Help clients limit the impact of low rates, inflation

“Interest rates are very low, I think they’re going to continue to be very low for quite a period of time,” said Cary Blake, vice president at RBC Global Asset Management. “On the inflation front, it certainly is a concern.”

The longer governments keep rates stay low, added Som Seif, president and CEO of Claymore Investments, Inc., the worse inflation will get.

“The longer you keep interest rates low, the more pent up inflation is going to look, and the more nasty it will look on the back end,” he said. “We think that there is a major issue with respect to inflation over the long term.”

As higher prices bite into Canadians’ disposable income, the panelists said advisors should help clients limit the impact of inflation on their investment portfolios.

While some advisors might look to real return bond products to protect clients from inflation, Seif warned that these products are currently overpriced. “They’re pricing in an inflation rate that is extremely high right now,” he said. “We think that that’s one of the worst investments that you could make today.”

Seif estimates that a real return bond product would provide clients with total annualized returns of just 40 basis points.

Instead, he urges advisors to protect their clients from inflation through exposure to commodities or floating rate securities. He noted that many products have emerged from the exchange-traded fund market offering this kind of inflation protection.

“What’s great about the ETF industry today is you’ve seen an evolution of product strategies and structures,” Seif said. “They’re now giving you exposure to asset strategies that have an inflation-inherent structure, and can allow you to protect in a different way.”

Low interest rates are also causing concerns with respect to weak rates of return.

With government bonds offering dismal yields, Blake encourages advisors to direct their clients to corporate bonds and high yield bonds in the fixed income space, in order to generate some more attractive returns.

“Relative to the financial crisis a few years ago, [credit spreads] are certainly not quite as wide as they were back then, but they’re still providing a meaningful enhancement over government bonds, and I think they can be quite valuable within your fixed income portfolio for quite some time,” he said.

On the equity side, investment executives are not much more optimistic about return prospects in the next few years.

“The next decade is going to be better than the prior decade – that’s the good news,” said Jonathan Needham, sales executive at Vanguard Investments Canada Inc. “The bad news is, relative growth is going to be slower in the next decade than what we’re accustomed to over the last 50 years.”

He projects that a balanced portfolio with 50% equities and 50% fixed income would generate net returns of about 4.5% over the next 10 years.

To help clients enhance returns as they save for retirement, advisors should look to alternative assets such as commodities and managed futures, suggested Seif. Also likely to generate more attractive returns are equities in emerging markets, according to Needham.

“For the next decade, we do still see emerging markets and Australia having more significant GDP growth than the developed world,” he said.