Why discipline and diversification are key amid heightened uncertainty

Chris Koltek, of Portfolio Solutions Group, explains how its multi-layered approach aims to deliver returns while protecting clients from inflation, interest-rate, and geopolitical risk

Why discipline and diversification are key amid heightened uncertainty

The world is in a state of flux. It’s a time of heightened uncertainty and, with markets experiencing a sharp downturn in Q1 of 2022, investors have switched from being speculative to risk averse. Emotions are running high and, spooked by poor performance, there is a risk of making rash decisions that will severely damage portfolios.

Investors don’t have to search hard for nerve-shredding news. Inflation and rising interest rates dominate the media coverage amid a backdrop of slowing economic growth. On a more visceral human level, geopolitical issues are front page, with Russia’s invasion of Ukraine leaving scores dead and drawing severe economic sanctions from Europe and North America. This has driven up the price of energy and other commodities. Compounding all this, supply chain issues persist, especially in China as it experiences more prolonged lockdowns related to their zero-tolerance policy for COVID-19.

Chris Koltek, Institutional Client Portfolio Strategist with Portfolio Solutions Group (PSG), a division of Canada Life Investment Management Ltd., says these factors have affected both fixed income and equity investors.

On the fixed income side, traditional long-term government bonds are down significantly, as are corporate, high yield and global sovereign. Short-term bonds and money market funds have provided a bit of a safe haven, but it’s been a period of minimal yields.

In the equity market, the strategies that worked in recent years, such as growth investing and buying the dip, have suffered. Cyclicals in sectors such as energy and financials, especially in Canada, have provided some solace, but stocks in general have been hit.

Different regions have been impacted differently, too. While Koltek believes equity valuations in the U.S. remain a bit extended relative to the rest of the world, and Europe is facing challenges because of the Ukraine-Russia war, Canada is looking attractive with lower valuations, a tailwind of strong commodities and financial services, and a strong COVID-19 vaccine uptake.

We are, however, in a tough environment for portfolios as advisors look for returns and protection, and Koltek believes PSG has the ability to meet these market challenges head-on. It actively manages portfolios, aiming to set them up for success in rising markets, while protecting on the downside during periods of volatility. At the centre of this strategy is the ability to navigate their portfolios through a full market cycle.

PSG’s portfolios are actively managed on two levels. The top level involves decisions around strategic asset allocation, which tends to be more long term in nature, and periodic, modest tactical positioning, such as changing weightings in fixed income or equity. The second level involves investment decisions made by the underlying fund managers themselves, which might include sector allocation or individual security selection. In fixed income, this might include the level of interest rate or credit risk the managers want to take.

“You're getting layers of portfolio management,” Koltek says. “A strong, disciplined investment process and diversification are going to be your best friends in this environment. Investing can get emotional during periods of significant volatility. You're never going to get rid of that completely but if you have a strong, disciplined investment process (including a measured rebalancing approach) to act as a guide during turbulent times, you can lower the amount of decisions that are required when things get tough.”

As part of its strategy, PSG offers multi-layer equity diversification across asset classes, sectors, styles, regions and market capitalizations. PSG’s underlying equity exposure aims to provide inflation protection, amplify returns and navigate problematic regional equity valuations. Tactically, given current prices, it has lower equity exposure to the U.S., and it’s also style neutral to benefit from both value and growth investment styles.

PSG has also broadened its strategic asset allocation framework in fixed income to include global bonds and real return bonds.1 Tactical positioning includes shortened duration to help manage the rising rate environment, including inflation risk. PSG has the economies of scale needed to provide exposure to the full spectrum of fixed income, while they can also offer exposure to alternative investments like real estate and private credit.2

“The funds we have are really one-step solutions that are designed to provide returns within a target risk level for the clients,” Koltek says. “Each fund is a diversified portfolio that uses various asset classes and invests in different types of holdings across industries, countries and styles.”

“The funds can help clients achieve their goals while making sure that they don't take on too much risk in their portfolios. They are also going to provide clients with strategic and tactical asset allocation. The strategic asset allocation is more long term in nature, over a four- to five-year timeframe, while the tactical asset allocation, on a six- to 12-month basis, is going to be more about those minor adjustments that are based on what the markets are doing today. Clients will also benefit from the day-to-day active management within the underlying funds.”

Flexibility and active management are at the heart of these portfolios, whether that’s combating equity volatility or the impact of rising interest rates on the bond market. PSG believes the ability to stay disciplined and diversified will stand advisors and their clients in good stead for the months ahead.


1,2 Exposure to real return bonds, direct real estate and private credit is only available in Canada Life Allocation Funds through a segregated funds policy issued by The Canada Life Assurance Company.

The views expressed in this commentary are those of this investment manager as at the date of publication 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.

This fund is available through a segregated funds policy issued by The Canada Life Assurance Company or as a mutual fund managed by Canada Life Investment Management Ltd. offered exclusively through Quadrus Investment Services Ltd. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing.  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.