Keeping You Informed: CI Multi-Asset Management

Speakers:
Stephen Lingard, Senior Portfolio Manager and Head of Investment Research
Marchello Holditch CFA, CAIA, Vice-President and Portfolio Manager
Alfred Lam, Senior Vice President and Chief Investment Officer

Overview

  • Overall, Asia appears to be past the past the worst point of COVID-19. Europe, including even Italy and Spain, has turned the corner in terms of new infections and deaths and it looks like the continent overall is beginning to gain control over the virus. Outside of the United States, new infections as well as hospitalizations seem to be stabilizing globally.
  • While we are seeing some signs of second waves in Asia, generally these seem modest. However, this serves as an important reminder to not become complacent and to stay vigilant until we are confident that we are on the downside of the COVID curve.
  • Until early April, the trajectory was very troubling. However, governments’ massive interventions rapidly averted a liquidity crisis as well as a balance sheet problem.
  • Until we have a remedy to deal with COVID-19, the world is not going to be the same. However, it appears the virus is expected to have a temporary economic impact.
  • The service sector is being disproportionately impacted. Manufacturing is somewhat less affected because of automation and in some cases longer lead times. Services purchasing manager indexes are at their lowest level in 20 years, after an extremely fast drop.
  • China is the first economy to be unlocked and has seen a rebound in its services PMI. This is a positive sign for developed economies.

CI Mosaic ETF Portfolios

  • The portfolios are overweight in Asia – largely, Japan, Australia, Korea and China, and in Europe and the United Kingdom as well. These areas are mainly past the worst of the pandemic. We’re more neutral in the United States and Canada.
  • We are underweighted in emerging markets, although we are carefully adding to our exposure there as we see attractive opportunities. There is evidence that the U.S. dollar is peaking, which is good news for emerging markets, as many of these countries have a significant burden in terms of U.S. dollar-denominated foreign debt.

Portfolio Series and Portfolio Select Series

  • Despite the intense volatility, we have remained within our risk budget in our balanced portfolios, which is a range of annual rolling returns from 30% to -18% during any 12-month period in order to generate a 6% annualized return over an eight-year period. Of course, we are mindful of short-term volatility, but we remain focused on our long-term objectives.
  • The portfolios entered 2020 strategically overweight equities and cash. We felt that equities were reasonably valued, particularly compared to fixed-income securities that are providing little to no income. Our equity position is now slightly overweight. We were underweighted in high-yield bonds, as there was minimal return opportunity due to tight credit spreads.
  • Positions in foreign currencies were added, notably the Japanese yen. We anticipated central banks would cut interest rates in response to the unfolding crisis, but Japan already had done so, and our U.S.-dollar hedge has been increased.
  • We also added gold to the portfolio. Gold is typically a hedge when there is a flight to safety, but it also is more attractive when fixed-income yields are low or even negative. While there is a cost to owning gold, the tradeoff is worthwhile given current interest-rate conditions. Moreover, gold has a lot of upside potential and diversification attributes.
  • Within equities, it has been a challenging period for security selection, particularly for portfolios with a value or small-cap bias. Our positions in low-volatility, factor-focused international and global ETFs aided our performance.
  • We also have liquid alternative equities, particularly those that take both long and short positions. This gives us the flexibility to manage our market exposure.
  • In addition, we have exposure to real assets such as real estate and infrastructure, which has helped offset overall portfolio volatility. With interest rates unlikely to go back up until 2021 or 2022, this will help real-property companies generate cash flow, income and yields that are particularly attractive in a low-rate environment.

Select Income Managed Corporate Class

  • We raised cash to 20% in January and we were underweight all asset classes in the fund, based on our concerns about the coronavirus outbreak in China.
  • Stocks continued to rally until late February as investors thought this was a local China problem. They recognized it was not when cases grew in Europe and the United States. This caused a liquidity event in the capital markets whereby all asset classes, including government bonds, were heavily sold as inventors favoured cash at the height of uncertainty.
  • This fund had low downside capture due to its large cash weight; but volatility was still unusually high. We also own non-traditional assets such as gold bullion and yen to add downside protection.
  • The massive stimulus programs have motivated us to favour assets that are backed by governments, such as Treasury bonds and credit. As the U.S. Federal Reserve has flooded the market with U.S. dollar supply, we have been reducing U.S. dollar exposure through hedging.
  • We deployed cash in the last week of March, bringing the level to 7% of fund assets. We favoured corporate credit, because it is now effectively backed by governments as they are buyer in the market. We consider the fund fully invested as cash is invested in foreign currencies.
  • While central bank action headed off a balance-sheet debacle, corporate income statements will remain problematic until people go back to work and money is being spent again. It will take some time to return to normal and recession is inevitable, although hopefully only a mild one. Price-earnings multiples are high and we are concerned there is too much speculation in the market. We anticipate earnings may return to 2019 levels in approximately three years’ time. We are reluctant to add equity exposure given this fund is managed conservatively for investors with short investment horizons.

Source: CI Multi-Asset Management

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Published April 14, 2020.