One of Canada’s Top Wealth Advisors says the secular bull market could last another 10 to 15 years but expects a “potential reset in the second half of next year” that could see public markets fall as much as 30 per cent.SusanneB/iStockPhoto / Getty Images
Equity markets are on a historic bull run and likely have more room to roam – although not without dips, corrections and even a short-lived appearance of a bear along the way.
That’s largely the view of four advisors who made SHOOK Research and The Globe and Mail’s inaugural ranking of Canada’s Top Wealth Advisors.
Yet, if these advisors are optimistic, it’s cautiously so.
Here’s a look at the strategies they’re using to capture equities’ upside while managing their risk, too.
Todd Degelman, founder, vice-chairman and senior investment advisor with Degelman Pruden Group at Wellington-Altus Private Wealth Inc. in Saskatoon
Mr. Degelman employs a three-sleeve strategy for clients that includes a pension-style allocation to a globally diversified balanced portfolio similar to the Canada Pension Plan Investment Board. The second sleeve is a yield portfolio that holds structured notes and dividend strategies “to get a little more enhanced return” over fixed income “without taking on a lot more risk.” And the third sleeve is dedicated to “alpha generation.”
That final part of the strategy often involves allocating capital to fund managers focused on stocks in disruptive technologies – including exchange-traded funds (ETFs) from Cathie Wood and her team at Ark Investment Management LLC – as well to value-style managers focused on mid-cap stocks.
Other alpha-based approaches include a momentum slant, selecting stocks with the highest capital inflows.
Depending on clients’ risk appetite, money is allocated to all three or even just one of the sleeves as opposed to the traditional 60 per cent equities/40 per cent fixed-income framework. Downturns are expected, but Mr. Degelman argues the low-interest-rate environment – hikes aside – offers investors few options.
Furthermore, focusing on proper allocation to the aforementioned sleeves, while ensuring submanagers perform, limits the negative impacts of the unexpected, he says.
“It’s up to the managers to navigate these uncertain times.”
Rob Tetrault, senior vice-president and portfolio manager with Tetrault Wealth Advisory Group at Canaccord Genuity Wealth Management in Winnipeg
Mr. Tetrault is “a big believer in equities,” saying the secular bull market could last another 10 to 15 years. Still, he expects a “potential reset in the second half of next year” that could see public markets fall as much as 30 per cent. “But you still can’t be short this market.”
His approach to managing equity and fixed-income risk has been allocating more capital to alternative assets. That’s because private equity is often non-correlated with public equities’ performance, and private debt offers a higher yield than traditional fixed income while is less affected, generally, by rising interest rates.
Alternatives also include real estate, infrastructure and farmland. Particularly noteworthy is an allocation to a music royalty fund that’s generating consistent income with capital appreciation.
“You can make an argument it has an inverse correlation to markets,” he says. “If there’s a recession, people are usually streaming more music at home.”
Shawn Jerusalim, first vice-president and investment advisor with Jerusalim Financial Group at CIBC Wood Gundy in Toronto
Mr. Jerusalim also believes equities still have a long runway for growth, despite risks in China and those associated with the pandemic. However, he says the biggest threat is inflation – although it affects fixed income more than equities.
“We have to be careful because fixed income is what protects clients a bit more when [equity] markets fluctuate to the downside,” he says.
Because of bonds’ low yields, Mr. Jerusalim is also allocating more capital to alternatives such as structured note positions that pay monthly income with downside protection.
As for equities, he often employs four active submanagers for global exposure while surrounding their strategies with passive exchange-traded funds for exposure to North America.
Constant throughout is reassuring clients that a diversified approach works best. “We build wealth by investing in a portfolio of companies over time,” he says
Still, most portfolios have about 10 per cent cash to buy into falling markets. “Markets go down very quickly.” And they often rebound quickly, too, he adds. “So, if you don’t have cash available, you often can’t take advantage.”
Nader Hamid, portfolio manager and director, private client group with Total Wealth Management Group at iA Private Wealth in Pointe-Claire, Que.
Equities remain attractive given their performance over fixed income, he says.
“The premium you’re getting for equities is just as attractive as it was 10 years ago,” Mr. Hamid says. “The [return] gap between equities and bonds is still worth the risk.”
He adds that equity markets are in “a Goldilocks era” with strong economic growth and accommodative monetary and fiscal policy.
“It’s very rare to have a massive market correction in such prosperous economic times,” he says.
Mr. Hamid is quick to note, though, that equity markets could still decline between 5 per cent and 20 per cent.
“But there is so much cash on the sidelines that when we see drawdowns, they’re often short-lived.”
Fixed income continues to be “a ballast” against falling stock prices. Yet, Mr. Hamid is allocating more capital to alternatives for greater yield.
He relies on third-party submanagers for fixed income and alternative assets, but equities are handled in-house, consisting of a portfolio of about 30 Canadian and the same amount of U.S. stocks.
Only firms with high returns on equity, low debt, that are participating in growing sectors and have consistent earnings growth and good management make the cut.
In turn, the strategy often uncovers companies in industries with long-term tailwinds such as cybersecurity, renewable energy, and health care, Mr. Hamid says.
“So, we’re less concerned about short-term bumps.”