Why portfolios will have to work harder in 2021

With fixed income yields low, Mackenzie CEO explains how advisors can expand their tool box

Why portfolios will have to work harder in 2021

The fundamental, basic rule of having a diversified portfolio is more important than ever but elements of your allocation will clearly have to work harder over the coming years to get the returns your clients expect. However, there are fresh avenues to explore and more tools than ever at an advisor’s disposal, according to Barry McInerney, CEO of Mackenzie Investments.

With equites having rebounded spectacularly since the onset of the pandemic, for many investors, the shortfall comes in fixed income, with central banks committed to keeping rates in the zero-bound range for the foreseeable future.

But there are compelling alternatives ... literally. As we know, liquid alts are an established part of the landscape, not just for the institutional investors, after regulators opened the door for the retail market. But McInerney said the final leg of the democratization of alternatives is now coming to advisors via access to private alternatives, private credit and infrastructure.

Mackenzie offers those three major asset classes through their partnership with its partnership with Northcleaf Capital Partners.

He said: “These are relatively new strategies, accessible by advisors and investors, and they all extend the opportunity set for your traditional fixed income and traditional equity by offering return opportunities, and risk diversification.

“That's a really exciting area because, while investors and advisors have to decide that they want to invest, they really couldn't before. They can now make the decision about whether they are suitable for their portfolio and to start that journey of understanding alternatives.

“We really get excited by this because we believe that what’s good for the Canada Pension Plan is good for the individual investor, and the good thing is they now have [the chance] to make that decision if it makes sense for your portfolio.”

In addition to the expansion of the alternative market, McInerny said investors simply can’t ignore emerging markets, calling the opening up of the China's economy “arguably the most significant event in the history of our capital markets”. Investors now have access to a new market, both equites and fixed income, which happens to be the second largest stock market and the second largest economy in the world.

This offers Canadian investors returns and opportunities as China leads global growth. Its interest rates are higher – by 200-300 basis points – and the stock market is lowly correlated to Canada. McInerney added: “[China's capital markets] grew up differently, in different sectors and there is a wonderful opportunity in both Chinese fixed income and equities going forward.”

The strength and size of the Canadian ETF and mutual fund industry – about $2 trillion – gives advisors a broad array of building blocks and McInerney also highlighted sustainable investing as another avenue for advisors seeking growth.

He said: “We are at the beginning of a significant reallocation of capital where tens of trillions of dollars will be reallocated through a combination of environmental climate control improvements, infrastructure spend, and a sustainable way of financing investing. This is a really exciting area.

“It allows investors, again, to put their money into a potentially high return are. For example, our global environment mutual fund that we launched over two years ago will hit a billion dollars in size this week. This is the way of the future - a new energy transition.”

He added: “Everything we’ve talked about is new. We need to have a portfolio that works harder to compliments equities and fixed income to produce returns over the next 10 to 20 years.”