The COVID-19 crisis should be a wake-up call for financial advisors to offer broader diversification in clients’ portfolios, including more assets overseas and in havens such as bonds and gold, according to a couple of Canadian portfolio managers and a research analyst who participated in an online panel discussion on June 11.
“Under heightened uncertainty, we need to prioritize maximum asset-class diversification,” said Rodrigo Gordillo, co-founder, president and portfolio manager at ReSolve Asset Management, during the webinar, which was a collaboration between Inside ETFs Canada and Globe Advisor.
Before the market meltdown began in March, Mr. Gordillo said some advisors were too heavily focused on chasing yield through equities while not holding enough secure assets like bonds and hedges like gold.
“Hopefully, they’ve learned a lesson of proper diversification in risk management,” Mr. Gordillo said. “It provides an opportunity for advisors to rethink … and to really implement a more robust portfolio that can withstand the next [black swan] event without it affecting their clients’ portfolios.”
He believes advisors need to diversify not just in sectors and geographies, but strategies including active and passive investing.
“You couldn’t find better timing [to get started],” Mr. Gordillo said.
Meanwhile, Robert Duncan, senior vice-president, institutional sales, and portfolio manager at Forstrong Global Asset Management Inc., said he sees investment strategies around three emerging “super trends,” which include higher debt, less globalization and growth in the digital economy.
For example, Mr. Duncan said higher government debt as a result of COVID-19 government support packages will create financial pressures that will likely lead to higher taxes and inflation.
“The consequences, I think, will be a big focus for investors to work more closely with their advisors to reposition and look at what’s happening in their portfolios and how they can take care of themselves for the future,” he said during the panel discussion.
Mr. Duncan also sees investment opportunities in the shift away from globalization and toward localization as a result of the pandemic, which could force countries to find growth within their own borders or regions.
“We want to invest in markets that have very high growth rates, and we do see that from investing around the world, including as a part of a growth opportunity in portfolios,” he said.
With digitalization, which has been hastened by the coronavirus lockdowns and more people working from home, Mr. Duncan sees opportunity in the technology sector.
“We think this trend can continue,” he said, but with a focus on global markets like Europe and Asia and less in the United States.
“We do think there’s a lot of crowding happening in the work-from-home trade in the U.S. ... and opportunity to diversity away from that.”
Mr. Duncan agrees that now is “an opportune time to globally diversify” portfolios and recommends that advisors discuss these trends with clients.
“You clearly have to match up the risk profile and make sure that clients are going to be comfortable with what they’re investing in,” Mr. Duncan said. “From our view, picking a stock to try to outperform or beat a particular index is very difficult. We focus almost exclusively on the asset mix and try to get that right for clients.”
As such, exchange-traded funds (ETFs) will continue to play a larger role in client portfolios in the years ahead, said Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial Inc. (NBF).
NBF data show that ETF assets under management (AUM) in Canada have experienced a compound annual growth rate of about 20 per cent over the past five years, with more than $200-billion in AUM in Canada today.
While that’s only about 10 per cent of the $2-trillion in mutual fund AUM in Canada, Mr. Straus said asset inflows into ETFs have outpaced mutual fund growth since the global financial crisis of 2008-09.
“It’s an astonishing … pace with no end in sight,” he said during the panel discussion.
“Anytime there’s something that upsets the apple cart or shakes the equilibrium, there’s going to be people who withdraw assets from all sorts of risky areas and then, when it comes time to deploy, they will re-evaluate,” he added.
“ETFs, being relatively smaller than mutual funds [in total AUM], are going to be the beneficiary of this kind of process. It happened in 2008-09 when ETFs were really quite small compared to mutual funds – and it’s happening now, too.”
Mr. Straus expects ETFs to “take another leg up in market share” during the COVID-19 crisis, including the creation of more thematic plays.
One example he cited is the work-from-home trend, which has led to increased interest in ETFs that includes everything from cloud computing and cybersecurity to online document management and remote communications.
In fact, a new ETF, Direxion Work From Home ETF, that tracks the newly launched Solactive Remote Work Index is expected to begin trading in the U.S. in the coming weeks.
“ETFs are figuring into more portfolios, more than ever,” Mr. Straus said. “It’s a brave new world and ETFs are going to figure very prominently.”