Why long-term investment focus pays off despite short-term pain

Why asset allocation is your most important decision and how protection from volatility can keep your clients invested

Why long-term investment focus pays off despite short-term pain
Leonie Mac Cann, Senior Multi-Asset Portfolio Manager, Multi-Asset Solutions team, Irish Life Investment Managers

This article was produced in partnership with Canada Life.

If the majority of the past decade has been an ambient, meditative journey to positive portfolio returns, 2022 has been a heavy metal-style reminder of the cyclical nature of markets. Short-term noise, generated by inflation at 40-year highs, has been amplified by the war in Ukraine and drastic monetary policy changes.

Russia’s invasion of Ukraine is, first and foremost, a horrendous humanitarian crisis but it also precipitated economic sanctions and fears about energy and food security. The resulting supply chain problems, added to lingering pandemic supply related constraints, have subsequently fed into higher and stickier-than-expected inflation, causing central banks to aggressively hike interest rates.

For investors not used to seeing negative numbers on their statements, the sell-off across equities and fixed income has been chastening. The S&P 500 has fallen 21% so far this year (as at June 16, 2022, in CAD), its worst start to a year since 1932, while the U.S. Federal Reserve’s recent 75 basis points hike was its highest since 1994.

With both risk assets and fixed income struggling, Leonie Mac Cann, Senior Multi-Asset Portfolio Manager in the Multi-Asset Solutions team at Irish Life Investment Managers, believes this is a particularly challenging time for investors, with a traditional 60-40 portfolio, by her calculations, down about 12% as at June 16, 2022.  Despite a lot of the rate increases being priced into the market, and supply issues caused by the pandemic and exacerbated by the war in Ukraine expected to ease, she believes things could get even worse before they get better.

“Central banks still feel a soft landing might be possible,” she said. “But there is potentially going to be [more] pain. Hopefully, we should see inflation start to come down towards the end of this year and into next year but still remain high, and higher than target.

“There are challenges ahead, and there is potential for more downside, but over the longer term, we would still have a positive view on equity markets, and we still think they offer attractive returns over that longer term versus other asset classes. However, given the move we've seen in rates and the pullback in equities, the relative attractiveness of equities over bonds has reduced.”

While we are in the middle of a tough period, Mac Cann urged investors to retain a sense of perspective after a decade of strong equity and fixed-income performance. And given that markets are cyclical in nature, and will invariably go through recessionary periods over time, she stressed the need for long-term positioning. It’s this philosophy that informs the Canada Life Risk-Managed Portfolios, a single-fund solution that brings together risk management strategies and traditional and non-traditional investments. These portfolios are specifically designed with a core focus on reducing volatility while still delivering capital growth over the long term.

All three portfolios – conservative, balanced and growth – have an anchor allocation to The Canada Life Risk Reduction Pool, while the rest of the portfolios use both qualitative and quantitative factors, across equity, fixed income, and alternatives to achieve their desired long-term outcomes.

Mac Cann explained: “The reason you focus on that strategic asset allocation is that this will deliver approximately 90% of your return over that longer term - it's the most important decision that you can make. That helps you ignore a lot of the short-term market noise by staying the course towards your longer-term objective.”

Underpinning these portfolios are the fundamental principles of diversification and risk management. Alternatives try to deliver a less correlated return stream compared to your more traditional funds while within all the asset classes there is further diversification across style (for example growth and value), geography, and both passive and active management strategies.

“Not just in a bear market but in general, I would caution against trying to chase returns or trying to be overly reactive to market developments,” Mac Cann added. “In the Canada Life Risk-Managed Portfolios, we stick to our medium- to longer-term focus and those core pillars of portfolio design. We try to look through a lot the market noise and position the portfolios from the outset so they can withstand periods of market volatility and provide a level of protection. We've definitely seen the benefit of that year to date, in what has been a difficult environment.”

The Canada Life Risk-Managed Portfolios adapt to the changing investment environment and Mac Cann believes the current conditions have provided a “proof point” in their ability to provide robust downside protection. It’s a shield that can help advisors steer clients away from emotional decisions to exit the market, which at the time might feel logical but can cause irreparable damage to a client’s ability to achieve their long-term goals.

“This encourages clients to stay invested,” she added, “because when they look at their experience, they can see that they're getting a level of protection, so they don't get as nervous and they don't decide to disinvest.”

With markets in bear territory and so much of the world in a state of flux after a global pandemic, it’s easy to get caught up in the headlines of the day. For Mac Cann, having a comprehensive risk-reduction strategy in place can help deliver a smoother ride while protecting investors from volatility and the temptation to run for the hills. The current situation is painful but, with the right strategy, the future is still bright.

Contact your Canada Life wealth wholesaling team for more information about Canada Life Risk-Managed Portfolios.


This material is for advisors and not intended for use with clients.

The views expressed in this commentary are those of their respective fund managers and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice.

Portfolios are managed based on the strategic asset mixes shown, however actual allocations may vary. Strategic asset mixes, portfolio holdings, and their percentage weightings are subject to change. The portfolio sub-advisor may also employ investment strategies that seek to reduce volatility. These strategies seek to reduce losses from market declines, while recognizing that they may not fully benefit from strong equity markets.

Canada Life Risk-Managed Portfolios are available through a segregated funds policy issued by Canada Life or as a mutual fund managed by Canada Life Investment Management Ltd. offered exclusively through Quadrus Investment Services Ltd. Make your investment decisions wisely. Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.