Doug Cooper discusses recent market events, their impact on Canadian equities, and how the Empire Life Asset Allocation Fund is positioned.
Greetings, my name is Doug Cooper, Senior Portfolio Manager, Canadian Equities at Empire Life Investments. I’m co-manager on the Empire Life Asset Allocation Fund, also the lead manager of the Empire Life Dividend Growth Fund.
Today I want to provide a quick update on the positioning of the Empire Asset Allocation Fund. As of the end of April, the Fund was a 56% invested in equities, 36% fixed income and about 8% in cash. The equity weight is at the lower end of the Fund’s targeted range, which is 55 to 65%, reflecting a conservative stance that we have been taken for a number of months and continue to take today. We believe that it will be difficult for equities to do well in an environment where the outlook for global economic growth continues to deteriorate, and where IPA (Inflation-Protected Annuity) cost of inflation is becoming a real challenge for a number of industries and companies.
The Fund is overweight, in Canadian equities, which makes up just over 77% of the equity allocation. We believe that Canadian equities are relatively well positioned for three reasons.
First, a major source of IPA costs inflation mentioned previously, is due to elevated commodity prices as a result of the Russia-Ukraine conflict. Canada’s commodity-driven economy has- and we believe, should continue to benefit from this.
Second, valuations for Canadian equities remain attractive on a relative and on an absolute basis with the S&P/TSX, trading at about 13 times earnings.
Third, interest rates have increased significantly year-to-date, and we expect them to remain elevated for the foreseeable future. And really, there are two implications for this, the first being that a significant portion of the Canadian equities market, in particular the Canadian banks and the Canadian life insurance companies benefit from a rising rate environment. The second implication is that we’ve seen a material rotation away from growth stocks triggered by rising interest rates, and Canada is very much under indexed to growth stocks, relative to global markets and U.S. equity markets in particular. And with our view that interest rates remain elevated for the foreseeable future this rotation away from growth stocks could continue.
On the fixed income side, the Fund has maintained a low duration at less than four years over the past year or so, and this has really sheltered the portfolio from the rising rate environment. Corporate bonds, make up over 80% of the fixed income allocation where we’re seeing attractive value and then the weighted average yield of the fixed come allocation is just over 4%. We expect interest rates to continue to move higher in the short term, as central banks continue to tighten to counter inflation, but we are watching economic data and the yield curve very closely to inform our views on the extent to which economic growth slows, which may eventually bring rates down.
So, to summarize, the Fund’s conservative equity positioning and overweight in Canada, along with low duration on a fixed income side over the past year or so, collectively has allow the Fund to perform relatively well recently, and especially over the year-to-date period during some very volatile market conditions. We believe this volatility will continue and therefore remain conservatively positioned in equities favoring Canada and maintain a short duration on the fixed income side consistent with our view that rates continue to increase, at least in the short term.
Thank you very much for your time. I really appreciate it.
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June 8, 2022