Stock and Bond Prices Falling Is Tough On A Traditional 60/40 Balanced Portfolio

Bond yields are rising (prices are falling), but balanced portfolios are not getting any relief from the growth part of a traditionally balanced (and fully invested) portfolio as previously over-valued stocks encounter the reality of the investing cycle: stock prices are falling at the same time.

As we suggested on our Weekly High Rock Video, the addition of non-correlated assets in a portfolio (Canadian High yield Bonds, for example) become an important part of containing the volatility. Defensive assets like cash (or short-term cash equivalent assets) are also helpful. 

Non-correlated (see the table above) means that assets like Canadian High Yield (C$HY) bonds do not necessarily trade in line with interest rate sensitive assets like government (C$ 5yr) or investment grade (Corp IG) bonds. In other words (as highlighted in yellow),  prices in these assets move independently, based on the quality and ability of the issuer company to pay interest and principle on the debt.

Owning these C$HY assets, however, demands deep levels of research on each of the respective companies to understand their ability to repay their obligations and the underlying security pledged against the bonds. Only a seasoned portfolio manager with plenty of experience is going to be able to offer this. It is one of those features that makes High Rock's value proposition different and better. We have one of, if not the best C$HY portfolio manager in the country. Scotiabank trusts High Rock to manage a C$HY fund (AHY.un) for their clients (and does all the due diligence necessary to ensure that we are keeping to our mandate to do so) and there is a seven year track record to show for it. As I mentioned in my blog last week, C$HY has had better risk adjusted returns than the S&P 500 over the last 5 years.

Having more than normal cash or cash equivalent assets in our collective portfolios by being tactically underweight equity (less than 60% in a 60/40 equity/bond balance) is an other way that we have been able to provide a more defensive strategy.

Tactical portfolio management and non-correlated assets: helpful strategies when the 60/40 balance is not working for you.

And as always, past performance is never a guarantee of future returns, but as you regular readers know, at High Rock we work darn hard to get our clients the best possible risk-adjusted returns.