Portfolios Reconstructed

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With pandemic lockdowns now well in the rearview mirror, investors are confronted with an unfamiliar investment landscape.

Many investors have come to the realization that the portfolio that worked prior to the pandemic may not work today. The past decade was dominated by high-growth investing, seemingly ignoring risk. But as the world’s central banks grapple with inflation, interest rate increases shifted investor preferences.

As the markets adapt to this new reality, now is the time for portfolio reconstruction.

A different world

The fiscal and monetary stimulus enacted at the height of the pandemic has left the world awash in cash. This includes a massive increase in consumer savings, as spending patterns changed during lockdowns. That pent-up demand has now been unleashed, driving inflation to highs not seen in decades.

“This is typically an environment where many dividend-paying stocks perform well,” says Darren McKiernan, Head of the Mackenzie Global Equity and Income Team and the lead manager of the Mackenzie Global Dividend Fund. Katherine Owen and Ome Saidi are also named portfolio managers on the fund.

As managers of a core portfolio, his team is style agnostic in terms of the growth-value spectrum. The overarching goal is to find high-quality businesses with the free cash flow to support a healthy dividend.

McKiernan points out that over the past decade of growth dominance, dividends have accounted for just 15% of realized investor returns, far short of the 40% average that was established over the preceding 120 years.

The dividend solution

A pivot toward durable businesses that pay sustainable dividends may provide a degree of stability to a portfolio overloaded with higher-risk growth.

“We believe dividends will be an important source of total returns going forward,” says McKiernan. “All we need is for the world to look more like the last 120 years than the last 10 — and signs seem to indicate that’s going to be the case. At the very least, the long-term averages are on our side.”

Even as the global economy slows, still-high inflation and the rising interest rates designed to tame it should benefit portfolios that are weighted toward pro-cyclical sectors, such as financials, travel and leisure, as well as energy and materials.

However, active management remains key, as skillful stock selection has the potential to add considerable value.

“Not all dividend-paying companies are created equal when it comes to a rising-rate environment,” says McKiernan. “There’s a big swath of the investment universe that might be disproportionately negatively affected by rising interest rates.”

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Last updated on September 6, 2022