Low interest rates. Longer lifespans. Slow economic growth. A government that’s tightening its belt.
Are the retirement challenges of the New Year—and plenty of years to come—any different from those of the old one?
The potential strain on the global economy caused by retiring Boomers is likely to be significant. It will touch everything from health care to real estate to social services to tax policy and more.
While the question above may be easy to answer, what to do about it is not. Yet that’s precisely the question investment managers—and many others in the world—are wrestling with every day. I believe it is within our capacity to meet this challenge, with the ultimate aim of helping Canadians better achieve their financial goals.
Here’s how we’re currently doing it at Sun Life Global Investments.
First, we’re investing primarily for growth. In its most basic form that means favouring equities over bonds, which has been our position for some time. The level of interest rates today, though slightly higher than recent record lows, truly justifies it. And it’s paid off quite handsomely.
Last year, global equity markets as represented by the MSCI World Index rose 27% in U.S. dollar terms, including dividends. Global bonds rose just 1%, as measured by the Barclays Multiverse Index, hedged to Canadian dollars. The DEX Universe Bond Index meanwhile fell 1%.
That’s not to say we’re avoiding fixed income—we’re just maintaining a lower allocation. The capital protection and portfolio “smoothing” effects that typically come with investing in bonds are as crucial as ever. We are however diversifying within the asset class, both for income opportunities and capital appreciation. In our portfolios that contain allocations to high-yield and emerging market debt, we are overweight.
Second, we’re increasingly investing outside of Canada. We believe strongly that this approach will pay off well in the coming years.
For a few years now, global developed markets have significantly outperformed the S&P/TSX Composite Index, thanks largely to Canada’s heavy exposure to the materials sector. Last year, the S&P/TSX Composite rose 13% including dividends. But even the equity markets in some of the harder-luck countries in Europe—including Spain and Italy—have been putting the domestic equity market to shame with local currency returns of 28% and 20% respectively.
Canada’s economic growth prospects are looking tepid at best. The International Monetary Fund is calling for annual GDP growth in this country of about 2.5% for the next half decade. According to the IMF’s October outlook, that’s less than half the average rate projected for emerging market and developing economies taken as a group.
In the 2014 Global Market Sentiment Survey from the CFA Institute, Canadian members cite “weak economic conditions” as the number one risk, by far, to their home market. We would agree, and in specifying “weak economic conditions,” we would list what we view as an overvalued housing market, consumers with high debt levels, and productivity challenges well documented by the central bank.
We’ve been increasing our exposure to emerging markets given current low valuations. This is a long-term growth opportunity that’s an integral part of our investment thesis. These markets do bring higher volatility, but we believe the potential end result will more than justify the short-term ups and downs.
The growing spread between emerging market equity valuations and their U.S. counterparts is certainly on our radar. As measured by the forward P/E ratio of the MSCI Emerging Markets Index versus the MSCI World Index, emerging market stocks are trading at a discount of more than 40%.
Europe is becoming more of a contender with each passing month. We’re seeing encouraging signs of a more stable recovery that’s prompting us to consider increasing our exposure.
Why Europe, and why now? Data suggest governments are making headway in cutting their deficits. Unemployment rates, while high, are levelling off. Exports appear to be increasing. In short, we would say that the “plan”—including tough austerity measures and unprecedented monetary policy moves—is working. Efforts at promoting economic recovery and financial market stabilization may be haphazard and at times wildly off the mark (remember Cyprus?), but clearly investor optimism is growing.
More investors than ever face the possibility that their portfolio will be in decumulation for longer than it was in accumulation. Such a portfolio has got to be sustainable, and that means growth within the parameters of a balanced approach. We manage our investment solutions to reflect our long-term, strategic thinking, while maintaining flexibility to adapt to changing market conditions.
You don’t drive a car the same way in every weather condition. The same holds true for your portfolio.
Today’s retirement challenges may be the same as yesterday’s, and likely tomorrow’s too. But the way we choose to meet them is constantly evolving, and if all goes well, improving—as it should be.
This article contains information in summary form. Although information has been obtained from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness. Information is subject to change. The article should not be construed as providing specific individual financial, investment, tax, or legal advice. Investors should speak with their professional advisors before acting on any information contained in this article. Please note, any future or forward looking statements contained in this article are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.
© Sun Life Global Investments (Canada) Inc., 2014.
Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.
Mr. Adatia joined Sun Life Global Investments in July 2011, bringing with him over 15 years of experience in the investment industry. Prior to joining Sun Life Global Investments, he was Chief Investment Officer at Russell Investments, a position he held since 2008. Mr. Adatia was responsible for all domestic and foreign investment funds sold in Canada and was also the portfolio manager for the Canadian equity, dividend and small cap products, as well as balanced portfolios. Prior to that Mr. Adatia was the Business Leader for Investment Consulting for Central Canada at Mercer Investment Consulting.
Mr. Adatia is a member of the annual Up the Down Market Event for Down Syndrome Foundation and the Education and Examination Committee for the Society of Actuaries.
Mr. Adatia holds an Honours Bachelor of Mathematics degree in Actuarial Science & Statistics from the University of Waterloo. He is also a CFA Charterholder, a Fellow of the Society of Actuaries (Investment Specialty Track) as well as a Fellow of the Canadian Institute of Actuaries.