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By the end of 2020, the report said, corporate bonds looked “only modestly less expensive than they did prior to the recession” despite stunted earn- ings growth and an uncertain economic outlook.
The Federal Reserve’s willingness to purchase corporate bonds made the market more expen- sive and masked credit risk, Mesman said, and the uncertain recovery has left more companies exposed to downgrades.
Gordillo warned against taking on more credit risk. “Reaching for yield is just turning your portfolio into 100% equities,” he said. “You are going to get burned.”
He prefers sticking to sovereign bonds that make money during market sell-offs.
“While the yields on those bonds feel like they’re not adding any value to a portfolio, there is tremendous value from a behavioural perspective in keeping those bonds there in a large proportion to equities,” he said, in terms of the rebalancing pre- mium and reducing volatility.
Goode limits higher-yielding debt to one-tenth of
”Reaching for yield is just turning your portfolio into 100% equities. You are going to get burned.”
a portfolio’s fixed income allocation. After getting out of preferred shares in 2019, she recently added a small component to increase the yield in the fixed income side of some portfolios.
“Preferred shares are so beaten up right now that they’re quite attractive,” she said.
Private debt
Private debt can be a tax-efficient fixed income option, offering a steady income stream that can be paid in deferred capital gains.
“There’s virtually no correlation to equity mar- kets, so it is a diversified asset class that can reduce the volatility in your overall portfolio,” said Crowe.
Depending on the client, Crowe said she would allocate 5% to 10% of a portfolio to private debt funds. The funds’ volatility is usually low and they produce steady returns (traditionally in the 6% to 8% range), but there’s risk on the liquidity side, she said.
“It’s not a short-term, three-month investment,” she said. There are one-year minimum holds for most funds, and investors typically must give 180 days’ notice for redemptions.
“If you have a cash crunch and you need funds, this is not going to be somewhere you can pull from.”
Advisors should also check fund managers’ track records and understand the loans, she said.
This may be especially important with so much economic uncertainty: the pandemic has left many companies relying on government aid and some may not survive more lockdowns.
Gordillo warned that private credit funds carry equity-like risk.
“You’re lending to a small company that can’t get lending from anywhere else,” he said. “That is pure default risk.”
Private credit funds may also be hard to use within the fixed income portion of portfolios.
“Private debt is typically considered to be higher risk than traditional fixed income securities, despite the standard deviation of the products usually being extremely low,” Crowe said.
Despite fees for some funds that take 20% on performance above a target return, Crowe said the net return still tends to exceed what investors can get with traditional fixed income.
Real estate
While investors who owned residential real estate in Canada likely did well in 2020, funds invested in retail real estate and office space had a much harder time. Multi-family apartment funds performed
fairly well, Crowe said, even though caps on rent increases hampered some upside.
Real estate funds provide an inflation hedge, she said, which is important given the massive amount of recent stimulus from governments. Funds’ monthly distributions are often tax efficient, and she said the correlation to public equities is minimal.
That said, some real estate funds offered little bal- last in March when equities tanked, and didn’t recover

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