This series of articles, “Solving your investment problems,” will explore advisors’ and investors’ key concerns and suggest some of the best solutions for each one.
Part 3: Thinking outside of the core box: Satellite equities
The problem: How to integrate more than just core assets into a portfolio
One solution to consider: Satellite equities
Most investors’ portfolios contain core holdings, which track markets and typically aim to bring in consistent returns. One example of this would be a Canadian equity index fund. However, core holdings often provide returns that are close to the markets’ overall performance.
Many investors also look for investments bringing better returns than the market. These are known as satellite equities, which can deliver much different exposure than core holdings, and bring what’s known as alpha — higher risk adjusted returns than the markets. Investors also look for satellite equity options that may help provide a smoother, less volatile ride to their overall portfolio, by being less correlated (ie. performing differently) than the overall market. Let’s take a look at some satellite equity options and why they could be well-placed to provide alpha or protect you against volatility.
Most investors have a fairly low percentage of their portfolio in China. It’s not easy to research and buy individual Chinese stocks, so while some global funds contain Chinese equities, the exposure is pretty nominal. It doesn’t help that Western media typically focuses on negative headlines in relation to China, rather than the more positive aspects, such as the country’s economic modernization and speed of economic recovery from COVID-19.
Chinese stocks have historically had a low correlation with Western markets (its stocks don’t typically rise and fall in value in line with markets in developed countries). Also, China has very different economic prospects compared to other countries and economic growth expectations that are far higher than most other places.
Now could be a good time to invest in China, given the reluctance of both North American investors and broad market indices, (such as MSCI) to have high exposure to the country. This may not last, and it could be beneficial to invest in China now to take advantage of growth opportunities.
Real estate investment trusts (REITs) provide investors with a convenient way to own real estate without becoming a landlord, committing a large amount of money or having money tied up for long periods of time. REIT ETFs can be bought and sold easily while providing exposure to real estate markets. They also offer a wide choice of real estate options, such as industrial, retail, office, residential and health care.
One of those benefits is that real estate has historically protected portfolios from the effects of inflation by continuing to perform well when stocks and bonds are under pressure. Real estate exposure also tends to be less volatile than equities and can serve to protect portfolios during market downturns. Also, many REITs typically pass on 90% or more of their taxable income to shareholders, so they can provide a reliable income stream for investors.
This asset class typically includes utilities, water, energy, pipelines, transport, etc. It has historically had very low correlation with most other equities, so it can provide a really effective way to diversify your portfolio and offset your exposure to other asset classes. President Biden’s US$2.3 billion infrastructure plan is just one example of the long-term global infrastructure spending needs.
Women in leadership funds
There is considerable evidence that shows how companies with more women in leadership and management roles perform better than companies with lower female representation. Research from S&P Global,1 for example, discovered that companies with female CEOs, CFOs and board members are typically more profitable and have a superior stock price performance. I’ve experienced this at first-hand. My wife became the chief operations officer for her company and I’ve seen how its performance has improved significantly under her leadership.
Funds aimed at promoting women in leadership only contain stocks in companies that have female CEOs or CFOs and/or have a considerably higher-than-average female representation on the board and in senior management. You can help improve gender diversity and potentially boost your portfolio’s performance by investing in these funds.
Global equity funds
Many actively managed global equity funds are designed to provide exposure to their asset class while seeking to provide downside mitigation. This is a perfect satellite asset for risk-averse investors. These funds typically provide a reasonable amount of growth, but more importantly they usually experience drops in value during market downturns that are a fraction of the size of what the market experiences.
There are also index solutions available that are not actively managed, but that offer lower management fees and broader diversification, and often focus on factors such as dividend yield. Shares that pay dividends can be an antidote for the low interest-rate bonds that we’ve been experiencing lately. However, it’s important to invest in companies that have sustainable dividends, that is to say, that they are able to maintain over a long period of time. This is where an index screening process adds considerable value.
Mackenzie’s satellite ETF options:
Mackenzie offers a wide range of ETFs that can potentially deliver benefits way beyond core holdings. Here are some that match up to what we’ve just discussed:
China: The Mackenzie China A-Shares CSI 300 ETF is the only ETF in Canada that holds China A shares (companies based on the Chinese mainland). The fund offers exposure that you won’t get anywhere else in Canada and provides investors with a way of participating in China’s economy as it potentially moves towards taking over the US as the world’s largest economy.
Real estate: The Mackenzie Developed Markets Real Estate Index ETF can provide an alternative source of yield in a low yield environment and give some protection against inflation. It’s heavy on retail property and so focuses on countries with high consumer spend.
Infrastructure: The Mackenzie Global Infrastructure Index ETF tends to have low correlation with other asset classes and can therefore add considerable diversification.
Women in leadership: The Mackenzie Global Women’s Leadership ETF only contains companies that have been ranked with a very high gender diversity score by the management team and will help tilt your portfolio towards more companies with female leadership.
Global equity funds: The Mackenzie Ivy Global Equity ETF aims to provide greater diversification, increased investment opportunities and more protection during downturns. Also, the Mackenzie Sustainable Dividend Index ETF offers a high-quality dividend focus, with a current dividend yield of 3.1%.
Find out more about integrating satellite equities into your portfolios. For advisors, speak with your Mackenzie sales team; for investors, talk to your financial advisor.
In case you missed them:
1 S&P Global: “When women lead, firms win”