This article was featured in Wealth Professional.
Over the past two years, a number of black-swan events have disrupted the world, and the resulting shockwaves are continuing to reverberate through central bank policy, national and regional economies, and portfolios.
In many ways, those events fell outside the models that analysts and investment professionals have laid out. But that hasn’t impacted how Manulife Investment Management’s Multi-Asset Solutions Team (MAST) views their duty as portfolio managers and asset-allocation specialists.
“While the pandemic has been unprecedented, and so has some of the recent geopolitical risk, the challenge for our team has always remained the same,” says Alexandre Richard, a Portfolio Manager on MAST. “It's up to us to assess what are the macroeconomic and fundamental implications of those events and to identify where opportunities are mispriced across various asset classes.”
Finding hidden gems and dormant bull markets certainly hasn’t been easy in the current climate, but MAST will look for areas that can potentially weather the storm better than the broader market. They’ve also found several pocket sectors and asset classes that were abandoned or overlooked by investors even as their underlying economics and fundamentals gain strength.
“We don’t think of the world of asset allocation within our portfolios as risk-on or risk-off,” says Jamie Robertson, Head of Asset Allocation – Canada and Global Head of Tactical Asset Allocation, MAST. “We generally build the portfolio from the bottom up, trying to allocate to asset classes where we believe capital is going to be treated the best and keep aware of the risks that may be developing, as well as opportunities that are compelling.”
One overarching risk, notes Robertson, is the ongoing dynamic of rising rates. In the context of last year’s elevated valuations and ultra-low rates, the recent hikes from central banks have prompted a wave of repricing across both fixed-income and equity markets. While fixed income as a whole hasn’t provided the cushion it traditionally has against a correction in risk assets, MAST has mitigated that effect by favouring shorter-duration fixed income securities in its portfolios.
“Since the summer of 2020, we've gone from close to 50 basis points on the Canadian 10-year to upwards of 3% recently,” Robertson says. “While upside risks remain in the fixed income market, particularly as the inflation outcome remains uncertain and continues to evolve, we do believe that rates are beginning to look compelling at these levels.”
On the equity side, MAST generally prefers to avoid more expensive areas like technology and consumer discretionaries in favour of defensive options like utilities and consumer staples, while balancing those exposures with cyclical and value-oriented sectors including energy. Recent valuation resets in certain larger-cap growth areas have also created some additional opportunities. From a regional perspective, they also keep an eye on non-U.S. assets that remain attractively valued even with the recent pullback.
“For the most part, the value and cyclical areas of the market can look particularly attractive at this stage, especially since some of those areas are essentially pressing into a recession, which we're not seeing today in our baseline forecasts,” Robertson says.
From Manulife Investment Management’s point of view, U.S. consumers have continued to live up to their reputation as the juggernauts leading the North American economy. Continued job vacancies in the labour market also cast doubt on the case for a recessionary scenario for the rest of the year. To the contrary, Robertson points to more attractive interest rates, more attractive equity valuations, and continued growth potential in some of the MAS team’s portfolio positions as reasons for a constructive outlook.
On the inflation front, it’s hard to ignore the gathering storm from persistent multi-decade high CPI prints in recent months. But while MAST does see the beginnings of a new inflation regime, it foresees a reality of 2.5% to 3% inflation – as opposed to the 6% to 8% handles of today – as supply chain issues get resolved and base effects begin to wash out of the system.
“Our portfolios really do have exposures to asset classes that can do well during inflationary environments, including infrastructure, Canadian equities, and certainly energy,” Richard says. “People who are really concerned with inflation should have a lot of confidence that these portfolios are built to withstand and could potentially provide attractive returns through a period like this.”
As expectations for future financial market returns get crushed by a perfect storm of economic factors, investors will need every opportunity available to reap alpha within their portfolios. To that end, in our view, Manulife’s multi-asset portfolios are driven by a robust strategic asset-allocation process that’s been refined over 20 years. It also potentially benefits from diversification into asset classes that many other portfolio managers don’t have access to, as well as the ability to quickly respond to market risks that arise through rebalancing in its opportunistic sleeve.
“Since inception, our asset allocation portfolios have garnered an overall four- and five-star ratings from Morningstar1. We are pretty much in the top quartile across the board,” Robertson says. “Through our partnership with Dimensional Fund Advisors, our strategic beta ETFs have certainly been a big help over the course of 2022.”
“We think these represent a fantastic one-ticket solution for advisors looking for a well-diversified, actively managed portfolio,” Robertson adds. “We've got a team of 60 investment professionals2 monitoring, rebalancing, and actively managing the portfolio on a daily basis. That allows advisors to provide value added by keeping clients invested and on track, with the confidence that these portfolios may be able to deliver the type of return profile their clients are looking for.”
1 Morningstar Ratings: The Star Ratings as of May 31, 2022 for Series F for the Funds shown, and the number of funds within their categories for each period are as follows: Manulife Conservative Portfolio within the Global Fixed Income Balanced category: 3-year period, 626 funds, 4 stars, 5-year period, 484 funds, 4 stars. Manulife Moderate Portfolio within the Global Fixed Income Balanced category: 3-year period, 626 funds, 5 stars, 5-year period, 484 funds, 5 stars. Manulife Balanced Portfolio within the Global Neutral Balanced category: 3-year period, 1,272 funds, 4 stars, 5-year period, 1,004 funds, 4 stars. Manulife Growth Portfolio within the Global Equity Balanced category: 3-year period, 1,045 funds, 4 stars, 5-year period, 860 funds, 4 stars. Series F is generally designed for investors who have a fee-based or wrap account with their dealer. Series F performance is net of fees and expenses. Advisor Series is also available and includes a 1.00% trailing commission. The Morningstar Rating, commonly referred to as the Star Rating, relates how a fund has performed on a risk-adjusted basis against its Morningstar category peers and is subject to change every month. Calculations are based on the funds in each Morningstar Category to better measure fund manager skill. Funds are ranked by their Morningstar Risk-Adjusted Return scores with the top 10% of funds in a category receiving 5 stars, the top 22.5% receiving 4 stars. A fund in the middle 35% receiving 3 stars, a fund in the next 22.5% receiving 2 stars and a fund in the bottom 10% receiving 1 star. The overall Star Rating for a fund is a weighted combination of its 3, 5 and 10 year ratings. Overall ratings are adjusted where a fund has less than 5 or 10 years of history. Please refer to www.morningstar.ca for greater detail on the calculation of the Star Ratings. © 2022 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. 2 As of December 31, 2021.
Sponsored by Manulife Investment Management, as of June 2022.
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