“This fund is suitable for people who don’t want a lot of volatility, but want more than fixed income returns,” says Alfred Lam, senior vice-president and
portfolio manager at CI Investment Consulting in Toronto. “This fund is not modeled on benchmarks, and there aren’t allocation parameters. We concentrate
on risk budgeting to minimize the downside, while providing positive returns that beat inflation over a three- or four-year time frame.
“We don’t want to have two years of 10% returns and then a -10% return,” Lam adds. “We try to narrow that outcome range so that it’s highly consistent. We
are using engineering to make sure we have the right asset mix for that time horizon.”
And indeed, the fund has been delivering as consistently as promised, with 10-, 5- and 3-year average annual compound returns of 5.3%, 5.9%, and 6.2%
respectively through periods ended June 30, 2016. While the one-year return through June has slipped to 3.1%, Lam says this was to be expected. “Bonds are
down dramatically,” he notes. Still, the fund achieved a monthly FundGrade™ A-Grade
rating for June.
As for the how and wherefore of that “engineering,” Lam says other fund managers may take a technical or one-dimensional approach, buying whatever assets
are producing good returns at the time without looking at the correlations between asset classes. But his team takes a multi-dimensional approach to
allocations, in order to get better risk-adjusted returns.
“So, for example, if you look at high-yield bonds, 25% of these are energy-related, and high-yield bond volatility today is primarily being generated by
the energy sector,” Lam explains. “There is a strong correlation between the U.S. dollar and oil, and we own a lot of U.S. dollars and a lot of high-yield
bonds. The two combine to offset each other and generate more predictable returns.”
And how does Lam respond to events like Brexit? “We have no crystal ball, and it’s difficult to know what the outcome can be, so we don’t try to predict,”
he says. “We take a more reliable approach that’s very valuation-driven. While the outcome of Brexit was quite unpredictable, it did change valuations.
Before Brexit, bond yields were rising, so we added some bonds, and we will make a handsome return.
“To use an analogy, we don’t go to Walmart and try to predict what’s going to be on sale next week,” Lam adds. It’s the same as trying to predict the
market. When there’s a sale, we buy what’s on sale. We proactively react.”
“We’ve been very consistent with our engineering and risk budgeting process,” Lam continues. “We also manage the portfolio on a ‘look-through’ basis,
taking an aggregate view of our holdings. We look at our actual exposures to cash, to Canadian and U.S. holdings, to high-yields, sectors, currency – we
look at the sum of all our holdings to make sure we don’t have too much risk in any areas. And we look at the correlations. We are active managers on an
ongoing and dynamic basis, and try to optimize our holdings over that three- to four-year time frame.”
is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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