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Granite Managed Portfolios Tactical Update

November 2020

Opinions as of December 15, 2020

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The views expressed in this tactical update apply broadly to all Sun Life Granite Managed Portfolios, whereas the tactical highlights and allocation data in the chart below are specific to Sun Life Granite Balanced Portfolio. For the latest information about other Sun Life Granite Managed Portfolios, including Sun Life Granite Managed Income Portfolios, please refer to our quarterly fund reviews.

This was a year like no other. U.S. President Donald Trump, claiming massive election fraud, refused to concede. COVID-19 swept across the world – the arrival of new vaccines offered hope. Investors weighed all three, with markets rallying to record highs on a preference for President-elect Joe Biden’s predictability and the possibility that the virus could be beaten.

Even with the vaccines’ promise, we still have a long way to go. Millions of people remain unemployed; COVID-19’s second wave is proving extremely difficult to contain – another down leg in the global recession is still possible.

Despite this uncertainty, markets remained buoyant at year-end. And we are overweight U.S., emerging markets and international equities, in which we have a small overweight. While still underweight Canada, we moved closer to neutral.

In terms of fixed income, we reduced exposure to Canadian and U.S. investment grade bonds. However, we are slightly overweight high yield corporates, which continue to be backed by the U.S. Federal Reserve. We remain neutral on emerging market debt. 

At 3%, the U.S. is our largest overweight position. From a macro standpoint, we believe the U.S. is still the world’s most resilient economy. There is also room, on both the monetary and fiscal side, for the government to further support the economy. In addition, with its move to a record high, the market has signaled its preference for President-elect Joe Biden, but with a Republican-controlled Senate in opposition. However, that sentiment could change if the Democrats take control of Congress by winning two Senate elections in Georgia on January 4. 

We have also added U.S. value names and asset classes that lagged growth in the run-up. Indeed, we’ve seen value stocks, including cyclicals, rise in anticipation of a broader economic bounce back. This trend could accelerate if the economy improves as vaccines roll out. For now, we continue to look for opportunities to rotate more of the portfolio from growth to value. As well, we have made some tactical options trades in value sectors, including industrials and financials.

Emerging markets are our second-largest overweight. Both China’s and India’s economy have posted strong growth in recent months. Indeed, Chinese companies shipped US$268 billion in exports in November, up 21% over the same month last year.  India’s composite purchasing managers index rose to 58.9% in October versus 54.6% in the previous month – it’s strongest increase in nine years.

It remains to be seen whether the recovery in emerging markets broadens out. To that end, with U.S. interest rates remaining low, these countries could continue to benefit from a cheaper U.S. dollar.

With a slight overweight position in international equities, we are closely watching the impact of COVID-19 on Europe. In Q3, economic growth in the European Union (EU) started to recover, driven by both domestic demand and exports. However, a number of EU countries have been hit hard by the pandemic’s second wave. As well, stalemated Brexit negotiations have further clouded the economic outlook. In response, the European Central Bank eased monetary policy by increasing and extending its bond-buying program again.

However, with the economic slowdown equity valuations remain more attractive than their U.S. counterparts. We are waiting for more clarity on the damage COVID-19 and Brexit is doing to the EU economy. And we will look for opportunities take advantage of the lower valuations – particularly in the U.K.

We are underweight Canada, but the economic outlook appears to be improving. Corporate earnings are at a two-year high. Oil prices have also rebounded to the US$50 a barrel range from US$40. Some forecasts suggest it could go as high as $60 if the economy recovers in the coming months.

Canadian consumers are also flush with cash. This, because of federal government support programs. Indeed, higher rates of saving over the last three quarters boosted savings by the equivalent of 6.8% of GDP ($151 billion). If consumers start spending this money, it could have a significant impact on the economy.

However, despite job gains nearly 750,000 Canadians remain unemployed. As well, we are concerned that home prices are overvalued in some areas of the country and could soften. And as we are in the U.S. with our rotation into value, we will look for opportunities to invest in areas of the Canadian market benefiting from a potential upswing in global growth. 

Tactical Highlights

Change   Rationale
Reduced underweight to Canada Could see further rotation into value
Reduced weighting in Canadian, U.S. government bonds See better yield alternatives
Overweight equities in general Optimism around vaccine, new U.S. president
Used options on value trade Expect rotation into value to continue

Tactical Allocations | Sun Life Granite Balanced Portfolio

The graph shows the tactical allocations for the sun life granite balanced portfolio. It is a stacked bar graph with each bar being the same height, representing 100% of the total asset allocation for the fund.  There are no numbers on the graph. It is intended to provide an approximate representation of the funds’ asset allocation.  The x-axis represents the months from December 2019 to November 2020.  The y-axis represents the percentage allocated to 12 asset classes as follows:  For November 2020, canadian equity, U.S. Equity, and international equity are large segments at the top of the bar, representing approximately 45% of the bar. Next, emerging market equity, global equity and real assets segments make up about 15% of the bar. Next, canadian bonds makes up approximately 20%. U.S. Bonds is approximately 5%, and the remaining 10% is comprised of global bonds, emerging markets bonds, high yield bonds and cash.  The months prior to November 2020 show variations of these values, illustrating shifts of asset allocation over time as some asset classes shifting the others higher or lower as a percentage of the total.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or other 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.

This document is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed or sub-advised by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

© SLGI Asset Management Inc., 2020. SLGI Asset Management Inc. is a member of the Sun Life Financial group of companies.