When compared to the traditional 60/40% mix in balanced funds, Sarah Riopelle favours a multi-asset, global approach as manager of the silver-rated Phillips, Hager & North Balanced Fund F mandate.
“It’s all about diversification,” says Riopelle, vice-president and senior portfolio manager, investment solutions, at RBC Global Asset Management Inc. in Toronto. “It really is a fundamental belief in the benefits of blending multiple asset classes, regions and investment strategies to help us achieve our risk and return goals.”
As a fund-of-fund mandate, the actively-managed portfolio includes 10 fund holdings of multiple managers, styles and disciplines. Focused on asset allocation, both strategic and tactical measures are used to optimize the portfolio.
Sights on Steady
“So the ultimate goal,” says Riopelle, “is balancing returns to deliver a smooth and consistent performance experience for our clients over the long term.” The fund is suited to investors seeking less volatility than a typical all-stock portfolio and a higher potential for growth than a typical all-bond portfolio.
The portfolio’s overweight equity position of approximately 63% and 36% in fixed income has been the case for several years. Focused on the investment philosophy, the investment managers don’t want to take big bets within the asset mix. “So by taking just small measures of bets,” says Riopelle, “on an ongoing basis, has been enough to generate the returns.”
Overall, the fund remains overweight equities and underweight bonds in the asset classes, although a little more cautious on equities. “When I say a little bit more cautious on equities,” says Riopelle, “that just means we reduce the degree of overweight in stocks. On a relative basis, we still like stocks over bonds.”
Essential Dose of Global Equities
Taking a macro view for opportunities and risk measures, the portfolio is positioned with approximately 43% in global equities. According to Riopelle, the global strategy offers access to 97% of the world’s investment opportunities in the MSCI World Index, compared to the approximate 3% weighting that Canada represents.
While the S&P Index is one of the most fully invested markets that the investment managers track, many markets outside large-cap U.S. equities are attractively valued, so they are still quite positive on equities on that front.
“The pandemic environment of the last year,” says Riopelle, “has had varied impacts on different companies at different times. So taking a globally-diversified approach is going to help achieve that smoother return profile that we look for.”
Adding Real Estate to the Income Mix
On the fixed-income side, given the current low level of yields, the mandate added direct real estate investments to the portfolio last November. As well, a more diversified exposure away from Canada was reallocated to add global bonds and high-yield investments.
The broad research team includes a specialized asset mix committee, a macro strategy team and an economics team. In addition, the underlying fund managers bring their own investment skills and research tools to the mandate.
When building optimizing portfolios, the managers look at how sectors work together and how they’re correlated and blend together. The focus is on creating the best portfolio that will generate strong returns over all types of markets and market cycles. Quantitative and fundamental tools and strategies are included in the research process.
From a sector perspective, the overall mandate is currently weighted approximately 22% in financials and 14% in technology. The sector exposure is a function of the positions taken by the underlying fund managers, with risk measures followed.
Today’s investors have seen long periods of exceptionally strong returns from both stocks and bonds and robust performance for most traditional 60/40% portfolios. But that’s the historical returns, Riopelle says.
Re-Set Your Expectations
The realities of a low-interest rate world means that investors need to re-evaluate their portfolios to achieve their long-term objectives. “The equity markets,” says Riopelle, “have had a strong bull run and valuations in some parts of the equity market are full. You have to lower your expectations for both equities and the bond side of the portfolios, which is going to lead to lower total returns for a balanced portfolio than what investors have been accustomed to.”
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