Chief Investment Officer at Harvest Portfolios Group says macro challenges and volatility bolster the case for modest leverage
With inflation eating into their portfolio returns and higher interest rates translating into greater borrowing costs over the past few months, income-focused investors are facing greater pressure to achieve returns. Recognizing that challenge, Canadian asset managers have unveiled enhanced versions of tried and proven income strategies.
Last week, Harvest Portfolios Group officially joined that movement as it unveiled five new enhanced equity income ETFs.
Structured as funds-of-funds, the firm’s latest offerings present mildly leveraged versions of previously launched core equity income strategies. While those strategies are already designed to generate attractive yields, the new ETFs bump up investors’ exposure to the potential longer-term growth in selected stock-market areas by 25%, giving a slightly sharper edge in the race to outpace inflation.
“We’ve had a 20-plus per cent correction in the market, and we’re facing a challenging macro backdrop,” says Paul MacDonald, chief investment officer and portfolio manager at Harvest. “So we think it’s a little bit more opportunistic to launch these enhanced strategies now versus earlier in the year.”
According to MacDonald, there have traditionally been very few ways to incorporate leverage-based strategies within registered plans. That changed when the Canadian Securities Administrators unveiled new rules allowing modest leverage to be used within ETF structures.
Harvest’s equity income ETFs also employ covered-call strategies, which create a buffer against losses during bearish lurches in the market.
“There’s been a structural shift in the volatility curve,” MacDonald says. “We’re seeing geopolitical issues that aren’t going away – in particular, we’re thinking about the energy situation in Europe and the U.S.-China geopolitical situation that’s impacting tech stocks – and some systemic tensions that are likely to stay elevated for some time.”
Because Harvest focuses on large-cap, dominant companies that have been proven across economic cycles, current prospects of recession and slowing growth don’t factor much into the firm’s playbook. But based on indicators he’s watching, MacDonald sees a very pessimistic picture.
“The language in the media is very pessimistic,” he says. “Sentiment amongst individual investors, which we can measure, is among the lowest we’ve seen in the past 30 years. Cash allocations among institutional fund managers are approaching levels we haven’t seen prior to ’08.”
Still, it’s always darkest before the dawn. While the prospects of the Federal Reserve staying on its rate-hiking path this year are virtually certain, MacDonald says the language from central banks they’re watching across the world is becoming less aggressive.
Some of the balance sheets and language from companies this earnings season reveal bright spots, MacDonald says. Some leading economic indicators for the next six to nine months also suggest that supply-chain congestion and commodity price pressures are starting to ease.
Because the individual companies held within Harvest’s income strategies are chosen with quality in mind, Macdonald believes they’re positioned to benefit from a long-term rebound.
“As these indicators start to flow into real data, we think there’s real potential for a positive surprise to the upside, when there really has been no positivity in the very recent short term,” he says. “It should bode well for companies that are trading at attractive valuations and have proven themselves across the cycles.”
The Harvest Tech Achievers Enhanced Income ETF (HTAE), Harvest Healthcare Leaders Enhanced Income ETF (HHLE), Harvest Equal Weight Global Utilities Enhanced Income ETF (HUTE), Harvest Brand Leaders Enhanced Income ETF (HBFE), and Harvest Canadian Equity Enhanced Income Leaders ETF (HLFE) are all currently trading on the TSX.