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Posted by Greg Taylor on Sep 9th, 2019

Purpose’s CIO: My Top Three Approaches For These Uncertain Markets.

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wasn’t built to  succeed on low bond yields, and contributes to why this “modern” portfolio strategy feels increasingly out of date today.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 defence

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.

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Funds mentioned in this story

Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.