CONTRIBUTORS
Ahmed Farooq
VP of ETF Business Development Franklin Templeton Canada
Many advisors I speak with continue to struggle with the increasing complexities of today’s fixed-income environment and are looking for guidance. The combination of interest rate fluctuations, inflation threats, trade tensions and political upheavals is a challenging environment to make the right call for their client’s portfolios. There is a real concern that volatility is on the horizon and fixed income mandates will be needed to provide that cushioning to the overall portfolio.
Active management may be the best way for advisors to navigate this market. For advisors that want an expert’s opinion when it comes to managing future interest rates, credit quality or duration calls in their fixed income allocation, I like to remind them that this is something that may be best left to a manger who can effectively deal with these factors and risks.
The Trend Towards Active Continues
This trend of more advisors switching to actively managed fixed income solutions can be seen in monthly ETF inflow reports over this past year. Within the world of fixed-income ETFs, actively managed products have seen the biggest area of growth. For example, National Bank of Canada’s January 2020 ETF Research & Strategy Report showed that at the end of January, the total AUM of fixed-income ETFs was $73.4 billion in Canada. Of that $22 billion was put into actively managed funds, which now amounts to nearly a third of all fixed-income ETFs.
Active Strategies Seek to Achieve a Specific Investment Outcome
The goal of passive indexing strategies is to minimize tracking error to the index, maintain index exposure by either fully replicating the index or though a stratified sampling approach, one thing a passive investment cannot do, is adjust to any type of market events. This can certainly be a headache for most advisors as the onus of making any changes to their portfolio will be on them. Further, with the vast number of options available, this headache is something that cannot be easily solved. Active managers can adjust to different type of market events, changes to monetary policy and yield curve, adjustment from geopolitical events, and duration management. Outsourcing your fixed income exposure that align with your client’s outcomes will provide relief in this ever-tougher fixed income environment.
Improving Client Portfolios
As more advisors look at their options within the active fixed income space, I think they will be pleasantly surprised by the pricing of active fixed income funds. This can be especially attractive for advisors who may consider parking assets in Guaranteed Investment Certificates because they can’t find the right solution for their fixed income allocation. As seen in the charts below, GIC yields are not providing the type of historical returns that investors expect. Adding an actively managed fixed income fund provides the opportunity to improve client portfolios without adding much to costs. One actively managed solution is our Franklin Liberty Short Duration Bond ETF (FLSD) which provides investors with attractive yields compared to GICs by investing in Canadian federal and provincial government and corporate bonds and short-term notes. However, unlike GICS, which require lengthy investment periods during today’s uncertain investment rate environment, FLSD provides daily liquidity and experienced investment management at an attractive cost of 40 basis points.
