CMI offers insights into possible solution as fixed income fails for investors
Fixed income has cratered. A decade of low interest rates has been capped off by central banks cutting rates and yields down to the bone. Bonds can’t even outpace the rate of inflation at a time when a growing group of retired and retiring clients desperately need income. Advisors have spent the second half of the year asking where they can find income.
A new whitepaper from Canadian Mortgages Incorporated (CMI) sets out to answer that question by outlining alternatives in fixed income investing. Warren Aarons, VP of Investor Relations at CMI, shared some of his insights in the whitepaper and explained how mortgage investment corporations (MICs) can help improve the overall yield picture for client portfolios. He says that a low-yield bond environment is likely to continue for the foreseeable future, and therefore advisors must get a handle on the alternatives in order to deliver the income their clients need.
“Alternatives are important to include in an investment portfolio in order to hedge against stock market volatility while still generating greater yield than is currently available in the bond markets,” Aarons says. “MICs are an alternative investment option that offers investors the opportunity to increase the overall yield in their portfolios while maintaining a low correlation to the performance of the equities in the portfolio.”
Aarons says that incorporating MICs in a portfolio helps to maintain a more attractive risk-adjusted return profile and may result in a more defensive stance than a traditional 60/40 allocation. MICs may offer low volatility, he says, which is appealing for many investors and their advisors, given this turbulent investment climate which doesn't look likely to end anytime soon.
While alternatives have been touted as a solution across the board, Aarons notes that MICs and other defensive strategies within the wide alternatives universe may be particularly well suited for the current environment as they provide a potentially attractive mix of capital preservation, income, and yield.
He says that MICs are also well suited for retail investors as an accessible means of investing in the real estate sector without taking the time and capital involved in property ownership.
Aarons says the whitepaper offers some key strategies and guidelines for MIC investing. He says that examining MICs, investors and their advisors need to look closely at the MIC’s manager and their level of experience in the industry, dealing with regulators, managing risk, underwriting, and operating. Advisors should also consider the manager’s reputation and the MICs risk profile, ensuring their client invests in a MIC that aligns with their risk tolerance and yield objectives.
The whitepaper, Aarons says, will serve as a guidebook for advisors to make the right choices as they move to MICs to take care of the yield question.
“2020 has and continues to be a volatile year in the global equity markets,” Aarons says. “Canadian real estate investing, through a MIC, can offer investors a reduction in the overall risk and volatility of their investment portfolio while enhancing their yield.”