Is now the time to switch strategy?

The current cycle can't last forever and investors are beginning to look for other options in the marketplace

Is now the time to switch strategy?

Although index hugging funds have performed well in recent years, investors who have profited from such passive strategies should be considering how to reposition portfolios.

The current cycle cannot last forever and investors are beginning to look for other options in the marketplace. Although they’ve been slow to catch on in Canada, liquid alternatives represent a strategy that could start to play an increasingly important role.

“The biggest point is that, at some point, people are going to need uncorrelated returns to the market,” says Mark Purdy, Managing Director & Chief Investment Officer, Arrow Capital Management Inc. “We’ve been in a bull market since 2009, rates are really low and it’s hard to find stocks that are uncorrelated. People are going to need strategies within their portfolio that exhibit some low correlation, especially with the growth of ETFs and more passive investments.”

In the U.S. the liquid ‘alts’ space has grown steadily in recent years. In Canada, however, alternative products have been targeted at high-net-worth investors and not available to the mass market. But a CSA proposal could change all of that. Expected to be ratified in the next 12 months, the rule change would allow regular mutual fund investors to access liquid alt strategies.

If ratified, the proposal will give mutual fund investors the ability to sell short, which, in the current low interest rate environment, is very attractive. It will also enable investors to use leverage in the search for better returns.

“The new rule is going open up a big market for companies that are already positioned in the alternative space, as well as create opportunity for more traditional mutual fund companies who are losing some market share to ETFs,” Purdy says. “Those firms will be able to either convert existing products into liquid alts or launch new products in the liquid alt space. That will provide investors with a different return stream to what they can currently access in Canada.”

Although Purdy believes that the current market cycle has some legs, he also urges caution. He encourages investors to maintain exposure to the market but at the same time add protection, just in case we do see a big rise in inflation and rates. 

“In the current environment, I would be looking for active equity in the US, Europe and select emerging markets,” Purdy says. “On the fixed income side, I would not want to be completely long. I would recommend a strategy that protects against inflation and from rising interest rates.”

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