Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about cash-equivalent investing, with Chris Koltek, institutional client portfolio strategist with Portfolio Solutions Group, a division of Canada Life Investment Management. We talked about why so many investors parked their cash in recent years and whether now’s the time to re-enter riskier markets. And we started by asking how higher interest rates changed the investment landscape.

Chris Koltek (CK): We’ve seen higher asset flows into money markets in Canada the past couple of years. According to the Investment Funds Institute of Canada, money market mutual fund assets grew by 48% in 2023. Yield on cash is paying a lot higher these days, and there’s a lack of conviction in the direction of the markets, and people have been talking about a looming recession since 2022. For years we were in a low-interest rate financial environment. It was a great world for borrowers, but not so much for savers. Pre-2022, financial advisors would spend a significant amount of time hunting for yield, looking for higher-paying income products for their lower-risk clients. The FTSE [Financial Times Stock Exchange] Canada Universe Bond Index had a yield about 1.5% to 2.5% annualized. Today, we’re looking at a yield that’s over 4% on the FTSE, and around 4% for cash equivalents.

The cost of sitting on cash

CK: It’s important for investors to consider their real rate of return. Cash isn’t a long-term solution. It loses value over time due to the opportunity cost and inflation. The other factor that must be considered for non-registered investors is tax. Typically the returns on cash would be taxed as interest income, while income from a fund, depending on what it holds, can be taxed as a mix of interest, capital gains, dividends and/or foreign income.

The cost of missing major market moves

CK: Look at what happened over the last three months of 2023. Fixed income in Canada was up over 8% after being down almost 4% the previous quarter. And we saw forward equities jump 8% as well in Canadian dollars. Since then, we’ve seen the S&P 500 exceeding 5000, and hitting new record highs. Waiting to invest can hurt returns. Missing only a handful of the best days can significantly diminish returns. For example, if you put $10,000 into the S&P TSX 20 years ago and stayed fully invested, you’d end up with a bit over $55,000 at the end of 2023. If you missed the best week, you’d end up with about $49,000. Miss the best 10 weeks and you end up with $25,000 — less than half [than] if you’d have stayed fully invested.

Whether it’s time to raid those cash-equivalent accounts?

CK: We’ve seen a normalization of key economic data, and there’s those lower risk options that are available and can be rewarding. Short-term bonds are paying a higher yield these days, can provide some stability, and have the opportunity for price appreciation in the event of rate cuts. Also, using a diversified balanced portfolio can manage risks at the same time as expanding return potential. For more aggressive and growth-oriented investors, they still may want to look at investing in equities, as long-term returns are still expected to be higher than fixed income.

Asset classes he likes

CK: Canadian fixed income as an asset class looks promising in terms of both stability and growth potential. It offers a high yield relative to what we’ve experienced in the past decade. And even if rates don’t move over the next year, you can still collect about a 4% yield. In the event of an interest-rate increase, investors will receive the yield from bonds. Rates would have to go up about 0.6% over a year for the FTSE Canada to show a negative return for the year. And in the event that rates move down, investors still get the yield, plus a return from the price increase. The opportunities for emerging-market performance are looking up as well. China’s market returned 10% in February. But the ongoing shift in global supply chains away from China has benefited other emerging markets, such as Mexico and India. This is on top of strong economic trends, such as growth of domestic demand and a diversification away from commodity-centric economies. There’s a real opportunity to be selective in emerging markets and benefit from some of these trends.

And finally, what’s the bottom line on the return to risk assets

CK: Cash is not a long-term investing solution. Cash feels safe, but it loses value over time, and has an opportunity cost. Holding cash can make sense as part of an emergency fund or part of the client’s overall financial plan, but not as a long-term planning tool. The old saying that the best time to invest in the markets was yesterday, and the second-best time is today, is likely going to hold up in the next five years, just as it did in the past 50.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Chris Koltek of Portfolio Solutions Group. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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