Asset allocations, parking violations and China’s hibernation

Good morning. A Wall Street Journal headline this week appealed to the fiscal conservative in me: Bonds Over Stocks — The New 60-40 Portfolio. It turns out, money managers are urging clients to have portfolios containing 60 per cent bonds and 40 per cent stocks, flipping the traditional 60/40 (stocks/bonds) strategy designed by Nobel Laureate Harry Markowitz in 1952 on its head. The reasoning is that bond yields are high enough that you should buy more of them if you want some growth in your portfolio this year, but still want to have something on hand if and when stock markets rebound.

It’s not the first time the 60/40 value proposition has been challenged, but the boldness of the latest message serves as a reminder that markets are still volatile and that means protecting capital is at least as important as growth, perhaps even more so, as portfolio manager David Kaufman tells the Financial Post’s Larysa Harapyn. Investors already seem to be catching on. National Bank Financial says Canadians poured a record $5.9 billion into fixed-income exchange-traded funds in December, while equity flows attracted a mere $1.7 billion. For the year, fixed-income ETFs attracted $19 billion, the highest-ever annual inflow for that asset class.

Nevertheless, buying more bonds may seem weird given that 2022 was the worst year for United States Treasuries on record, based on Bloomberg data back to 1974, and the classic 60/40 portfolio lost 17 per cent on average in 2022, according to BlackRock Inc., because bonds declined in tandem with stocks for the first time in a couple of decades. “We’re not anticipating performance in 2023 will be as bad as 2022 … but the broader point is you can do better than 60/40 with a similar risk profile,” says Vivek Paul, head of portfolio research at the BlackRock Research Institute.

But an analysis by economist David Rosenberg’s team found that a 60/40 portfolio provides superior risk-adjusted returns over longer periods of time as measured by the Sharpe ratio, an indicator that measures return relative to overall risk. And a blend of 50 per cent equities and 50 per cent U.S. Treasuries scored even better. “In any event, to suggest abandoning 60/40 — or 50/50 which, to repeat, is the more optimal mix over time — is to say diversification is out of style, but diversification never really goes out of style,” they say in one of their subscriber-only notes. “It remains a prudent risk management tool, in the past, present and future, notwithstanding the reality that overall expected returns are far lower today than they have been historically.”

In other words, if you’re in for the long haul, it’s best to have a healthy portion of your portfolio dedicated to some kind of fixed income. But it also seems to be working even in the short run. The 60/40 mix is off to its best start to a year since 1987, having returned about 3.6 per cent so far, according to Bloomberg. And if interest rate hikes tail off as inflation drops, bonds are less likely to fall again if a recession drags equities lower.

“In time, the historical dynamic between bonds and stocks is likely to return, especially in the case of a recession, which could give bonds an undoubted boost while leaving equities more vulnerable,” says Ash Lawrence, senior vice-president and head of AGF Private Capital at AGF Investments Inc. Of course, he points out that another way of balancing stock-market risk is to add alternative investments such as private equity, private credit, real estate and infrastructure, though he’s wary of cryptocurrencies and other highly speculative corners that are unregulated or poorly governed.

Either way, owning a lot of stocks is a good way to increase your worries since even if there is a rising market tide, it won’t lift all boats equally. That means looking for opportunities others can’t, or don’t want to, see. “I think we will see a long period of time with very, very low returns,” Nicolai Tangen, chief executive of Norway’s sovereign wealth fund, tells the Financial Times, citing inflation and the damaging impact of 2022’s market declines. “I think it takes a long time to sweat it out.” No wonder we’re being told to drink more bonds, at least until equities start to rise again.

Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].

3 reasons why investing now is better than in the go-go days of 2021

As bad as 2022 was, it was also a year when things became more normal. Financial Post columnist Tom Bradley points out interest rates moved back up to more sustainable levels, price-to-earnings (P/E) multiples came down and investor behaviour got more rational. That’s all put him in a pretty optimistic mood going forward compared to the go-go days of 2021.

THE FUTURE IS SOMETHING TO BUILD

It’s time for investors to change their thinking if they want to get to the finish line

The pervasive theme is that inflation and interest rates will return to pre-2020 levels. But portfolio manager Martin Pelletier wonders what might happen if interest rates stay where they are due to the tightness of the labour market, and, if so, where future growth is going to come from. Besides, he adds, just imagine the macro environment required to drive a rate cut.

CHANGING LANES

The times they are a-changing — and so should your portfolio

The higher earnings and valuations unleashed by decades of falling rates cannot be overestimated, with the S&P 500 index producing a compound annual return of 10.3 per cent from August 1982 to the beginning of 2022. Sadly, all good things must come to an end, and they did. Financial Post columnist Noah Solomon says inflation will probably abate, but the deflationary influence of globalization is slowing, so that will change what works in your portfolio in the months and years ahead.

ONE, TWO … PUNCH

FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.

Inflation seems to have peaked, judging by the official numbers. But Dennis Mitchell, chief investment officer at Starlight Investments Capital LP, tells the Financial Post’s Larysa Harapyn that we’re in a weird little period where households and businesses can see nothing but continued and elevated levels of inflation, which means the market will be tense for a while yet. His advice: reduce your portfolio’s volatility by replacing some of the small caps with larger caps that have dominant market shares.

WATCH THE VIDEO

China won’t be able to save the global economy this time

The reopening of the Red Curtain has investors excited about a return to the good times, or at the very least a quick and painless global recession. But economists David Rosenberg and Krishen Rangasamy are more cautious because the country’s poor vaccine efficacy and the negative wealth effects tied to ongoing real estate woes could limit consumption increases. If COVID-19 data and the real estate sector do not improve, they say investors should take advantage of any rallies to shed risk.

THE GREAT WALL STALL

The initial public offering market in Canada took a beating in 2022, with just 48 deals crossing the finish line, a drop of 34 per cent, but the value of those deals plunged 87 per cent to $1.18 billion. BMO Capital Markets’ managing director Peter Miller describes 2022 as a “year of blandness” in dealmaking, adding it will take time for rates to work their way through the markets and stomp out inflation.

What are the pros and cons of using a DRIP account for your investments?

Dividend reinvestment plans are a simple way for investors to automatically purchase additional full and/or fractional shares of a particular security without paying any extra commission fees, which could save you hundreds of dollars a year. But certified financial planner Andrew Dobson says such plans do have some potential drawbacks.

GET THE ANSWER

If you have an investing or personal finance question, hit us up at [email protected].

Business should be good corporate citizens is a central premise of the environmental, social and corporate governance (ESG) movement, but Bruce Pardy, a professor of law at Queen’s University in Kingston, Ont., says executives breach their duty by pursuing good deeds if they conflict with the company’s financial interests. The fiduciary responsibility of officers and directors is ultimately to increase the corporation’s profits, not to determine the moral and political content of their actions.

Taxpayer tries to claim parking costs as medical expense, claiming discrimination for travelling short distances

You can include transportation costs when claiming the medical expense tax credit, but only if you have to travel more than 80 kilometres to receive treatment. One taxpayer in Alberta recently tried to claim $853 for hospital parking expenses even though the round trip was only 44 km. He argued in court that the 80-km requirement was discriminatory and contrary to the Canadian Charter of Rights and Freedom. Tax expert Jamie Golombek has the details on what the judge had to say.

NO PARKING HERE

4 ways the wealthy can make a dent in a large tax bill

The top 20 per cent of Canadian income earners pay more than 61 per cent of the income tax, according to the Fraser Institute, although many, including Justin Trudeau, believe “the middle class pay too much in taxes and the wealthiest don’t pay enough.” Either way, wealth adviser Ted Rechtshaffen looks at four ways the wealthy can save on taxes.

HOW THE RICH STAY RICH

Questions to ask yourself when allocating money to debt repayments, savings and investments

There is a sweet spot for how much debt is optimal for both households and corporations alike, and mortgage renewal time is a good opportunity for the former to review how they are allocating capital between debt repayments, savings and investments. Investment adviser Rita Li says one solution doesn’t fit all, so it pays to ask some good questions about where your priorities really lie.

THE BIG THREE

Good news if you’re against government intervention in capital markets: The Toronto Stock Exchange is taking Ottawa to task after the government ordered three Chinese companies to divest their stakes in Canadian producers of critical minerals, saying it is harming the free flow of capital on which mining companies rely to explore and develop resources.

Bad news for Barrick Gold Inc. shareholders: The Toronto-based miner slightly missed its 2022 goal of producing 4.2 million ounces of gold even though fourth-quarter production increased from the third quarter. Its shares fell as much as four per cent following the announcement on Tuesday.

Good news for Lightspeed Commerce Inc. shareholders: The Montreal-based point-of-sale maker is laying off 300 employees after previously saying it planned to make new hires, and its shares rose 1.1 per cent following the announcement on Tuesday. Not quite the bump Meta Platforms Inc. received when it announced its layoff plans in November, but upward, nonetheless.

Bad news if you’re sick of telecom takeover talks: Rogers Communications Inc.’s deal to take over Shaw Communications Inc. has passed the Competition Tribunal’s scrutiny, but now faces two more hurdles. The Competition Bureau has appealed the tribunal’s decision, which will be heard by the Federal Court of Appeal on Jan. 24, and the House of Commons standing committee on Industry and Technology plans to take a second look at the transaction a day later.

Good news if you like commodities: Despite a weak beginning to the year, commodities have the strongest outlook of any asset class in 2023, with a perfect macroeconomic environment and critically low inventories for almost every key raw material, according to Jeff Currie, head of commodities research at Goldman Sachs Group Inc. “You cannot come up with a more bullish concoction for commodities,” he says about China’s reopening and insufficient investment in new supply.

Even better news if you like oil: Global oil demand will hit a record high in 2023 as China reopens and price-cap sanctions on Russia dent supply, according to the International Energy Agency.

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