It's time for a new portfolio, advisors told

CEO says challenges are different and investors have more tools than ever at their disposal

It's time for a new portfolio, advisors told

Diversify, diversify, diversify … no one can claim that investors have not been warned. While many will sniff at the “this-time-it’s-different” rally cry, there is ample evidence that things have shifted as we head for the turn of the year.

In the second part of his interview with WP, Barry McInerney, president and CEO of Mackenzie Investments turned his focus away from the rollercoaster of the past nine months to address what might lie ahead for advisors.

With interest rates set to be lower for the next few years at least, return expectations more modest, and a potential shift from growth to value, investors have more levers than ever to pull in terms of portfolio allocation. Diversification, therefore, can include many facets. McInerney said the legacy of 2020 could be that it’s time for advisors to adopt a new portfolio.

He said: “The story here is to diversify: by style, growth-value core; by capitalization, small, mid, large; clearly by sector; and increasingly more and more by geography.

“I have a very globally diversified portfolio on the equity side, and that includes, obviously, China, the second-largest stock market in the world, which provides good risk diversification and is relatively new in terms of accessibility.

“It was challenging to access those markets but now, through mutual funds, ETFs, China equity, they have been here for many years, us included, obviously.”

A proponent of China as an investment option – he believes it should be viewed as an asset class all to itself – McInerney told WP change is happening. The Chinese government is opening up markets to foreigners because, ultimately, it wants to raise its fast-aging population out of poverty by providing retirement security.

He said: “To do that, it needs a well-functioning, institutional quality capital markets and retirement system. They need foreign investment and foreigners to come in to help, so there's an alignment of interest.”

Diversification is not confined to equities, of course. Fixed income has taken a battering in many ways in 2020 but the CEO believes it should still occupy a strong position in your portfolio for diversification. There are many different routes to take to ensure a modest yield - length and duration, corporate, geography and currency, for example.  Again, China is an option.

McInerney said: “The China bond market is becoming more accessible and they have 300 basis points-plus additional yield than we have in Canada and United States. More and more foreigners are accessing Chinese bonds in their portfolio in the search for yield and diversification, and it’s the second-largest bond market in the world. You’ll see that trend speed up in 2021.”

Throw in the alternative space, which is becoming more accessible on the retail side through mutual funds, ETFs and private OMs, and advisors not only have more diversification tools but also more scope for long-term returns.

McInerney’s outlook for 2021 is one of cautious optimism given the monetary support, stimulus packages and vaccines now coming into play. A section of the economy, however, will take time to recover and spikes of volatility should be expected. With that backdrop and with all the tools now at an advisor’s fingertips, McInerney said active management is going to be crucial.

“You've got to be more nimble,” he said. “We’ve got some terrific teams, boutiques at MacKenzie and I’m just so proud that when the pandemic hit, they didn’t rest on their laurels, they thought, ‘we've got opportunities here’. There is some serious rotation of industry winners and losers within sectors, countries and interest rates, so they went at it hard and studied it. That’s active management at its best.

“For all the great returns we've had on the upside in 2020, we've done really well protecting the downside. We have monthly income [products] that have downside-risk protection, using protective puts and derivatives, and they held strong when the markets went south. Active management is going to continue to play an important role next year going forward.”