With stocks close to all-time highs, some advisors are taking profits and keeping more cash to have 'dry powder' in the event of a selloff.denozy/iStockphoto
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As interest rates rose and stocks and bonds plummeted in 2022, many investors parked their money in guaranteed investment certificates (GICs) and other cash-like instruments offering attractive yields for the first time in years.
But with short-term GICs maturing and stock markets rallying to record highs, many investors have moved their money back into higher-risk assets. According to TD Securities Inc., net outflows from Canadian cash ETFs in February and March totalled $755-million.
Advisors are now weighing several factors as they determine the appropriate cash allocation for client portfolios.
Brianne Gardner, investment advisor and co-founder of Velocity Investment Partners at Raymond James Ltd. in Vancouver, says cash weightings depend on risk levels, the state of the business cycle, volatility and specific stock opportunities.
“As active managers, we will raise cash and get defensive, and are comfortable keeping some dry powder on the sidelines to protect our clients’ profits and manage their downside risk,” she says.
When fully invested, her client accounts will still have 1 to 2 per cent cash, but they’ve gone as high as 40 per cent in extreme bear market scenarios. She notes her firm has actively been taking profits in recent weeks, moving to about 7 to 10 per cent in cash across client accounts.
Cash was long ignored during a period of low interest rates, Ms. Gardner says. “It’s an underrated asset class, but very important from a risk management and tactical perspective.”
Stan Wong, portfolio manager and senior wealth advisor with Scotia Wealth Management in Toronto, says his cash position is above target levels following significant gains in equity markets over the past five months. Some of his portfolio mandates currently hold cash and cash equivalents of about 7 per cent.
“While investors may be well-served to take advantage of current interest rate yields for cash and cash equivalents, it’s essential to maintain a balanced approach across asset classes, including bonds and equities,” he says.
Mr. Wong notes that longer-term target cash allocations are determined largely by the client’s total wealth and financial plan. The recommended portfolio weighting for cash and cash-like investments may vary depending on factors such as market conditions, the client’s age or time horizon, risk tolerance and financial goals.
Ryan Lewenza, senior portfolio manager, private client group, with Turner Investments at Raymond James Ltd. in Toronto, says he keeps roughly 3 per cent of client portfolios in cash over the long term.
For retired clients, especially those just entering retirement, the firm likes to keep a full year of monthly withdrawals in cash so clients are not forced to sell assets in a down market.
However, tactical calls are made to increase the cash weighting when they see the potential for shorter-term weakness.
For example, Mr. Lewenza says Turner Investments raised cash to 7 to 8 per cent of client portfolios last May after a big run-up in stock prices. They then invested the cash in October, after a market selloff.
The firm is considering doing the same thing this year, he says, as it sees the potential for a pullback in the coming months – particularly in October ahead of the U.S. election.
“You can only take advantage of market pullbacks if you have cash, and we want to be ready when markets could take a bit of a dip,” he says.
As far as specific cash-like instruments, Mr. Lewenza recommends high-interest savings account (HISA) exchange-traded funds (ETFs) and funds based on shorter-term U.S. Treasury bills.
“Currently the yield on HISA ETFs is around 5 per cent, which is quite attractive, especially as the funds are highly liquid and can be accessed at any time,” he says.
His team uses HISA ETFs from Evolve Funds Group Inc., High Interest Savings Account Fund HISA-NE, and Purpose Investments Inc., Purpose High Interest Savings ETF PSA-T. For a T-bill fund, he favours Horizons ETFs Management (Canada) Inc.’s Horizons 0-3 Month T-Bill ETF CBIL-T.
Ms. Gardner also uses HISA ETFs such as Evolve’s High Interest Savings Account Fund, Horizons High Interest Savings ETF CASH-T and CI Global Asset Management’s CI High Interest Savings ETF CSAV-T, as well as mutual fund money market funds. Her firm has also been taking advantage of opportunities in some government and bank bonds.
“We have been substituting these in place of GICs in some cases because of the tax benefits they possess and net return to clients is so much higher,” she says.
GICs still make sense for some clients depending on their cash flow needs or future purchases, she adds.
Mr. Wong says that for investors prioritizing stability and flexibility, short-term and cashable GICs remain dependable options. He also favours short-duration floating rate strategies, which he says provide attractive avenues for yield enhancement while effectively managing interest rate exposure.
Funds that follow this approach include Invesco Canada Ltd.’s Invescp 1-3 Year Laddered Floating Rate Note Index ETF PFL-T or Mackenzie Investments’ Mackenzie Floating Rate Income ETF MFT-T.
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