Continued uncertainty calls for active management
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With economies still dealing with inflation, high interest rates and geopolitical uncertainties, now is not the time for passive portfolio management, says Susan Spence, vice-president and portfolio manager with Portfolio Solutions Group, a division of Canada Life Investment Management.
She said market conditions throughout 2023 proved the value of diversification, investor flexibility and the willingness to make strategic adjustments — even subtle ones.
“Having exposure to active managers,” she said, “would have provided the opportunity for investors to benefit from nuanced and shifting positioning within these asset classes, something passive allocations don’t capture.”
Spence said the economic picture was in constant flux in 2023, as the post-pandemic environment of ultra-low interest rates gave way to inflationary pressures, prompting decisive monetary policy.
“Although overnight rates are the only part of the curve that is actually controlled by central banks, increases implemented there had a knock-on effect on interest rates all along the curve,” she said.
The rapid rise in shorter-term rates were accompanied by hikes at the long end as well. As a result, she said, bond yields reached much more attractive levels and drew renewed interest in fixed-income investing.
More recently, particularly during the fourth quarter of 2023, investors saw long rates pull back. Again, active management was critical to optimize returns in such a fluid environment.
“There is still a way to go before interest rates are fully normalized, which we ultimately expect will include a steepening of the yield curve, led by shorter rates lowering somewhat,” she said. “This process is expected to continue through 2024 and beyond, with the path becoming clearer as inflation and economic growth rates settle out.”
She said economic headwinds for the coming year include the potential erosion of personal savings and the lagged impact of higher mortgage rates on consumers.
In her review of 2023, she said there was no shortage of headlines, including artificial intelligence, regional bank failures and the resilience of the U.S. consumer.
“But in my opinion,” she said, “inflation was the big story of the year. Questions around inflation drove volatility in both bond and stock markets and created continued uncertainty about economic growth rates globally that investors are still grappling with as we head into 2024.”
Spence said 2023 market performance also reinforced the benefits of diversified asset allocation in both equities and fixed income.
“Within fixed income, there have been significant differences in returns for different parts of the market. For example, corporate bonds did very well, while inflation-linked bonds weren’t as strong,” she said. “Within equities there have been even more material differences in returns – such as across sectors, large cap versus small cap, U.S. equities versus other regions, and developed markets overall compared to emerging markets.”
She also said alternatives brought value to portfolios by enhancing diversification and moderating volatility.
“As an example, private credit was one alternative asset class that saw steady, solid performance through the year,” she said.
Spence pointed out that while the debate over whether 2024 brings a recession or a soft landing continues, recent data points in North America have been “directionally encouraging.”
“The global economy is still growing, but at a slower pace, and is looking to find a footing,” she said.
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
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