By Canada Life | Feb. 25, 2022
We know that shifting market conditions and changing outlooks can increase your clients’ concerns about their investments, and they may be tempted to make emotional decisions that might not be the best for their financial plan. On top of that, market and economic uncertainties, combined with low expected returns for many asset classes, require new and different ways of designing portfolios.
That’s why in late 2020 we launched Canada Life Risk-Managed Portfolios™, a single-fund solution designed to help protect clients from the unexpected while still helping them reach their goals.
To celebrate the one-year anniversary of the launch of Risk-Managed Portfolios, we welcomed Leonie MacCann on the Canada Life™ Portfolio Manager Connect Series. On the call, she walked us through the opportunities in the market and how the portfolios are positioned to help. Leonie is a senior multi-asset portfolio manager with Irish Life Investment Managers (ILIM). Founded in 1939, ILIM is an award-winning global asset manager based in Dublin, Ireland with C$136 billion in assets.
What’s in this article
ILIM has examined past market events and their effect on a traditional balanced portfolio (60/40 weighting of equities to fixed income). Looking at bond yields and return in this analysis raises a big question: can government bonds continue to deliver the same protection they've delivered historically when starting bond yields are so low?
‘Dotcom’ refers to the Dotcom crash, a two-year market downturn from March 2000 to late 2002. ‘GFC’ refers to the global financial crisis of 2007-2008.
Fortunately, this analysis doesn’t reveal that fixed income is broken. In fact, ILIM believes fixed income remains a core feature of any multi-asset solution. What this analysis does show is that there’s an opportunity to supplement client portfolios with broader diversification and risk management techniques to help manage volatility and reduce downside risk.
Strategic asset allocation is the most important way ILIM looks past market noise and volatility to deliver on long-term outcomes. It’s supported by three pillars:
- Diversification – a foundational tool used within and across asset classes.
- Risk management – strategies used within the asset allocation, complemented by ILIM’s proprietary portfolio modelling framework, which tests the portfolios’ strength during downside scenarios – both past and future.
- Efficiency – rather than a fully active or passive approach, real-world conditions demand nuance.
- ILIM uses active strategies where active skills will make the most impact, and cost-efficient passive solutions where they won’t.
ILIM uses what's known as an equity collar strategy across all three target-risk portfolios. You can think of equity collar strategies as an agreement to give up some potential gains in exchange for protection from large declines. (For a deeper dive into this important risk management tool, check out this short education piece – The case for options.)
An equity collar strategy involves the use of options to buy or sell an underlying security, such as a stock, at a predetermined price. This predetermined price is known as a strike price. There are two components to a standard collar strategy: put options, an option granting the buyer the right to sell at the strike price and call options, an option granting the buyer the right to buy at the strike price.
Standard collar strategies usually result in the put option being more expensive than the call option. This can be a drag on returns since there is excess market demand for protection. ILIM solves this pitfall by using a calendar collar approach. This means they sell call options more often and with shorter maturities than the put options. Rather than weighing on returns, this collar strategy is designed to generate positive income for investors.
Calendar collar performance scenarios
On the call, Leonie provided several example scenarios of how ILIM’s calendar collar approach works in practise. This is the approach used by Canada Life’s Risk Reduction Pool, a key part of the portfolios. It helps protect against the downside at a small cost to the upside for more consistent returns. When combined with the portfolio’s mix of other investment styles, strategies and asset classes, this creates a framework that’s designed to deliver a protected band of returns.
| Scenario | Positive absolute performance | Negative absolute performance |
|---|---|---|
| Positive performance relative to the benchmark3 |
Steadily rising markets Underlying equities rise in value. Option portfolio isn’t needed and option income is mostly earned on the sale of call options. |
Sharply falling markets Example: Feb. and March 2020 Equities fall in value, but protection kicks in if fall is sufficiently large, defending against further declines. Back-tested analysis indicates the fund would have likely experienced a drawdown of 15%, far less than benchmark losses.4 |
| Negative performance relative to the benchmark3 |
Fast rising, rallying markets Example: Nov. 9, 2021 vaccine rally Equities increase in value, but these gains are partially lost when sold call options are exercised. |
Choppy markets Example: late Feb. and early March 2021 Large moves up and down without direction can require the option portfolio to be rebalanced to maintain market exposure. Works against the fund if the market reverses course. |
Clients also have unique needs, goals and attitudes towards risk. That’s why we launched Canada Life Risk-Managed Portfolios as three different portfolios: Conservative Income, Balanced and Growth. Each contains a mix of underlying funds and is designed to achieve target outcomes – with specific income, risk and return objectives.
One year after launch, the portfolios are delivering strong performance without compromising on the downside protection they’re designed to offer.
Mutual fund net performance (Series A)
Net returns in Canadian dollars (%)
| Portfolio | 3 months | 6 months | 1 year | Since inception5 |
|---|---|---|---|---|
| Conservative Income | 2.3 | 2.3 | 3 | 4 |
| Balanced | 3.2 | 3.6 | 6.2 | 7.5 |
| Growth | 3.7 | 3.9 | 8.6 | 10.7 |
Segregated fund net performance (Standard Series 75/75)
Net returns in Canadian dollars (%)
| Portfolio | 3 months | 6 months | 1 year | Since inception6 |
|---|---|---|---|---|
| Conservative Income | 2.2 | 2.3 | 3 | 4.1 |
| Balanced | 3.1 | 3.5 | 6.2 | 7.4 |
| Growth | 3.8 | 3.9 | 8.6 | 10.5 |
Leonie also provided some key takeaways for what they’re watching in the overall economy.
- Inflation: ILIM expects inflation to be higher than pre-COVID-19 but ease later in the year.
- Global outlook: There’s a favourable backdrop for continued global growth, such as strong corporate earnings. They expect the rate of growth to slow slightly, and this can already be seen in the U.S.
- Equities: Equities are expensive in absolute terms but relatively attractive, given they’re supported by earnings growth, attractive relative valuations and stimulus. ILIM expects mid- to high-single-digit potential returns over the next 12 months. The environment of low bond yields has enabled equities to trade at higher price-to-earnings (P/E) multiples.
- Fixed income: Global bond yields are still low by historic standards. ILIM expects yields to pick up, with the benchmark 10-year U.S. Treasury yield to remain between 1 and 2.5%. The upside for fixed income generally is affected by central bank policies and inflation, but higher yield areas present opportunities.
- Read ILIM’s full macro-economic outlook in our 2022 Market Outlook report.
Today’s investors face unique challenges. This is where managed solutions from Canada Life can help. With Canada Life Risk-Managed Portfolios, you can provide your clients with a single-fund solution that brings together risk management strategies and traditional and non-traditional investments. This suite of managed solutions can help you keep their portfolios on track – even in unpredictable markets.
See your Canada Life Risk-Managed Portfolios toolkit for additional marketing, support and educational materials. You can also reach out to your Canada Life wealth wholesaling team for more information.
The views expressed in this commentary are those of this fund 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. Irish Life Investment Managers (ILIM) is a subsidiary of Great-West Lifeco Inc. ILIM’s direct parent, Canada Life Group U.K. Ltd, is a subsidiary of The Canada Life Assurance Company. Great-West Lifeco and its companies have approximately $2 trillion in consolidated assets under administration and are members of the Power Financial Corporation group of companies (as of Dec. 31, 2020).
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of Dec., 31, 2021 including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.
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