Nervous investors continue to plow their savings into bonds, but with higher interest rates on the horizon –– and plenty of strong opportunities in equity markets — advisors should shift clients away from traditional fixed income holdings, money managers said on Tuesday.
At a presentation in Toronto hosted by IA Clarington Investments Inc., fund managers highlighted the risks facing bondholders, with interest rates at rock-bottom levels.
“We’ve seen a massive flow of funds out of equities and into bonds,” said David Taylor, president and chief investment officer at Taylor Asset Management Inc., which is partnering with IA Clarington to launch two new mutual funds in early June. “It’s staggering.”
Investors consider bonds a much safer alternative to equities, Taylor explained. But he said many don’t realize that as inflation increases and rates begin to rise, the value of their investments could decline.
“Rates will rise, and bondholders will realize…they can actually lose money holding a bond,” Taylor said.
Ben Cheng, president and chief investment officer at Aston Hill Financial Inc. and manager of three IA Clarington income funds, agreed that investors should be cautious about holding government bonds in the current environment.
“Investing in plain vanilla fixed income instruments carries with it probably more risk than investors are willing to admit at this point in time,” Cheng said. He expects that interest rates could remain very low for many years.
Clients seeking income should look beyond traditional fixed income instruments, according to Dan Bastasic, senior vice president at IA Clarington and lead portfolio manager on three of the firm’s funds. He recommends dividend-paying stocks, which currently offer attractive yields. And with corporate balance sheets in good shape, Bastasic said yields could move higher.
He also favours high yield corporate bonds, which boast strong fundamentals and a lower sensitivity to interest rates than other fixed income instruments.
Many stocks undervalued: Sarbit
Clients may be wary of equities given the extreme volatility that’s prevailed in recent years, but the fund managers said stock markets currently present strong opportunities for investors. Larry Sarbit, CIO of Sarbit Advisory Services Inc. and manager of IA Clarington Sarbit U.S. Equity Fund, said many stocks in the U.S. in particular are undervalued.
“America is not going out of business. The companies are doing well,” Sarbit said. “There are great opportunities, and people are absolutely ignoring them.”
He added: “We’ve got to get [clients] to see the opportunity.”
Identifying the strongest opportunities can be a challenge, especially amid historically high levels of market volatility, said David Scandiffio, president of IA Clarington. He urged advisors to embrace active management, rather than steering clients towards broad-based market exposure.
“Now is not the time to stand idly, or passively by,” said Scandiffio. “In any market, there are opportunities to add return and to manage risk by having the courage to be different than the pack. We think this is particularly true in volatile and choppy markets like the ones we have today.”
Financial advisors also have an important role to play in helping clients navigate the current market environment, Scandiffio said.
“Advice is critical for the retirement portfolios of Canadians,” he said. “Providing advice to your clients is essential to guiding them through the risks and opportunities of today’s complex and changing world.”