As we approach the end of 2024, markets are strong, but questions remain about how to navigate potential volatility as we approach a historically challenging season and the year ahead. With the U.S. economy outperforming recession fears, rate cuts on the horizon, and market concentration growing, we sat down with our portfolio managers for their thoughts on positioning.
From diversifying into emerging markets to incorporating real assets like cryptocurrency and alternative income strategies, our team is committed to helping investors stay agile and well-positioned for whatever comes next in 2025.
Navigating Market Volatility
Passive vs Actively Managed Strategies
Optimizing Asset Allocation
Diversifying with Real Assets and Cryptocurrencies
Unlocking Returns with Alternative Income Strategies
Strategic Cash Management for Market Opportunities
1. Markets are near all-time highs and many are wondering if it’s time to take some profits. As we head towards year end, how is your team approaching portfolio management in light of expected volatility?
This year has turned out to be a stronger year than many expected, with the U.S. economy keeping recession fears at bay. However, as we look towards 2025, it’s important not to get too complacent. After two straight years of strong equity market gains, it’s worth wondering if too much good news is already priced in. When expecting a combination of strong earnings, aggressive rate cuts, and stimulus, you have to think not all of that will come to pass at the same time. That’s why now might be a good time to start looking into alternative strategies that can offer some upside while also protecting you if things go south. It’s also important to consider active strategies, especially since the U.S. market has become increasingly concentrated in just a few big companies, making the passive indices riskier than before.
— Greg Taylor, Chief Investment Officer2. As we near the end of 2024, barring a major stumble in the remaining weeks, markets will post two very strong back-to-back years. In your view, are we back in a simple beta-driven market, where we buy the index and watch it go up?
2023 was a big rebound year for equities and bonds following the pain of 2022. Despite all the negative news on wars, election angst, and yen carry trade implosions, in 2024, markets have proven not just resilient but very pleasant. Continued improvement on the inflation front really helped, especially combined with a reasonable pickup in global economic growth. It’s a very market friendly combination that continues to fuel the buy-the-dip mentality on any signs of weakness.
Enjoy these times and make sure you have enough broad market exposure to profit, but don’t get too lured in by the siren’s song. The market lift from falling inflation appears largely played out, and there are some signs inflation may be picking up again. Plus, looking at Q3 earnings, guidance for 2025 continues to cool from corporations. It seems costs are catching up while sales growth slows. A tough combination.
The challenge for the broad market, especially in the U.S., is the concentration among a handful of mega caps. They’re certainly great companies but it makes for an increased risk for the market cap-weighted markets. You likely want some exposure but be cognizant of the risk.
We believe market breadth or leadership will broaden into 2025. This creates a more friendly environment for active management.
3. How is your team evaluating and adjusting your asset allocation across different sectors and asset classes given all that’s going on in the world these days?
Within the Purpose Active suite, which are multi-asset portfolios combining both active and passive investments, we tactically position the portfolio in two ways: fundamental and rules-based.
Fundamental - We put the ‘active’ in the portfolios, making portfolio tilts driven by our macro asset allocation team. For instance, we added emerging markets in May of this year based on valuations, less fear of China’s equity market and improving global trade. In early August, during the brief sell-off from the yen carry trade unwind, we sold U.S. bonds and added U.S. equity. More recently, some of that added equity has been parsed off to international.
This has the portfolio roughly equal weight or neutral on equity, lighter on bonds and holding extra cash. Enough exposure to benefit if this market simply keeps going up, but with a defensive tilt among our equity exposure in case it doesn’t. The higher cash provides some optionality should another sudden drop materialize that looks appealing.
Rules-based - One of our allocations in the portfolio is the Purpose Tactical Asset Allocation Fund, a rules-based tactical strategy that can oscillate as much as 100% equity to 100% bonds/cash. It's designed to quickly pivot to more bonds/cash if the equity market loses momentum and starts to go down. If the market rises, the opposite happens. It doesn’t care why the market is weakening, it simply reacts faster than most of us would.
Add them together, we have diversified our tacticality by process and believe this can really add value over time — especially if 2025 turns out to be more challenging than 2024. It sure can’t be easier (hoping this doesn’t jinx 2024 as there are a few weeks left).
4. Do you believe cryptocurrency will eventually replace gold's long-standing status as a safe haven? In your opinion, does a well-rounded portfolio contain both?
In my opinion, real assets and diversifiers should be between 5 and 10% of a portfolio, and in the new digital world, we should expect crypto to become a part of that sleeve.
Gold’s performance this year has been notable, reaching all-time highs amidst a broader “everything rally” where all risk assets are appreciating. This is normally an environment where gold would lag as it's often viewed as an uncorrelated asset that provides diversification in times of stress. The fact gold is higher means something else is at work, potentially reflecting growing dissatisfaction with central banks’ money printing and governments’ lack of fiscal controls. These conditions are a great backdrop for crypto, and Bitcoin in particular, to do well.
5. In rate-cutting environments, what advantages do alternative income strategies offer?
When central banks begin cutting rates, investors face new challenges and opportunities. Here's how alternative income strategies can stand out:
- Search for yield intensifies: As rates on GICs and money market funds drop, the income these options provide will become less attractive. Investors will likely be hunting for yield once again.
- Navigating rate volatility: Uncertainty around U.S. fiscal policy and global macro risks can lead to significant interest rate volatility. Traditional bonds may require investors to take on more risk just as rates are trending down, necessitating a strategic rethink.
- Risk-controlled income: Our Purpose Structured Equity Yield Fund (PSY) provides an attractive, risk-managed solution. The fund generates a mid-6% yield taxed as capital gains—far more tax-efficient than traditional fixed income. We've proven our strategy works, delivering consistent income through over five years of volatile rate environments.
- Equity exposure with downside protection: PSY balances moderate equity risk exposure with a contingent barrier to limit downside. Plus, unlike traditional fixed income, our fund carries no credit risk or duration risk, adding a layer of stability when it's needed most.
This combination of yield, tax efficiency, and risk control makes alternative income strategies like PSY especially compelling as the rate environment shifts.
— Jason Chen, Portfolio Manager6. When rates drop, investors often move their money out of cash funds. What are your thoughts on this strategy? Is there anything else to consider when evaluating how much cash to allocate to your portfolio in times like these?
Investors often hold money market or cash instruments for various reasons, such as meeting liquidity needs, adhering to ultra-conservative investment mandates, or capitalizing on the attractive yields these instruments have recently provided. Although it's true that in a transition from a rate-hike to a rate-cut environment, the opportunity cost of holding cash increases and alternative investments with higher returns become more appealing, it’s crucial to consider the broader context. Markets are influenced by more than just interest rate changes; factors such as political and geopolitical uncertainties, economic data fluctuations, and shifts in government policy all contribute to potential volatility.
Reallocating funds from cash to higher-yielding investments can be a reasonable strategy when rates drop. However, investors should weigh this move against the potential need for liquidity and the safety that cash instruments provide, especially during periods of market uncertainty. Maintaining a strategic allocation to cash or money market instruments can act as a buffer during these unpredictable times, offering stability, minimal risk, and immediate liquidity. Additionally, cash positions provide the flexibility to seize sudden market opportunities or meet personal capital needs without liquidating long-term holdings at a disadvantage. This approach ensures that investors maintain the agility to respond to market shifts without disrupting their core investment strategy.
We also advocate for actively managed money market funds as an especially effective option. These funds not only deliver the traditional benefits of security and liquidity but also offer the flexibility to capture slightly longer durations, potentially yielding higher returns in a declining rate environment. Furthermore, active management can help mitigate risk by adapting to evolving market conditions and economic data trends, ultimately enhancing the overall portfolio strategy. This adaptive approach can provide investors with both stability and the opportunity to optimize their cash allocation through varying economic cycles.
— Hilbert Wan, Portfolio Manager
As we look ahead to the end of the year and 2025, our portfolio managers believe that navigating potential volatility will require a mix of strategic flexibility, active management, and diversification across asset classes. While markets have proven resilient so far in 2024, questions remain about how sustainable the current trends are, particularly in light of a concentrated U.S. equity market.
The strong performance of cryptocurrency and gold highlights the important role of real assets, including digital assets, especially in environments where traditional safe havens face challenges. As interest rates shift and volatility persists, maintaining an adequate allocation to cash or short-term liquidity remains essential for managing risk and seizing new opportunities when markets recalibrate. For now, stay agile, and reach out if you'd like more thoughts from our portfolio managers on positioning for the year ahead.
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