past five years, earning an annualized return of just 3.0%. This is well below our long-term return assumption of 10.3% and represents the largest shortfall for an asset class relative to its long-term assumption. However, the shortfall in 2023 narrowed compared to the shortfall in 2022, and given the high expected risk (i.e. price volatility) of Emerging Markets Equity, we are not concerned by the current deviation from expectations. The recent underperformance of Emerging Markets Equity has largely been a China story, and the country’s economic fortunes should recover at some point. We will monitor this asset class and expect it to trend closer to the long-term return assumption over time.
  • Gold (+9.3%) has experienced impressive returns over the past five years, exceeding our long-term return assumption of 5.3%. The price of the precious metal is historically very volatile so it is not surprising to see large deviations from our long-term return assumption for this asset class. Gold is an optional component in some of our model portfolios, included primarily for its diversification benefits, not because it is expected to provide consistently high (or stable) returns.

Chart 4 demonstrates that the hypothetical 5-year performance of our model portfolios obeyed the typical relationship between portfolio risk level and portfolio return, with higher risk portfolios experiencing better returns over the past five years than lower risk portfolios. Given the impressive returns experienced last year, the 5-year annualized returns for all model portfolios ending December 31, 2023 improved compared to the 5-year period ending in 2022.

Firm Highlights

2023 was a successful year for High Level Wealth Management as we continued to welcome new clients and grew the firm’s assets under management by more than 70% compared to December 2022. We are proud of the fact that most new clients find us through word-of-mouth referrals or by organically searching for alternatives to traditional wealth managers. There is clearly an appetite among Albertans for fair-priced passive investment management services that are delivered in a professional, trustworthy, client-focused manner.

From an operational perspective, our biggest undertaking in 2023 was the transition to a new financial planning software provider. The new tool offers more advanced features and presents information in a more client-friendly manner. Throughout the year, we also continued discussing our new sustainable investment strategies with clients, made small enhancements to the My High Level Wealth client portal, and introduced a new asset class – United States High Yield Bonds – to our model portfolios.

High Level Wealth Management has several priorities in 2024:

  • March 2024 marks the 5-year anniversary of our firm’s incorporation. Like most startups, we’ve undergone an incredible amount of change in our first few years, particularly related to the many steps required to receive registration as a Portfolio Manager. Added to this were the unique challenges of operating a business during the COVID-19 pandemic. Thankfully, we’ve now reached a point where our business feels fully established and sustainable. With fewer resources being dedicated to building the basic foundation of our business, we can now dedicate more time and effort to what really matters: improving and expanding our client-facing services.
  • A specific focus for 2024 will be enhancements to how we collect client information. Currently information is typically collected via email or during regular review meetings. We will begin work on a “client profile” module in our client portal that will enable clients to provide their personal information – and keep it up to date – in an efficient and well-structured manner.
  • Improving the user experience of our client portal on mobile devices remains a priority, as does converting several reports from standalone spreadsheets to interactive client portal modules. Your feedback on our client portal is always appreciated, so let us know if you have any ideas, criticisms, or opinions.
  • Introducing our services to new clients also remains a priority. It is hard to assess in advance what our maximum capacity will be for bringing on new clients, but we are always conscious of our limits and continually assess whether we can continue bringing on new clients without adversely affecting the level of service provided to existing clients. At this point we estimate that we are at about 50% of our ultimate capacity, so there is still a good amount of room to grow. If you know someone that might benefit from our services, please let them know about us.

Looking Ahead

Before looking ahead to 2024, let’s revisit how we concluded last year’s annual review:

While 2022 marked the abrupt end to an era characterized by steady inflation, low interest rates, and debt-fuelled speculative investments, we remain optimistic about 2023 and the years beyond. While the global economy may continue to slow and various regions could fall into recession over the coming months, much of the potential bad news now seems to be priced into capital market valuations. If inflation continues to normalize, central banks should stop raising interest rates – or even contemplate rate cuts – and good economic news could once again become more plentiful.

In hindsight, these comments proved to be fairly accurate: inflation continued to normalize, central banks stopped raising interest rates, and by year end investors generally became more optimistic about the future.

As we move into 2024, a key question is how quickly inflation returns to target (i.e. 2%) and how this impacts central bank interest rate policy. Investors currently predict rate cuts to start in the first half of the year, which could be overly optimistic should the economy continue to perform above expectations and if inflation remains high as a result. There will also be a Presidential election in the United States in November, the outcome of which could have far-reaching implications for the world and capital markets.

There are many risks and opportunities on the horizon, but trying to predict future outcomes is impossible. Instead, we remain confident that over the long term investors are best served by remaining fully invested in low-cost passively-managed portfolios that are suitable for their circumstances given their financial objectives and risk tolerance. That may seem like unsophisticated advice, but it is advice that has undeniably served many investors well.

We wish everyone a prosperous year ahead and we look forward to playing a part in your continued success.

Footnotes

Data sources:

Inflation & Currency
Inflation
: Canada All-Items CPI (1 Month Lag)
U.S. Dollar: Bank of Canada CAD/USD Daily Rate
International Currencies: Bank of Canada Daily Nominal Canada Effective Exchange Rate excluding the U.S. Dollar (Inverted)

Fixed Income
Cash: S&P Canada Treasury Bill Index
Short-term Bonds: Solactive Broad Canadian Short Term Bond Universe Index
Universe Bonds: Solactive Broad Canadian Bond Universe Index
U.S. High Yield Bonds: Markit iBoxx USD Liquid High Yield Index (CAD Hedged)

Equity
Canada: S&P/TSX Capped Composite Index
U.S.: CRSP US Total Market Index (CAD)
International: MSCI EAFE Investable Market Index (CAD, net of withholding taxes)
Emerging Markets: MSCI Emerging Markets Investable Market Index (CAD, net of withholding taxes). Prior to December 2023: MSCI Emerging Markets Index (CAD, net of withholding taxes)
Global Low Volatility: MSCI All Country World Minimum Volatility Index (CAD, net of withholding taxes)

Alternatives
Gold: LBMA Gold Price (CAD, AM Price)

It is not possible to invest in a benchmark or index directly and returns do not reflect the transaction costs or management fees that an investor would incur when investing in a financial product, such as an exchange-traded fund, that attempts to track the performance of a benchmark or index.
Data sources:

Model portfolio returns are calculated by averaging the asset class returns presented in Chart 1, weighted by each model portfolio’s asset allocation targets. Review our 2023 Model Portfolios article for additional details.

Returns presented are hypothetical because it is not possible to invest in a benchmark or asset class index directly. The returns presented do not reflect the transaction costs or management fees that an investor would incur when investing in a financial product, such as an exchange-traded fund, that attempts to track the performance of a benchmark or asset class index.

Clients’ actual returns will vary based on their management fees and the timing of cash flows into or out of their accounts. Model portfolio returns also assume that asset class weightings are held constant while in practice an account’s asset allocation may deviate from targets within a predetermined range before being rebalanced.

Data sources:

Inflation & Currency
Inflation
: Canada All-Items CPI (1 Month Lag)
U.S. Dollar: Bank of Canada CAD/USD Daily Rate
International Currencies: Bank of Canada Daily Nominal Canada Effective Exchange Rate excluding the U.S. Dollar (Inverted)

Fixed Income
Cash: S&P Canada Treasury Bill Index
Short-term Bonds: Solactive Broad Canadian Short Term Bond Universe Index
Universe Bonds: Solactive Broad Canadian Bond Universe Index
U.S. High Yield Bonds: Markit iBoxx USD Liquid High Yield Index (CAD Hedged)

Equity
Canada: S&P/TSX Capped Composite Index
U.S.: CRSP US Total Market Index (CAD)
International: MSCI EAFE Investable Market Index (CAD, net of withholding taxes)
Emerging Markets: MSCI Emerging Markets Investable Market Index (CAD, net of withholding taxes). Prior to December 2023: MSCI Emerging Markets Index (CAD, net of withholding taxes)
Global Low Volatility: MSCI All Country World Minimum Volatility Index (CAD, net of withholding taxes)

Alternatives
Gold: LBMA Gold Price (CAD, AM Price)

It is not possible to invest in a benchmark or index directly and returns do not reflect the transaction costs or management fees that an investor would incur when investing in a financial product, such as an exchange-traded fund, that attempts to track the performance of a benchmark or index.

Data sources:

Model portfolio returns are calculated by averaging the asset class returns presented in Chart 3, weighted by each model portfolio’s asset allocation targets. Review our 2023 Model Portfolios article for additional details.

Returns presented are hypothetical and do not reflect actual investment returns earned by clients of High Level Wealth Management – our firm was granted registration in the category of Portfolio Manager in early 2021 and did not manage client investments prior to that time. We present hypothetical 5-year model portfolio performance to illustrate how our model portfolios might have performed (before fees) over a medium historical time frame. It is not possible to invest in a benchmark or asset class index directly and the returns presented do not reflect the transaction costs or management fees that an investor would incur when investing in a financial product, such as an exchange-traded fund, that attempts to track the performance of a benchmark or asset class index.

Clients’ actual returns will vary based on their management fees and the timing of cash flows into or out of their accounts. Model portfolio returns also assume that asset class weightings are held constant while in practice an account’s asset allocation may deviate from targets within a predetermined range before being rebalanced.