Volatil­ity re­turns

Investment Executive - - FRONT PAGE - BY ME­GAN HAR­MAN

cana­dian in­vestors kicked off 2018 with an ap­petite for risk, thanks to the strong per­for­mance of eq­ui­ties mar­kets over the past cou­ple of years. But af­ter a few days of sharp sell-offs in early Fe­bru­ary, some fi­nan­cial ad­vi­sors now find RRSP sea­son chal­leng­ing, as clients face a star­tling re­minder of the rapid pace at which gains can turn into losses.

“I hope in­vestors are smart and pa­tient enough to use this as a

buy­ing op­por­tu­nity,” says Ja­son MacKay, se­nior vice pres­i­dent and na­tional sales man­ager with Toronto-based In­vesco Canada Ltd., in ref­er­ence to re­cent dras­tic de­clines in stock mar­kets — in­clud­ing mul­ti­ple ses­sions dur­ing which the Dow Jones in­dus­trial av­er­age plunged by more than 1,000 points. “On the flip side, though, I do be­lieve you will see some of the sen­ti­ment move to­ward more sta­ble strate­gies.”

This year started off strong for many in­vest­ment fund com­pa­nies, with healthy sales in a broad range of cat­e­gories. For ex­am­ple, Toronto-based Macken­zie Fi­nan­cial Corp. had its best Jan­uary in his­tory in terms of in­vest­ment fund sales, ac­cord­ing to Da­mon Murchi­son, se­nior vice pres­i­dent, re­tail dis­tri­bu­tion, with Macken­zie.

The firm re­ported mu­tual fund gross sales of $882.5 mil­lion for the month, up from $698.3 mil­lion i n Jan­uary 2017. In ad­di­tion, Macken­zie’s ETFs gen­er­ated $267.2 mil­lion in net in­flows in Jan­uary.

“[This] has been a very pos­i­tive time for us,” Murchi­son says. “The most en­cour­ag­ing part is that the flows are broad[ly dis­trib­uted] — it’s not one or two things that are driv­ing this.”

Sales of mu­tual funds and ETFs have been strong for Toron­to­based Bank of Mon­treal as well, says Robert Arm­strong, vice pres­i­dent of multi-as­set so­lu­tions, with BMO Global As­set Man­age­ment. “So far this year, we’ve seen very at­trac­tive pos­i­tive in­flows.”

In­vestors were in the mood to take on more risk in Jan­uary com­pared with re­cent years, Arm­strong notes. He ob­served in­vestors shuf­fling some as­sets into eq­ui­ties and away from fixed-in­come.

“Gen­er­ally, in­vestor sen­ti­ment has turned pos­i­tive,” Arm­strong says. “In­vestors have moved up the risk spec­trum a lit­tle bit.”

Re­cent fund sales at In­vesco re­flect a sim­i­lar trend, MacKay says: “You’re see­ing an ap­petite for risk, for stand-alone eq­uity funds for the first time in a long time. You’re see­ing a move to­ward global eq­ui­ties, global fixed­in­come and emerg­ing mar­kets.”

The grow­ing ap­petite for risk also is no­tice­able on the ETF side, says Mark Noble, se­nior vice pres­i­dent, sales strat­egy, with Toronto-based Hori­zons ETFs Man­age­ment (Canada) Inc. In par­tic­u­lar, “the­matic” ETFs, in­clud­ing those track­ing in­dus­tries such as cannabis, blockchain tech­nol­ogy and ro­bot­ics, have at­tracted high vol­umes of sales. For ex­am­ple, he notes, Hori­zons Mar­i­juana Life Sciences In­dex ETF was the top-sell­ing ETF in Canada in Jan­uary, with in­flows of al­most $250 mil­lion.

Al­though such ETFs can carry con­sid­er­ably more risk than a broader mar­ket in­dex fund, “they of­fer the po­ten­tial for out­sized re­turns,” Noble says. “More in­vestors are chas­ing those kinds of high risk/high re­ward as­set classes.” How­ever, re­cent stock mar­ket volatil­ity could cause some clients to re­con­sider the amount of risk they’re com­fort­able hav­ing in their re­tire­ment port­fo­lios. The sud­den mar­ket cor­rec­tion that took place in early Fe­bru­ary came as a shock to many clients be­cause mar­kets had been mov­ing higher for an ex­tended pe­riod.

“In­vestors have gone with­out see­ing any volatil­ity in the mar­ket­place for about two years,” Arm­strong says.

A key part of your job as an ad­vi­sor is en­sur­ing your clients are pre­pared when mar­kets plunge un­ex­pect­edly, says Adrian Mas­tracci, se­nior port­fo­lio man­ager with Ly­cos As­set Man­age­ment Inc. in Van­cou­ver.

“Lay out a plan for both the up­side and the down­side,” Mas­tracci says. As long as your clients’ port­fo­lios are de­signed to re­flect their long-term goals and their risk tol­er­ance, he adds, their in­vest­ment strate­gies shouldn’t be af­fected by short-term mar­ket noise.

For strate­gic in­vestors, mar­ket dips present an op­por­tu­nity to buy a de­sired stock or fund units at an at­trac­tive price. Says MacKay: “These bouts of volatil­ity can be great op­por­tu­ni­ties to add to po­si­tions, or maybe even to ini­ti­ate new po­si­tions.”

For clients con­cerned about volatil­ity, balanced funds are an at­trac­tive op­tion, as unithold­ers can par­tic­i­pate in mar­ket gains while pro­vid­ing some down­side pro­tec­tion, Murchi­son says.

“Balanced [funds are in] that sweet spot, where you’re get­ting the re­turns that you need to grow your port­fo­lio to achieve your goals,” Murchi­son says, “but you can sleep at night be­cause the risk that you’re as­sum­ing isn’t as high as the over­all mar­ket.”

Macken­zie’s balanced funds, such as Macken­zie Global Strate­gic In­come Fund, are among the top-sell­ing funds for the com­pany so far in 2018, he adds.

Sales fig­ures for mu­tual funds and ETFs sug­gest that in­vestors are be­com­ing more com­fort­able in ex­plor­ing op­por­tu­ni­ties out­side Canada and the U.S. Fol­low­ing a strong run in U.S. eq­ui­ties that has stretched val­u­a­tions — and re­cent un­der­per­for­mance by Cana­dian stocks rel­a­tive to other global mar­kets — clients and their ad­vi­sors in­creas­ingly look abroad for more at­trac­tive re­turn prospects.

“There’s a big move­ment to­ward look­ing at stocks out­side North Amer­ica,” Noble says.

Case i n point: in­ter­na­tional eq­uity ETFs in Canada at­tracted in­flows of $1.3 bil­lion in Jan­uary, while Cana­dian eq­uity ETFs ex­pe­ri­enced net out­flows of $812 mil­lion, ac­cord­ing to a re­port from Mon­treal-based Na­tional Bank of Canada.

On the fixed-in­come side, ris­ing in­ter­est rates threaten to drive down the value of clients’ bond hold­ings this year. Says Noble: “This could be a year in which, fea­si­bly, some bond cat­e­gories could pro­vide neg­a­tive re­turns on a to­tal year ba­sis.”

Still, Cana­dian in­vestors con­tinue to show de­mand for fixed­in­come. Fixed-in­come ETFs in Canada at­tracted in­flows of al­most $1 bil­lion in Jan­uary, ac­cord­ing to Na­tional Bank’s re­port.

In ad­di­tion, MacKay says, global fixed-in­come funds, such as In­vesco Global Bond Fund, are prov­ing pop­u­lar be­cause their broad diver­si­fi­ca­tion helps to re­duce risk in a ris­ing in­ter­est rate en­vi­ron­ment.

“These bouts of volatil­ity can be great op­por­tu­ni­ties to add to po­si­tions, or maybe even to ini­ti­ate new po­si­tions”

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