Portfolio manager says it's time to correct the COVID lag in your traditional portfolio
Investors should take some corrective action on their portfolios now that the rapid acceleration out of the COVID-induced recession is almost complete, Michael White, Picton Mahoney Asset Management’s Portfolio Manager of Multi-asset Strategies, told WP while reviewing his company’s Q3 2021 Investment Review and Outlook.
He urged investors with traditional portfolios to look beyond diversifying stocks with bonds, as they will stop being the great tailwind to performance in a balanced portfolio, as they’ve been for almost 40 years, if interest rates continue to rise. He encouraged investors to look at other tools to provide greater diversification as well as replace lost return.
“If you’ve lived your whole life investing with two colours, just stocks and bonds, you’ve been okay. The traditional balanced fund has served investors very well for close to 40 years since interest rates have done nothing but go down,” he said. “Now it's time to open up the toolkit and really see what else we can do to not only seek, and replace, returns that have been lost from fixed income, but achieve more diversification and really help those parts of the portfolio that just can't do the heavy lifting anymore.”
White is encouraging investors to move now because we’ve already felt the economic impact from the fiscal and monetary stimulus in the system. That’s caused many leading economic indicators to peak, so we’re now in a mid-cycle phase that tends to have some corrective action.
“You can diversify your asset classes better. You can use other assets to proxy economic growth and get some of that inflation sensitivity. It doesn't have to be all stocks,” he said. “You can have some commodities in there. You really need to look through your asset classes as well. Stocks are not just stocks. You've got emerging market and developed market stocks. You've got large cap and small cap. You’ve got factors like growth and value momentum. There are lots of means by which these broad asset classes perform, and you can harness those returns.”
While he said early cycle themes tended to be reflationary as the global economy reflated with the stimulus, that had a lot of inflation impulses, so base metals, commodities, and other assets that were more inflation-sensitive performed well. On the flip side, while interest rates were rising for much of the past year, bond portfolios probably caused most balanced portfolios to lag.
“Adding these diversifying strategies to a portfolio really represents the biggest opportunity that most investors are not really exploiting right now,” said White, noting bonds have tricked people into thinking they’re a return vehicle as opposed to a pure diversifier to equities.
“This is really like that moment in the ‘60s when modern portfolio theory was born, and investors diversified with bonds, instead of just holding the stock portfolio,” he concluded. “This is one of those big moments where the portfolio future will have more diversifiers and you’ll have a really acute sense of what role each part of the portfolio plays.”
