Within the fixed-income realm, he says credit risk has taken on renewed importance. And while many have raised their exposure to duration over the past several years, simply because it’s been the best-performing trade, Pelletier says it has also put portfolios in a precarious position.
“Those areas, including equities that are exposed to rising interest rates, have been hit pretty hard. Some have gone down over 30%. So maybe now is not a bad time to look at that duration exposure within your portfolio,” he says. “But as a first step, it’s crucial for advisors to understand what duration is, and how it impacts their clients.”
A large majority of advisors may also be hesitant to integrate ESG into their investment processes, given the continuing challenge posted by inconsistency in ESG ratings and the confusing array of frameworks globally. For his part, Pelletier acknowledges that themes like sustainable investing and climate change can impact capital allocations, particularly in certain pockets of the market.
That’s been exemplified by the energy sector, which has been severely undercapitalized over the last decade due to restrictive government policies, as well as decisions being made by asset allocators at pension plans and other large institutions.
“These companies have had to adapt and look at changing their business model, from being focused on growth to harvesting cashflow,” he says. “Now’s not a bad time to look at those areas that had been undercapitalized, since the resulting impact on the supply side has meant they’re in a stronger financial position today.”
