Markets rallied toward the end of Q3 2014, despite the sell-off that occurred after the Federal Reserve ended quantitative easing.
That’s partially because the Bank of Japan implemented stimulus at around the same time, and the European Central Bank was considering how it could boost growth, says Peter Hardy, vice president and client portfolio manager at American Century Investments in Kansas City, Missouri. His firm manages the Renaissance U.S. Equity Income Fund.
Still, he adds, “there will be continued interest-rate sensitivities for broad asset classes [this year], including stocks and bonds.”
Consider that some the most interest rate-sensitive sectors are some of the highest yielding, he notes. Many investors dropped REITs and utilities during the sell-off in the summer of 2013, but “as interest [fell] in 2014, those sectors [were] the biggest beneficiaries—in Q3 last year, REITs were up about 25% and utilities were up more than 22%, and the broad market was up well below that level.”
Read: Tech and big data shake up utilities sector
He predicts, “Those areas have been sensitive to interest rate movements and they’ll continue to be, given that they’re beneficiaries of low rates.” As a result, Hardy sold those securities last year based on their price strength, and re-deployed the assets into areas where there’s been relative stock weakness.
Read: Fed may hike rates by mid-2015
At that time, he says, his weighting in the financial sector dropped by “a pretty sizeable 3% to 4%” from about 30%. That’s because that sector could also be negatively affected as interest rates rise.
Read: Oil prices could hurt big banks
In 2015, Hardy plans to “underweight more market-sensitive business models, where […] sensitivities could lead to higher degrees of volatility.”
Don’t give up income for security
Top tips from portfolio managers in 2014
Canadians unprepared for rising interest rates