Welcome to Soundbites, weekly insights on market trends and investment strategies brought to you by Investment Executive, and powered by Canada Life.

For today’s Soundbites, we speak to Jack Manley, global market specialist with J.P. Morgan Asset Management, about building a balanced portfolio. We asked him about asset allocation in a complex macroeconomic environment, and why balance is such an important target. And we started by asking about the keys to building well-crafted portfolios in uncertain markets.

Jack Manley (JM): I think at any given moment it is important to remember two things when it comes to portfolio positioning. One of them is the need to avoid timing the market. We know that’s extremely tempting. We can oftentimes let emotions get in the way of our investing. But timing the market seems to be one of the best ways to really ruin longer-term financial success. The data show you very, very clearly that if you stick with it over the course of five, 10, 15 years, generally speaking you’ll be better off for it. The other thing that we always like to talk about is this need to be well diversified. And that means looking across asset classes, looking up and down within quality spectrums, looking across different sizes, different geographies. The best thing that I’ve heard on this is that asset allocation is going to be your best friend on the market’s worst days.

The need for active portfolio management.

JM: We are in a very challenging market environment. Rising interest rates, hot inflation, geopolitical tensions, an ongoing pandemic — this is challenging at a global level. And if we think about what 2021 looked like, it was very much a beta play. Everything was doing well because we were fresh off of those Covid lows. It was easy to invest in 2021. That is not going to be the case this time around. And so, as a result, prudent sector and security selection — active management — is going to be more necessary now than it has been in years.

Why balance is especially important now.

JM: Things going on right now suggest that maybe we need to adopt a tactical approach to asset allocation, in addition to the strategic approach that we normally have. When we think about asset allocation right now that balance is the name of the game. And it’s all about tactical versus strategic, short-term versus long-term, opportunistic versus something a little bit more secular in nature. You know, just as an example, we probably want to underweight some of those very cash hungry, high growth technology names that have been underperforming thus far this year, right? That’s a tactical story. But no one is going to tell you that over the next 10 to 15 years, technology is going to be less important than it is at the moment. If you look at the way that technology is bleeding into other sectors, everything is becoming a little bit of a tech sector, one way or another. That’s a more strategic view. These things suggest the need to be a little bit more defensive with an eye toward quality and, in some cases, an eye toward cyclicality.

On bond yields.

JM: Particularly this year, it has just not been a pleasant experience owning fixed income. We think about what’s gone on with high-quality debt instruments in the aftermath of central banks starting to normalize. The 40 in your 60:40 portfolio has not protected you in the way that it traditionally has. There are a lot of investors that are tempted because of that and because of the low-yield environment to abandon bonds altogether. That is not the way forward. We do need to own fixed income in our portfolios. We just need to get a little bit more creative about how we allocate in that space. Maybe it means looking down in the credit spectrum. Maybe it means committing to foreign debt instruments particularly in the emerging world. But I think it also means looking at fixed income chiefly as an insurance policy. The ballast for your portfolio. That thing that’s going to zig when everything else is zagging. And when market conditions are behaving normally, fixed income will do poorly until the economy turns over. Then all of a sudden it is that lifeboat that will help to keep you afloat. So, we need to continue to own bonds in an environment that has otherwise been pretty challenging for fixed-income investors. Now, the bond yields have risen dramatically as a direct result of the threat of rising interest rates. If the central banks don’t actually deliver with all of the hikes that they were promising, well, there’s a chance that we actually see bond yields move a little bit lower as we close out the year.

And, finally, the bottom line on well-crafted portfolios in a changing market.

JM: My key take away right now is that this is a complicated year and it’s going to stay complicated. And even when things cool off, you’re still going to be looking at markets that are structurally more volatile in the future than they have been in the past. We have to remember that time is on our side, and that diversification is going to be your best friend on those worst days.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Jack Manley of J.P. Morgan Asset Management.

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