How active management evolution fuelled a $15-billion private client business

While the last few years have been conducive for investors with broad public market access, the recent environment of rising rates and inflation has brought active management and alternative-asset diversification back into the spotlight. And for one Canadian active manager, it’s been a chance to prove the wisdom of its ever-evolving approach.

“There is no doubt there is a body of academic research showing the benefits of a passive approach to investing,” says Andrew Henry, Principal and Portfolio Strategist at Connor, Clark and Lunn Private Capital Ltd. (CC&L Private Capital). “But through our record with large institutional and private clients, we’ve demonstrated as a firm that we can outperform benchmarks over long periods.”

Connor, Clark and Lunn Financial Group Ltd. (CC&L Financial Group) has worked with institutional investors worldwide for four decades. Though younger, its $15-billion private client business has a proven record of more than 25 years, chronicling its journey from traditional equity and fixed-income asset allocations to adding more innovative strategies.

“We've been building wealth and growing client portfolios since 2001,” says Candice Jay, Wealth Advisor, Associate Advising Representative at CC&L Private Capital. “Every few years, you could see us adding something to our overall platform of offerings that helps diversify risk but also helps improve returns for clients in the current market environment.”

Canadian roots, branches worldwide

From being a Canadian equity and fixed income manager 40 years ago, Henry says the firm added asset classes to expand its shelf outside Canada. Today, it has a global reach, with a network of international offices in London, England, India, and the United States. 

“Before the Global Financial Crisis, we would have a focused allocation to core fixed income or investment-grade bonds,” he says. “Coming out of that crisis, we saw an immense opportunity in high-yield bonds, where credit spreads were the widest they’d ever seen. At that point, we reconfigured our fixed income and credit team to offer high-yield bond portfolios.” 

Henry recalls it wasn’t a comfortable time to invest in this space, as it was a rocky period when the strategy began in 2009. However, the firm was vindicated in time, and the strategy ended up paying clients very handsomely in the long term. 

“We see high-yield bonds as a long-term strategy. It’s not something we want to take out of our portfolios at any point. It’s something that strategically, we thought would add to portfolio returns longer-term.”

‘We try to get ahead of the trends’

A couple of years later, the firm made its first foray into direct investments in commercial real estate and infrastructure assets. As a large company, CC&L Financial Group had been investing its balance sheet in real estate and infrastructure and decided to leverage its capability to make an offer to CC&L Private Capitals' clients.

“We built those portfolios on the idea that they have very strong income and had differentiated sources of returns,” Henry says. “The infrastructure assets – solar, wind, hydro assets, as well as roads, highways and bridges – are not closely tied to the economy, and therefore, provide a differentiated source of returns."

The firm’s conviction on non-correlated assets was supported last year when benchmark stocks and bonds saw double-digit negative returns.

“We were adding infrastructure and real estate to client portfolios over ten years ago – and later added private loan investments – when people were asking, ‘Why do I need alternatives?’ Fast forward to today, and some companies are trying to catch up. As a firm, we are focused on evolving to get ahead of the trends.”

During last year’s public-market carnage, the firm had about a third of clients' target allocated in private market investments and hedged strategies, all of which posted positive returns. In the last six years, the firm added private loans to its repertoire as investment-grade bond yields were quite low, and there was a concern about an inevitable rate increase. 

“Clients just weren't getting paid like they were in the past to own bonds. And we felt that bond yields were too low and that that would be a big headwind when yields eventually rise,” Henry says. “We allocated some of our clients’ fixed income into our multi-strategy hedge portfolio and private loans, which seek to generate much better returns over time than traditional fixed income while reducing portfolio sensitivity to rate changes. This was particularly attractive when bond yields in Canada fell below 2% around the pandemic.”   

Exploring new investment frontiers

Frontier investments – small countries with high growth potential but not yet counted as emerging markets – are another recent addition to CC&L Private Capital’s shelf of offerings. Roughly three years ago, Henry says the firm started looking at picking up frontier-market companies with reasonable valuations and strong earnings growth potential relative to companies in the developed world.

“We’re diversifying our exposure to some of the largest names that dominate the investment universe and reducing exposure to the global supply chain. Returns here are very concentrated, and we wanted to provide some incremental diversification to portfolios if those trends don’t persist. Our investments in frontier markets are a good way to do this,” he says. “It’s a small component of the portfolio, but it's also the largest area of expected return.”

It might feel so long ago, but before 2022, interest rates were declining, bringing large capital gains. Now, Henry argues, there’s a secular shift of yields and rates to higher levels than they’ve been in recent history. Inflation, he adds, will likely be higher than it has been in other cycles.

“We want to incorporate other fixed-income investments that have a higher yield or carry because we can't rely on that declining interest-rate environment to supercharge traditional fixed income,” he says. “We’re adding mortgages, such as commercial mortgages yielding over 8% right now, while investing in the lower risk, conventional loan market. We have focused our investments in the industrial and multifamily sectors, which can do well despite economic uncertainty.

“It all comes back to the fact that we're really in just one business. We're a discretionary investment manager, so we live and die by our ability to add value and service our clients,” Henry says. “We have to evolve, be savvy and attract and retain the right talent to deliver the outcomes our clients desire.”