With today’s lacklustre yields, how can advisors replicate the stability of bonds without increasing volatility? This asset management executive vice president shares his strategy for both his clients and his own portfolio
To James Porter, executive vice president and head of Canadian & Institutional Business Development for Cidel Asset Management, it just “makes sense” to take a page from his clients when it comes to his own portfolio.
“It’s not always identical but it’s absolutely in the same philosophy; I might change the allocation to financial services a little bit because I work in it, but the philosophy behind the investment approach is the same as what we do for our clients,” he says. “I think that if you had somebody who is invested entirely differently, that is worrisome to the client.
“I try to take the same approach for my personal finances and family finances, and try to divide things up into, ‘what is the purpose of our savings – what are we trying to do with the investments?’”
To support his three key areas of focus – retirement, his kids’ education and ownership in his business – Porter goes beyond home bias, mainly looking to foreign equities and eschewing bonds altogether given today’s lacklustre yields.
“I don’t own bonds – and I would not necessarily recommend that for every client, because bonds can serve an important role in a client portfolio - but I just look at it right now and the return is so low in domestic bonds and most European and U.S. bonds are relatively low. Emerging markets or high-yield bonds are effectively like buying an equity anyway,” he says.
“Instead, what I look for are companies that can produce cash flow, prefer to return capital to shareholders over time in the form of dividends (or) insured buybacks – that type of company, if you look at it in the long term through a financial analyst lens, might be a better bet than a bond without a great return.”
It’s a tactic he replicates in many of his clients’ portfolios as well, as they seek bond substitutes that pack more bang for their buck.
“They want something that can take the place of a bond in a portfolio without increasing the volatility. It’s very hard to do that with just one or two alternative investments, but with the right portfolio, you can start to target things that would look like inflation plus two per cent, which is the role bonds used to play,” he says. “No one wants a 10-year bond with barely any yield – you’ll lose any return to inflation and taxes.”
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“It’s not always identical but it’s absolutely in the same philosophy; I might change the allocation to financial services a little bit because I work in it, but the philosophy behind the investment approach is the same as what we do for our clients,” he says. “I think that if you had somebody who is invested entirely differently, that is worrisome to the client.
“I try to take the same approach for my personal finances and family finances, and try to divide things up into, ‘what is the purpose of our savings – what are we trying to do with the investments?’”
To support his three key areas of focus – retirement, his kids’ education and ownership in his business – Porter goes beyond home bias, mainly looking to foreign equities and eschewing bonds altogether given today’s lacklustre yields.
“I don’t own bonds – and I would not necessarily recommend that for every client, because bonds can serve an important role in a client portfolio - but I just look at it right now and the return is so low in domestic bonds and most European and U.S. bonds are relatively low. Emerging markets or high-yield bonds are effectively like buying an equity anyway,” he says.
“Instead, what I look for are companies that can produce cash flow, prefer to return capital to shareholders over time in the form of dividends (or) insured buybacks – that type of company, if you look at it in the long term through a financial analyst lens, might be a better bet than a bond without a great return.”
It’s a tactic he replicates in many of his clients’ portfolios as well, as they seek bond substitutes that pack more bang for their buck.
“They want something that can take the place of a bond in a portfolio without increasing the volatility. It’s very hard to do that with just one or two alternative investments, but with the right portfolio, you can start to target things that would look like inflation plus two per cent, which is the role bonds used to play,” he says. “No one wants a 10-year bond with barely any yield – you’ll lose any return to inflation and taxes.”
Related stories:
How I Invest: CEO says long-term bull market is winning strategy
