A team approach to investment strategy

In the investment world, equities are the offence, producing returns. But equally important is the defence from fixed income that mitigates downside volatility and protects investors from market shocks.

These views are held by Kevin Headland and Macan Nia, Manulife’s co-chief investment strategists, who were appointed to the roles in October 2021 following the departure of Philip Petursson, who previously held the chief investment strategist title.

After equities markets soared last year, Headland and Nia now counsel advisors and clients to proceed with caution.

“It’s important for advisors to set expectations for their clients and say, ‘Listen, 20%-plus returns are not normal,’” Headland said in January, after the S&P 500 composite index posted a 26.9% return in 2021. “We’ve done very, very well. But we have to remember why we have a diversified portfolio. [This] is not the time to chase returns. Let’s get back to our goals and reset our expectations, longer term.”

Nia agreed that clients should not let past performance influence their mindset: “Investors maybe have some recency bias. They look at their [account] statements and they expect [the same performance] going forward.”

Despite last month’s performance of –5.00% for the S&P 500 and –0.60% for the S&P/TSX composite index, Nia said returns are likely to remain above average in 2022. “But they’re unlikely to be in the realm of what we have seen over the past three years.”

Headland and Nia forecast earnings growth for U.S. equities between 10% and 15% for 2022. For the S&P/TSX composite, they expect earnings will drop from recent levels but remain attractive through the first half of this year.

Last month’s market volatility didn’t spark client panic, Headland said, but rather prompted questions along with uneasiness about whether such volatility could lead to a recession or bear market.

“For us, [our response] was all about reassurance and saying that history would suggest that when we get this type of volatility, brief sell-offs or corrections [without] a recession, it’s actually a good time to invest,” Headland said. “Not only were we trying to reassure advisors and their investors that this [volatility was] not recessionary, but might actually be a good time to add money to a portfolio if they have liquidity.”

Given that equities returns may return to more normal levels, however, Headland and Nia also emphasized the role of fixed income in mitigating downside volatility.

“Remember why you [have] a portfolio — it’s a long game, not a one-year-return game. Bonds play a good part in the portfolio over the longer term,” Headland said. In times of lower yields, he added, clients can look outside traditional fixed income and explore corporate bonds, and floating-rate and emerging-market debt.

“These types of bonds have shorter duration and higher yield than North American government bonds, which should help them outperform in a rising rate environment,” he said.

Headland and Nia’s capital markets strategy portfolio is currently weighted 65% to equities and 35% to fixed income (25% sovereign and investment-grade corporate bonds, and 10% high-yield).

The strategists noted in their 2022 outlook that they reduced their high-yield exposure by five percentage points and increased their defensive fixed-income allocation. High-yield is “no longer offering you the same type of advantage or spread to take on the additional risk” compared with investment-grade, Headland said.

For clients sitting on the sidelines, the strategists suggest employing dollar-cost averaging for the behavioural benefits.

“Some people say, ‘Well, the markets have run. I’ll wait for a better time to get in.’ You had people waiting [after] the financial crisis [of 2008], saying, ‘Oh, another shoe will drop. There’s going to be a better entry point.’ Sometimes there isn’t,” Headland said.

Dollar-cost averaging, therefore, “is a really good strategy to get money into the markets without waiting completely on the sidelines. And if a better entry point does come, you can [go] back in after that. But just staying on the sidelines can be detrimental to a long-term portfolio.”

Providing this kind of support and resources to Manulife’s advi­sors is part of Headland’s and Nia’s roles as co-chief investment strategists. Headland said there was a succession plan in place for the chief investment strategist position, but once Petursson left for IG Wealth Management in September, Manulife offered the joint role to him and Nia.

“Identifying one over the other can sometimes create tension. I think it made sense that we could both be promoted in the role. We were both ready for it,” Headland said. He noted that he and Nia have worked together for about a decade, and have developed a friendship too.

“Working together, you have to have a very good dynamic. And you have to have a similar viewpoint, but also be able to challenge each other,” Headland said. “We get along very, very well. We’ve taken side trips after business trips together.”

And from an investment perspective, the two men are philosophically aligned.

“We believe that fundamentals, the earnings environment and valuations are the primary drivers of long-term investment returns,” Nia said. “We also believe in the importance of understanding behavioural economics because, more often than not, the biggest obstacle for investors to achieve desired returns is the space between their ears.”