Our Flight Plan for 2024

4 minute read • January 31, 2024

Navigating investment markets can be a challenging endeavour.

  • What should my asset allocation targets be?
  • Should I favour equities or fixed income relative to my long-term strategic asset mix?
  • How should I allocate my equity exposure regionally within the growth side of my portfolio?
  • Should I consider alternatives?

Several questions plague investors with uncertainty and doubt in their decision-making. The Matco Balanced Fund is a holistic investment solution that not only answers these questions but implements them dynamically as the investment landscape evolves.

In the Matco 2024 Outlook: The Year of the Landing, we assess three potential paths for the future of the economy:

  • Optimistic scenario: The immaculate soft landing, wheels touchdown perfectly with a probability estimate of 15%
  • Baseline scenario: The turbulent landing, wheels hit hard, bumps and jumps while the cabin rattles with a probability estimate of 65%
  • Pessimistic scenario: Crash landing, nose into the asphalt belly of the plane skids along the tarmac with a probability estimate of 20%

The dynamic asset mix of the Matco Balanced Fund considers each of these scenarios and their respective probabilities. The result is our current investment mix, with a flight plan prepared to implement as the markets evolve in real-time.

The current yield or income the fixed-income asset class offers is too healthy to ignore. Yields in the 4% to 5% range mean that fixed income is now in a much better position to compete with equities. The equity risk premium highlights the attractiveness of fixed income relative to equities. It’s not suggesting that the relative outperformance of the fixed-income asset class is a sure thing. Instead, the risk-relative-to-return potential of a bond portfolio is compelling. Our range of scenarios shown above also communicates a greater probability of economic deceleration than growth. It translates to the likely path for interest rates being lower by the end of 2024, not higher. The result is additional capital appreciation for bonds.

The scenarios also don’t ignore the possibility of an immaculate soft landing. If a soft landing occurs, equities are likely to outperform bonds. Given the current economic landscape, focusing an equity allocation on regions, sectors, and companies with more reasonable valuations, healthy dividend income, and robust earnings growth will allow investors to capitalize on any potential upside that might be realized.

It leads to our Matco Balanced Fund favouring Canadian equities. With twice the dividend income of its global counterpart and valuations that remain below historical long-term averages, the risk-adjusted outlook favours Canada. Over a more extended period, 5 and 10 years, the growth potential of the global economy and, therefore, global equities will be impossible to ignore. With technological developments dominating the lion’s share of future economic growth potential, Canada is poised to underperform. Over this more extended timeframe, we favour the rest of the world over Canada.

Do alternative investments matter? Of course, to the extent they can offer additional portfolio diversification risk-adjusted return potential and be sourced at reasonable valuations, they can contribute to creating a more efficient portfolio.

Our Flight Plan for 2024

Within this context, what does the flight plan look like for the Matco Balanced Fund in 2024:

  • Given the uncertainty of the smooth economic landing, we remain overweight fixed income relative to our long-term targets
  • As the health of the economic landing becomes more confident, re-deploy into equities opportunistically at attractive entry points
  • Re-deployment into equities will favour the most attractive valuations, with long-term infrastructure investments being a focus

When interest rates move lower, the relative attractiveness of bonds will fade, while the relative attractiveness of equities will improve. The Matco asset mix committee determines our asset mix targets. We do so by utilizing our propriety Investment Horizon Indicator, which has a track record of identifying long-term entry points into equity markets. It isn’t tactical. It’s long-term and strategic. The Matco Balanced Fund has an unambiguous mandate: first protect, then grow capital. Our horizon indicator utilizes real economic indicators to identify disciplined investment mix decisions, instructing us when to focus on protection and when to focus on growth. The result is a long-term stable return profile, with approximately half the volatility of the broader equity markets.

It would be cliché to suggest that uncertainty is on the horizon. That’s always the case, particularly when it comes to investing. It’s how you go about navigating uncertainty that can make the difference. We’re optimistic about 2024. Whether it comes with a hard or soft landing, investment returns are always on the horizon.

The Matco Balanced Fund is fundamentally based, dynamic, and provides individual investors access to a more institutional investment mix, such as alternative asset classes. This mandate resonates with many of our clients and perhaps resonates with you. If you would like to hear more details on our investment outlook and how we can implement this holistic solution in your portfolio, please don’t hesitate to book a meeting.

Trevor Galon

Trevor Galon CFA

Chief Investment Officer

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