BY BRIAN FOX
SENIOR VICE PRESIDENT, EQUITIES, STANDARD LIFE INVESTMENTS
PORTFOLIO MANAGER OF THE STANDARD LIFE U.S. MONTHLY INCOME FUND

You may remember the “fire triangle” from childhood school chemistry labs. This model shows the three ingredients_ – heat, fuel and oxygen – necessary for a fire to start, and teaches that removing any one of them would extinguish the fire. These days when I consider the long term future of the investment industry, I sense that Canadian investors are living on the cusp of one of the most profound shifts we’ve seen in a generation. I use a similar concept to describe this, and I_call it the “Baby Boomer triangle”.

“ THE BABY BOOMERS REPRESENTED THE POWERHOUSE FOR A GENERATION OF SOCIAL, TECHNOLOGICAL AND POLITICAL CHANGE, AND NOW_THEY’RE DOING THE SAME FOR INVESTMENTS.”

A trio of challenges
Canada’s “Baby Boomer triangle” has three distinct themes. Firstly, Canada is witnessing a huge increase in the size of the retirement age population. According to Statistics Canada, by 2021 nearly 1 in 5 Canadians will be over 65. As the Baby Boomers start to retire en masse, the demand for income securities will multiply. But with all of these extra years in retirement, this cannot come at the expense of capital appreciation.

The second theme in the triangle of challenges is that bond yields in recent times have been the lowest they’ve been in over 50 years. With current long term Canadian bond yields so low, this market is not seen as providing a lot of potential value. This has led to investors looking more seriously at corporate and high yield bonds.

And here we run into the final problem which makes up the “Baby Boomer triangle” – the Canadian market place is concentrated in three sectors. Financials make up over a third of the S&P/TSX Composite, with energy and material stocks accounting for an extra 37%. Is it possible to find proper diversification if three quarters of your equity investments are limited to just three sectors?

An unprecedented shift
Faced with this trio of problems, the Canadian inves tment industry is set to undergo a shift as retirees seek to find yield and capital appreciation in the same place. So what can you recommend for these clients?

The Standard Life U.S. Monthly Income Fund takes a flexible and balanced approach for investors who are looking outside of Canada to find income. The fund seeks to provide investors with an ongoing income stream while still aiming for capital appreciation. The portfolio manager aims to achieve this by investing in the most attractive risk adjusted securities within both fixed income and equity markets. Simply put, the fund’s flexibility allows it to generate income from where it is most attractively priced while freeing up capital to seek capital growth, often from low or even non-yielding equities. Most importantly, the fund is able to tilt its ratio of fixed income and equities to make sure that it is seeking out the best opportunities.

Our world is changing. As demographics evolve, this in turn will lead to a shift in what your clients demand from their investments. The Baby Boomers represented the powerhouse for a generation of social, technological and political change, and now they’re doing the same for investments. In order to quench the problems of the “Baby Boomer triangle”, it could be time to look for a fund which offers a flexible and balanced approach to asset allocation for income seekers.

For more information on Standard Life Mutual Funds and  their range of global solutions, advisors are invited to visit slmf.ca/globalexpertise.

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