Navigating uncertainty while positioning for the long term

In volatile times, a focus on balance, quality and patience is key to building long-term portfolios, says Leslie Alba, head of portfolio solutions, total investment solutions, CIBC Asset Management.

These three “time-tested pillars” of investing help manage risk, ensure sustainable capital growth, and avoid the pitfalls of emotional decision-making, she said in a Jan. 20 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

According to Alba, a balanced portfolio should be diversified across asset classes, sectors and regions.

She takes a “total portfolio approach,” which treats the portfolio as a single, integrated entity focused on real risks and opportunities, not short-term trends.

“What that means is we keep equity risk in perspective of overall investment objectives and risk tolerance,” she said. “We use fixed income for income and stability in the portfolio, and really size exposures so that no single theme or region dominates the outcomes.”

Meanwhile, high-quality businesses with durable cash flows, prudent capital allocation and real competitive advantage provide the quality component when constructing a portfolio, she said.

“Quality is like our buffer against the unexpected, and really helps us deliver smoother capital appreciation or wealth accumulation over time,” she said.

Being patient is equally important to prevent emotional reactions to short-term noise. Many of the S&P 500’s best days happen in bear markets or early recoveries, when investors are most tempted to sell, she said.

“The evidence of having patience is pretty compelling,” she said. “Missing just the best 10 days in the S&P 500 would have cut returns in half. And missing the 30 best days would have reduced returns by 83%.”

Balancing risk and opportunities

Alba seeks balance across regions in order to manage concentration risk and capture returns.

While U.S. stocks still anchor portfolios for their strong earnings, U.S. exposure is below global market cap share to avoid risks like deglobalization, rising input costs, and potential shifts in foreign demand for U.S. assets.

“We’re looking for profitable growth at reasonable valuations, rather than extremely momentum-heavy concentration, which helps us reduce reliance on the most stretched AI-linked segments as leadership may broaden beyond the Mag Seven,” she said.

Emerging markets like China also offer opportunities, she said.

“China’s rapid ascent in technology and production, which really does span electric vehicles, solar, AI infrastructure, and other areas, China’s ascent in those areas highlights the emergence of a changing competitive landscape.”

Alba said other areas to watch include:

• Europe, which is exhibiting signs of earnings improvement;
• Japan, which is benefiting from corporate reform; and
• Canada, which offers diversified exposure, attractive valuations and steady dividends.

Low-volatility strategies also complement broader market exposure, she said.

“Those low-volatility holdings allow us to remain fully invested in the equity markets, and also allow us to benefit from equity market participation, while managing volatility throughout the market cycle, throughout market turbulence.”

If equities sell off, Alba said today’s higher yields in fixed income could provide diversification and downside protection. That’s because higher coupons cushion drawdowns by offsetting price drops during equity stress. And higher yields give more room for interest rates to fall, making bond gains more meaningful than in a low-rate environment. 

Finally, “correlations tend to normalize when rates are higher,” she said. “Outside of inflation shock environments, historically, we’ve observed that high-quality bonds have exhibited low or negative correlation to equities, which helps diversify those risks.”

Alba likes investment-grade credit over high yield, due to the tightness in spreads and macroeconomic backdrop.

“We’re also leaning towards shorter-dated bonds to capture the attractive coupon rate, while controlling rate risk, maintaining balanced duration across domestic and international markets,” she said.

To round out the portfolio, Alba said there is carefully selected private assets, which help improve risk-adjusted returns, as well as some gold exposure through high-quality producers.

“So as volatility and policy uncertainty evolves, our playbook remains pretty straightforward,” she said. “We remain invested, fully diversified and disciplined throughout time.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.