Decision by Committee (August 21, 2024)

This commentary is authored by the Guardian Capital LP Asset Mix Committee (AMC)1

Financial markets experienced heightened volatility since the AMC last met in June, however, the underlying backdrop has undergone little by way of material changes in the interim period.

Indeed, while there was a run of underwhelming data in the US through the end of July, punctuated by a soft (and likely hurricane-impacted, though still not outright bad) US jobs report in the first week of August, the dataflow since has proven stronger and reaffirmed that the American economy remains on a positive trajectory and price pressures continue to wane.

There remain downside risks to the outlook that suggest a non-zero possibility of a more significant economic slowdown, however, the baseline forecast remains one of broadening modest growth momentum (with the US still leading the way), moderating inflation and declining policy interest rates. This would appear to be supportive of earnings and represent a constructive backdrop for markets.

To the extent there has been a material change concerning the path forward, recent rhetoric from central banks has placed added emphasis on downside risks to employment (and, as such, growth) which suggests that the pace of monetary policy easing may be somewhat faster than previously assumed — it now appears that rate cuts will most likely occur at every decision date into next year, rather than potentially a more gradual pace (such as every other meeting).

The knee-jerk selling of risk assets in early August has since reversed course with equities trading back near prior peaks and credit spreads narrowing in an apparent acknowledgement that the sharp rise in concern over the outlook may have been overblown.

Bond yields, however, remain notably below their earlier levels, which may suggest a greater embedded risk of recession. That said, the market pricing of central bank policy paths appears reasonable right now and risks seem somewhat balanced — a material turn for the worse in the data could drive a rally in bonds that price-in added policy support, while positive data that would affirm a “soft/no landing” outcome (and more gradual pace of policy easing) could see rates revisit earlier levels, particularly at the front-end of the curve.

In terms of equities, the recent market spasm saw better relative performance of quality growth and more defensive equity strategies that have underperformed the historically narrow performance of the last two years — the subsequent rebound has largely unwound these performance gains.

As a result of this, and with the general improvement in corporate profit expectations following the latest earnings season, relative valuation discounts of segments of the market outside of US mega-cap technology names have returned to extremes and, arguably, represent attractive entry points.

The AMC remained comfortable with its overall exposures to Equity and Fixed Income, however, changes were made to allocations within asset classes.

Within Canadian Equity, the AMC decided to increase its exposure to the Equity Income strategy that is biased toward more defensive and “bond proxy” segments of the market, with the funds being taken from the more growth-oriented Canadian Equity strategies.

In Global Equity, the decision was made to make a shift from the Global Dividend Growth mandate to the quality growth-focused Fundamental Global Equity strategy. As well, in an effort to narrow the underweight to Japanese equities, while maintaining a slight value bias that serves as a complement to other exposures, the decision was made to shift the entire allocation from the non-US-focused International Equity Select strategy to a passive allocation in a Japan Value Equity ETF.

For Fixed Income, the decision was made to draw down the cash balances — the looming prospect of declining short-term interest rates makes deploying cash further out the curve more compelling — and reallocate to the mid-term-focused Investment Grade Corporate Bond strategy. Similarly, it was decided that the small allocations to the Strategic Income (which focuses on below-investment-grade debt issues) and Short Duration Bond strategies would also be shifted to the Investment Grade Corporate Bond mandate in an effort to increase the overall quality and duration of bond exposures.

As a result of these decisions, the AMC’s target allocation mix remains overweight Global Equity with a bias toward Quality Growth strategies. Fixed Income target allocations are skewed toward corporate credit and modestly below benchmark duration.

The AMC will continue to monitor economic and market developments closely in the coming weeks and stands ready to tactically exploit opportunities that may present themselves.

 

Asset Mix Committee Summary Views2
Conservative Asset Allocation

Fund Benchmark* New Target Allocation** Changes from pre-decision positioning**
Equity 30.0% 34.7% –
Canadian Equity 17.5% 17.2% –
Canadian Equity 6.7 -0.4
Canadian Focused Equity 4.7 –
Canadian Growth Equity 4.6 -0.4
Canadian Equity Income 1.3 +0.8
Global Equity 12.5% 17.5% –
Global Dividend Growth 5.5 -0.4
US All Cap Growth 4.3 –
Fundamental Global Equity 4.3 +0.4
Emerging Markets Equity 2.0 –
US Equity Select 1.0 –
Japan Value Equity Index ETF 0.4 +0.4
International Equity Select 0.0 -0.4
Fixed Income 65.0% 65.3% +3.0
Canadian Bond 47.9 –
Investment Grade Corporate Bond 17.4 +4.9
Short Duration Bond 0.0 -1.9
Cash 5.0% 0.0% -3.0

*Benchmark= portfolio strategic asset allocation **Figures may not add up due to rounding

 

Growth Asset Allocation

Fund Benchmark* New Target Allocation** Changes from pre-decision positioning**
Equity 70.0% 77.2% –
Canadian Equity 40.0% 37.9% –
Canadian Equity 13.7 -1.0
Canadian Growth Equity 12.2 -1.0
Canadian Focused Equity 9.0 –
Canadian Equity Income 3.0 +2.0
Global Equity 30.0% 39.3% –
Global Dividend Growth 12.9 -1.0
Fundamental Global Equity 10.5 +1.0
US All Cap Growth 9.5 –
Emerging Markets Equity 3.5 –
US Equity Select 2.0 –
Japan Value Equity Index ETF 1.0 +1.0
International Equity Select 0.0 -1.0
Fixed Income 25.0% 22.8% +1.9
Canadian Bond 17.2 –
Investment Grade Corporate Bond 5.6 +3.1
Strategic Income 0.0 -1.2
Cash 5.0% 0.0% -1.9

*Benchmark= portfolio strategic asset allocation **Figures may not add up due to rounding

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Guardian’s Asset Mix Committee (AMC) consists of investment professionals and asset class specialists and is charged with overseeing the development and management of multi-asset investment portfolios, specifically addressing asset mix composition/allocation and areas for advice or communication to such clients as it relates to the makeup of their
portfolio.
2 These Asset Allocations represent the Asset Mix Committee’s tactical views given their assessment of market conditions and performance expectations.

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Published: September 6, 2024