Investing 101

Four investment themes to consider in 2010

As we head into 2010, the strength of both the economic recovery and equities markets will become clearer. And as the year unfolds, here are four themes that you may want to discuss with your advisor in the months ahead: the impact of currency exchange rates on your portfolio, fixed-income diversification, investing in quality companies and tax efficiency.

Currency

The US dollar declined versus Canadian and other currencies over the course of 2009. The US Dollar Index, which compares the US dollar to a basket of currencies, was at a 15-month low in late November. Currency can play a major role in portfolio performance, and at times may cause Canadian investors to question the value of global diversification. Your financial advisor can help you achieve proper diversification and reduce currency risk through mutual funds that use currency hedging. For a list of Mackenzie funds that hedge foreign currencies, go to mackenziefinancial.com/currency.

Fixed-income diversification

“A common misconception is that fixed income is all the same,” says Mackenzie portfolio manager Dan Bastasic. “It’s not.” The current low interest rate environment has a number of implications for investors. Longer duration bonds carry some interest rate risk: if rates go up, bond prices may adjust downward, so bonds can actually lose value. Corporate bonds may be less sensitive to changes in interest rates, and play a valuable role in many investment portfolios. Your advisor can help you select one or more actively managed fixed-income or income oriented balanced funds.

Quality

Mackenzie has a number of fund families, which use different investment styles – growth, value, deep-value, and “blend” are common descriptions. But another way of viewing a manager’s style is by looking at his or her emphasis on quality – whether the portfolio has companies with higher or lower credit ratings. Over long periods, the returns generated for investors by high and low quality companies are surprisingly similar. However, over shorter time frames, they can be miles apart. In the difficult markets of 2008, lower quality led the way down, with C and D-credit-rated companies on the US S&P 500 index dropping 56.9%. (Note: if an investment drops 50% one year, it has to return 100% the next year to break-even.) In 2009, low quality did indeed roar back. In the first ten months, the C/D rated companies rose 99.8%. As for A/A-rated companies, the drop was nowhere near as severe in 2008 and the recovery in 2009 was reasonable, but certainly not eye-popping. This is a long way of saying that if your equity fund didn’t seem to spring back in 2009, it may have held more high quality companies. Given the long-term similarity between high and low quality, it may pay to be patient with such a fund.

Tax efficiency

Surveys carried out in late 2009 showed that most Canadians were not taking advantage of the Tax-Free Savings Account which allows Canadians of majority age to invest up to $5,000 a year, with all investment returns being tax-free. We believe that the best way to save in a TFSA is through your own financial advisor. That way, the asset mix can be coordinated with the rest of your investments.