Canada insurers like emerging markets, high-yield debt

Wed Aug 29, 2012 1:53am IST

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* Large cap stocks, emerging markets seen attractive

* Prices in Europe looking very cheap, but may be risky

* High-yield debt a new favorite asset class

By Andrea Hopkins

Aug 28 (Reuters) - The men who set investment strategy at two of Canada's biggest life insurers both like real estate, large-cap equities and emerging markets as they seek the best returns for their massive wealth management portfolios, but they disagree on the risks of Europe and high-yield sovereign debt.

With global risks and slow growth likely to keep North American bond yields low and equity markets on a sideways pitch for the next 12 months, strategists at Sun Life Financial Inc's global investment arm and at Manulife Financial Corp's asset management unit are looking elsewhere for returns.

Both start with relatively safe plays like large-cap, dividend-paying North American stocks for income, add real estate for cash flow, and then sprinkle in emerging market stocks and high-yield debt for riskier upside potential.

"What you really want to focus on are companies that have very strong cash flow, growth potential and the possibility for dividend growth," said Bob Boyda, co-head of global asset allocation at Manulife Asset Management, who oversees some $218 billion of assets.

That recommendation is shared by his counterpart Sadiq Adatia, who is chief investment officer at Sun Life Global Investments, which has C$5.6 billion ($5.7 billion) in client managed money.

"Today I would be putting money into income portfolios, because there is an opportunity to get some yield. A lot of those are large cap companies that have good balance sheets, so if there is a downturn they are able to withstand that downturn without losing that dividend," Adatia said in an interview.

"I think that is a great way to play what is a sideways moving market. Valuations are also cheap as well, so there is also an upside potential with those dividend stocks."

Dividend-paying blue chip stocks from banks to retailers to pharmaceuticals and aerospace companies may not be sexy, but they're a source of income in a landscape where bond yields are stuck at historic lows and geopolitical risk lurks.

And with North American economic growth barely positive and European growth trending negative, Adatia and Boyda both look to emerging markets to add growth potential.

"Everyone puts a lot of emphasis on China slowing down, but relative to other countries, China is still head and shoulders above everybody else," said Adatia, noting that a slowdown in Chinese gross domestic product to 6 percent is still triple Canada's expected growth in the next year.

"People talk about emerging markets as a riskier asset class, but is it riskier than the euro zone? And does it not have more upside than the euro zone?"

Boyda adds that Brazil, Russia, India and some smaller emerging economies are on his list of volatile markets that promise growth and are "a good place to put some assets".

Adatia said emerging economies stand to benefit if North American or global demand picks up, as well as from their own growing middle class, whose wealth is increasing even as the developed world is stuck in a rut.

While large-cap stocks and emerging market exposure may be unsurprising picks by asset managers with huge portfolios, they both also point to high-yield debt -- whether junk bonds or emerging market corporate debt -- as a favorite asset class.

"We are very positive on corporate and even high-yield debt," said Boyda, noting opportunities in Asian bonds.

"Developing nations are in need of capital and they are willing to pay up for it, so we see an 18- to 24-month horizon that offers high single-digit or low double-digit returns in something like an Asian bond fund that has a total return objective."

Where Boyda and Adatia disagree is on high-yield sovereign debt. Manulife said it remains too risky, while Sun Life said careful choices among economies that won't be allowed to default can offer high returns for buy-and-hold investors.

"Even if they get it wrong, and were supposed to get 17 percent yield on something, they may get 12 (percent) in the end, and that is still fine for them. What they don't want is a default. But even if it is a small portion of a portfolio, it is worth the risk given what else there is to invest in," Adatia said.

They also disagree on Europe. Adatia thinks the outlook there is still far too cloudy to start taking advantage of cheap stocks, Boyda sees large-cap European equities looking like very inexpensive buys for long-term investors.

"A lot of great global companies are being ruthlessly marked down simply because of an accident of where they are domiciled," Boyda said.

Both strategists like real estate -- Boyda likes commercial real estate, while Adatia also likes residential and even high-flying REITS -- for diversity and yield.

The men are also united in their expectations for a rocky ride globally for the next few years, as massive global risks play out on financial markets. As always, diversified portfolios and a long-term view are recommended.

"What is my main message? We're fully invested and scared," Boyda concluded with a laugh.

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