By Canada Life | June 17, 2022
The team at Portfolio Solutions Group (PSG) walked through enhancements to Canada Life™ target-risk asset allocation funds and their commitment to improving investor outcomes.1 Keeping clients invested and focused on their goals during uncertain times can be a challenge, and all the while you need to continue to grow your practice. Managed solutions, such as the target-risk funds PSG manages, are an increasingly important tool to help you focus on what matters.
What’s in this article:
PSG recognizes that markets are constantly changing – success requires proactively evolving to meet tomorrow’s investment realities. Investors today are faced with several factors that may affect their portfolio’s potential to achieve favourable risk-adjusted returns:
“How will inflation impact my investments?”
“Is my portfolio designed for a rising rate environment?”
“Which regions have the most attractive equity valuations?”
The reality is that we continue to face headwinds that affect near-term return potential. By evolving their strategies, PSG remains firmly optimistic that their portfolios can weather these challenges. The team believes enhancements completed throughout 2020 and 2021 have put the funds in a strong position, improving expected return potential and principal protection in a rising yield environment.
PSG has also made several tactical changes that reflect our changing world:
Asset allocation for 2022 (as of April 30, 2022)
| Current themes | Tactical view |
|---|---|
| COVID-19 and geopolitical risk contribute to heightened capital market uncertainty | Neutral asset mix to benchmark equity/fixed income weighting as economies adjust to less stimulus and greater trade |
| Valuation of U.S. equities appears extended | Reduced exposure to U.S. stocks |
| Growth and value leadership is expected to continue to fluctuate | Neutral style exposure in equities |
| Inflation is expected to continue in developed markets throughout 2022 | Exposure to alternatives and increased exposure to real return bonds |
| Longer-term interest rates are expected to moderate | Closer to neutral benchmark duration in Canada |
Multi-sector fixed income exposure
PSG has the economies of scale needed to provide exposure to the full spectrum of fixed income asset classes, and the extensive resources and expertise required to manage them effectively. They’ve made the following shifts to portfolios:
- Broadened the strategic asset allocation framework to include global bonds in the fixed income benchmarks
- Added to positions in real return bonds to help manage the risk of inflation
- Shortened duration (this reduces the time it takes for bonds to repay their true cost, which lowers the portfolio’s sensitivity to interest rate changes)
After years of strong and resilient growth, we’re now in the late stages of a market cycle. This creates 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 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.
Check out this recent article from PSG’s Chris Koltek, Institutional Client Portfolio Strategist, for a deeper dive into how they’re managing through this short-term volatility in fixed income.
Multi-layer equity diversification
Finding areas of opportunity without taking on undue risk requires looking across the broadest investment opportunity set. PSG has made several changes to the equity allocation in portfolios:
- Reduced exposure to U.S. equities, given relatively high valuations
- Aligned the portfolios with a style-neutral approach to benefit from both value and growth equity investment styles
Being nimble within traditional asset classes is no longer enough to succeed. In a market environment where forward-looking return expectations are lower, PSG believes it’s important to look elsewhere to find value or reduce certain risks. That’s why the team continues to expand the funds’ allocation to alternatives. These funds already include exposure to Canadian real estate, which will be complemented by direct U.S. real estate investment and private market access.2
Private credit
Private credit is debt financing extended to businesses by non-bank institutions. The borrower may be a public or private company that might not have access to funds through traditional bank financing and debt markets. Or they might prefer to work with lenders offering more flexible terms, bespoke structures and faster loan processing.
To add this exposure, we’ve partnered with Northleaf Capital Partners, a global private markets investment firm with US$19 billion in private equity, private credit and infrastructure commitments under management.3 Northleaf has a 20-year track record and is based in Toronto, with 7 offices across Canada, the U.S., the U.K. and Australia. The underlying fund will provide exposure to a diversified portfolio of private credit floating rate loans focused on mid-market companies and assets in North America and Europe.4
Role in portfolios:
- Higher return potential compared to traditional fixed income
- Improved diversification
- Attractive yield potential
Direct real estate
Direct real estate investing involves the purchase and management of a property providing the potential for rental income and appreciation. Segments include residential and multi-family, industrial, office and retail.
To complement the funds’ existing exposure to Canadian real estate, we’ve partnered with EverWest Real Estate Investors.5 The firm evolved from Alliance Commercial Partners, with over 20 years of real estate operating history and US$4.7 billion in assets under management. The underlying fund will provide exposure to a diversified portfolio of properties throughout the U.S.6 It’s focused on top major markets and high-demand properties in enduring locations, with a current overweighting in the industrial and multi-family sectors.
Role in portfolios:
- Improved diversification
- Wider breadth of return streams
- Inflation protection
When clients might be having a hard time feeling comfortable about the roller coaster that is the markets, it can help to provide an easy-to-understand investment solution at a risk level they’re comfortable with. Reach out to your Canada Life wealth wholesaling team for more information on this one-step investment solution.
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.
Unless otherwise noted, the funds are available through a segregated funds policy issued by The Canada Life Assurance Company or as a mutual fund managed by Canada Life Investment Management Ltd. offered exclusively through Quadrus Investment Services Ltd., IPC Investment Corporation and IPC Securities Corporation. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. 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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