As the environment for risk assets improves, Sun Life Global Investments portfolio manager Jeff Israel is favouring U.S. equities.
?From a flow-of-funds perspective, you?re starting to see a lot more money coming off the sidelines into equities,? he said. ?People are also recognizing that bond yields are so low and getting pushed into riskier assets.?
Mr. Israel still considers U.S. stocks attractive in terms of valuation even though the S&P 500 is up roughly 11% year to date. He also finds them more promising than Canadian or European equities.
?The U.S. just stacks up better in our eyes,? said Mr. Israel, adding his portfolios are overweight on U.S. stocks, with slight underweights for Canada and Europe.
Along with Sadiq Adatia, Mr. Israel manages the Sun Life Milestone Funds and the Sun Life Granite Managed Portfolios, overseeing about $1.4-billion in assets.
The four Milestone funds all have target dates (2020, 2025, 2030 and 2035) and offer investors a guaranteed maturity value. They each have similar underlying investments, but different asset mixes due to the varying maturity date. For example, the longer-dated funds have more equity exposure.
These asset allocation strategies utilize six index futures contracts ? the E-mini S&P 500 Index, DJ Euro Stoxx 50 Index, S&P Canada 60 Index, CME Nikkei 225 Index, LIFFE FTSE 100 Index and Australian SPI 200 Index ? that can move within 5% of their MSCI World Index benchmark weightings.
The Sun Life Milestone 2035 Fund, which has an MER of 2.3% and current effective exposure to equities of about 50%, returned 10.27% for the year ended Oct. 31, 2012. That made it a top-quartile performer over one- and two-year periods.
In Canada, Mr. Israel isn?t overly concerned there will be a huge decline in the housing market, but he does see an economic downturn threatening consumers.
?Consumer spending in Canada in the past couple of years has propped up the economy quite well, so if you get a little bit of pressure, it impacts employment,? he said.
?So the trickle-down effect is that you?re starting to see a little bit more risk in the Canadian market right now.?
He adds Canadian equity investors should keep an eye on how well China engineers its soft landing.
?While I do feel emerging markets generally still offer a great longer-term risk-reward trade, in the short to medium term Canada is just more exposed.?
As for Europe, Mr. Israel recommends investors focus on big consumer names that do a lot of business elsewhere, and notes there haven?t been any positive structural changes in the eurozone in the past few months.
?In terms of austerity, more and more research is suggesting that when you cut spending, it has a bigger impact on future growth than previously thought,? he said.
However, Mr. Israel has increased the European weighting in his portfolios recently.
He explains that as countries such as Spain announce tax increases to raise more revenue to meet budget targets, consumer spending has risen in an effort to get ahead of higher prices.
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