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Investors need more than a 60% equity, 40% bond mix

In a time of increased volatility and lower expected returns, investors need to hold the right asset class mix, says CIBC’s Francis Thivierge

Ruth Saldanha 6 December, 2018 | 6:00PM
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Ruth Saldanha: Multi-asset absolute return strategies aim to achieve long-term returns that beat inflation while also reducing the risks associated with volatility. As the name suggests, these strategies use multiple assets and so are more diversified. But how does the strategy actually work and what are the risks associated with it? With me to discuss this is CIBC's Senior Portfolio Manager, Francis Thivierge. Francis, thank you so much for joining us here today.

Francis Thivierge: Thank you, Ruth.

Saldanha: To begin with, can you explain for us, what does the strategy actually mean and how does it work?

Thivierge: Absolutely. So, investors today are facing a difficult time in their portfolios with increasing volatility and lower expected returns on more traditional asset classes. The typical balanced fund, sort of, 60-40 equity versus bond balanced fund, is actually not very well diversified. So, investors have a lot of their risks concentrated into equities. So, this need for higher expected returns and better diversification leads to investors requiring new solutions. The good news is that today investors have access to a very broad number of new asset classes and strategies. So, if you look beyond equities and bonds, you can look at currency strategies, commodities and also factors are becoming very important like momentum factors, carry or cyclical factors. The problem is, it becomes very difficult to put all the pieces of the puzzle together into a portfolio.

So, a multi-asset strategy aims to put these things together. It's first and foremost an asset allocation

product. So, it will seek to provide exposure to this very broad set of this universe of asset classes and strategies that investors typically don't have in their portfolios. Generally, this product will tend to aim for an absolute return, so generating positive return in all kind of market conditions. So, this portfolio will tend to be more resilient than a traditional balanced fund. So, the aim is really a solution that incorporates all these new strategies into an asset allocation product that puts everything together for investors.

Saldanha: What are the kind of risks that are associated with this strategy?

Thivierge: Well, if you look at individual strategies that can go into these funds, some of them individually on their own could be considered riskier strategies, but also, there are some of these strategies that are typically more defensive. And when you put all of them together, the combination ends up with a portfolio with lower risk and lower volatility. Of course, it does not eliminate completely the risk, but it does reduce the risk of the portfolio.

So, typically, the way we see those is, compared to bonds, for example, you would have more risk and also higher expected return than bonds. But compared to equities, you would have comparable, competitive return than equities with lower volatility. So, kind of, stands between the two. And also, it brings diversification, because many of these strategies would be less correlated with traditional asset classes.

Saldanha: CIBC launched the CIBC Multi-Asset Absolute Return Strategy Fund last month. Run us through the fund features and how it works.

Thivierge: You need better diversification in your portfolio. So, this type of strategy will offer better diversification. But diversification on its own, it's not sufficient. You need to hold the right asset classes. So, our strategy has basically three pillars. We call those risk buckets. The first pillar or risk bucket is traditional equities and bonds. You do still want to have some equities and bonds in your portfolio. You have to select the right ones. So, our approach is to look at global markets focused on longer-term structural macroeconomic outlook and determine which markets offer the most attractive opportunities and also determine in which currencies these equities and bonds will be more attractive.

Beyond that, what you need in your portfolio is other asset classes or strategies that will diversify. So, we look at alternative strategies like commodities, currency carry and all type of non-traditional strategies that really bring diversification in a portfolio. And they do so mostly because they are long and short strategies. So, it's relative strategies of one market versus another. As such, the performance of this strategy is not dependent on a direction of the market. So, it can really help to diversify your portfolio. So, this is a very large asset allocation exercise where you determine how much you want to have in equities, bonds and these alternative strategies.

And the third pillar of our strategy is to dynamically adjust the exposure of the fund to make sure that we are always properly aligned with current market conditions. You have to be opportunistic in order to make sure that you keep up with the market conditions.

Saldanha: Finally, the fund has launched about a month ago. What has been the response to this fund so far?

Thivierge: Well, investors are really interested in this type of strategy. I think people recognize the challenge they are facing, and they see how MARS could help. This is a new fund, and this is a less traditional strategy. So, there's a little bit of a learning curve. But people are interested in learning about these strategies and we also have received significant interest in the strategy.

Saldanha: Thank you so much for joining us with your perspectives, Francis.

Thivierge: Thank you, Ruth.

Thivierge: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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