Positioned for a challenging market, Sadiq Adatia, chief investment officer and portfolio manager at Sun Life Global Investments Inc. in Toronto, looks for risk/reward dynamics in asset allocation.
“I think this is a very difficult market that we’re going to be in this year,” says Adatia. “We do know there are some risks out there, starting with global trade, the U.S. and China in particular, the Brexit scenario, and then policy decisions when it comes to interest rates, whether it’s the Bank of Canada, or more important probably, the U.S. Federal Reserve.”
According to Adatia, if these key things head in the wrong direction, they could really have negative consequences on the global markets and says that the market reflected nervousness of that happening in Q4 2018.
Despite the potential risks, “if the markets head in the right direction,” says Adatia, “it creates a massive opportunity as well.”
The silver-rated, four-star Sun Life Granite Balanced Growth Portfolio F, a fund of funds, reflects the tactical investment strategy in this environment. The overall strategic guideline for the mandate is a 60% equity/40% fixed income position. Within those equity guidelines, 20% of the equities are allocated to Canada, 20% to the U.S. and 20% internationally, including emerging markets. The mandate cannot go more than plus or minus 10% on those allocations but can change it’s positioning within those ranges according to market conditions.
On the equity side, the fund currently holds approximately 21% U.S. equities, 17% Canadian stocks, and 14% in international equities. Heading into this year, the U.S. economy was seen as the strongest, and that reflects the exposure in that market. From a downside perspective, in Canada, there were concerns over housing and consumer debt and that view resulted in an underweight position in Canadian equities. Internationally, there were concerns over the political and economic climate in Italy, Argentina, Turkey, as well as Brexit repercussions, and that resulted in an underweight position in international equities.
The team was neutral on emerging markets but now has a more optimistic view. “We think that the valuations are great,” says Adatia, “and we also see higher growth coming out of those regions versus developed markets. We do think we’ll get some sort of certainty on trade that will give a boost to emerging markets as well.”
Some of the weighting going into emerging markets is coming from the U.S., because the investment team believes there are some risks popping up in the U.S. economy, such as less stimulus coming through. If the Fed increases interest rates faster than markets expect, that would result in a bit of a drag as well, says Adatia.
On the fixed income side, the approximate 30% weighting is held in more traditional government bonds, moving some of the credit exposure.
The balanced portfolio includes approximately 20 investment managers, who provide a diversified mix of styles and expertise. “No one particular manager does every asset class really well,” says Adatia. “We think a combination of both active and passive management is the important driver when it comes to your tool set.”
In today’s environment, the investment team is very focused on earnings and the strength of companies. “But if you go back two or three years,” says Adatia, during a strong bull market rally, “almost everything was doing well. Now risk management is more paramount and therefore you want to have more of an active management tilt.”
To gain insights on macro and global economic issues, Adatia travels the globe and meets with managers of the fund. “Just last week, I was in Ireland,” says Adatia, “and a year ago, I was in China.” The managers are continuously monitored on a quarter to quarter basis to ensure that the best managers represent the fund. The mandate also draws on another layer of expertise, a group within Sun Life, called the international investment center. There are “two sets of eyes” overseeing the managers, adds Adatia.
In addition, hedging is used as a strategy for risk management. For example, in Q4 2018, Adatia says that hedges were successfully put in place in the U.S. technology area to reduce risk during the downside and major pullback in a lot of technology names.
In managing the fund during volatility, “it’s in our DNA for risk management,” says Adatia. “Because we’re long-term investors, we don’t need to pinpoint the right time when exactly [the market] is going to turn, but we can gradually increase our positioning to take advantage of those opportunities.”
