Balanced Strategies

January 2024

 

2023 began with considerable uncertainty about future inflation, interest rate increases or decreases, and problems in the banking sector. Nevertheless, global equity and bond markets experienced a strong rally in the fourth quarter, ending the year on a high note. As inflation data and central banks messaging moderated in the second half of the year, interest rates peaked in mid-October, pushing both equity and bond prices higher.

Mega-cap stocks led the way, with the “Magnificent Seven” accounting for almost half of the MSCI All Country World Index (ACWI) returns for the year. Excluding the largest mega-cap stocks, small-caps and large-caps performed broadly in line with each other, returning close to double digits, and growth stocks outperformed value stocks over the year.

Overall, the strategies maintain a balanced approach to asset allocation with the aim of reducing volatility through effective diversification. Pembroke’s balanced strategies also have a general preference for smaller quality growth companies relative to their benchmarks.

Global Balanced Strategy

Pembroke’s Global Balanced Strategy invests primarily in Pembroke-managed active equity funds, externally managed active equity and fixed income funds, and externally managed passive funds (Exchange Traded Funds or ETFs). The strategy has a bespoke benchmark with the following three allocations: 30% FTSE Canadian Universe Bond Index, 45% MSCI All Country World Index (ACWI), and 25% S&P/TSX Composite Index.

The objective of the strategy is to provide long-term capital appreciation and income through a diversified exposure to global equities and bonds. The strategy also has the flexibility to invest in publicly traded real assets such as gold. It is diversified by asset class, geography, sector, style (value versus growth, or large capitalization versus small capitalization), manager and approach (active versus passive).

The strategy generated positive absolute returns in the fourth quarter of 2023, outperforming the benchmark, which rose slightly less. Over the period, the strategy generated positive absolute returns from equities, fixed income and the gold allocation. The outperformance relative to the benchmark was driven by the strategy’s equity allocations and the gold ETF. However, this was offset by the three bond holdings, which underperformed their respective benchmark components over the period. This was due to the manager maintaining a shorter average duration than the index during a period of falling interest rates.

Over the 12-month period ending December 31, the strategy rebounded from its lows of the previous year to end the period significantly higher, but underperforming its benchmark, which rose slightly more over the same period. All of the strategy’s asset classes and underlying funds contributed to absolute returns. On a relative basis, Canadian equities and fixed income outperformed, while US and international equities underperformed their respective benchmark components. The gold allocation was in the middle of the pack, outperforming fixed income but underperforming the equity components of the benchmark.

At the end of December 2023, the strategy’s bond allocation represented approximately 22.1% of the portfolio. The cash and gold bullion ETF allocations were approximately 3.2% and 4.25% of the holdings, respectively. The strategy remains diversified across asset class, geography, sector and style. Its equity and fixed income managers continue to actively seek new opportunities.

Canadian Balanced Strategy

The Pembroke Canadian Balanced Strategy posted strong returns over the past twelve months. The equity portion of the portfolio, represented by the holdings in the Pembroke Dividend Growth Fund (see Canadian Equity Strategies), showed strength during the period, rallying from bear market lows as investors looked through an uncertain economic environment to the longer-term prospects of an eventual recovery. Meanwhile, the fixed income part of the strategy, represented by the Pembroke Canadian Bond Fund (see Fixed Income Strategies), posted gains in 2023 as interest rates retreated from their peaks and coupon income was collected.

Income in the balanced strategy comes from a combination of dividends and interest. The equity portion has a current gross annualized yield of 3.6%, while the fixed income portion is primarily invested in securities rated A+ or higher with an average collective yield to maturity of 4.7% and an adjusted portfolio duration of 6.3 years. Minor changes were made to the asset mix of Pembroke’s balanced mandates during the year, with approximately 28% of the portfolio invested in fixed income as of December 31, 2023.

 

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