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ILLUSTRATIONS: ISTOCKPHOTO.COM / JDAWNINK
“What used to represent
a prudent way to reduce volatility has become a drag on portfolio returns”
More equities
The simplest fix for lower returns from the fixed income portion of a portfolio is to move some of it into equities. This is easier to pull off with younger investors, who have longer investment horizons and who may be more comfortable in growth portfolios.
Clients closer to retirement will want to take on less risk, said Caroline Goode, investment advisor and portfolio manager at National Bank Financial in Surrey, B.C. “We’re not taking a portion of their portfolio and adding to high-tech growth.”
Depending on the client, she may move 5% to 10% of the fixed income share to blue-chip dividend stocks and to ETFs that hold those companies, she said.
However, an advisor can only allocate so much to equities before running into compliance issues.
“I think you add to equities and you’re likely
changing the client’s risk within the portfolio. You have the potential to put them outside the risk level they’re comfortable with,” said Darcie Crowe, senior vice-president and portfolio manager at Canaccord Genuity in Vancouver.
“We’re still expecting to see volatility into 2021. There is a lot of potential risk out there.”
Low interest rates have also contributed to higher equity valuations, as more investors see no choice but to invest in stocks.
“Everything is expensive — not just bonds,” said Rodrigo Gordillo, president and portfolio manager at ReSolve Asset Management in Toronto.
He said advisors who want to replace bonds with equities could consider using minimum volatil- ity ETFs.
“You’re reducing the overall volatility by as much as 33% by doing that while still remaining exposed to global growth,” he said.
High-yield bonds
Low-yielding government bonds have led some investors to seek returns in riskier forms of credit, be that lower-rated corporate debt or emerging market sovereigns.
Capital Group’s 2021 outlook report said a shift toward riskier bond categories left many investors exposed when the pandemic hit, but that investors returned to high yield credit when pandemic fears waned.
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