When speaking at meetings with clients and advisors, the topic of the Cambridge Asset Allocation Corporate Class (CAA) performance and positioning invariably comes up. I wanted to share this week’s podcast with you because I think it is very important to recap some key points as we look ahead:
1. How CAA fits into the Cambridge line-up in terms of the risk/reward
- It is important to understand that our balanced funds are our most conservative funds.
- We are currently conservatively positioned because we do not view the reward-to-risk relationship as favourable, nor do we feel our clients would be expecting us to increase risk during the later stages of this market cycle.
- We manage CAA to our client expectations, as over the years clients have repeatedly told us “Whatever you do, don’t lose the money.”
- We strive to achieve a higher quality of returns, with greater consistency and lower volatility.
2. Our rationale for the fund’s current positioning
- We acknowledge that economic activity has improved, translating into positive earnings momentum for corporations.
- The challenge is determining how much of this improvement is already reflected in prices.
- With both valuations and market sentiment at or near historic highs, it appears that much of the optimism has already been priced in.
- Given the euphoria reflected in valuations and sentiment in what appears to be the later stages of this market cycle, we are pursuing a more conservative approach.
- Within our most risk-adverse funds, we tend to err on the side of caution.
Cambridge’s risk/reward framework permeates all aspects of our investment process, from our asset allocation decisions to our individual security selection decisions. We will take on higher levels of risk when we believe we are being compensated for it, and we will reduce risk when we do not feel we are being adequately rewarded for doing so.
Five years ago, equity market valuations were much more reasonable and market sentiment was more cautious. Our nearly 79% allocation to equities in February 2013 (click here for 2013 fund profile) reflected a more favourable risk/reward environment. During that time frame, earnings on the S&P 500 went up roughly 20% while prices have soared more than 50%. In Canada, the TSX has appreciated over 30% on a 24% increase in earnings. Today, our asset allocation reflects the elevated risk levels that we perceive in this market.
Having worked with institutional clients for many years, I will mention that their investment policies tend to require them to rebalance from outperforming asset classes to underperforming asset classes and from outperforming managers to underperforming managers. This is a structured form of dollar-cost averaging and risk rebalancing. So, for example, after a period where equities outperform bonds or other asset classes, most asset allocation mandates would rebalance back to their strategic or target allocation (e.g. if the stock/bond ratio is 63%/37% now, they will rebalance back to 60%/40%). Given the strength of the equity markets, it is believed that this periodic rebalancing will result in an estimated $25 billion being reallocated from stocks to bonds in the early part of 2018.
Rebalancing is a typical policy measure of most institutional managers representing some of the largest asset pools in the world. Within CAA, we are employing similar techniques as we rebalance from higher-risk asset classes to lower-risk and from higher-risk securities to lower-risk securities. We recognize that this may be challenging to implement across a wide variety of retail accounts, which is why we believe it is beneficial to have exposure to a tactical fund such as Cambridge Asset Allocation.
Should you have any further questions about the fund, please reach out to your CI sales team.
Thank you again for your support.
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This commentary may contain forward-looking statements about the fund, its future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all 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 share value and reinvestment of all dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Cambridge Global Asset Management is a division of CI Investments Inc. Certain funds associated with Cambridge Global Asset Management are sub-advised by CI Global Investments Inc., a firm registered with the U.S. Securities and Exchange Commission and an affiliate of CI Investments Inc. Certain portfolio managers of CI Global Investments Inc. are associated with Cambridge Global Asset Management.