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Patrick O’Toole, vice-president, CIBC Global Asset Management.

The bull market has ended and stock market investors are rethinking their asset allocations. Now, what are we recommending for fixed income strategies going forward? Well, we see a sea change in the outlook. It wasn’t very long ago, only a couple of months ago really, that investors were scrambling for anything with some semblance of yield on it. In the bond market, investors were lamenting the fact that yields were extremely low. That includes all kinds of bonds, government bonds, corporate bonds, even had some high-yield bonds yielding less than 4%.

Not now. Now you’ve got an environment where high-quality investment rate corporate bonds have yields above 3% again, even have some investment-grade energy bonds in Canada yielding about 6%. You have some subordinated investment-grade bonds of pipeline companies yielding about 7%. And you have many, to a certain extent, relatively safe, high-yield corporate bonds have yields about 8% again. So while it’s true the government bond yields remain extremely low, we now have something to buy that offers investors a much better return on a go-forward basis.

So we’re recommending that investors raise their exposure to corporate bonds and that includes both investment grade and high yield, but maintain some government bonds. They have acted as they should have to protect portfolios in times of trouble and no one knows. We could see a resurgence, could see a second wave of infections. Nobody really knows for sure. So you still want to have some of those, but it’s still, at this point, looks like it’s worthwhile to reduce your allocation to government bonds to a certain extent, and increase to both investment-grade and high-yield corporate bonds.

Another thing you can look at doing is diversifying in fixed income more broadly. So generally a lot of investors will have a typical bond pool or bond fund that has the government of Canada bonds and provincial, some corporate bonds. But you can take this as an opportunity to look at different vehicles or different products in the marketplace that have a broader set of funds available to you to diversify. You can get exposure to more global bonds in your portfolio, some private debt in your portfolio, maybe even some currency exposure, other things like that, that could really broaden out your fixed income exposure. Add a little more stability, improve your overall yield for the longer term and hopefully keep your volatility a little lower as well in the backdrop.

One thing people did see this time is that the market can respond very violently like we saw in 2008, 2009. You saw almost a repeat of that in how fast you can see, to a certain extent, the market fall away or fall out on the corporate bond side. But if you broaden your diversification a little more fully with different types of portfolios, different types of funds, you can reduce your overall volatility, reduce your overall risk and improve your long run expected returns.

To protect portfolios going forward I think, number one, don’t panic. These episodes happen and they will happen again and that’s why you should have a diversified portfolio at all times. So right now I think you should be looking at rebalancing your assets. You likely got somewhat away from your long run targets in this episode, but look to diversify better. See what you are missing in this episode and don’t get caught again.

So if you’re still nervous, you could look to build a bit of cash so you have some dry powder, some ammunition that can be deployed if markets become unstable again. But always remember, it’s not timing the market that matters, it’s really time in the market that wins over the long term. So stay with your disciplined approach, stay very well diversified, rebalance your portfolios, look for those areas, those types of asset classes maybe didn’t have and diversify a little more broadly on a go-forward basis.

Renaissance Optimal Income Portfolio
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