Vanguard Canada leader underscores importance of historical context, and how stress-testing models can help mitigate knee-jerk reactions
As an entire generation of investors stares down the barrel of an elevated interest rate environment for the first time ever, advisors have a crucial role to play in preventing panicked reactions and instilling confidence in their clients, according to one investment industry leader.
“There's a generation of financial professionals, and certainly, people in the industry who have never seen rates go up,” says Mario Cianfarani, head of Distribution at Vanguard Canada.
“I think as we go across the landscape with advisors, it’s important to give them historical context around where interest rates are, and the fact that we’ve hit this new normal,” he says. “For us, it’s about taking advantage of where rates are.”
“Over the course of my time here at Vanguard, we’ve heard people declare the death of the 60/40 portfolio numerous times, and suddenly, it tends to come back.”
Looking at the shape of the yield curve, particularly focusing on where short rates are at the moment and the state of aggregate bonds in general, he says the bond portion of 60-40 is set to do very well. In his conversations with advisors, a major focus has been around how to allocate portfolios in the current environment, with “boring is back” emerging as a common refrain.
“I like to tell advisors, just as we do at Vanguard, to strip out a lot of the noise and some of the more tactical calls being made,” Cianfarini says. “For us, it’s about getting advisors to look at a longer sample size of history.
“Certainly, interest rates today are the highest that a generation has seen. But when we think about it in historical terms, we’re on the higher end of normal,” he says. “So we’re making sure advisors can communicate that to their end clients.”
Many advisors today are working with clients who are still firmly in accumulation mode, Cianfarini says. As that cohort considers the picture of interest rates and equity returns, he says it’s important for advisors to provide education on the value of bonds, particularly the type of return stream, cash flow, and ballast they’re potentially able to provide.
Beyond pure education, Cianfarini underscored the value of tools such as portfolio stress tests. Across Vanguard’s organization, he says there are north of 100 professionals developing in-house models to help stress-test portfolios. Those multi-factor models consume a large array of data, including forecasts of key economic and market indicators, to simulate portfolio performance under various scenarios.
“When we're dealing with advisors, certainly advisors with larger books in the high-net-worth and ultra-high-net-worth category, a lot of the questions come down to ‘What will my portfolio do?’ Around two years ago, rates started going up, and a lot of people are asking where we think rates will go now that we're at what we hope is the peak level of interest rates,” he says.
“Now they can go back and look at some of the stress tests that we performed on their portfolios back then and say, it's kind of in line with where we thought they’d go,” Cianfarini says. “Now what happens if rates come off and we settle at a new normal? What happens also, when you consider currencies, equity markets, and international markets? And so we run models that will help us answer those questions for advisors.”
Beyond bolstering confidence with stress tests, Cianfarini emphasized the value of advisors in helping their clients stay invested. Clients who have an investment and financial plan, he says, should not be making knee-jerk decisions based on market events, especially if they’re transitory, and instead should be making adjustments based on life events or changes in their financial objectives.
“Obviously, rates are responding to where we are from an inflationary perspective,” he says. “We've seen over time and through history that central banks are generally pretty successful at making sure and mitigating those inflationary pressures.
“Those stress tests, and that work that we do on clients' and advisors' portfolios are a tool that we offer to help advisors educate and provide that behavioural coaching … That’s so important.”
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