Ten years into the bull market and on the back of central banks tightening their monetary policy, investors should brace for change.
So says Michael Sager, vice-president and client portfolio manager, multi-asset and currency management, at CIBC Asset Management. The main challenge, he said during a late October interview, is “we have an environment where returns have been excellent, but [where] the outlook for expected returns are not as positive by any means, compared to the past 10 years.”
Asset returns have been so strong, he added, because of the way policymakers responded to the 2008 global financial crisis and how that stimulated “risk-taking, which pushed money back out of cash and into equities and bonds, and other asset classes.”
The tables have turned in the last six to 12 months, however, as central banks around the world are looking to follow the U.S. Federal Reserve’s lead in tightening and hiking, Sager said. The impact has been a pullback in “very strong and synchronized economic growth across the global economy—it’s been a very rare situation over the last two or three years.”
Going forward, “the impact of this year’s U.S. fiscal policy will start to moderate as well,” Sager said. Overall, “the backdrop to the strong asset market performance that we’ve seen is starting to deteriorate just a little bit.”
He’s not worried. Over the upcoming 12 to 24 months, Sager predicts growth will correct moderately rather than plummet. “We’re currently growing above estimates […] for the world, as a whole. So we’re not going from a strong outlook to a very weak outlook; it’s a moderation of growth from a very strong position.”
After all, “most asset classes are trading fairly rich to longer-term valuations,” he added, including sovereign bonds in developed markets. In the U.S, in particular, “we have not seen equity valuations this high and this stretched since 2000.”
The one exception is emerging markets, Sager noted, “where there does seem to be some opportunity.”
One positive for investors is the private sector has now “come to the party after years of repair after the global financial crisis” in terms of confidence, balance sheets and capital spending, said Sager. He manages the CIBC Multi-Asset Absolute Return Strategy, which invests in assets such as currencies and commodities, and in factor-based strategies.
Investors can also start looking beyond traditional asset mixes, Sager said. One reason is “traditional portfolios typically focus on equity and bond risk, but when you look at the contribution of both of those [asset classes] to total portfolio risk, it’s overwhelmingly dominated by equities. So it’s a very concentrated portfolio.”
That leads to “very lumpy” performance that’s “subject to the broader equity market cycle.” Such a portfolio “will look very good in strong macro periods,” but may not perform as well when global and market growth is challenged.
Alternative assets can help, Sager suggested, because they provide “a range of sources of return.” One example of an attractive, liquid, single-asset-class strategy is actively trading currency, he said—managers typically buy one currency while selling another, and this requires active rebalancing and monitoring.
If this approach is implemented in a segregated account, he added, “there’s no upfront funding requirements, in terms of reallocation of capital from another part of the portfolio to the active currency strategy. It’s very efficient in its use of portfolio risk capital.”
Another option, Sager said, is investing via a multi-asset absolute return strategy. “These […] typically combine a mix of traditional core asset classes like equities and fixed income, with alternatives like currency [and] emerging markets.” They can also include strategies like “so-called factor investing in the likes of value, carry and momentum strategies, for example; these reward investors.”
More alternative investment funds will likely be available to retail investors going forward, following the Canadian Securities Administrators finalizing regulation for such products in early October. The new rules for alternative mutual funds will come into effect Jan. 3 and offer access to products that use strategies that have so far been restricted to accredited and institutional investors.
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