'Our job is never done - every strategy has an expiration date'

Advisor on being prepared for the Fed tapering, the expertise required to select alternatives, and where he sees the reopening opportunities

'Our job is never done - every strategy has an expiration date'

It's the time of the optimist – or the raging bull. Vaccination rates are on the rise, stock markets rebounded in sensational style from the depths of March 2020, and now economies are poised to reopen. What could possibly go wrong?

Paul de Sousa, SVP, Investment Advisor, Sightline Wealth Management, believes investors shouldn’t get too ahead of themselves, however. He warned that while many people were shocked at how well the markets performed during the pandemic, those same individuals are likely to be shocked at how modestly they perform when the big economic reopening kicks in.

If – or when – the Fed tapers and/or interest rates rise, good vaccination numbers might not be enough to stop shockwaves reverberating through indexes. Sousa’s forecast is for that scenario to take hold in 2023 but, of course, central banks may bring policies forward depending on inflation.

Regardless, the advisor believes money managers should be prepared for a reversion to the mean after the current stimulus-fuelled run comes to an end. For example, some managers that Sightline use, and who adopted risk-averse strategies, were targeting about a 6-8% return. Instead, they've been up closer to 40%. Sousa cautioned that rather than hit 50%, that number is likely to come back down, so it's paramount to keep emotions in check and manage clients' expectations.

“It’s about being prepared to be proactive rather than reactive,” he said. “The natural inclination is to kind of squeeze every last bit of juice from the fruit. But you won't get out at the very top or get in at the very bottom; be happy that this occurred.

“The Fed’s liquidity has been a great gift to prop up the market but we’ll see how the markets do without that. I don’t think they will be as strong as they were with it. There’s a high correlation between stock market return and the amount of money that's been put into the system by various central banks. It doesn’t take much to say, 'okay, when that stops, the market could face a tougher time'.”

The pulling back of central bank support is not the only thing advisors must be cognisant of moving forward. Sousa believes attention needs to be paid to asset allocation and the “antiquated” 60-40 split, which he stressed does not cut it anymore. Sightline specializes in alternatives and advocates for all-weather portfolios across various asset classes. Depending on individual client’s liquidity needs, Sousa said anything from 10% up to 50% in alternatives could be appropriate.

From mortgages, private debt, senior debt, hedge funds and SPACs, there is a mind-boggling amount of options out there. Picking the right one for the client is critical, which is where a firm like Sightline comes in.

“[Alternatives] provide wonderful and consistent returns but it takes an inordinate amount of time and a skilled team of individuals to do the proper due diligence. It’s not like a traditional open-ended fund or daily liquidity, there are a lot of factors that go into it.

“Through our parent company (Ninepoint Partners), and through trusted people that we have on our team, we look at many and it will take a long time before we put them on the shelf. Once that job is done, it's really about monitoring, oversight, and just continually staying in touch and making sure that what was true five months ago is true today.

“Our job is never done because every strategy has an expiration date; we’re always looking for new alternatives.”

With the fiscal and monetary stimulus set to expire at some point, portfolio protection is crucial. This is particularly true for retirees or the soon-to-be retired. One conversation Sousa advocates is an allocation to tangible assets, including gold.

He admitted bullion can frustrate clients in that it often won’t rise or fall when expected but it’s lack of correlation to major markets fulfils an important role. He added he expects certain commodities will do well as economies reopen and that broad diversification when it comes to real estate is wise.

The “new normal” almost demands a tilt to the new industrial revolution of AI and biotech. Areas like these are volatile and fast-evolving, and Sightline outsources this to a few select tech managers who spend all their time researching the space.

He explained: “I’m happy to pay them to do this – then you get to the ETF versus active management conversation. Most ETFs are just a cap-weighted representation of the index but I'd rather get in with earlier stage companies that don't make up a large percentage [of the index], so I'd rather use active management.

“They're finding the next emerging company today that are not even in the index. I’d rather own a meaningful part of that than a minuscule part of a large index, which is dominated by the top five.”