Great Lakes Investment Group
February 01, 2024
Money Financial literacy EconomyFinding Balance in Your Investments Once Again
At Great Lakes Investment Group, we’ve relied on balanced and diversified portfolios to help build a Financial Blueprint that works well for them. It is prevalent for all clients to strive for a balance between capital appreciation and capital preservation as they approach their retirement age. And risk mitigation is always top of mind.
However, we’ve experienced historically low yields for fixed income across the board for the last decade. The 10-year average yield on Canadian 3, 5, and 10-year bonds is 1.52%, 1.61%, and 1.88%, respectively.[i] If we use any of these securities as a proxy for high credit-rated fixed Canadian income yields, it isn’t difficult to conclude that the fixed income portion of balanced portfolios hasn’t been adding much to the total return of those investments.
If we look at the benchmark for Canadian balanced funds, the 10-year annualized rate of return comes in at 5.43% net of fees.[ii] If the S&P/TSX Composite Index over that same time returned 7.62%,[iii] we can certainly infer that the fixed income portion of those funds wasn’t exactly helping to add anything positive to the mix.
Since the spring of 2021, we’ve all heard a lot about inflation,[iv] and the increases in the rates from the central banks worldwide. A year later, in the spring of 2022[v], work started to help combat inflation, and in Canada, the overnight rate climbed from 0.50% to 5.25% since the battle first began.
If rates continue to rise, one can expect to see an improvement in the fixed income side of balanced portfolios. That’s precisely what’s been happening. If we look at Canada’s most popular ETF bond as a proxy for that asset class, we see that ZAG’s annualized weighted yield to maturity is over 4% in January 2024[vi]. At 4%, this asset class is now a positive contributor to your targeted rate of return to reach your Financial Blueprint goals. It’s a far cry from what we’ve been experiencing for years.
What does this mean for your portfolio?
In the absence of an acceptable rate of return from traditional fixed income, Canadian investors have been forced to look for other sources of return to replace it. While this absence has spawned the accessibility of institutional alternative income investment options, traditionally not available at the retail level, not all of those may be a good fit, acting as fixed income replacements for every investor. At Great Lakes Investment Group, our due diligence and thorough investment selection process allows us to offer a selection of reliable investments to help mitigate risk and give our clients what they need to meet the goals of their Financial Blueprint.
As an integrated team of experts, we welcome the revitalization of the traditional fixed income asset class. Its mere existence affords our clients a more comprehensive range of options for seeking returns while managing the risk and volatility of their overall portfolios. Feel free to connect should you feel you need a second opinion on your overall financial plan.
[i] Canadian bond yields: 10-year lookup - Bank of Canada
[ii] Canadian Mutual Fund Search – Mutual Funds, Segregated Funds, Pooled Funds, Hedge Funds | Fundata Canada Inc.
[iii] S&P/TSX Composite Index Performance & Stats (ycharts.com)
[iv] Canada Historical Inflation Rates - 1989 to 2024 | Inflation Rate and Consumer Price Index (rateinflation.com)
[v] Canadian interest rates and monetary policy variables: 10-year lookup - Bank of Canada
[vi] BMO Aggregate Bond Index ETF ZAG | BMO Global Asset Management (bmogam.com)