Mackenzie Strategic Income Fund: Asset Allocation Update | Mackenzie Investments

Manager Videos

Mackenzie Strategic Income Fund: Asset Allocation Update

Steve Locke believes it's time for investors to be more selective

Steve Locke, who heads the Mackenzie Fixed Income Team, takes a selective approach in Mackenzie Strategic Income Fund.

In this video, Locke explains how his team is positioning the fund to benefit from specific relative value opportunities across a number of asset categories, while carefully managing portfolio risk.

Mackenzie Strategic Income Fund: Asset Allocation Update

Steve Locke believes it’s time for investors to be more selective

Show transcript

STEVE LOCKE: As far as the EM currency and EM yield curves and EM markets are concerned, there's going to be some volatility in 2014. We've started the year with a little bit of volatility, we've seen that develop in January, and really, that's a result of a number of factors that have been building for many years in these economies. So I don't think we're done with that volatility here early in the year. Now we've seen some reaction on the monetary policy front from central banks in these EM countries, especially the ones being hit hardest. And we've seen some movement in the currencies that show about a 20% depreciation versus the US dollar if we look at it over the last 12 months. In Argentina's case it's more like a 40% depreciation.

So these are troubling signs for these countries. They're suggesting there's some economic problems that are likely to develop from that type of destabilization. And I expect that we're going to be in some choppy water for some of these countries as we go through 2014. So we shouldn't expect that we're done with it early in the year. And I think as we go through, there will be small ripple effects for other asset classes. But overall, the developed economies tend to be on more robust economic footing, and I don't think we're going to see a major spillover this year.

Flexibility is one of the most important attributes of the Strategic Income fund and how we can approach selecting the assets that go into it. From an asset mix point of view, right now it's fairly stable. We're a little bit below 50% on the equity weighting coming into 2014. And we think that's appropriate where valuations are in that space, the equity space, relative to the fixed-income spaces we're looking at today, high yield bonds and loans and principle and also investment grade corporate debt. So while we like all asset classes, there are individual selections within each that make sense for the portfolio, it doesn't make sense to us to really ramp up or down the equity weighting given where valuation is. And so that's the best relative value choices across the piece that we're making that are determining the relative return and risk of the portfolio over the next year.

Well, within the equity asset class, that's a decision that our two equity managers, Houvig Moushian and and Darren McKiernan, are making day in and day out within global and Canadian equities. There's definitely still a dividend tilt to the equity side of the mandate, and in fact, over the last year we've seen some dividend-oriented stocks cheapen up a little bit relative to non-dividend stocks. So we're still looking at those higher income equities as the focal point for the equity mandate.

On the fixed income side of the mandate, we see a lot of value across a number of spaces within fixed income, whether it be investment grade corporate debt, high-yield bonds, floating rate loans, FRNs. But it's not uniform, so we have to select from each of these spaces actively all the time. So it's really deal by deal and case by case specific, what we're buying on the fixed income side. And that shows where we are in the credit cycle. Maybe we're at the beginning of the third period of the credit cycle, and valuation is not uniformly good across all fixed income asset classes today, So we need to be selective, increasingly, as we go forward from here.

Cash in the fund today is under 10%, it's around the 7 to 8% mark, and traditionally it's been in that sort of area over time. It acts as a volatility brace at times for parts of the portfolio. And if we look back into 2013, it was nice having a little bit of cash because we took advantage of some good relative value opportunities, particularly in the fixed-income space, through the middle part of the year. In addition, it was a bracing against a rising yield curve, which did impact the relative return of some parts of the fixed-income space, particularly the more investment grade-oriented places. So having the cash today, well, it's important to us as we look forward, because we see some opportunities developing this year, we will be able to deploy that cash into a little bit of a weaker pricing environment, perhaps for some areas of the equity markets, and certainly some areas of the global and EM debt markets.