How income solution weathered the pandemic storm

Multi-asset investor explains which equity sectors excelled and how Canada drove returns

How income solution weathered the pandemic storm

An income solution launched on April 30, 2020 risked an inauspicious start. COVID-19 infection rates were spiking, lockdowns closed business, and interest rates were cut to near zero.

Instead, the Capital Group Monthly Income Portfolio weathered the storm, delivering first-year returns above 11%. Relatively new to Canadian investors, the Monthly Income Portfolio is a multi-asset portfolio created by the company's Global Solutions Committee and is currently a blend of seven individual Capital Group mandates.

Behind its strong opening 12 months was a larger allocation to equities than its benchmark – the Monthly Income Portfolio blended benchmark – with materials and technology companies contributing to results. Canadian and emerging markets companies drove a significant proportion of this.

Jeb Bent, equity and multi-asset investor director, said that Taiwan Semiconductor (TSMC) was one of the largest contributors and that the strong demand for microchips that underpinned the digital transformation was accelerated by COVID-19. "TSMC was at the forefront of this, as it had two powerful tales playing out: robust demand, and its leading-edge foundry process. It continues to be a top-10 holding within the portfolio.”

From a materials perspective, there were positive contributions from Canadian companies such as Labrador Iron Ore Royalty Corporation and First Quantum Minerals. Labrador gained on strong demand as iron ore prices doubled, while shares of First Quantum, one of the largest copper miners in Africa, climbed on a rise in copper prices.

In the final months of its first year, the mandate increased exposure to cyclicals, with additions in financials, metals and mining companies, and energy companies.

Bent explained: “Within financials, the mandate increased exposure to Canadian banks such as TD Bank and Bank of Nova Scotia. Managers also added to insurance companies, such as Sun Life Financial. One of the reasons exposure increased to some Canadian banks is because mortgages make up a pretty significant size of their balance sheets, and the Canadian mortgage market is structurally attractive today due to strong housing activity and an improving rate environment.”

The fixed-income aspect of the portfolio provided welcome ballast. At the end of 2020, it reduced cash and increased exposure to U.S. Treasuries and sovereign debt to become more conservative. Emerging markets debt was added, along with high yield, to a larger degree than the portfolio’s benchmark.

Inflation remains a overhanging cloud. It’s hard to say at this stage whether we will get longer term, higher inflation, according to Bent. Instead, the question is whether something has changed dramatically given all the fiscal and monetary stimulus? Or will we revert back to the old regime?

Bent said: “Capital Group doesn’t have a single ‘house view’ on any issue. It’s up to investment professionals to make decisions based on their own convictions. But we think most people believe that inflation will be higher than it has been in the recent past. We focus on scenario analysis concerning the various possibilities of the market environment to position the portfolio to hold up under different circumstances.”