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Inside the Market Why this Sun Life portfolio manager is trimming her equity position and embracing higher quality bonds

Sun Life portfolio manager Kathrin Forrest

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The markets have rebounded strongly so far in 2019, after a sharp correction in the fourth quarter of 2018, which has some investors feeling confident. At Sun Life Global Investments, portfolio manager Kathrin Forrest is more cautious.

“There has been a push-up in valuations across both equities and bonds. One thing we are watching closely is the underlying fundamentals, where the data has turned mixed, particularly outside of the U.S., including here in Canada,” says Ms. Forrest, whose team manages more than $14-billion in assets. “We are watching corporate earnings very closely.”

The Sun Life Granite Balanced Portfolio F she co-manages (with a benchmark of 60-per-cent equities and 40-per-cent fixed income) has returned 10 per cent year-to-date as of April 26, and 8 per cent over the past 12 months. The fund has seen an average annual return of 7 per cent over the past 5 years (all return data net of fees). The Globe and Mail recently spoke with Ms. Forrest about her market outlook and the asset classes she’s been buying and selling.

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What concerns are you hearing from investors today?

There’s a lot of ongoing headline noise, including trade discussions between the U.S. and China, political uncertainty in the European Union, upcoming elections in emerging markets and the ongoing debate around pipelines and transportation infrastructure in Canada. All of that, put together, doesn’t instill a lot of confidence and it may take away from investors seeing the bigger picture in an objective way. It’s not clear to investors where we might be headed given the long economic expansion we’ve seen. A recession is also a concern, but it’s not something we see on the horizon. With respect to managing a portfolio, you want to stay ahead of that. If a recession hits, you will likely already have seen the drawdown on your portfolio.

How can investors stay ahead of a potential recession?

I can tell you how we do it. We look at a broad set of data that includes economic fundamentals, monetary and fiscal policies, valuations and sentiment in the market. We assess the broader investment environment and risks and opportunities. We don’t want to see where we’ve been, but anticipate where we’re going.

What asset classes have you been buying lately?

In the short-term, we have a modest bias toward cash and higher-quality fixed income. We’ve trimmed our equity [in the Sun Life Granite Balanced Portfolio F] from 60 per cent to 58 per cent and are holding cash for potential buying opportunities in the near-term. Bonds tend to hold up well in a market downturn, but yields are low. Given that our objective is to take down the risk profile, we are focusing on higher-quality bonds in the U.S. and Canada and leaning toward investment-grade bond products.

What assets are you trimming?

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We’ve reduced our allocation to developed equity markets overseas, in particular in Europe and Japan, where underlying fundamentals look weaker relative to emerging markets and equity markets here in North America. From a longer-term perspective, we have replaced our allocation to smaller-cap stocks here in Canada with a global strategy to open up broader opportunities and enhance diversification in our portfolios.

What's one sector you wish you’d bought into?

Given our longer-term focus, we sometimes don’t participate in pockets of the market that see strong appreciation over shorter periods. An example is the recent rally in Canadian health-care stocks, largely driven by a small number of companies in the cannabis space. We’re not ignorant of the space, but it’s not consistent with our process, which is founded on managing risk and generating long-term sustainable returns for our clients.

What’s your best advice for Canadians hoping to become high-net-worth investors?

Every investor is unique. Some of the common traits of successful investors are those who are clear about their objectives and constraints over various time horizons, both short-term and long-term. They look beyond investing and take a holistic approach to financial planning. In the end, you want to work with someone you can trust, who puts your interests first.

What’s a common mistake that investors make that throws off their financial plan?

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Short-term trading and getting caught up in headlines. As investors, we are all prone to behavioural biases. We get scared at certain points in time and we might get greedy at other times in the market cycle. Typically, that’s counterproductive.

This interview has been edited and condensed.

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