Konstantin Boehmer, Senior Vice President, Portfolio Manager and Co-Head of Mackenzie's Fixed Income Team, sub-advisors for Canada Life Investment Management Ltd., explains why he sees a bright future for the broad asset class
Ask Mackenzie Investments’ fixed-income mastermind Konstantin Boehmer what is catching his eye right now, and he doesn’t miss a beat. He rattles off a host of reasons why he’s even more excited about fixed-income investments today than he has been in years.
Boehmer, a tenured-industry veteran, who leads a diverse team of 27 fixed-income specialists, managing a multitude of strategies, has keenly examined Inflation-Linked Bonds (ILBs) throughout his career to identify fixed-income trends. In his view, the state of ILBs today signals bright days ahead. That’s because these government issued securities are indexed to inflation, meaning principal and interest payments move with inflation to help protect investors. In simple terms – if those ILBs are held to maturity, the investor doesn’t need to worry about inflation. The extra yield offered by these bonds is a very pure form of looking at valuation for ILBs and the entire fixed-income market.
“When looking at fixed income from a fundamental perspective, it looks really good. The reason why is not because I have a special feeling in my stomach that is indicating that direction, but because I look at (ILBs) to guide me to how attractive fixed income is as a whole,” he says.
Investors can access Boehmer’s team’s expertise through various Canada Life fixed income funds. Some of the Mackenzie funds were recognized for showing consistent exceptional results throughout 2022. Read about the funds in Canada Life wins at the annual Fundata FundGrade A+® awards.
He points out that ILBs are yielding roughly 1.7% regardless of whether they are two or 30-year bonds. Clearly ILBs are but one subset of a highly robust sector and those returns aren’t indicative of the entire segment, but the fact that with inflation built in, ILBs point to modest but consistent growth indicates to Konstantin that the asset class overall has turned a corner.
“It's a very pure form of looking at how attractive fixed income is,” he says. “It gives me confidence that from a structural lens, fixed income is looking quite attractive.”
That’s not to say that Boehmer is advising investors to go all in on fixed income. Far from it. He still sees residual weakness in the asset class. But it does suggest that the timing is right for investors to consider a broader based, multi-asset, fixed-income strategy and to view sell-offs currently underway as an opportunity to increase holdings.
“If you are presently underweight in fixed income, reduce that underweight. You don't have to go all-in at this stage, but from a risk/return trade-off fixed income looks well positioned for long-term investors.” he advises. “And because it is more attractive than neutral, you probably want to be slightly overweight at some point in the near future.”
It should come as no surprise that the German-born Boehmer, a lifelong soccer fan, elegantly frames portfolio management in a soccer analogy. To his eyes, economic climates can be likened to various soccer teams one might play against, and the way one balances their portfolio is like the player positions they choose to field. In some cases, you want to have a little bit more offensive power, so you bulk up with strikers (growth equity) and midfielders (dividend stocks). In other situations, you want to strengthen your defence (investment grade corporate credit and government bonds). Your gate keeper, goalie is your cash and guaranteed investment certificates (GICs).
“You need all of them at times. But it always depends on who you're playing,” he says. “If you're playing against Lichtenstein, you want to have a little bit more offensive power. You want to overload. And if you are playing Brazil, maybe you have a little bit more strength in the back. And that is kind of the equivalent to the economic environment that you're in.”
In today’s match, Canada looks attractive
With that in mind, where does Boehmer suggest advisors look to increase that defensive position with recessionary clouds on the horizon?
Setting aside the fact that it’s based in Canada, Mackenzie’s Fixed Income Team doesn’t have to look far to seek opportunities. That’s because they regularly rank and re-rank countries searching for the best duration. Topping the list right now is Canada.
High levels of household debt coupled with an overly aggressive approach from the Bank of Canada, means that rate hikes will likely be paused, Boehmer says, as was recently proved by the central bank’s latest decision to hold its policy rate steady. While central banks are important, they don’t dictate the entire fixed-income market – the combination of relevant factors for fixed income makes us bullish on Canada.
“I think it is just a matter of time until that shows up,” he says. “It will hit an economy like Canada earlier than it should hit an economy like the U.S. And as such, I think Canada makes a pretty good case to be long duration. So that is an overweight position that we have in our funds.”
Boehmer’s optimism is tempered by an understanding that the coming months with be highly choppy. The team’s approach rarely leaps from short duration to long, preferring instead to assess the gap between its view and its actual position and move incrementally to narrow that gap. While Konstantin anticipates that they’ll move from shorter durations to longer in the coming months, he’s also quick to point out that the team is monitoring the market morning to night. He cautions advisors, who don’t have resources to monitor the market constantly, to take the long-term view.
“You don’t want to be short-fixed income right now. So, your view should be neutral-fixed income, whatever that is to you, and maybe a slight overweight,” he says. “But what is most important is to have a strategy of how you want to align your view and the positioning in your funds.”
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