The volatile nature of the equity markets, as amply demonstrated in 2018,
is the big reason why a balance between fixed income and equity holdings is
always recommended. And while a -0.3% return is hardly worth crowing about,
it sure beats -10.5%, besides which, those are averages and there are many
fixed-income funds with more positive returns on the year.
But wait a sec – aren’t ETFs almost by definition supposed to be passively
managed replicas of an underlying index? What does that “active” signify?
“What makes us different is that we will make duration or interest rate
anticipation calls,” says Laurie. “This drives about two thirds of our
added value. For example, the [benchmark] duration is now 7.5 years, but we
can go as high as 10.5 or as low as 4.5, although there are limits on the
maximum weightings of federal, provincial and corporate debt – what I call
“We use two approaches to doing this,” Laurie adds. “On a longer-term view,
we take a top-down macro approach, looking at the fundamentals, but
short-term it’s done with technical analysis. So, for example, if we feel
interest rates are going to rise over the long term, we can move to shorter
durations, but on the day-to-day side we may see other opportunities.
“Sector spreads generate about another 10%-15% of our added value,” Laurie
says. “I should add we’re not credit pickers, we look more at corporate
allocations, which could be 30% or 35% or 40%, depending on where the
spread is going. But this is a top-down allocation as opposed to picking
individual companies or issues.”
As for where interest rates are headed now – how far and how fast – Laurie
sees some softening of the upward trajectory that saw Canada’s bank rate
increase five times over the past 18 months. “We see Canadian as well as
U.S. rates as being range-bound over the next year,” he says. “For example,
the Canadian 30-year rate is now 225 basis points, and we see the range as
between 210 and 260 basis points. And we see the U.S. 10-year range as 250
to 300 basis points.
“My view is that we will see Canadian and U.S. GDP slowing in 2019,” Laurie
suggests. “The Canadian economy grew 2% in 2018, and that will slow to
1.9%, while the U.S. was 3% in 2018, and that will slow to 2.5% in 2019.
And, there is a small – very small – possibility of recession in 2020.
“Trade and tariffs are the biggest wild card,” Laurie adds. “We’re seeing
global growth slowing to 3.5%, and that’s the slowest it’s been in a few
years. Brexit is another wild card, although it won’t have as much impact
as trade and tariffs. So while there was talk in 2018 about several more
rate hikes this year, both the Fed and the Bank of Canada have become more
dovish the last couple of months, and we’ll probably see no more than two
hikes. But of course, it’s all data-dependent.”
is an experienced financial and business journalist and a frequent
contributor to the Fund Library.
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