A team approach to investment strategy

In the investment world, stocks are the offense, producing returns. But just as important is the fixed-income protection that mitigates downside volatility and shields investors from market shocks.

These views are shared by Kevin Headland and Macan Nia, Manulife’s co-chief investment strategists, who were appointed to these roles in October 2021 following the departure of Philip Petursson, who previously held the title of chief strategist. investments.

After soaring stock markets last year, Headland and Nia are now advising advisors and clients to proceed with caution.

“It’s important for advisors to set expectations for their clients and say, ‘Listen, returns above 20% are not normal,'” Headland said in January, after the S&P 500 Composite Index posted a return. by 26.9% in 2021. “We” did very, very well. But we have to remember why we have a diversified portfolio. [This] Now is not the time to chase returns. Let’s get back to our goals and reset our expectations, longer term.

Nia agreed that clients shouldn’t let past performance influence their mindset: “Investors may have some recency bias. They look at their [account] statements and they expect [the same performance] go forward.

Despite last month’s performance of -5.00% for the S&P 500 and -0.60% for the S&P/TSX Composite Index, Nia said returns are expected to remain above average in 2022. “But there unlikely to be in the realm of what we have seen over the past three years.

Headland and Nia forecast earnings growth for US equities between 10% and 15% for 2022. For the S&P/TSX composite, they expect earnings to fall from recent levels but remain attractive over the course of the year. first half of this year.

Last month’s market volatility didn’t trigger panic among customers, Headland said, but rather sparked questions as well as unease about whether such volatility could lead to a recession or a bear market.

“For us, [our response] was all about reassurance and saying that history would suggest that when we get this type of volatility, brief sell offs or corrections [without] a recession is actually a good time to invest,” Headland said. “Not only were we trying to reassure advisors and their investors that this [volatility was] no recession, but could actually be a good time to add money to a portfolio if it has cash.

However, given that equity returns could return to more normal levels, Headland and Nia also highlighted the role of fixed income securities in mitigating downside volatility.

“Remember why you [have] a portfolio – it’s a long game, not a year back game. Bonds play a good role in the long-term portfolio,” Headland said. In times of falling yields, he added, clients can look beyond traditional fixed income and explore corporate bonds and floating rate and emerging market debt.

“These types of bonds have a shorter duration and higher yield than North American government bonds, which should help them outperform in a rising rate environment,” he said.

Headland and Nia’s capital markets strategies portfolio is currently weighted 65% in equities and 35% in fixed income (25% investment grade sovereign and corporate bonds and 10% high quality). yield).

Strategists noted in their outlook for 2022 that they had reduced their exposure to high yield by five percentage points and increased their defensive allocation to fixed income securities. High yield “no longer gives you the same type of advantage or allocation to take on the added risk” compared to investment grade, Headland said.

For customers sitting on the sidelines, strategists suggest using the average dollar cost for behavioral benefits.

“Some people say, ‘Well, the markets ran. I’ll wait for a better time to come in. You had people waiting [after] the financial crisis [of 2008], saying, ‘Oh, another shoe is going to fall. There will be a better entry point. Sometimes there isn’t,” Headland said.

Averaging, therefore, “is a very good strategy for getting money into the markets without completely waiting on the sidelines. And if a better entry point presents itself, you can [go] come back after that. But simply staying away can harm a long-term portfolio.

Providing this type of support and resources to Manulife advisors is part of Headland’s and Nia’s roles as co-Chief Investment Strategists. Headland said there was a succession plan in place for the chief investment strategist position, but once Petursson left for IG Wealth Management in September, Manulife offered him the joint role with Nia.

“Identifying one in relation to the other can sometimes create tension. I think it made sense that we could both be promoted to this role. We were both ready for it,” Headland said. He noted that he and Nia had worked together for about a decade and had also developed a friendship.

“Working together, you have to have a very good dynamic. And you have to have a similar point of view, but also be able to challenge yourself,” Headland said. “We get along very very well. We have taken detours after business trips together.

And from an investment perspective, the two men are philosophically aligned.

“We believe fundamentals, the earnings environment and valuations are the primary drivers of long-term investment returns,” Nia said. “We also believe in the importance of understanding behavioral economics because, more often than not, the biggest obstacle for investors to achieve desired returns is the space between their ears.”

Cryptocurrency vs Blockchain

Kevin Headland of Manulife Investment Management recognizes the value of cryptocurrency, but is more interested in investing in the underlying technology.

“Fundamentally speaking, it is more difficult to value cryptocurrencies because, as with [certain precious metals], the value is only based on what the next person is willing to pay for it. It’s harder to value something that doesn’t have tangible fundamentals,” Headland said.

Conversely, Headland said, blockchain technology is “really where we’re going to see the game-changer for markets,” adding that the technology is “very tangible.”

Headland is interested in companies that use blockchain technology to solve big business problems. For example, a food supplier could use it to track produce from harvest to distribution and be able to trace the source of an E. coli.

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