Alternatives To Volatile Stocks

With machines dominating the stock market: see the Economist article (Oct. 5 edition) entitled "The Stock Market Is Now Run By Computers, Algorithms and Passive Managers" amid the economic and political landscape that produces such a staggering array of news upon which all these machines a programmed to react too, it is no wonder that there are growing numbers of stock market skeptics defying the "stock market cheerleader crowd".

That and the fact that global stock markets have shown little growth over the past 2 years, might be cause for some concern:

There is a relatively non-correlated asset class that we (at High Rock) specialize in: Canadian High Yield Bonds. In fact Paul (who manages the portfolio for our clients and a fund for Scotiabank: Advantaged Canadian High Yield Bond fund, AHY.un) may be one of the best managers in the country in this asset class as AHY.un was given the status recently as the best performing C$HY fund over 2,3,4 and 5 years.

High Yield was once upon a time given the less than aesthetically pleasing handle of "junk" bonds, back in the 1980's when it was a relatively new asset class.

However, these less than investment-grade bonds (rated below BBB) have attributes that put them well above common stocks on a corporations capital structure:

and importantly, they have little correlation to stock markets and almost no correlation to movements interest rates:

In times of stock market volatility, when a 1 standard deviation move in the S&P 500 leaves you with about a 12% vulnerability to stocks (see chart at the top of the page), $CHY (circled), leaves you vulnerable to only about a 4% move. If the cash yield (interest income) on our HY portfolio is generating better that 7% annually, you are very well paid to sit tight. The annual dividend income on the S&P 500 at about 1.86%, can be wiped out in a single day with the current levels of volatility. That won't happen in C$HY. And, as we saw in 2008, dividends can be cut by corporations. The coupon on the HY bond is fixed. You will get paid the interest that you are owed.

In 2018, when stocks were recording big annual losses, C$HY was the best performing asset class. AHY.un (with Paul at the helm) was right in the mix:

and of course, as it says on the slide, past performance is not a guarantee of future returns. However, at High Rock, we work darn hard to get the best possible risk-adjusted returns for ourselves and our clients. 

Sometimes, it can be worth looking into the alternatives. You might just find that this asset class makes sense for your portfolio. It has done well for our clients.

This is in no way a solicitation to purchase this security, merely an example of an alternative asset class. Any decision to invest should be made in consultation with an adviser that fully understands your objectives, time horizon and risk tolerance. We are always happy to advise.