With asset valuations high these days, it makes it increasingly difficult to find returns without taking on more risk. I wanted to provide a few charts that have helped our framework for navigating this market. I hope they can help you in your process as well.
1) How would the prices of different sovereign bonds respond to a 1% increase in yield? (Pennies--and in many cases a bill!--in front of a steamroller.):
Source: WSJ debt calculator.
Here is the link to the calculator if you want to explore it yourself.
2) Of course, we have seen massive flows into bonds YTD (at the expense of equities):
Source: EPFR and JPM
Within the equity flows that are occurring, most are going into passive strategies:
Source: EPFR and JPM
And of the passive strategies, most are going into low-volume/defensive ETFs:
Factor-based ETF investing and the momentum in defense have pushed up prices to the point where it is tough for income and income-equities to find absolute value. This same momentum however has emboldened investors, driving greater flows in such products despite the higher valuations implying less future return potential (with higher levels of risk).
At Cambridge, we will stay disciplined to our absolute return focus and risk-reward framework. We believe over time this strategy can help to provide attractive returns while helping navigate risk. However, this can from time to time result in portfolios that look very different from the market. For example, if you look at the Cambridge Dividend suite of funds, you will find a much different set of investments than the typical dividend mutual fund or ETF. The Cambridge Asset Allocation Corporate Class has found ways to deliver absolute income returns while working to minimize risks by avoiding crowding (i.e. expensive) areas of the market.
The next month promises to be busy and exciting. Members of the team will be attending numerous conferences and company visits (including a busy week in Japan). We are also excited to see a number of you at the annual CI Leadership Conference.
Thank you all for your support through the beginning and middle of this year and enjoy the rest of the summer!
Cambridge Asset Allocation Corporate Class as at July 31, 2016
|1 YR||3 YR||5 YR||Since Inception|
|Cambridge Asset Allocation Corporate Class A||2.3||7.4||7.0||5.8|
|Inception: December 2007|
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.