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Granite Managed Portfolios Tactical Update

February 2021

Opinions as of March 15, 2021

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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.

Rising interest rates and inflation (the market’s nemesis) haven’t been a factor since the COVID-19 sell-off a year ago. All that abruptly changed in late February when hints of inflation, triggered by the tidal wave of economic stimulus, caused rates to rise. With that, bonds sold off, with the yield on U.S. 10-year Treasuries surging to 1.61%. Growth stocks with stretched valuations (the most vulnerable to higher rates) also fell sharply.

The turmoil in the market didn’t last, with bond yields retreating, while inflation remained near zero. Still, the shift from growth to cyclicals and value stocks – the so-called reopening trade – quickened. Now, with the market rally broadening out, we are moderately bullish and slightly increased our overweight position in equites to 3.5%.

Within our portfolios, we remained overweight U.S. and emerging market equities. With the slower pace of the European economic recovery, we are neutral on international equities. As well, we are neutral on Canada, but think it’s possible that the S&P/TSX Composite Index may perform better this year if the cyclical rotation continues.

Concerns over inflation and rising interest rates will likely continue to hang over both bond and equity markets. Those worries could grow with investors questioning how long the U.S. Federal Reserve will stay on hold if the economy surges later in the year. Certainly, as we witnessed in the latest sell-off, the bond market is nervous. And as the rout in longer-dated maturities accelerated, our decision to underweight Canadian and U.S. investment grade bonds proved timely. For now, we are holding to our underweight position. In terms of high yield corporate bonds, spreads have tightened and we remain neutral.

On the equity side, we are positive on the U.S., where two million people a day are being vaccinated. At the same time, President Joe Biden’s US$1.9 trillion-dollar stimulus plan is being rolled out. Moreover, the American economy is expected to accelerate rapidly toward the end of the year, with the Conference Board calling for a 5.5% jump in U.S. GDP. 

As such, at 1.6% the U.S. is still our largest overweight and we added slightly to our position. We had anticipated that the market would shift away from growth stocks as the economy reopens and we took profits. As we did, we started to move into value stocks and cyclicals, including industrials, materials and small- and mid-cap stocks. As well, to add further exposure to value, we used derivative trades through the Sun Life Granite Tactical Completion Fund.

There is nearly US$20 trillion in monetary and fiscal stimulus sloshing through the global economy. As the economy improves, with the reopening trade accelerating, we believe emerging markets will outperform their developed counterparts. Indeed, the IMF predicts India and China will grow by 11.5% and 8.1% respectively in 2021, more than double its estimate for the global economy. Given this strength, we have added to our overweight position and are looking across emerging markets for opportunities to increase it further.

In terms of international equities, the slow roll out of vaccines and continued lockdowns have hurt the European economy. Indeed, there is the possibility of a double-dip recession, before an anticipated rebound later in the year. We are cautious, and moved from overweight to neutral. Even so, European markets are more value based and could still outperform the S&P 500 this year, and we may add to our position at some point in the coming months.

We are growing more positive on Canada – moving from underweight late last year to neutral in the first quarter. As noted, the S&P/TSX Composite Index performed well in 2020 despite the pandemic, low oil prices and high consumer debt levels. But it still underperformed other major equity indexes.

However, if the global economic recovery picks up, we believe the S&P/TSX Composite Index, which has outperformed other markets in recent months, may continue to do so. This, given its large exposure to metals, mining, financials and oil. Indeed, benchmark West Texas Intermediate jumped from US$48 a barrel on January 1, to almost US$67 on March 5. 

Tactical Highlights

Change   Rationale
Added to emerging market weighting Expect emerging markets to outperform 
Continued to shift into value and cyclical stocks  To participate as recovery broadens 
Underweighted investment grade bonds vs. high yield bonds Rising interest rate risk

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 FEBRUARY 2020 to FEBRUARY 2021.  The Y-axis represents the percentage allocated to 12 asset classes as follows:  For FEBRUARY 2021, 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 FEBRUARY 2021 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., 2021. SLGI Asset Management Inc. is a member of the Sun Life Financial group of companies.