Ben Fawcett outlines his approach to a perennial focus for asset managers as it evolves
Ben Fawcett’s approach to investment is informed by a core lesson from his 25+ years of asset management experience: most mistakes investors make are not analytical, they’re behavioural. The Chief Investment Officer at Canaccord Genuity Wealth Management now builds investment strategies that keep investors in the market, driving home the power of long-term compounding. Income, he says, plays a key role in that mix.
Income and income-generating strategies have seen significant changes over the course of Fawcett’s career. Bonds had fallen out of favour for their low yields while higher income strategies relying on options trading have become more popular. Despite those shifts in popular appetites, Fawcett continues to see utility in some of the more traditional income asset classes. He emphasizes that any income allocation needs to be thoughtful, client-specific, and cognizant of how best to keep clients invested and growing long-term.
"A lot of people have moved away from [bonds]. That tends to be an indicator to me that maybe you need to be looking there, because some of those inflation-adjusted yields are actually getting quite interesting. I think they still play an important part in a portfolio as far as smoothing returns, allowing clients to stay in the market rather than trying to time the market. That's generally the way I approach it: I'm not trying to time markets. I'm trying to build the right asset allocation that keeps me in the market so I can benefit from that longer term."
Finding quality income for the long-term
Fawcett emphasizes the importance of income strategies that can help smooth returns for clients. That includes bonds and their negative correlation to equities in periods of low or controlled inflation. Even in today’s higher inflation environment, Fawcett notes that bonds can stabilize performance. That stability from income-paying assets is key, he argues, because many clients now face the prospect of 30-year retirements. The simple fact of inflation mandates some exposure to more growth-oriented equities for most clients. Stabilization is absolutely necessary to keep those older clients exposed to growth.
A useful way to provide both income and equity exposure is through a selection of dividend stocks. While dividend strategies are remarkably popular, especially among Canadian investors, Fawcett cautions against seeking the highest dividends on the market. He looks for sustainable yields, typically between 4 and 5 per cent, which imply that a company can still reinvest enough to grow earnings, which should lead to dividend growth. It’s that combination which he sees powering serious compounding over time. Higher dividend yields can be unsustainable and lead to a drop-off in earnings growth.
Options strategies have become remarkably popular among Canadian investors as a whole, with some covered call option ETFs boasting double-digit income yields. Fawcett is broadly cautious about those strategies because of their inherent growth trade-offs. He says they can be used tactically in certain client situations, but that those are specific and the covered call fund wouldn’t be fundamental to that client’s overall income strategy.
Of course, advisors can also now generate income from client portfolios through simple decumulation formulas. Portfolio management technology has made that process, which used to be quite complex, very easy to execute. However, Fawcett notes that certain clients prefer the comfort of a dividend rather than income from asset liquidation.
Communicating the complexity of modern income
While income can be a psychologically stabilizing force for investors, modern income strategies are deeply nuanced and complex. They contrast with past generations’ wider pension access, which far more closely resembled the employment income they once knew. That complexity is all the more acute for high net worth and ultra high net worth clients, who often need to manage significant tax burdens in their income strategies.
Even when the numbers work, the projections looks good, and everything feels solid there’s the visceral lived experience of inflation that advisors have to deal with. Psychology can rear its ugly head again when clients start seeing how much the price of beef or gasoline has risen. Communication is key, Fawcett says, as is an asset allocation strategy that can deliver consistent portfolio growth even as it pays out regular income.
Advisors, Fawcett says, need to focus on their own education as they work to make sure clients understand how their income strategy fits in their overall portfolio. That education can help when it comes time to explain how income, growth, tax management, estate plans, and legacy plans all fit together. It can help, as well, when clients or wholesalers come knocking at the door with a supposed ‘silver bullet’ that can pay enough income and deliver enough growth to solve all your clients’ problems. With that knowledge in place, the final piece is advisor communication.
"The advisor needs to make sure they're talking to their client regularly and have a deep understanding of what their needs are, what their goals are, what their objectives are. Once you have that, you can bring the different tools in… That's the true value of an advisor. It's not just the investment side. If you get those right, it can provide a lot of reassurance to a client. They can see the plan mapped out, and they have the comfort of knowing there's a plan you can execute to help them achieve it."
