Balanced Fund Perspectives | Mackenzie Investments

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Balanced Fund Perspectives

The value of asset allocation in today’s markets

Alain Bergeron, who heads the Mackenzie Asset Allocation Team, and Tony Elavia, Chief Investment Officer, believe that balanced funds can enhance their returns in today’s complex markets by taking an active approach to asset allocation.

In this video, Bergeron and Elavia discuss the role of asset allocation in the eight balanced funds Bergeron now oversees, and how Bergeron is currently positioning their asset mix.

Balanced Fund Perspectives

The value of asset allocation in today’s markets

Show transcript

TONY ELAVIA: The goal of our balanced funds is to maximize risk-adjusted returns, and that is no different from all of our other funds. Now, as you know, markets keep getting more and more complex, and we find ways to deal with the complexity.

Now we are going to add an asset allocation function to these teams in order to round out the capabilities and running all our balance funds. But for all the traditional balanced funds, we want to make sure that the equity management is done by the equity teams, the fixed-income management is done by the fixed income team, and the asset allocation function is done by an asset allocation team. So that's how we add value from all three perspectives – equity management, fixed income management, and the asset allocation in all of our traditional balanced funds.

Alain Bergeron's job as the asset locator in all of these funds is to align all of our balanced funds using a very systematic asset allocation process to either overweight equities or underweight equities. But the overweights and underweights will be in the context of where these funds traditionally are supposed to be living in.

ALAIN BERGERON: So specifically, we have six investment professionals that are fully dedicated to asset allocation. We've made significant investment in our technology to bring our asset allocation capabilities to the next level. And that manifests itself in the rigor of the research, the risk considerations, and importing the breadth of factors and geography that we can analyze at the same time.

TONY ELAVIA: For each of our balanced funds, we have designated a neutral position. So for our equity-oriented balance funds, the equity component is generally on the higher side than our fixed income-oriented balanced funds.

But the point is that for each of our traditional funds, we have what we call a neutral positioning. That means if we do not have a preference for equities or fixed income, where would the allocation be? We call that the neutral allocation.

ALAIN BERGERON: To come up with our views, we consider three broad inputs – evaluation, macroeconomic environment, and sentiment. This analysis is based on rigorous research. It uses both quantitative models and qualitative analysis. The models and the views will be updated continuously, but the asset mix will be changed only when the views have changed significantly enough. In a normal year, I'd expect that you'd see maybe from zero to five asset mix changes from the low end to the high end.

Now, our models and our analysis will not be static. We believe in constantly conducting research, refining and evolving our inputs and models. And that's to make sure that we're not only using the most relevant information for today's market, but that we also have the ability to adapt and evolve to future market conditions.

The bottom line here is that asset allocation is not something that we do on a part-time basis. It's not something we do once every quarter. Asset allocation is done on an ongoing basis by a dedicated team with dedicated resources. And that's something that our balanced funds' investors should able to benefit from.

TONY ELAVIA: The majority of returns will come from security selection on the equity side and the management of the fixed income portfolios. Incremental return will come from the asset allocation decision.

ALAIN BERGERON: A simple way to think about it is, for example, if we overweight stocks by 3% and stocks outperform by 10%, then the value add would be 30 basis points. So the bottom line here is that we are aiming to add incremental value over time, but the vast majority of returns will come from the neutral target mix and the security selection in both equity and fixed income.

We believe that at this point in time, investors should have a neutral stance. And by that I mean not having underweight – or overweight, either – stocks or bonds. And that's because for both stocks and bonds, there are many factors and forces right now that are conflicting.

For stocks, from a valuation standpoint, they're showing expensive. The macro picture is maybe mixed to supportive, but on the sentiment picture is favorable.

Examples of that is many people are skeptical, or have been skeptical, of this rally, and they still haven't fully gone back in the market. There is a strong positive price trend. And we also run statistical analysis daily on markets to get a sense of market vulnerability. And that shows us that markets right now are relatively robust to shocks.

On the bond front, valuation shows us that they're also expensive. And we believe that rates will rise. An important nuance here, however, is that that doesn't mean that investors will lose money. One thing that investors often miss is that to lose money, a bond's interest rate must not only rise, but they must rise faster than what's already priced in the curve.

On the macro front, from a bond perspective, the picture is also mixed. But the sentiment is also supportive to counteract the valuation. So the bonds are still in a positive trend. And from a contrarian perspective, one concern that I have, and my team has, with underweighting bonds is that almost everyone has this view expressed in their portfolios. And when there is consensus, everything else equal from a return standpoint, you're often better off doing the opposite.