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Barry McInerney is the President and CEO of Mackenzie Investments

Over the last few years, Canadian markets have evolved in significant ways. We have more products to choose from, new ways to create portfolios and better access to once hard-to-find investments. Yet, we still lag behind the United States in important areas – although likely not for long. Over the next 12 months, three big trends will emerge that will not just affect Canadian markets, but also the way people construct portfolios and invest for their futures.

These trends will allow Canadian investors to create more diversified, pension plan-like portfolios that can withstand expected market volatility. Here’s what investors should be paying attention to in 2019.

Introducing liquid alternatives

As of Jan. 3, every Canadian investment firm can now sell liquid alternative funds. These funds, both mutual and exchange-traded, employ hedge fund strategies such as long-short or market neutral. Mackenzie, which received permission to sell liquid alts early, has been offering them since last May. However, the rest of the industry will begin rolling out their own funds over the next few months – and that could reshape Canada’s investing landscape.

Liquid alts have been available in the United States for many years, and the market for them has grown quickly, but they’re arguably even more ideal for Canadians. Why? Because they provide investors with non-correlated assets, which means that when markets fall, these funds tend to stay stable or increase in price. In Canada, where the stock market is heavily concentrated in the financial, materials and energy sectors, having that kind of diversification is critical.

With volatility likely continuing in 2019, the liquid alts market will be a big one in Canada. We think it could reach $100-billion sooner than later.

Investing with impact

Socially responsible investing (SRI), which is also called sustainable and impact investing, or environmental, social and governance (ESG) investing, is also going to have a much bigger influence on people’s portfolios in the years to come. At the end of 2017, U.S. investors had about US$12-trillion in SRI strategies while Canadians had $2.1-trillion, up 41.6 per cent from 2015. That number will increase, with 87 per cent of Canadian asset managers saying responsible investing will grow at a moderate to high level over the next two years, according to an October survey by the Responsible Investment Association.

SRI is becoming more mainstream, in part because millennials want to own socially responsible companies in their portfolios. One survey found that Canadian millennial investors are 65 per cent more likely than boomers to consider ESG factors when making investment decisions. This cohort is also pushing more companies to adopt ESG principles. Mackenzie is highly active in this space, with three SRI-focused funds. We are a signatory to the United Nations-supported Principles for Responsible Investment, which is a network of international investors that are putting ESG principles into practice. We are also a signatory of the UN’s Principles of Women’s Empowerment.

With younger people wanting to own companies they feel are aligned with their social values, and with more evidence showing that businesses that adopt ESG principles can produce strong returns, impact investing is going to play a bigger part in Canadians’ investment decisions.

ETFs continue to thrive

The continued rise of exchange-traded funds is going to be another big trend. While this may seem odd, since ETFs have been around for years, Canadian adoption still pales in comparison with the United States. At of the end of October, about $157-billion had been invested in ETFs in Canada, compared with US$3.5-trillion stateside. The good news is that our domestic ETF market is expanding at a faster pace than it is in the United States, with some reports estimating that assets under management could triple in size over the next five years.

This is important, because ETFs will give investors additional ways to create more personalized portfolios. Going forward, mutual funds and ETFs, including smart-beta and active ETFs, will work together to help people address their individual savings needs.

Ultimately, portfolios of the future will look much different than they do today. They will be more global, more diversified, include fewer individual stocks, and they will include pooled vehicles with different market exposures and efficiencies. As much as the market has evolved over the years, the industry will take an even greater leap forward in 2019.

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