What portfolio risks should advisors be paying attention to?

Top portfolio manager walks through some factors that should be considered in evaluating asset and sector exposures

What portfolio risks should advisors be paying attention to?

As the world crosses the threshold of a new era of inflation and higher interest rates, portfolio managers navigating the new landscape of assets and financial markets must be mindful of certain key risks, according to one top advisor.

“Currency risk is going to be very important, especially as certain governments and central banks tighten while other ones don't,” Martin Pelletier, Senior Portfolio Manager and Founder of Trivest Private Wealth with Wellington-Altus Private Counsel, told Wealth Professional.

“Regional macroeconomic risk will also be important, as certain areas are more exposed to energy prices and inflation.”

Within the fixed-income realm, he says credit risk has taken on renewed importance. And while many have raised their exposure to duration over the past several years, simply because it’s been the best-performing trade, Pelletier says it has also put portfolios in a precarious position.

“Those areas, including equities that are exposed to rising interest rates, have been hit pretty hard. Some have gone down over 30%. So maybe now is not a bad time to look at that duration exposure within your portfolio,” he says. “But as a first step, it’s crucial for advisors to understand what duration is, and how it impacts their clients.”

A large majority of advisors may also be hesitant to integrate ESG into their investment processes, given the continuing challenge posted by inconsistency in ESG ratings and the confusing array of frameworks globally. For his part, Pelletier acknowledges that themes like sustainable investing and climate change can impact capital allocations, particularly in certain pockets of the market.

That’s been exemplified by the energy sector, which has been severely undercapitalized over the last decade due to restrictive government policies, as well as decisions being made by asset allocators at pension plans and other large institutions.

“These companies have had to adapt and look at changing their business model, from being focused on growth to harvesting cashflow,” he says. “Now’s not a bad time to look at those areas that had been undercapitalized, since the resulting impact on the supply side has meant they’re in a stronger financial position today.”

But even as investors make decisions in alignment with their convictions, Pelletier stresses the importance of understanding the fundamental tailwinds and risks underlying their investments.

As an example, he points to how at the end of last year, Caisse de dépôt et placement du Québec sold off its energy positions in favour of technology stocks and a hefty investment in Celsius, a crypto lending platform. That decision have proven disastrous this year as rising rates crushed the tech sector, while Celsius recently was forced into bankruptcy amid a broad implosion in the crypto space.

“I’m certainly not denying climate change. I'm not disagreeing with people who invest to help tackle it,” he says. “But understanding how different forces, like ESG, can drive policy and capital flows is very, very important.”