Investors both big and small are facing many challenges in the current investment environment. Pension plans, institutional investors and, of course, individual investors – all are having difficulties in the search for yield.
So, how should advisors be dealing with the current situation? “From our perspective, selective dividend paying stocks and selective corporate bonds present the best opportunities,” says Jeremy Peng, Director & Portfolio Manager, NEI Investments. “Investors need to remember that yield alone is not the whole story. Total return will determine how much money you actually make, not yield alone. You can get 10% yield a year but if your stock price drops 10% then you didn’t make any money.”
Although investors in other countries have traditionally been reluctant to look for their yield away from bonds, Canadian investors seem to understand the importance of dividend investing. In the current landscape, Peng believes in a strategy of looking for yield across as many different sources as possible.
“Diversification across asset classes to reduce volatility is very important and diversification across different sources of yield is no different,” he says. “For example: large cap, blue chip US dividend payers have a place in every portfolio as a core stabilizer, but you need more than that if you want to perform better than the benchmark.” Peng recommends Canadian investors look to US small cap dividend payers, which many US investors overlook as they pile into blue chip. Everyone is buying the telecoms and consumer staples, which is pushing up valuations and making them less than ideal investments.
In his current role, Peng aims to add value through conscientious asset allocation and stringent portfolio manager selection. “We hire sub-advisors in each asset class to pick the stocks and then allocate them to the right asset class,” Peng says. “Our job is more macro and based around valuation. We have to pick the right mangers who have the right process in place, so that they can repeatedly generate excess returns.”
Peng believes that advisors need to be encouraging their clients to look away from traditionally safe investments, which can be a challenging task. “There is a lot of hand-holding and education involved because, previously, advisors could tell investors to buy Canadian bonds which would give them 4 – 5% yield,” Peng says. “Canadian bonds now yield less than 2% and, if you adjust for inflation, that’s potentially negative yield. That’s also true for GICs.”
For advisors, finding alternative ways to generate yield, while finding a balance with total return, is critical. “The value of a good advisor has never been higher," Peng says. "They need to educate their clients and help them understand their options outside of the traditional safe investments, which are not so safe anymore.”
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