Ten years after the boom and thanks to the tightening of monetary policy by central banks, investors should prepare for changes.
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That’s according to Michael Sager, vice president and client portfolio manager for multi-asset and currency management at CIBC Asset Management. The main challenge, he said in an interview in late October, is that “we have an environment where returns are excellent, but (where) the outlook for expected returns is by no means as positive as it has been over the last 10 years.”
He added that asset returns are so strong because of the way policymakers responded to the 2008 global financial crisis and how it stimulated “risk-taking that pushed money out of cash and into stocks, bonds and other asset classes.”
But the tide has turned in the past six to 12 months as central banks around the world look to follow the U.S. Federal Reserve’s lead in monetary tightening and hikes, Sager said. The result was a slowdown in “very strong and synchronized economic growth across the global economy – a very rare situation over the last two or three years.”
Last year, both the Fed and Bank of Canada they raised their rates three times. The BoC recently raised its target for the overnight rate to 1.75%, the highest level since December 2008.
Going forward, “the impact of this year’s U.S. fiscal policy will also begin to fade,” Sager said. Overall, “the backdrop of strong asset market performance we’re seeing is starting to deteriorate a bit.”
He’s not worried. Sager expects economic growth to be moderate rather than explosive over the next 12 to 24 months. “We are currently seeing growth above estimates (…) for the world as a whole. So we don’t go from a strong perspective to a very weak one; this is moderate growth from a very strong position.”
After all, “most asset classes have fairly high valuations over the long term,” he added, including Treasuries in developed markets. In the U.S. especially, “we haven’t seen equity valuations this high, and that’s been going on since 2000.”
The one exception is emerging markets, Sager noted, “where there seems to be some opportunity.”
Read: Benefits and barriers for emerging markets
Investment options
The positive for investors is that the private sector has “joined the party after years of recovery from the global financial crisis” in terms of confidence, balance sheets and capital spending, Sager said. He manages the CIBC Multi-Asset Absolute Return Strategy, which invests in assets such as currencies and commodities and in factor-based strategies.
Investors can also start looking beyond traditional asset mixes, Sager said. One reason is that “traditional portfolios tend to focus on stock and bond risk, but when you look at the share of both of those (asset classes) in the portfolio’s total risk, it’s overwhelmingly dominated by stocks. So it’s a very concentrated portfolio.”
This leads to “very uneven” results that are “subject to the broader equity market cycle.” Such a portfolio “will look very good during periods of strong macroeconomics,” but may not perform as well when global and market developments are a challenge.
Alternative assets can be helpful, Sager suggested, because they provide “a range of sources of return.” One example of an attractive, liquid single-asset-class strategy is active currency trading, he said. Managers typically buy one currency while selling another, and that requires active rebalancing and monitoring.
He added that if this approach is implemented in a separate account, “there are no upfront funding requirements to reallocate capital from another part of the portfolio to an active FX strategy. It is a very effective use of portfolio risk capital.”
Another option, Sager said, is to invest through a multi-asset absolute return strategy. “These (…) typically combine a mix of traditional core asset classes such as equities and fixed income with alternatives such as currency (and) emerging markets.” They may also include strategies such as ‘so-called factor investing, such as value, carry and momentum strategies; these reward investors.”
More alternative investment funds are likely to be available to retail investors in the future once Canadian securities administrators finalize regulations for such products in early October. New rules for alternative investment funds will come into force on January 3 and will enable access to products using strategies that have previously been available only to accredited and institutional investors.
This article is part of AdvisorToGo powered by CIBC. It was written without the involvement of a sponsor.
