a man on a precipice

Portfolio managers will have to employ new tools and look further afield for returns in a slowing economy, said Ken MacNeal, portfolio manager and investment advisor with Richardson Wealth in Calgary.

At the Inside ETFs Canada conference on Tuesday in Toronto, MacNeal said current economic conditions require more than passive asset management and a 60-40 portfolio, which he said was devised to reassure amateur investors in volatile times.

“This is a new environment,” said MacNeal. “We have to use expert techniques of asset allocation, macro indicators, research and active portfolio strategies to avoid risks when they come up and to seize on opportunities as they arise.”

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MacNeal said he abandoned the traditional 60-40 split during the Covid reopening phase.

“On a macro basis, it was a terrible time to own a bond. The Federal Reserve bank amping up to fight inflation by raising interest rates? That’s hostile for bonds. A war in Europe? That’s a disaster for bonds.”

In that kind of hostile climate, a 60-40 split would have meant “toughing it out.” Instead, his clients were out of bonds and in other types of fixed income like rate-reset preferred shares.

On the equities side, MacNeal has moved his balanced clients from 70% equities to 40% equities today since it’s a “hostile environment” for stocks. He added he likes ETFs because they allow him to move in and out of positions efficiently.

Lisa Langley, president, CEO and founder with Emerge Canada in Toronto, said in the same session that the recent drawdown in some sectors has revealed low valuations and new opportunities.

“We’ve seen historical whipsaws,” she said. “Tech stocks have demonstrated exceptional earnings growth, but because they’re focused on innovation and not profitability because that’s not what they should be focused on right now, have been unduly punished.”

Similarly, health care is a long-runway sector. Driven by advances in genomics and DNA sequencing, Langley said, the sector is poised to do well in the near future.

“Our desire to cure thousands of monogenic diseases is not going to slow down,” she said. “That will only accelerate, so there’s tremendous opportunities there, and also in remote health care. The ability to serve more people, provide a higher standard of health care, and do it less expensively is only going to be more urgent in a recessionary environment.”

She said the same could be said of the opportunities in the electric vehicle market.

“The road ahead is about stock picking and active management,” she said.

MacNeal also suggested recession-proof areas such as clean energy, uranium, staples and utilities: “things that tend to be more predictable.”

Bill DeRoche, chief investment officer with AGF Investments LLC and head of alternative strategies with AGFiQ in Boston, said he is not yet ready to abandon the 60-40 formula, which has long offered a hedge against equities drops.

“The good news is there is actually income in fixed income now, so I don’t think we have to worry as much as what we see over the last year,” DeRoche said, adding that investors could benefit from becoming more aggressive as early as the end of Q1 2023. But, “with inflation continuing to stick around, you’re going to need more than exposure to equities and fixed income.”

Langley offered a hopeful note about the future.

“Good times are coming,” she said. “Strong individual analysis is required, and I’ve always been a proponent of active management. If we carefully step on the right stones, we have an opportunity to do well. Stock picking is really the right strategy. We can find opportunities even in a slow environment.”

Investment Executive is an Inside ETFs Canada media sponsor.