Sun Life Granite Managed Portfolios

Fund commentary | Q4 2023

By SLGI Asset Management Inc. Opinions and data as of December 31, 2023 unless otherwise noted. 

Q4 Tactical asset allocation

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 Q1 2021 to Q4 2023.  The Y-axis represents the percentage allocated to 12 asset classes as follows: For Q4 2023, 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 12%, and the remaining 10% is comprised of Global Bonds, Emerging Markets Bonds, High yield bonds and Cash. The quarters prior to Q4 2023 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.

Allocations are as at quarter-end and subject to change without notice. The graph above provides an at-a-glance comparison short-term portfolio allocations (tactical). With this information you are able to see how the portfolio composition reflects our investment views, and how the composition evolves over time in accordance with an ever-changing market environment.

Key tactical changes

  • Our tactical weights are broadly neutral across equities and bonds
  • Within equities we are neutral across various geographies across the U.S., Canada, Euro zone and emerging markets. While valuations look rich in the U.S., growth concerns will likely challenge geographies outside the U.S.
  • Within bonds, we are overweight high-quality credit with a preference to investment grade U.S. fixed income and Canadian government bonds
  • We are underweight high-yield fixed income as we estimate the risk-reward ratio of this asset class to be less favourable

Equity and bond markets rallied during the final two months of the fourth quarter (Q4) of 2023. That was in stark contrast to the volatility financial markets experienced in October, when 10-year U.S. Treasury yield spiked to a 16-year high of 5%. But a slew of reports showing slowing inflation and moderate but still growing job numbers injected momentum back into markets in Q4 2024. Also, a clear message from the Fed signaled that interest rates have peaked. Markets then climbed higher and seemed to overcome geopolitical uncertainties.

All this pushed down the 10-year U.S. Treasury yield to below 4% in late December. Encouraged by easing in financial conditions, the benchmark S&P 500 index jumped almost 24% in 2023. Euphoria about artificial intelligence helped the tech-heavy Nasdaq-100 index post its best performance since 1999. After two bad years, bonds found their footing too. The Bloomberg Global Aggregate Total Return Index jumped 10% in the final two months of 2023, its best two-month performance since 1990. 

While markets had an impressive run in 2023, we expect economic data to get a bit noisy over the next while. For instance, inflation, which trended down nicely for the past few months towards the Fed’s target of 2%, hit a bump in December. The U.S. Consumer Price Index (CPI) increased 3.4% in December, the highest since September. While services costs remained steady, goods disinflation showed signs of stalling. Markets currently expect the Fed to cut rates as early as March. In our view, this is only possible if inflation continues to fall consistently. That said, we expect the Fed to renew its focus toward growth and full employment in the months ahead.

The U.S. economy defied all recession forecasts and posted robust economic growth in 2023. We think this will be challenging to repeat in 2024. As consumer savings dwindle and nominal corporate profits normalize from slowing inflation, 2024’s growth numbers are likely to be lukewarm. While the U.S. has largely been resilient to rising interest rates, other global economies are struggling to keep up. Our indicators show that the outlook for manufacturing outside the U.S. has worsened. The sector has come under pressure in the Euro Area, U.K., Canada and Japan. We expect manufacturing challenges to pressure overall growth in these regions.

Further, we expect monetary conditions in the U.S. to set the tone for economic growth in other countries. If the Fed doesn’t cut interest rates by as much as expected, this could lead to tighter financial conditions for much of the developed world outside the U.S. and for emerging markets.

Given this scenario, we are largely neutral in our positioning. Our tactical equity and bond weights are close to our strategic weights. Within equities, we are neutral across geographies including the U.S., Canada, other developed markets and emerging markets. Within bonds, we prefer higher quality issues that can withstand credit market volatility. Given the lagged effects of tighter monetary policy, we expect U.S. core fixed income and higher quality Canadian bonds to perform better than risky credit in a scenario of slowing growth. We are less constructive about the conditions in high-yield markets. Despite the historic pace of rate hikes in the past two years, high-yield spreads remain low. We feel the risk-reward from high-yield bonds are disadvantageous and are underweight this asset class. 

Contributors (+) and detractors (-)

SUN LIFE GRANITE CONSERVATIVE, MODERATE, BALANCED, BALANCED GROWTH & GROWTH PORTFOLIOS

+ Underweight cash in favour of bonds

+ Fixed income managers

+ Real assets and Canadian equity managers

- U.S. and international equity managers

SUN LIFE GRANITE INCOME & ENHANCED INCOME PORTFOLIOS

+ Cash underweight

+ Fixed income managers

+ Real assets and Canadian equity managers

 

- International equity managers

- Quality versus credit overweight in U.S. bonds

View fund performance (Series F)

 

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 by SLGI Asset Management Inc. These views are subject to change and are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. This commentary is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this commentary 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.

The indicated rates of return is 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.

This commentary may contain forward-looking statements about the economy and markets, their future performance, strategies or prospects or events and are subject to uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.