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David Wolf is balancing his portfolios a little differently in today’s high interest-rate environment due in part to the uneven economic picture between Canada and the U.S.
“Canada is going to have a much harder time with these higher rates than the U.S., given our higher household debt levels, and, ultimately, that’s going to be reflected in our economic policy, performance and the exchange rate,” says Mr. Wolf, a portfolio manager at Fidelity Investments Canada ULC in Toronto, who oversees about $75-billion of the firm’s $206-billion in assets under management across several funds.
The outlook has led Mr. Wolf and his team to increase its weighting in U.S. assets, including exposure to the U.S. dollar, and reduce its holdings in interest-rate sensitive Canadian sectors, such as banking.
His flagship Fidelity Global Balanced Portfolio, which he co-manages with David Tulk, currently includes about 41 per cent U.S. assets, 23 per cent Canadian and the rest in smaller portions of between 1 and 4 per cent in various countries across Asia, the U.K. and Europe.
About 60 per cent of the fund’s assets are in equities, split roughly even between Canada, the U.S. and other international jurisdictions at 20 per cent each. The other 40 per cent is invested across a mix of assets such as investment-grade and high-yield debt, high-yield bonds, treasury inflation-protected securities, cash (including money market funds and Treasury bills), and commodities (specifically, iShares Gold Trust IAU-A).
The fund has returned 11 per cent over the past 12 months. Its three-year annualized return was 3 per cent, while its five-year annualized return was 6 per cent. The performance is based on total returns and is net of fees as of Oct. 31.
The Globe and Mail spoke recently with Mr. Wolf about the assets and sectors he’s been buying and selling and a sector he wished he had sold outright when inflation started rising two years ago.
Describe your investing style.
It’s not a very sexy answer, but I would describe our style as balanced. It’s literally in the name of most of the funds I help manage. I’m an asset allocator, and most of what I manage are funds of funds. These are low- to medium-risk portfolios that include a mix of equities, bonds, currencies and other assets from different regions. The idea is to put them together in a thoughtful way to achieve a diversified portfolio that can generate superior risk-adjusted returns. When done right, we have the potential to outperform, regardless of whatever style is working in the market at the moment.
What’s your take on the current market environment?
It’s clear that the outlook for Canada’s economy is more daunting than the U.S. There’s a bullish productivity argument to be made in the U.S. that just can’t credibly be made in Canada. Also, Canada has historically high household debt levels, and we have shorter-duration mortgages in Canada versus the U.S. That means the big increase in interest rates will hit us harder and faster. We’re probably already in a recession in Canada – and it’s likely to get worse before it gets better. The Bank of Canada will probably have to respond by easing monetary policy [cutting rates] much sooner than the U.S. Federal Reserve. It’s plausible there will be an economic downturn in the U.S., but we believe it won’t be as deep as in Canada.
What have you been buying based on this outlook?
We have been buying more U.S. currency assets. We believe it’s a good way to protect our portfolios and hedge equity risk, and much better than bonds in recent years. Bonds have traditionally played that role in a balanced portfolio, but when they’re not doing that, you have to get more creative with that diversification.
What have you been selling?
We’ve been selling Canadian banks, given the higher interest rates and household debt levels. Given our global investment reach, we’d rather take risks in areas that aren’t subject to the same vulnerabilities we have here in Canada. We’re underweight Canadian banks and neutral U.S. banks at this point.
Is there another sector you wish you sold?
I wish we had sold all our bonds two years ago when we saw inflation starting to rise. We sold a lot of bonds back then and ducked some of that bond market rout, but I regret not ducking it more. If there was ever a time to do it, it was then with yields below 1 per cent. Now that yields are around 5 per cent, it’s a viable asset class. We’re still underweight in bonds but have been adding some back recently.
What advice do you have for new investors?
Beware of behavioural biases that can affect your investing. We all have them. One, in particular, is confirmation bias, which is when investors favour information and analysis that confirms their existing views. I encourage new and experienced investors to seek out opposing views actively and look at them with an open mind. I try to do that, and if that other information is compelling, I’ll change my mind. There’s no shame in that. I like to say that it’s better to lose a little bit of face than a lot of money.
This interview has been edited and condensed.
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