Liquid alternative assets such as listed infrastructure, real estate and commodities can offer lower correlations to traditional stock market indexes.Easyturn/iStockPhoto / Getty Images
The past year was one like no other. We faced a global pandemic that caused stock markets to decline at a remarkable rate, although they recovered their losses and even rose to new heights as 2020 progressed. We also experienced record economic contraction, but Canadians showed their resilience as they worked to navigate their personal finances through this unprecedented crisis.
In 2021, it will be important for financial advisors to understand the lessons learned from the past year and apply them as they help clients navigate stock markets and the economy in the near and longer terms.
We were reminded throughout 2020 that capital markets can be very volatile. For the second time in just more than a decade, we witnessed how market volatility can affect savings adversely – particularly for those approaching retirement.
We should expect volatility to continue in the year ahead. There remains too much uncertainty because of the ongoing efficacy of the COVID-19 vaccines and the logistical challenges involved in distributing them, the unknown long-term negative effects on certain industries and the sustainability of global economic recovery.
We were also reminded during the past year that investors may need to save more and for longer. Investment returns in the future will most likely be lower than in the past as corporate earnings need to catch up to the exuberant stock market valuations that currently exist in several sectors.
In addition, U.S. Federal Reserve Board Chairman Jerome Powell has noted that the time frame for ultra-low interest rates will be “measured in years,” exacerbating challenges for savers using lower-risk investments like bonds for income.
The best way for advisors to help investors navigate this ever-changing environment that’s so difficult to predict is to combine proven strategies with new ones.
The most tried-and-true strategy is diversification, which may result in more modest gains, but can lead to lower risk. A well-diversified equity portfolio should include many companies across a range of industries and countries, ensuring investors aren’t too concentrated in the growth stocks that haven’t performed so well recently.
Including traditional bonds can lower a portfolio’s overall risk, but likely needs to be complemented with other new income-generating strategies – especially as the Bloomberg Barclays Global Negative-Yielding Bond Index is at an all-time high of US$18-trillion.
One strategy to consider that addresses both of these concerns is adding Chinese securities to clients’ portfolios. China is the only major country in the world that enjoyed strong gross domestic product (GDP) growth in 2020. This year, China’s GDP growth is predicted to exceed 8 per cent, or a full one-third of all global economic growth. That’s truly remarkable.
China’s stock and bond markets are both the second largest in the world and simply too big to ignore. Chinese stocks are accessible, liquid and offer tremendous diversification benefits to Canadian investors. Furthermore, Chinese bonds yield at least 300 basis points more than those of developed countries.
Advisors should also look at opportunities to invest in alternatives as part of a diversified strategy for their clients. Asset management companies in Canada now offer “liquid” alternative funds that include strategies such as shorting and leverage to enhance returns and mitigate volatility. Furthermore, liquid alternative assets such as listed infrastructure, real estate and commodities can offer lower correlations to traditional stock market indexes.
New alternative funds and products are now becoming available to retail investors that will give them direct access to private alternative investments. They will now have access to the same benefits from private equity, private credit and infrastructure that institutional investors have enjoyed for years.
Investing in both liquid and direct alternatives should be considered as part of a modern, future-oriented portfolio that provides enhanced risk diversification and higher return opportunities.
Finally, a significant opportunity in 2021 – and for decades to come – is sustainable, responsible and impact (SRI) investments. According to the Responsible Investment Association of Canada, more than $3-trillion in assets under management in this country use an SRI strategy.
The largest and fastest-growing category within this space is the environment. That includes companies, both private and public, focused on developing superior products and services that aim to drive the transition to more sustainable forms of energy. They generally fit into six sectors: clean energy, clean technology, energy efficiency, water, sustainable agriculture and transportation.
Investing in this growing category can be a win-win for investors. They could be in a position to experience strong potential returns for years to come as more capital is directed to these companies – all while they put their dollars at work to improve our environment and climate for future generations.
The emphasis on portfolio diversification as a strategy combined with incorporating new opportunities such as China, alternatives and SRI point to an overriding trend for 2021 and beyond — active management is going to be critical. Investors will be looking to advisors to help them navigate these uncertain times.
Barry McInerney is president and chief executive officer of Mackenzie Investments.