There are many factors contributing to the turbulence, including:

• Elevated inflation and concerns about how the world’s central bankers will manage it
• The geopolitical uncertainty created by Russia’s invasion of Ukraine, which has led to numerous economic sanctions against Russia and driven up prices of energy and other commodities
• Continuing supply chain issues, particularly in China as it enforces a zero-tolerance policy and lockdowns amidst a surge in COVID-19 cases 

After years of strong and resilient growth, we are now in the late stages of a market cycle. These factors have created an environment where economies around the world are attempting to balance a tightening of monetary policies with a potential risk of economic slowdown. The key tools that are being used are increasing short-term interest rates and discontinuing the quantitative easing (purchases of bonds) that provided an economic boost during the pandemic.

For fixed income investors, the impacts of these factors have been difficult in the short term. Traditional long-term government bonds are down significantly, as are corporate, high yield, and global sovereign bonds.  Short-term bonds and money markets have provided a safe haven, but with minimal yield in an inflationary environment. 

For equity investors, the strategies that have worked well in recent years have not yielded the same results. Growth investing, buying the dip and high-risk meme stock leadership have all suffered while some solace has been found in the cyclical parts of the value universe in sectors such as energy and financials, especially in the Canadian market. 

In turbulent markets such as these, it’s important to maintain a long-term perspective with the understanding that volatility is part of investing and that even bonds can (and do occasionally) have negative returns. However, over the long term a well-diversified portfolio with exposure to multiple asset classes provides higher returns than short-term savings vehicles. It can also help to understand how the active management of the portfolio is working.  

PSG-managed portfolios are actively managed on two levels to deal with this type of environment: 

1. The first, or top fund level, involves the decisions regarding the asset mix, investment managers and mandates that each fund invests in. These strategic allocations are more long term in nature but can be adjusted based on forward-looking expectations. For example, changing the weightings of fixed income and equity in a portfolio or the addition of new investment managers. 
2. The second level is the investment decisions that are made by the underlying fund managers themselves.  These include not only the sector allocation and individual security selection by the portfolio managers, but in fixed income the desired level of interest rate or credit risk to take.    

Throughout 2020 and 2021 PSG implemented strategic asset mix enhancements that can help combat increasing rates and market uncertainty. We have several tools in the fixed income portion of our portfolios to deal with this environment:

• Having active managers that tactically position duration for current market conditions, which is now slightly under benchmark duration. As the fixed income markets fluctuate and rates continue to rise, the overall fixed income portfolio is taking on less interest rate risk than the benchmark.
• Strengthening our exposure to real return bonds, which can also act as a hedge against inflation.³

Additionally, we have been maintaining and adding to strong diversification geographically and by sector to provide varied income streams and exposures. In certain portfolios we are adding additional alternative asset exposure to the mix, such as U.S. real estate.³

Looking forward, we continue to maintain a watchful eye on the direction of interest rates as well as the active duration positioning in the underlying fixed income funds, and will adjust our holdings accordingly to match our interest rate and inflation expectations. 

Seeing this type of volatility can often drive a desire for action. It is important to remember that both PSG and the underlying portfolio managers are actively monitoring and managing assets in the best interest of clients. Over the long-term, making sure clients are in the appropriate risk levels and not trying to time the market have been successful investing strategies. 

The views expressed in this commentary are those of this investment manager as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice.

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