Sadiq Adatia, chief investment officer and portfolio manager with Sun Life Global Investments Inc., is taking a cautious stance in the balanced portfolios that he oversees.
"We're positioned defensively for the first time in a long time," says Adatia. Sun Life Granite Balanced Portfolio Class A, a fund of funds, currently holds 33% of its assets in fixed-income funds and a high 10% position in cash. "We're underweight equities, which we haven't been for four years now," says Adatia, whose blended benchmark for the fund is 60% equities, 37% in fixed income and 2.5% in cash.
The shift away from equities in the portfolio fund -- which has a four-star Morningstar Rating in the Global Neutral Balanced category -- began around the second quarter of 2015. That's when Adatia and his team of managers started to get more nervous about China's growth slowdown. At the same time, they've been increasing the cash weighting each quarter.
The fixed-income component is held mostly in funds that invest in Canadian government and corporate bonds, with an emphasis on high credit quality. The portfolio also has exposure to U.S. investment-grade bonds and, to a modest extent, high-yield issues.
Despite the Bank of Canada's recent decision to hold the line on its policy rate, Adatia believes there's still a strong possibility that the Bank of Canada will cut its trend-setting rate in the next six months. "That would likely give Canadian bonds a lift."
Even with Adatia's more defensive stance, the equity portion of the fund still accounts for about 57% of the portfolio. The U.S. is the most heavily weighted country, which is to be expected, because it has by far the highest market capitalization.
But the U.S. equities weighting, currently 16% of the fund, has been reduced for several reasons, says Adatia. The first is the risk of rising interest rates, the second is uncertainty over the U.S. election and what the results will mean to the economy, and the third is the challenges that U.S. companies face in replicating previously strong earnings while also seeking to cut costs.
"There's the possibility that we could have the first negative year for U.S. stocks in five years," says Adatia. "The risk/reward is not as attractive as it was two years ago, which means we need to reduce our allocation."
The Sun Life managers' view of international equities, which also represent 16% of the portfolio, is more bullish relative to other equity markets. They believe the monetary policy conditions in Europe and Japan are conducive to further market gains.
In Europe, Adatia says the economic and political situation surrounding Greece "isn't the wild card it once was, though it likely will be again." he says. But he described the Eurozone as "still a fragile economy" with many uncertainties. Among them is the June 23 referendum in the United Kingdom on whether to leave the European Union.
As for emerging markets, which represent only 2.5% of the portfolio, Adatia points to slowing growth in China as one reason to be cautious and selective. But he expects India to do well. "Expert research at a country- and stock-specific level is critical," he says.
In addition to the industry-diversified foreign and domestic equity funds that Sun Life Granite Balanced Portfolio holds, the portfolio also has holdings of global infrastructure and global real-estate funds. Together, these sector funds currently constitute about 8% of the portfolio.
Domestically, the 14.7% position held in Canadian equity funds represents a long-term underweight position compared to the balanced fund's neutral weighting of 17%. Adatia's concerns include high debt levels by consumers and the prices of oil and other commodities. The far worse than expected decline in oil prices, he says, "has caused major downturns in the markets and given the economy a big worry."
Prompted by those concerns, Adatia and his team moved into fixed income just two days before the Bank of Canada surprised everyone with a rate cut to stimulate the struggling Canadian economy. "That worked out exceptionally well for us. Bond values went up," says Adatia, "so it was a big win for us." Last year, Adatia also anticipated that the Canadian dollar would likely continue its decline and fall to 75 cents (US) or lower by the end of 2015.
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