To strengthen portfolios, consider building management teams that are made up of both internal managers and external experts from around the world.
This helps investors in two ways, says Suzann Pennington, chief investment officer at CIBC Asset Management. She oversees CAM’s portfolio management and research efforts, and manages the Renaissance Canadian All-Cap Equity Fund.
First, through collaborating with external experts, “Our internal investment team is compared constantly to other managers. And, our team is subject to ongoing review and due diligence. This keeps us on top of our game and focused on fund objectives.”
Secondly, “The internal team does not [need to] take on mandates that are outside its expertise. We’re focused on the areas where we can add the most value,” while external experts offer guidance on areas outside of that scope.
Due to the current state of markets, says Pennington, “we’ve invested heavily in equity, credit and macro research to support portfolio decisions. And, most recently, we’ve added to our high yield, small cap and global resource teams.”
By tapping into the knowledge of global experts, she adds, you’ll be better positioned to navigate low-growth and volatile market environments. You can more effectively find opportunities to enhance risk-adjusted returns, and can look at hedging through using instruments such as derivatives, if you have the capability.
“In our energy portfolio, for example, the portfolio manager chose to purchase the debt of a couple of energy companies, where he likes the asset quality but [has been] concerned about the risk associated with the stock,” says Pennington. “Those two companies were MEG Energy and Paramount.”
In an all-cap portfolio, she adds, “We [chose to] purchase Canexus convertible debentures instead of the [company’s] stock. Subsequently, the stock of all three of these companies declined significantly, [while] their debts and convertible debentures appreciated—in Canexus, particularly, by about 20%.”
In these examples, collaboration between internal and external managers helped to lower the risk profiles of portfolios. “In most of our portfolios, managers can also use conservative covered-call strategies to generate higher income and reduce risk.”