After a catastrophic 2022, fixed income securities are set to do well next year, financial advisers believe. Those who will rejoice are the holders of balanced portfolios who have suffered martyrdom this year.
As of December 20, a balanced portfolio, invested 60% in stocks and 40% in bonds, offered a negative return of 16% in 2022.
Everything suggests that it will be the opposite next year, say four investment advisers The Press has consulted.
“It has never happened in the history of the United States that stocks and bonds have had negative returns for two consecutive years,” said Sylvain Lapointe, investment advisor at Peak Securities.
Over the past 40 years, says Sylvain Lapointe, the average annual return on a 60/40 portfolio is 10.8%.
“It would not be surprising if in 2023, the Canadian bond index generates higher returns around 10%,” says Sylvain De Champlain, President of De Champlain Financial Group. “It’s still forecasts,” he insists. But we should be very pleasantly surprised by bond performances. According to him, a 60/40 portfolio will necessarily benefit from this.
More reserved, financial planner André Lacasse nevertheless expects a rebound next year. “Generally, with a 60/40 portfolio, we see a rebound the year following a negative year,” he points out, with a table in support. “When you have a good diversification strategy, it allows you to seek long-term stability despite rare years of negative returns,” he adds.
As much as 2022 has been a bad year for bonds, 2023 should be a great year for both bonds and 60/40, although some strongly suggest overweighting bonds for the first quarters, and I’m totally agree with them.
Jean-François Robert, mutual fund brokerage representative at Mérici Services financiers, in Sherbrooke
You have to go back to the 1930s to find a year as catastrophic as 2022 for a 60/40 portfolio, according to a compilation by New York University and featured in the blog of Ben Carlson, portfolio manager at Ritholtz Wealth Management .
In our example giving a return of -16% mentioned above, the equity part is composed of the exchange-traded fund (ETF) VIT Vanguard Total Stock Market, whose symbol is VIT, and the bond part by the ETF Vanguard Total Bond Market (BND symbol). The former has generated a return of -20% so far in the year; the second is at -12%. These are American ETFs. The weighted return of -16% does not take into account the effect of the exchange rate that a Canadian investor would have suffered.
What happened in 2022?
“What hurt bonds were the rapid rate hikes,” replies Sylvain Lapointe. There may still be rate hikes to come, but I don’t think they’re fast or there’s a lot left. That should help bonds from that perspective. However, he remains more reserved about the expected return on equities in 2023.
Usually, bonds are used to diversify a portfolio, as they have a low correlation with equities. When stocks are doing well, bonds are quiet.
When stock prices fall, bonds generally outperform. In 2022, the values of both asset classes, whose valuations were inflated, have plummeted.
“We had the worst year for a hundred years in the bond market,” said Sylvain De Champlain. What hurt was that we had no place to take refuge [à l’abri des mauvais rendements], except in energy. »
The fixed income portion of a portfolio
A bond portfolio is invested in various government issuers, which are safer, and companies, which give a better return. It distributes the deadlines over time. It can also be diversified internationally.
The longer the duration of a bond portfolio, the greater its sensitivity to a rate variation. The duration estimates in years the time to repay the initial investment made by the bondholder, taking into account the interest coupons attached to it.
An investor buys bonds individually or invests in units of exchange-traded funds or bond mutual funds. These can be index-based or actively managed by a professional manager.
In the current context, our financial advisors recommend the purchase of actively managed funds to take advantage of high market volatility. Two experts, Sylvain De Champlain and Sylvain Lapointe, like the Manulife Strategic Income FCP, actively managed, whose management fees amount to 0.89% for the F series. Its real duration reaches 4.77 years. Mr. De Champlain also invests in the Dynamic Premium Obligations FCP, managed by Derek Bastien.