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Feb 1, 2024

CMS Model Portfolio Update: It's All About Interest Rates

by Chris White

It has been some time since we did a thorough update of the CMS Model Portfolio, so we decided to dedicate a few pages to this topic here. Before we dive into performance and changes to the portfolio, we wanted to discuss the strategy of the portfolio as a refresher. 

Portfolio Strategy

The strategy of the portfolio is meant to be largely a passive, low-cost portfolio strategy diversified by asset class (equity, fixed income), geography (Canada, U.S., International), currency (Canadian Dollar vs. U.S. Dollar) and style (growth, value). We then tilt the portfolio around the edges to generate some alpha. This is seen through exposures such as the BMO Covered Call Utilities Exchange-Traded Fund (ETF) (ZWU), Consumer Discretionary Select Sector SPDR Fund ETF (XLY) and Vanguard Information Technology Index Fund ETF (VGT).

The holdings are concentrated more in Canadian and U.S. geographies and, in general, are tilted more to the growth spectrum, but we would consider it a balanced strategy overall. We believe that with longer lifespans and less reliable pensions (or none at all) for many, portfolios need a bit more growth in order to meet lifestyle needs than what investors may be accustomed to compared to past decades. 


There are two ways to rebalance a portfolio: Calendar-based or based on a threshold. For calendar-based rebalancing, investors set a time in their calendar (quarterly, semi-annual, etc.) and rebalance when the date comes up. For threshold rebalancing, investors set a range of weightings they are comfortable with and rebalance when a holding moves outside of the range. So, someone might be comfortable with a particular ETF at a 10% weight +/- 5% (as low as a five per cent weight or as high as a 15% weight). When the fund exceeds 15%, the investor would rebalance back to 10%, and/or if below five per cent, that investor would add to the position to bring it back to 10%. While we do not have set ranges for the CMS portfolio specifically, we tend to rebalance as the weightings drift from initial weights, but we are happy to let things drift either way to benefit from momentum trends and ìlet winners runî.


In general, tax implications and decisions need to be considered at the individual level. Since everyoneís situation is different, it is difficult to construct a general model portfolio that takes taxes into consideration. With that said, we strive to have low turnover to limit unnecessary taxable events. If an individual wanted to tax-loss sell some losers in the model, they could do so with relative ease.

Overall, the intention of the portfolio is to be a starting point for an investor that they can tweak in a manner that makes sense for the situation.

2023 Review

As most readers likely know by now, 2023 was an impressive run for the U.S. markets, particularly from the large-cap tech companies. It was a year of rebounding stocks from oversold companies, as well as bond market volatility, causing the bond markets to have another tough year. However, just in the past few months, the prospect of rate cuts in 2024 has sent the bond market rallying. 

Sectors that include companies with high debt loads such as Utilities and Real Estate were under pressure during the year. The highly cyclical sectors, such as Technology, Consumer Cyclical, and Industrials, outperformed the broader market. So far, it has been a strong close to 2023, and we feel that with the prospect of stagnating or declining rates and continued softening of inflation, markets have the potential to resume their long-term uptrend in 2024

Turning to the CMS Model Portfolio, no rebalancing was made throughout the year, and we feel the model portfolio benefited from the relative strength of the U.S. markets. The strength from mega-cap tech stocks caused the SPDR S&P 500 ETF Trust (SPY) (S&P 500) to gain in relative weighting, which we are comfortable with given it is comprised of the 500 largest U.S. companies. 

The Vanguard Information Technology ETF (VGT) expanded rapidly, given the strong performance of the magnificent seven tech names and, led by developments in AI, the tech sector as a whole. Consumer Discretionary, the XLY ETF, increased in weighting from the beginning of the year as well, led by cyclical sectors outperforming in 2023. Bond ETFs largely held up, but we did see some weakness throughout the year as a ìhigher-for-longerî narrative crept into the markets. We expect these bond ETF weightings to increase in the coming months as bond yields continue to slide lower and expectations for rate cuts in 2024 rise.

Rebalancing and 2024 Outlook

With cash nearing seven per cent and the equity allocation growing over the years, it is appropriate to put some of this cash to work in 2024 as the markets are witnessing positive momentum. We continue to like the mix of ETFs in the model portfolio, and we believe bonds could see a rebound in 2024 as bond yields remain at elevated levels.

The key is in thinking long-term while rebalancing holdings appropriately in the context of a diversified portfolio. Often, the most damage can be done when an investor gets impatient and attempts to make large and unnecessary changes.

We do not know what the next year will hold, but we know there will be points of uncertainty, fear, and doubt. But this is simply how the markets operate, and we believe we will get through any ìwalls of worryî that come our way. We continue to view the CMS Model Portfolio as a solid starting point for an investor looking for more of a passive, market-based portfolio while providing some potential for alpha over time with some of the sector and income tilts in the portfolio.

Chris White, CFA
Senior Analyst for 5i Research Inc