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 the current market volatility with Paul Punzo, chief investment officer and vice president, portfolio strategy, with Investment Planning Counsel. We talked about investment risks, leading indicators, and we started by asking what advisors may be getting wrong about volatility when they talk to clients.
Paul Punzo (PP): I don’t think advisors get things wrong, but perhaps they don’t emphasize certain risks enough. For instance, when we had news on tariffs, Liberation Day, a lot of clients were asking about, do we remove ourselves from the U.S.? Do we move to cash? The concern there is, if clients are moving out of an asset class, it’s easy enough to get out but the timing to get back in is very difficult. If they did move out of the U.S. in April, for instance, they would have missed the big rebound that we saw in May. So I think the key is having discipline.
Another risk is sequencing risk. And that’s really when clients are drawing down on their portfolios in a market downturn. Clients need to have an understanding of downside protection, which is important as clients are decumulating. And, in order to do that, we have multi-asset class portfolios, we’ll diversify with alternatives. But the key is not to move to cash, for instance, because now you’re going to be removing sequencing risk in a portfolio, but you’ll be creating a longevity risk where clients will outlive their assets.
And the last couple of risks are, you know, liquidity risk and concentration risk. Clients need to understand when they can pull the money out, because liquidity risk is not a concern unless they need money right away. And obviously there could be a change in circumstance, an event in their lives where they need their money, and when they don’t, that’s when the risk becomes prevalent. Education is key, advisors speaking with their clients about certain lock ups, gates and so forth in alternative investments, and ensuring that clients have capacity for the investment itself.
And the last one would be concentration risk, ensuring that clients have a broadly diversified portfolio, so you’re not over concentrating in a specific sector or region. If you’re taking too much risk in a specific sector, the downside and the volatility is increased as well. So always look under the hood of a mutual fund to ensure that you’re not taking an unintended bet within the portfolio.
Healthy volatility
PP: In terms of distinguishing healthy volatility versus structural, I think the key is healthy volatility is normal, and you see that through normal asset prices, due to changing investor sentiment, economic data, earnings reports, geopolitical events. So they’re often temporary. For instance, you’ll see a 1% or 2% S&P move during certain sector rotations. Or sometimes you see earnings season volatility. Structural dislocation, though, is more of a breakdown in pricing mechanisms. It’s policy misalignment or external shocks. It’s deeper and more persistent. So the key is here, when you look at structural, the best way is to keep on building a robust portfolio, and having multiple asset classes and low-correlated asset classes in a portfolio.
Leading indicators
PP: We’re looking at investor sentiment today, looking at consumer confidence index, at initial jobless claims and unemployment rates. Rates are important across Canada and the U.S., as you’re trying to gage the markets. Looking at the yield curve. You know, the 10-year over two-year spread, and looking for inversion, as inversion usually precedes recessions. So we’ll look at these to try and gage where the markets are headed. Sentiment is really driving things, but we also look at the actual strategies that we use within our portfolios and see how they respond across various market environments.
Investment strategies in the current moment
PP: Yeah, I think with when it comes to ETFs funds, right now, obviously, if you have exposure to your growth names, that’s benefited. But you know, going back to an earlier point on concentration risk, we try to diversify our names in a portfolio. So, we’re looking at the higher quality names, exposure to the profitability factor, and looking at overall exposure to international markets, international value as well. So diversifying our existing portfolios, and not necessarily over concentrating on growth or Mag Seven. Build around it. As we see, you know, the market’s been more volatile, so having some more defensive names in the portfolio is important.
And finally, what’s to be learned in the current volatility?
PP: Yeah, the key is stay invested, look past the noise, maintain a disciplined approach, have a target allocation, have a target risk profile that you’re working with. You can make changes, if necessary — small tactical changes — but try not to let the noise influence all your decisions.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Paul Punzo of Investment Planning Counsel. 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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