Resist major portfolio changes despite rates peaking, money managers say

With interest rates peaking, investors might be tempted to make major changes to their portfolio, but money managers say they should mostly stick with their current long-term strategy. THE CANADIAN PRESS/Nathan Denette (The Canadian Press)

With interest rates likely peaking, investors should consider small tweaks to their portfolio to boost their returns, but "wholesale changes" should mostly be avoided, money managers say.

"While we may be getting closer to a peak in central bank interest rates, monetary policy (including quantitative tightening) is very likely to remain restrictive for some time. We always advocate for minor adjustments to clients' long-term asset mix, as opposed to wholesale changes," Rob Spafford, vice-president and portfolio manager at Cidel Asset Management, told Yahoo Finance Canada.

"It is 'time in the market', rather than 'timing the market' that will deliver long-term compounding of wealth."

Dave Brune, vice-president and portfolio manager at The Rae & Lipskie Partnership, agrees that investors should generally stay the course with their strategy because their "strategy has been cultivated for a reason" but says bonds are interesting again.

"With many investment-grade bonds trading at 5%, these may be worth considering in a diversified portfolio. Compounding money at 5% is nothing to sneeze at and the downside of a market downturn will be mitigated," he said.

Fixed income back in style

Fixed income investments have arguably been the biggest comeback investment story in this cycle of rising interest rates.

Money managers and investors have flocked back to the bond market and other fixed income securities such as Guaranteed Investment Certificates (GICs) as their yields jumped to levels comparable to equities, but with much less risk.

Tiffany Woodfield, associate portfolio manager at Raymond James' SWAN Wealth Management, says she prefers longer-duration bonds.

"The rising rate cycle has made the ownership of bonds much more palatable and profitable. This will be amplified if rates begin to fall," she said.

"Also, those that hold bonds outside of registered/exempt plans have tax relief since the additional gains achieved if a bond is sold at a profit are taxed more favourably than regular interest."

Bonds should fit into an investor's balanced portfolio of stocks, fixed income, real estate and alternatives, she says.

Stocks can boost returns but beware of risks

For investors who have a long time horizon and sufficient risk tolerance, having a strong tilt towards equities in their portfolio is "perfectly acceptable," according to Brune. He points out there are many quality dividend stocks that are yielding a healthy six per cent or more.

However, even though interest rates might be peaking, their full impact on the economy likely remains to be seen because of the lagging effect of monetary policy.

That's partly why Spafford warns investors to temper their expectations for equity returns for the remainder of 2023 and next year.

He says higher-for-longer interest rates and slowing business activity might not be fully factored into the market yet.

"However, given the low valuation multiple on forward earnings not seen since the depths of the Great Financial Crisis in 2008-09, we must also be cognizant that equity markets are discounting mechanisms and will likely trough before forward earnings estimates," he said.

"Therefore, being overly defensive in our positioning despite the economic backdrop is not prudent. We continue to believe that tilting the portfolio's exposure to resilient businesses with sustainable competitive advantages and that exhibit a high degree of predictability will reward investors with strong risk-adjusted returns."

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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