Episode 44

MARCH 30, 2022

Chhad Aul on tactical asset allocation

Chhad Aul, CIO and Head of Multi-Asset Solutions, SLGI Asset Management Inc., discusses his team's approach to asset allocation amid spikes in inflation, rising rates, and geopolitical crisis.

Steve Peacher: Hi everybody thanks for dialing into this episode of “Three in Five” it's Steve Peacher, SLC Management and today I’m joined by Chhad Aul who is the CIO and Head of Multi-Asset Solutions at SLGI Asset Management Inc. and SLGI stands for Sun Life Global Investments, it's a platform that has been developed over the last I don't know eight to 10 years within Sun Life in Canada, very successful platform over a relatively short period of time and so I’m looking forward to this chat thanks for taking a couple minutes.

Chhad Aul: Absolutely thanks Steve.

Steve Peacher: So, what the main topic that I want to talk about is how you're dealing with asset allocation in this environment, and you head that. My first question first, if you would just give the audience a couple sentences on who Sun Life Global Investments Inc. is and what kind of products you have, and then could you talk a bit about in this environment lots of stuff going on we've got a war in Europe, we got inflation going up, we got interest rates going up. How are you thinking about asset allocation shifts across the portfolios?

Chhad Aul: Yea, so a little a little bit first about Sun Life Global Investments Inc., was founded back in 2012 so you were pretty close in terms of how long we've been in the market, but you know Canadian focused asset manager in really two channels. In the retail space, providing investment product that advisors use in building investment portfolios for their individual retail clients and then in the in the institutional space, we're in the defined contribution area. So again, with Sun Life’s very strong group retirement services footprint across Canada once again.

And then my team manages multi asset solutions which is really a big part of whereas Sun Life Global Investments Inc. focuses. So in the retail space that targets risk funds, and in that defined contribution space, target date funds. So to your first question, absolutely very volatile a couple of months in the market and tactical asset allocation is one of the levers that we use to add incremental value across our portfolio off a very, very strong strategic asset modeling that we have.

So in terms of our tactical positioning, you know it's been an unusually tough quarter so, for to start this year across asset classes. Equity markets in deep corrections some touching bear market territory, spiking yields, as you know, credit spreads marching higher, core bonds of course down you know 5, 6, 7 percent in Canada and the U.S.[1] So other than commodities cash has truly been king so far this year. Now, we have to say this sort of outperformance for cash it's rare, it usually does not last very long. And, when we look at various market sentiment measures that we track, flows and positioning data, activity in the options market, we did get the sense to in recent in recent days that the worst of selling pressure, at least in the near term was exhausting itself, right. So given all of that putting all that, together, you know we've been incrementally putting our cash allocation to work both in equities and bonds and actually moving to a modestly tactically overweight within equities.

Steve Peacher: Let's drill down on equities a little bit, so within that equity allocation you know what are you doing, are you making any shifts around regions around factors, styles, CAP levels, value, growth, how are you thinking about equities?

Chhad Aul: Exactly so let's start with regionally, you know we are preferring U.S. equities over international developed markets. So our largest overweight is to U.S. equities versus underweight to international markets. I mean of course, we know one of the key risk factors out there today is the unfortunate conflict in Ukraine. And we just feel that you know, the European markets and make up a big component of the international space, much more directly impacted from an economic perspective to those events, and the U.S. is relatively insulated. And when it comes our Canadian allocation, of course we do have some home country bias within our strategic mix. An exceptionally strong performance for Canadian equities this year, you know when a few markets and positive territory, given the large energy large, large materials weight, it's been a great hedge against geopolitical risk. We're sticking to our neutral positioning, though just in that off chance that there is some sort of escalation on the geopolitical front, it will still serve as a as a reasonable hedge we believe. And emerging markets, of course, regionally the other key component within our portfolios, you know significant underperformance for emerging markets last year. On the Chinese regulatory crackdown and Chinese stocks were sliding in recent days as well, so very early measures, again just in recent days Chinese policymakers are taking the foot off the gas on regulatory crackdowns as well as adding some stimulus to the market. We're watching it closely, it's not enough for us to go overweight, at this point, but sticking to a neutral position in emerging markets. And then, like you said you know there's some interesting pieces that we’re seeing from an investment style or an equity factor risk factor perspective.

All of the leading indicators that we follow really are pointing to a slowing global economy and now there's more risks to the downside. What might have been just a slowing but positive scenario, you know risk to the downside, whether it's a central bank policy mistake. You know much has been said, of course, that about how difficult to position central banks are in today compared to the past cycles and, of course, the geopolitical.

So, our work shows that in a in a slowing economic environment it's really quality as an equity factor that outperforms. I mean it's companies with strong balance sheets, companies with strong profitability. It’s really the art of the active managers that we use in our portfolio and it's really where they shine. So, we're accentuating our active applications over the passive allocations.

And then, finally, you know, an opportunity that presented itself is probably one of the you know the steepest sell offs has actually been in U.S. growth stocks, the technology sector, you know the NASDAQ actually touching bear market territory. Well, again as we look forward into the next segment of the economic cycle that we're moving into, what's going to be a slow down on some kind. As economic growth becomes scarce, as earnings becomes scarce, those companies that do have strong earnings, strong secular earnings happen to be the same technology companies that that have sold off so steeply are actually the ones that tend to perform. So, we're really accentuating our allocation to the U.S. growth story, in particular within our portfolios.

Steve Peacher: That makes sense to me what how about fixed income, what are you doing within the different sectors in fixed income?

Chhad Aul: Within fixed income, I mean we're you know, given that overweight position we're taking within equities, we're increasing the duration within our fixed income allocation, moving towards higher quality core bonds. Now I’m not calling the top end yields necessarily, although I wouldn't completely rule it out like we said given, given some of the risks to how this economic cycle may proceed from here, but more importantly sort of from a total portfolio perspective, thinking about the role the core bonds play and sort of multi asset solutions we manage like target risk funds, target date funds. Much of it is to offset the risks against those risky assets in the portfolios like the equity allocation. So, we have lower duration going back now several quarters knowing that that was really rising yields were probably the biggest risk to the equities within the portfolios. At the levels we're at today and yields we just believe that they return to that strategic function of performing as a as a diversifier against those riskier assets in the portfolio.

Steve Peacher: Well yeah, I definitely see it. This has been unusual because you know if you consider the situation Europe right now the Ukraine to be a global geopolitical crisis, you don't always see the Fed tightening in the middle, in the face of a geopolitical crisis and that's in fact what we're seeing right now, and so it's a bit of uncharted territory.

But let me ask you one final personal question which course I like to end with. Like a lot of our listeners, you have to be riding out the pandemic with kids at home. I have not, because my kids are older and they're not at home, I missed the joys and trials and tribulations of that, but also the joys of it. Tell me a little bit about what you've learned and what that experience has been like now that it's been you know we just hit the two-year anniversary.

Chhad Aul: Exactly Steve, and I mean we focus a lot on the tribulations how difficult it's been to or, particularly in the early days with the kids around far much more, and you know don't tell them that I’m saying this, but as you look back on it it's been a pretty good opportunity to actually become a little bit more involved in your kids’ lives, right. And one of I think the great takeaways and particularly Sun Life in Canada and their approach to return to office which I expect to really ramp up as we get into April, is that there will still be some flexibility and so there'll be you know an opportunity to get back to the best of both worlds. But I truly do miss the face to face interactions with my team and the collaboration and just talking about our portfolios, but you know we're going to be able to find that that right mix now I think you know of life/work balance, if you will.

Steve Peacher: Well my wife and I were jealous of some of our friends whose kids you know if they're older came and live with them during the pandemic and, unfortunately our kids weren't able to do it, but we missed that so I definitely think we probably would have seen that as a positive to have kids at home during this during this time. So listen, thank you very much it's interesting to hear about how you're making moves within the portfolio in an environment this volatile, with that always comes opportunity. Thanks again, and thanks to everybody for listening into this episode of “Three in Five.”


[1] Bloomberg


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