Antagonistic presidential tweets, inverted yield curves, and trade wars. We’re experiencing uncertainty now like never before. Our Chief Investment Officer, Greg Taylor, shares ways you can customize a portfolio to succeed no matter which way the markets turn.
Like any bull, the current market hasn’t always been easy to ride. It’s been a long run.
Despite all of the noise and headlines along the way, investors have been nicely rewarded with a traditional 60/40 portfolio mix. It’s been easy: In the first ten years of the bull market, 60/40 portfolios generated a solid return of about 9.6% per year .
Not bad at all for a business school strategy that’s considerably less risky than investing purely in equities.
But the only constant is change. And the times, they’re definitely changing.
From potential trade wars to barrages of ad hoc presidential tweets, these are just some of the headlines Canadians are seeing today. Confusion and concern are suddenly popping up a bit more easily than we’ve been used to recently.
People are rightfully wondering if we’re setting up for a repeat of 2008. Traditional strategies suddenly don’t feel as guaranteed to succeed as they used to.
Traditionally, economic cycles end with a rising inflation kept in check by an interest rate hike from central banks. And the following slowdown, typically after overly aggressive tightening measures, is how the cycle begins again.
This time around though, many central banks haven’t been able to “normalize rates” and latest round of easing is starting from historically low levels.
Combined, these factors make it difficult to imagine a return to higher yields anytime soon. In fact, most economists are expecting interest rates could be even lower a year from now. No one is calling for a return of 5% bond yields in the near future.
Projected low bond yields are bad news for anyone that’s too dependent on their 60/40 strategy. That portfolio mix wasn’t built to succeed on low bond yields, and contributes to why this “modern” portfolio strategy feels increasingly out of date today.
It’s time for new ideas to both earn income and protect wealth—your own and your investors. You need to design a way to deliver your long term outcomes by thinking beyond what you’ve traditionally done.
It’s becoming harder than ever for investors to feel confident, and more importantly, to earn an income to retire on. It’s natural for those fears to spiral into doubting your strategy and if you’re taking the right steps to protect yourself.
But there are tools at the ready to address all this uncertainty.
1. When uncertainty gets high, go for a lower correlation.
Reducing your dependence on both fixed income and equities for returns is a good way to build some stability into your portfolio. A lower-correlation strategy, like one that sells put options and effectively sells insurance to other investors, lets you build a new return stream that gives steady income without being tightly tied to the equity market. More good news, it often works even better when volatility is high. We’ve got proof that it works. Purpose Premium Yield Fund’s beta, a measure of volatility relative to the broader market, is just 0.22. Its value was showcased in 2018, gaining 2.07% even while the S&P fell 4.39%. PYF is a multi-tasker that can help you diversify and lower risk on equity exposure or complement your bond exposure by generating income for you even while yields drop.
2. Tap into the power of private debt.
Adding an alternative asset class can give you meaningful protection against market turns while generating a high, stable yield at the same time. It’s win-win and can be a much-needed stress reliever if you’re feeling stuck on finding new approaches.
Private debt is the perfect way to test the waters. Because it’s less liquid than the public fixed income and equity markets, there’s a bigger chance for a better risk-adjusted return through the liquidity premium.
We’ve got the one-ticket solution to try it for yourself. Purpose Specialty Lending Trust is Canada’s first global multi-manager private debt fund. It gives you unique exposure to this powerful asset class for the first time, previously only available to pension plans and larger institutions.
3. The best offense is a strong defense
Sometimes too much change too quickly can be a bad thing. Brand new asset classes and strategies might not be the right move for every investor. A time-tested way to fight uncertainty is by adjusting equity and fixed income allocations. But that’s easier said than done, especially with all the noise on the markets right now.
Purpose Tactical Asset Allocation Fund is a smart, hands-off way to adjust your allocations without having to pore over every economic data point. RTA uses a systematic model to meaningfully move your portfolio from offensive to defensive when you need with the ability to swing anywhere between 100% equities or 100% bonds.
Yes, challenging yourself to think differently can be uncomfortable. But it’s also an opportunity to examine what you’re doing and adjust so that you’re better prepared. That means challenging the comfort of familiarity.
It might feel terrible in the moment, but you’ll be glad you did it in the end.
When it comes to doing things differently we can take inspiration from pension funds. They’ve been ahead of the curve on this problem, and some of the biggest ones changed their investment models years ago.
Instead of sticking blindly to the traditional 60/40 portfolio, pensions have proactively added new alternative assets and strategies like private debt, options overlays and hard assets. They’ve successfully helped conquer the uncertainty of relying on old models, just to meet their current obligations, without a longer view of the future.
Pensions have unique objectives. Just like you. Just like every individual investor. Uncertainty poses challenges, but there are new options to address it that you might not have thought of yet.
And with the challenges comes an opportunity to think in different ways, find customized solutions that fit for each client, and ultimately tackle uncertainty head-on.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.