Ruth Saldanha: The Canadian stock markets have been extremely volatile over the last quarter, in line with U.S. equities. How should investors play the equity markets going ahead? With me to discuss this is Michael White, Portfolio Manager at Picton Mahoney Asset Management. Michael, thank you so much for joining us here today.
Michael White : Thank you. It's my pleasure.
Saldanha : In 2018, Picton Mahoney used the entire analogy of a poker game to describe the markets. Is that the same thing you are doing for 2019 as well and what's your outlook for the markets?
White : Yes, indeed. This analogy of a poker game we find is quite fitting. And as much as people draw the link with gambling, that's not where we are going. Where a poker game is a game of strategy. The idea that an investor may fold too early and leave a substantial opportunity on the table; sometimes that investor may stick around too long and ultimately be exposed with a busted hand. So, the analogy is fitting for investor positioning today and where we are in the cycle and how the rest of the cycle plays out. So, we think strategic thinking, observing other players at the table is very fitting for how an investor should position themselves.
We also believe that markets do exhibit volatility classically toward the end of a cycle. We are in a very long and extended economic cycle. So, from that perspective, much of the behavior that we are seeing in markets in quite normal and investors, frankly, just aren't accustomed to it because 2017 was a very benign year for volatility. We like to bring that conversation back to center that this is a normal type of experience. This is the way cycles classically end and there is an appropriate way to position and fortify portfolios a cycle end and ultimately recession.
Saldanha : You mentioned that now is the time for investors to think beyond traditional stocks and bonds. What are the ideas that you have and what should investors do right now?
White : It's a very strong point to make because we've had an industry that has built itself around this construct of a balanced portfolio that fixed income is a ballast or an offset to equity risk. So, using things like options-based hedges, short selling securities, using risk premia, these sort of factor-based approaches to investing, there are lots of ways to garner return that are far above and beyond the traditional long-only expression of stocks, bonds and then cash as a defensive tool.
So, we like to really focus that conversation on what portfolio construction looks like going forward. I think many investors and many advisors are starting to realize that 60-40 cannot deliver what it has delivered for a generation. And we are not here to add a log to the fire bashing 60-40, but just that the future balanced or a diversified portfolio will look very different. And it's a language that I think many advisors and ultimately investors need to start understanding.
Saldanha : What are some of the strategies that you use?
White : So, I mentioned a couple of the tools that we use, that we have expertise with at Picton Mahoney; short selling securities and using options-based hedges. Those are volatility management tools. So, as we move on in this economic cycle and volatility continues to play out and ultimately, we move to a recession and a bear market, those tools can really demonstrate their value in a portfolio by helping mitigate some of the downside risk in an equity-exposed portfolio for instance. But beyond that our research has again identified other opportunities to garner return that is very uncorrelated with traditional long-only stocks, bonds and cash.
And that word, correlation is a buzzword frankly. People are talking about it a lot more than they ever did. It was a word that people learned the hard way in 2008 when they thought they had a diversified portfolio and correlation went to 1, all assets started behaving the same directionally and it was a question of how far and how fast your diversified portfolio went down. We are very focused on building uncorrelated strategies, strategies that garner return in a manner that is differentiated form traditional long only stocks, bonds approach. Future return expectations may be lower for those two traditional asset classes, it doesn’t mean investors can’t get returns, but more importantly it is quality of that return that will matter more. When we are focused on these outcomes, like lower correlation, lower volatility, these will be buzzwords in the industry for many years going forward, it is our goal and intention at Picton Mahoney to make those proof statements that those strategies actually deliver quality of return and amore fortified investing experience
Saldanha : Thank you so much for joining us with your perspectives.
White : Thank you.
Saldanha : For Morningstar, I'm Ruth Saldanha.
