VELA Podcasts

In this podcast, Keith Allan of Harness Investment Management and Rob Wallis discuss positioning for portfolios and investment markets over 2023. They go through the current themes in asset allocation in portfolios given the current economic backdrop and what may happen in the coming year. They also discuss the recent talk around interest rates and the effects on growth and returns in the coming twelve months.

 

 

About the Guest – Keith Allan

Keith Allan is a Portfolio Manager with Harness Investment Management. Harness has engaged in a strategic partnership with VELA Wealth and provides discretionary portfolio management for many of VELA’s clients. With more than 15 years of buy-side investment management experience, Keith brings a wealth of knowledge and experience to provide insight and guidance to clients regarding their investment portfolios. At Harness, Keith is responsible for developing and maintaining investment portfolios for VELA clients. Keith is dedicated to fostering long-term relationships with high-net-worth individuals and families by providing a clear and transparent vision to help them achieve their investment goals. To learn more, please visit Harness Investment Management team page.

About the Host – Rob Wallis

Rob has been providing expert planning and strategic advice for nearly 20 years, and has been with VELA Wealth since 2016. Rob excels at working with entrepreneurial professionals and business owners to define their individual ecosystems and establish meaningful life and financial goals. A methodical and analytical thinker, Rob compassionately navigates clients through the complexities of a thorough financial planning process ensuring that they feel understood and supported throughout. To read more, please visit the VELA team page. 

 

 

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Disclaimer

The information expressed in the podcast is designed for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

 

The Podcast Transcript

 

Rob Wallis:

Welcome to VELA Wealth Polestar podcast. It is a pleasure to be interviewing Keith Allan from Harness Investment Management. Today we’re going to be talking about positioning, not predictions, for portfolios and investment markets over 2023, and we are deliberately not seeking a prediction from Keith as we don’t want to hold him to it. That said, we’re aware that lots of predictions do not come to fruition, so hence the title of this podcast is “Positioning, not predictions.”

So, with that in mind, Welcome Keith! What themes are we currently seeing in asset allocation in portfolios given the economic backdrop? What may be happening this year?

 

Keith Allan:

Well Rob, thank you again for having me. I certainly enjoyed the last time you had me on and I feel fortunate to be back.

Yes, positioning, not predicting. It’s always tricky to predict what’s going to unfold and manifest in capital markets, so I think giving clients and folks out there a better idea of how we have positioned ourselves would be certainly appropriate. With respect to the asset allocation, fundamentally, our position hasn’t changed over the last 18 months. For us at Harness and for the work we do with VELA clients, I think you would agree that our position has always been the same–that diversification is a key. We are a big believer in positioning clients’ portfolios with a mix of equities, fixed income, cash, and alternatives, and that hasn’t changed.

How do we tilt those asset classes, have perhaps evolved over the last 18 months. I think given the current economic climate, we’ve been more aware of using alternatives and real asset classes to a higher percentage, certainly being aware of what’s going on in the fixed income environment and how those assets have certainly underperformed, and what types of equities we’re holding. But we still believe in those four main asset classes, and we still make up the bulk of our portfolio allocation.

 

Rob Wallis:

So, lots of talk recently has been around interest rates and it’s super interesting to see higher interest rates again. It’s been at least a decade since we’ve seen any meaningful returns in cash as an asset class. We’ve always believed cash is an important asset class to hold because it provides opportunities to people to seek returns for that. That said, obviously, we’ve got inflation that’s driving higher interest rates to an extent. Given that backdrop now that we can see some meaningful returns, for example through the cash product that Harness has, how do you see interest rates affecting growth and returns in the coming 12 months?

 

Keith Allan:

I think that’s a great point, Rob. We are actively marketing and saying that cash is asset class – a true asset class now because you can use cash to get a yield north of 4% – 4.5% in some cases, which is meaningful for clients, especially those that want to keep their cash available and keep that dry powder available for opportunities. So, we are using cash as an asset class. We highly encourage it for clients, and the purpose of high interest savings we use for our clients as a cash position is yielding north of 4.5% right now. So, it’s certainly appropriate for those that want to keep cash now. With the second part of your question – with respect to interest rates and fixed income assets – everyone knows that as interest rates rise, fixed income assets fall. It’s an inverse relationship. We can spend the whole podcast talking about how and why that works, but folks don’t want to hear that. But the reality is, that’s what happened. So, as we’ve seen, interest rates have risen over the last 18 months, the capital depreciation of fixed income assets has taken place, and we’ve seen fixed income assets, most notably bonds, decrease in value. So, the question is then how do we utilize fixed income as an asset class? I think people have to understand that we use fixed income as a hedge in our portfolio. So, fixed income is not built into the portfolios to attract meaningful gains and show tremendous amount of capital appreciation, because that’s not what it’s there for. It’s there to provide a hedge, and yes, the assets have decreased in value, but over the long-term fixed income will do its job by providing a hedge against equity volatility and other volatility with alternatives. It’s there to provide us Gettys distribution of income in the form of the coupon, the bonds pay, and in most clients’ portfolios, those ETFs that synthetically hold the bonds or capture the bonds and pay out the distributions. So, while the assets themselves have decreased because of the rising interest rate environment, we still see them as a significant part of our portfolios, and we’ll continue to be that hedge against equity volatility. I think there was the third part of the question was what about interest rates? Well, certainly seeing interest rates rise to unprecedented levels over the last year and a half. It appears now that those interest rate hikes are on the path to stability. I don’t think, and in my estimation, we’re going to see the 100-basis point or 75-basis point hikes that we saw in the middle of 2022. That being said, it’s looks like there’s going to be 1/4-point hike here in Canada over the next couple of weeks. I can’t say for certain if that will be the last one or if we might see another quarter point hike in March, but certainly I think the days of drastic hikes in interest rates are potentially behind us.

 

Rob Wallis:

So, has the Bank of Canada achieved its mandate to control inflation?

 

Keith Allan:

I would say absolutely. It’s on the path to achieving it. I don’t know if it’s actually achieved it yet. I read today that the inflation rate in Canada has fallen to 6.3%, which is significantly lower than the north of 8% it was in mid-2022 or in third quarter of 2022, so it’s down to a level of that while still high, I think more in line with the expectations the Bank of Canada would like to see. So, in that way, it’s working. I don’t think it has achieved it yet, which is why I still feel like we may be in line for a 1/4-point hike here at the end of January. It’s a lengthy process, it doesn’t happen overnight as people have seen in a very painful way. But it’s getting there, and I am of the belief that if we were to have this podcast 12 months from now, we would look back and say that it has gotten there, it’s just going to take some time.

 

Rob Wallis:

All right. So, in terms of interest rates and how long they’re going to stay where they are, what are your thoughts and how that’s priced into asset values?

 

Keith Allan:

Well, I think about what we’ve seen here since the calendar flips of 2023, so the first two and a half weeks of the year we’ve seen a nice little bump, a nice little rally in capital markets, and I think that’s indicative of the fact that people feel like the worst is behind us, that we are now in an environment where there might be a small rate hike. But there is a higher probability of interest rates staying Status-Quo for the rest of 2023, then there is a significant rate hike. So, when that sort of filters down or cascades down in the economy, people become bullish in the sense that if interest rates have plateaued or if at some point over the next 24 months they might start getting cut that provides an environment for growth and  the sectors we saw really sell off like technology that are highly interest rate dependent, those types of names or securities or equities will show the most growth. We’ve seen that here in the first two and a half weeks of the year when the market has rallied. I’m reluctant to call it a bear market rally, I’m reluctant to call it a new bull market. I don’t think there’s any term for it. I think it’s just a matter of sentiment amongst consumers and investors that think that the worst could be potentially behind us and there could be a climate for growth here in the next six to eight months.

 

Rob Wallis:

So where is the capital heading right now?

 

Keith Allan:

Do you mean what asset class, or do you mean just in general?

 

Rob Wallis:

What asset class?

 

Keith Allan:

Well, we’re starting to see money filtered back into equities, which over time, equities have empirically proven that they are the best performing asset class out there. Certainly, that hasn’t been the case over the last 18 months, but repeatedly people gravitate towards that asset class. So, I think we are seeing more liquidity in the market. We’re seeing more capital enter traditional equities, but I still feel like people want an alternative, they want the ability to diversify their portfolio via private equity, private debt, alternatives, real assets, infrastructure, commodities. So, I think we are, and we will continue, seeing the capital deployed in those areas as people want to find the way to generate alpha. I know you speak a lot to your clients about that the days of the sort of 70/30 portfolio is an antiquated way of thinking about investing. I see a lot of people feel that way too – you’re not going to gain meaningful returns by just simply saying 60/40, 60 equities, 40-somethings income – set it, forget it, it’s done. It is very difficult to achieve meaningful alpha in your portfolio by doing that. So, for our clients we’re looking to deploy their capital in other areas.

 

Rob Wallis:

Got it. So, what positioning are you taking in alternatives right now?

 

Keith Allan:

That’s a good question, and it’s a great segue into the new portfolio that Purpose Investments has launched. They’re calling it the Alternative Completion Portfolio, or in short form Liquid Alts. This is a portfolio that was launched right before Christmas, and one that we’re beginning to put clients into, where appropriate of course. It’s effectively a portfolio that allows clients to gain access to real assets, infrastructure, some hedge funds, commodities, and a little bit of crypto, in a very liquid fashion, in the sense that their money isn’t tied up, there’s no lock up, period – it’s a liquid portfolio. All of its products within the portfolio are mark to market daily and have daily liquidity, but it is allowing clients to gain access to non-traditional asset classes and we’re really bullish on this portfolio. We think it will be a great way for clients to hedge their position, allow them entry into asset classes that they otherwise wouldn’t get without their money managers or other investment professionals. So, that’s one way we’re allowing clients to gain access to alternatives.

 

Rob Wallis:

What about crypto as an asset class? It has been interesting few months there. I’m sure some people are pleased with the predictions that they made in the past about what’s happened. What are your thoughts on crypto as an investment, and if it’s appropriate, what type of allocation would you put somebody in, at all?

 

Keith Allan:

Well, I will go on record, Rob, saying that my position on crypto has changed and I think anybody that reads my quarterly articles, or my quarterly updates knows that I was dead set against it a year ago, maybe a year and a half ago. I wouldn’t say that I’m backtracking on that. I still don’t feel that it is an asset class that has substantial fundamental prospects where it can be something where you want to hold 10%, 15% or 20% of your portfolio. That being said, I do feel that there is a small place for it in a very small percentage in one’s portfolio. In this Alternative Completion Portfolio, for instance, it holds the 2,5% weight. So, I think I’m becoming a little more flexible in my thought process there. No doubt it’s sold off considerably, and we’ve seen volatility in that asset class that would make a lot of people nervous, but it is also showing over the last several years that there’s potential for some meaningful gains there. So, I think having it in a 1.5% to 3% weight in your overall portfolio would certainly be appropriate.

 

Rob Wallis:

As we look to the year ahead, what risks do you see out there that could affect economic growth and stability for Canada specifically?

 

Keith Allan:

Well, I think people are very worried about the recession, whether we’re entering a recession or not. When I look at what the climate is and the current conditions of the economy, I feel like we’re there already. And I suppose if interest rates continue to rise, which again, I’m not so sure they will, that could provide some serious headwinds, but overall, I’m bullish on what 2023 has in store. I think the first half might be touch and go, but I certainly feel there’s opportunity for growth in the second half.

 

Rob Wallis:

For Canada specifically, or overall, for the global economy?

 

Keith Allan:

For Canada specifically. Again, it’s such a commodity driven country, and whether you are for or against energy and crude and oil and all of that, the reality is, oil is such a big part of the Canadian landscape and we’re in a full market for oil. And yes, a lot of that has to do with the war unfolding in Ukraine. When we look at other resource commodities, it’s a good place to be right now – and those stocks are the ones that have been best performing. So, I think Canada is in a strong position and as I said, I’m bullish on what 2023 has in store. I don’t believe we’re in a bear market rally. I think this is the beginning of what could be a very promising year, but I think it’ll take time. It’s not going to happen in Q1, unlikely in Q2. I think we won’t see some meaningful gains until the latter half of the year.

 

Rob Wallis:

Well, that kind of sounded like a prediction case.

 

Keith Allan:

No, no predictions.

 

Rob Wallis:

Would it be fair to say that you’re positioning portfolios to take advantage of any growth that happens and you’re not overly defensive right now?

 

Keith Allan:

I think right now we’re still remaining a little bit defensive. Our cash position is high, we’re encouraging clients to keep dry powder available to keep that cash on hand. As we progress through Q1 here in Q2, our cash positions for clients will probably start to hold a lower weight in cash and start to employ some of that capital elsewhere. We haven’t made any huge fundamental changes to the portfolios post-Christmas. We made a few model changes prior to Christmas. But overall, we’ve kind of stayed the course here and our clients are starting to see some meaningful gains, especially over the last three months. So, I think overall we’ll always look at ways we can improve our clients’ portfolios, but I think our positioning is quite strong right now. As the year unfolds, we’ll look at what tactical decisions we can make to continue to achieve meaningful gains for our clients.

 

Rob Wallis:

Got it, Keith. So, final question, how positive are you that we will end the year in a positive space?

 

Keith Allan:

I’m very confident about it. I feel like the first half will be kind of touch and go similar to what we saw in the latter half of 2022, but I think as we enter the second half of 2023 we’ll be able to see some meaningful advancements in capital markets and as such in our clients.

 

Rob Wallis:

And you’re positioned to take advantage of all of these upsides, as well as protect from any down position.

 

Keith Allan:

Absolutely. You never want to be reactionary in our industry. We want you to be forward-looking; you want to anticipate and be able to act before the market does and I feel like we put ourselves in that position.

 

Rob Wallis:

Awesome. Keith, thank you for your time. It’s a pleasure to have you on the Polestar podcast and we look forward to welcoming you back at the end of the year and we’ll see what happens.

 

Keith Allan:

Thank you, Rob.

 

Disclaimer

The information provided in the podcast transcript is designed for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.