This has no doubt been a very challenging year for conservative 60/40 investors who have been told for so long that having a decent weighting in long-term bonds will help protect their portfolios during market corrections.

We can’t blame them though, as it has been a successful strategy for the most part.

But, although rare, this has not always been the case.

The Morningstar Canadian Neutral Balanced category of fund managers faired a bit better, but is still down approximately 12.5 per cent this year.

Here are some ways to navigate this unique market environment.

by Martin Pelletier, senior portfolio manager, Wellington-Altus Private Counsel Inc.

We count eight times that a 60/40 portfolio (60 per cent in the S&P 500; 40 per cent in the S&P U.S. Aggregate Bond Index) has posted negative returns going back to 1975, with this year’s 14 per cent decrease being the most pronounced.

Unfortunately, the forward outlook doesn’t appear to be encouraging since central banks continue to hike rates as a means to bring inflation down to more reasonable levels, with the Bank of Canada making another 75-basis-point hike last Wednesday.

This means bonds and certain equities will continue to be negatively impacted based on their duration exposure.

The good news is things appear to be headed in the right direction, with commodity prices recently rolling over, even energy is showing some weakness (outside Europe anyway), so we think the next shoe to drop will be asset prices such as housing.

This means traditional 60/40 investors are likely not out of the woods quite yet.

But for those wanting to look at some alternative solutions to managing risk, here are five ways we’ve found to be very helpful in navigating this unique market environment.

Structured notes

Structured notes are a debt obligation issued by a bank that contains an embedded derivative component, which results in a coupon payment linked to the performance of a particular index, exchange-traded fund or even a basket of stocks.

There are many different note strategies, and they offer varying amounts of downside protection compared to owning the market outright.

The upside participation is often limited to just the coupon payment received, but can be very attractive in this low-rate environment, given it typically ranges from five to 20 per cent.

Overall, we’re currently running 30 to 50 per cent of our client portfolios, including our in-house fund, in notes, many of which we have custom built for us by the capital markets groups at the Canadian banks.

This way we can design them around our outlook and, therefore, include equity indexes such as the S&P/TSX composite and S&P 500, or particular segments of the market like agriculture, technology, materials, banking and energy.

Energy stocks

Our 10-to-15-per-cent weighting to oil and gas stocks has been especially beneficial this year.

This hasn’t always been easy though, with regular daily swings of five per cent both ways, especially as the Joe Biden administration keeps trying to talk down oil prices ahead of the midterms in the United States.

That said, our thesis remains intact and we think it could offer some attractive upside this winter as supply shortfalls accelerate and politics no longer influences paper markets.


Having some lower market-correlated commodity exposure in your portfolio can really help diversification.

We’re currently running about three to five per cent in gold, energy, agriculture and precious metals through either exchange-traded funds or managed funds of direct commodities via futures.

Besides diversification, as a contrarian, this market segment is appealing because commodities have been underinvested in over the past decade given their underperformance.

U.S. dollars

We love our U.S. dollars because they have been an excellent hedge in times of heightened volatility, and we don’t expect its status as the world’s reserve currency to change anytime soon.

In total, we estimate at least one-quarter to a half of our client portfolios are in U.S.-dollar-denominated assets.

Liquid alternatives

We have a smaller slice in liquid alternatives such as long/short, market-neutral and derivatives-based strategies that have done a good job of providing a consistent return profile in all market environments.

We would exercise some caution here though, and stress the word liquidity, because there are some private alternative funds claiming low correlations but lacking market transparency around the pricing of their underlying assets.

Overall, even with fixed income being at our lowest allowable levels, we’ve been able to protect a significant portion of this year’s correction thanks to this tactical approach to managing risk.

We are still maintaining our core position in U.S. and Canadian equities since they will be required to participate in the recovery upon the end of monetary tightening, while we’re significantly underweight Europe, Australasia and the Middle East (EAFE) markets, and have a zero weight in emerging markets due to their unique risks that we think are simply too high for the return potential.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.

This article first appeared in The Financial Post.