Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Adam Ditkofsky, senior portfolio manager, global fixed income at CIBC Asset Management 

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In terms of our positioning in our portfolios, with regards to the expectations for the Bank of Canada, we are currently long duration, meaning that we anticipate rates will continue to move lower, as we expect the bank will need to resume its rate-cutting cycle in the coming months. 

Now, if we look at what’s priced into the bond market right now, in terms of expectations for rate cuts, there are no further rate cuts fully priced in for the balance of 2025. But these expectations can quickly change, especially if we continue to see economic weakness that forces the bank’s hand. Right now, the Bank of Canada remains concerned with uncertainty surrounding the U.S. trade war and tariff implications, and more specifically, the bank is concerned with re-accelerating inflation. 

Now, as of the end of June, Canadian CPI stood at 1.9%. But core inflation data points, which exclude the most volatile components, like food and energy, is at approximately 3%. So the bank being on hold has been prudent. But while inflation remains their primary focus for the bank, we can’t ignore that the bank just recently cut their growth outlook for Canada significantly, from an average growth rate of 1.8% to 1.3% this year, and to 1.1% next year. So they may need to provide further support in a stumbling economy. And the current 2.75 for the overnight rate may not be appropriate. 

Now, I break it down into three things. 

The first being unemployment, which now sits at 6.9% and has been rising for the past few years. Anecdotally, it also appears to be getting worse, especially with the tariff uncertainties. Right now, there are roughly 3.3 unemployed people in Canada for every available job in our country. And based on recent StatsCan data, there’s less than 500,000 jobs available in Canada right now. So it’s no surprise we’re seeing wage growth rate quickly drop, and of course, without more labour needs, I expect our unemployment rate is going to worsen. 

The second issue is with the trade war. We’ve drastically reduced our trade surplus with the U.S. to the point that is no longer offsetting the trade deficit we have with the rest of the world. Now, if we can’t quickly improve these relationships or find some substitute markets for our exports, we’ll continue to see merchandise trade deficit north of $5 billion a month, which is roughly 2.5% of our GDP on an annualized basis. So that would be a massive drag for GDP as well. 

Historically, we’ve always thought of ourselves as an export nation because of our raw materials, but unfortunately, that hasn’t been really the case since the Great Financial Crisis. And up until this year, our surplus with the U.S. has offset the deficit with the rest of the world. So trade is painful, and this means that we’ll likely see a contracted economy, at least in the near term. 

And the third being real estate, which in Canada still represents close to 40% of the average household net worth. It has, unfortunately, been stagnant, especially residential markets, with inventories rising and sales not drastically improving. Also, we still have 60% of mortgages coming up for renewal this year, and while it’s not as painful as last year given that rates have come down, we are still seeing refis going from close to 2% from where they were five years ago for mortgages, to now closer to 4%. 

Overall, all three of these aspects — the unemployment rate, the trade situation and the stagnant real estate market — all provide me with confidence to believe that Canada is still very much not out of the woods economically. While the new government will look to stimulate growth, they have also noted plans to cut spending in government jobs. To me, this is all supportive for further monetary stimulus. 

Now, to be clear, our base case is not calling for a recession. But the risks are still very much there, and we continue to expect more rate cuts. And, in terms of our forecast, we’re expecting two to be included, at least until the end of Q2 of next year. 

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In terms of how fixed-income markets are reacting to the global rate divergence, particularly with the Fed, well, in reality, the Fed and the Bank’s actions have been very similar this year, other than the fact that the Fed has been on pause for longer and their overnight rate is much higher than ours at 4.5%. We’d argue if the U.S. weakens more than anticipated, they have more room to cut rates, especially with rates being well above neutral, and inflation being around 2.5% to 3% in the U.S. 

In July, the Fed left rates unchanged, but we saw that this was not a unified Fed, and President Trump continues to publicly challenge Chairman Powell, threatening to replace him next year. So far, the U.S. economy has been very resilient, but we are starting to see cracks with slowing employment growth, and a modestly weakening consumer. 

So if inflation continues to remain stable, it’s likely we’ll see some cuts this year in the U.S. as well. And if not, Trump could look to replace Powell next year with someone willing to lower rates more aggressively. Currently, in early August, the futures market is pricing in two cuts by the Fed this year, and four cuts by June 2026. We’d argue this is consistent with our forecast where we see four cuts through the second quarter of next year. 

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In terms of the role of Canadian government bonds in today’s environment compared to corporate credit, well, that role really has never changed. They continue to be a large part of the Canadian bond universe. They represent triple-A securities, or the highest credit quality of government bonds in our country, and they provide reasonable yields for high-quality, low-response securities. 

Unlike corporate bonds, they offer far more liquidity and are easily tradable, and represent benchmark securities that corporate bonds are priced off of. Even in periods of high volatility, like the early days of Covid and the Great Financial Crisis, government bonds maintained their liquidity, while corporate bonds in some cases, couldn’t be moved as easily. 

In terms of needs in a portfolio, government bonds have always acted as a lower-risk diversifier in periods of market sell off, and that should continue to be the base case. In risk-off periods, government of Canada bonds should generate positive returns as yields fall, so they should continue to act as a low-risk source of income, and increase overall portfolio diversification. 

We continue to hold a significant portion of our holdings in government bonds. 

First, markets are not experiencing the inflationary rates of 8% like we did post-Covid. So we aren’t in a period where we see rates rising drastically. And corporate bonds, like stocks, currently have very expensive valuations, with corporate bond spreads being close to their multi-decade tights, which has caused us to become more defensive in our portfolios. 

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Right now, we favour investment-grade credit over high yield, especially with high-yield spreads being less than 300 basis points, and their overall yields being less than 7% in many situations. Keep in mind, high yield means lower-rated companies, meaning they are considered to have lower credit quality, and in many cases, have weaker credit fundamentals or are more cyclical. Now, as I mentioned earlier, we’re more defensive in our portfolios, so we’re at the lower weights in terms of our positioning. That doesn’t mean we aren’t buying any high yield, it just means we’re being more constructive on credit investments. 

Bottom-up analysis is key to understanding the risks when we make these investments, and I’m also looking for mispriced securities right now. So key fundamentals, relative valuation and bottom-up analysis are very important to me at this juncture. 

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In terms of overlooked opportunities in fixed income, we still think that there’s some decent opportunities. If you look in our portfolios, one area that we like in particular is hybrid securities, which have essentially replaced the preferred share markets. These are generally deeply subordinated capital instruments from investment-grade corporate bond issuers, that are expected to be called by the issuers at certain dates in the future, but they can be extended. They tend to offer very attractive yields and spreads higher than levels seen in the traditional bond market, and in today’s market, better than the high-yield market. 

These securities benefit the issuers as they are treated as partial equity by the rating agencies, meaning the credit metrics benefit from their issuance while the companies aren’t diluting their equity. And the advantage to bondholders in our portfolios [is] we get enhanced returns that are currently very attractive relative to the rest of the market on a valuation basis. 

And these aren’t new names to us. These are very well-known names in our portfolios. Think about names like Enbridge, Bell Canada, Rogers, TC Energy, AltaGas. These are just some examples, but all high-quality, investment-grade corporate bond issuers where we’ve traditionally held in our portfolios as well. 

Other opportunities that we see that are also still in less traditional sectors, they include some private debt, data centre real estate opportunities that we like as well, and CLOs. And of course, our investment-grade bond funds continue to be solid alternative to cash holdings, offering attractive after-tax yields, with limited risks to yields rising, as all the funds have fixed maturity dates, meaning investors are protected from rising yields if they hold the funds until maturity.

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This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Leslie Alba, head of portfolio solutions, total investment solutions, CIBC Asset Management 

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Through the latter half of this year, our team at CIBC Asset Management is paying close attention to tariffs, policy relief and oil prices, especially in the context of their potential impact on GDP, unemployment and inflation. 

With respect to tariffs, markets seem to be pricing in more certainty now than they did earlier this year. 

You know, equity markets have been resilient following the volatility we experienced at the beginning of April. And with the 2026 midterm elections approaching, the U.S. does have strong incentives to finalize trade agreements sooner than later to alleviate economic pressures, but also to secure political wins ahead of the elections. 

So, our team expects a flurry of announcements this summer, including a comprehensive trade and political agreement with Canada. 

Policy relief is another area we’re monitoring closely through the rest of the year. Most countries, aside from the U.S., are delivering synchronized and important fiscal and monetary stimulus, which is really helping to offset the economic drag of tariffs. 

Also, lower oil prices and disinflationary trends outside the U.S. provide some room for central banks to cut interest rates without fueling inflation. Where we do see the most significant tariff-related headwinds is in the U.S., where we project a 1% GDP drag over the next 12 months, though this will likely result in federal rate cuts later this year, but not enough really to offset that drag. 

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The global macroeconomic backdrop remains broadly supportive of equities, and that’s really driven by several key factors, including fiscal and monetary policy offsetting tariff headwinds, reduced policy uncertainty leading to improved risk sentiment in markets, and if The Federal Reserve does resume rate cuts, this should support both equity valuations and global activity.  

However, the balance of risk is skewed to the downside, and so within our managed solutions, we maintain a measured near-term view. 

Many major equity markets are above the levels we saw before the U.S. election. So to put things into perspective, the TSX Composite Index and the S&P 500 Index closed the second quarter of 2025 at record levels — and that’s in local dollar terms. Meanwhile, MSCI Europe Index was not far from its previous peak. 

So, what we’re seeing is current valuations that imply a pretty benign outcome, despite persistent macro and policy risks. And therefore, if downside scenarios do materialize, particularly around trade disruptions or policy missteps, equity corrections could be significant, with U.S. markets likely to be the most vulnerable given their elevated starting point. 

Over the near term, we see a more favourable equity outlook outside of the United States — particularly in Canada, Europe and emerging markets. Canadian equities are well positioned for relative outperformance as domestic growth accelerates amid a U.S. slowdown. And then in Europe, we have improving medium-term prospects, and that’s being driven by supportive fiscal and monetary policies, and should lift equity markets. 

And then we also remain constructive on emerging market equities. And that’s supported by a weaker U.S. dollar, historically being a tailwind for emerging market performance. But also, we see continued strength in the global tech cycle, the lagged effects of earlier emerging market rate cuts, and lower oil prices. In addition to that, The Fed’s easing cycle should provide emerging market central banks with more room to cut, further supporting growth and equity returns in those markets. 

And then on the bond side, so, thinking about fixed-income markets, 10-year government bonds, especially U.S. Treasuries, remain attractive. They continue to offer relatively elevated yields, which could decline looking ahead, and lead to outperformance of U.S. Treasuries versus other bonds. 

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Our long-term orientation for markets remains risk-on, with equities continuing to be the cornerstone for wealth generation. 

Our outlet for equities includes the view that over long term, U.S. companies will remain exceptional, but that the spread between U.S. and the rest of the world will narrow. We’re observing growing signs of moderation in U.S. exceptionalism, particularly outside of mega-cap tech stocks.  

And while innovation-led returns — so returns from AI, for example — remain a powerful structural driver of U.S. market returns, the breadth of U.S. equity leadership continues to narrow. Also, valuations remain stretched, and the earnings premium, relative to rest of the world, is compressing. 

Meanwhile, when we look across to Europe, it appears to be at the inflection point and potential start at the end of secular stagnation, starting with near-term policy support, though this support could have longer lasting effects on its economy and markets if we see a fundamental shift in the region’s attitude towards debt.  

And then, when we look to China, China’s ascent in technology, manufacturing, particularly in electric vehicles, solar and AI infrastructure, there are signals that we could be moving towards a more multipolar investment environment. 

And although risks to investing in China remain high, the country is clearly reshaping global competitive dynamics. News from DeepSeek earlier this year is a pretty humbling reminder that technology and innovation can emerge outside the United States. 

We also maintain the long-term view that bonds are an important ballast in investors’ portfolios. So although yields have come down from their peaks in 2023, they remain relatively higher than levels seen over much of the last decade [or] decade and a half. 

The diversification potential of bonds should shine through amid economic headwinds and equity market weakness, given that the higher coupons that are offered today should create some buffer for portfolio returns. 

Also, what we find through our research is that long-term bond returns tend to closely follow the starting yield, and all-in yield today remains relatively attractive, so bonds are an important component of balanced portfolios. 

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Our view is that investors should continue to position their portfolios in line with their long-term investment objectives, and in consideration of any investment constraints. Our long-term view on equity and fixed-income markets is broadly constructive, and so we recommend remaining fully invested. History does remind us that leadership — whether across regions, sectors, strategies or asset classes — is rarely permanent. 

And so because of that, practical patience, selective positioning and disciplined diversification will remain central to portfolio construction through the second half of 2025 and beyond. And we believe that that approach of diversifying the portfolio, remaining fully invested with bonds being a ballast, really does equip the portfolio to navigate volatility while maintaining long-term opportunity capture.

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This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Jeffrey Mayberry, fixed-income asset allocation strategist and portfolio manager at DoubleLine Capital 

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The first half of the year had a pretty good return for fixed income, or at least on the U.S. side. We had about a 4% return on the U.S. Agg [Bloomberg U.S. Aggregate Bond Index] in the first half of the year, and a 1.2% return in the second quarter. It was interesting on the U.S. Treasury curve in the second quarter, you had a pretty good steepening of the Treasury curve, with the two-year down actually 16 basis points, while the 10-year was actually up two basis points, and the long bond was up 20 basis points. 

So, this kind of weird steepening pivot around that 10-year point of the curve is something we’d been expecting, something that we were putting on in our portfolios. But it’s really much more of a move towards the idea that over the long term — and the long-term Treasury’s reflecting this — there are some fiscal problems in the U.S., and that’s really putting upward pressure on longer-term interest rates. 

You have seen, interestingly enough though, credit continuing to do well. Credit spreads have continued to grind in. Certainly, there was a lot of volatility around tariffs and what’s going on in Congress in the U.S. But overall, point to point, spread’s grinding in tighter. Really, if you look at your riskier credits, your high yield was up 2.5% on the quarter. It’s almost doubling the return of the Agg and, your bank floating rate side was up 2.8%. 

Really, the question going forward is, what’s going to happen with inflation, and what’s kind of priced in with inflation? I like to look at inflation swaps. They don’t have the supply/demand dynamics that you do see in Treasury inflation-protected securities. The TIPS really gives you a pure view on inflation. 

And over the shorter term — call it one to two years — zero coupon inflation swaps are pricing in higher inflation, but over the medium to longer term, inflation is coming back down towards a more normal level. If we look at it, we say, yes, that makes sense to us. The tariffs, no matter what level they’re implemented in, will lead to short-term higher inflation, whether it’s year-over-year or maybe a couple years, but shouldn’t affect things over the medium term. 

But really, when we look at it, we think the risk is to higher inflation. The Fed continuing to say inflation is a level that is unacceptable. And so that’s really the risk: that higher inflation. 

No rate cuts at the end of July seems pretty reasonable. But really — and this has been the case throughout the entire year — the probability of rate cuts is continuing to drop. We’re about 65% chance of a rate cut in September. And the first rate cut is continuing to be pushed out. It wouldn’t surprise me if we get, after the July meeting, the September rate probability goes down. And then October rates continuing to come down. And really, you’re at a place where inflation is still at top of mind, given what’s happened over the past five years. And that mindset has to switch in people in order for them to be comfortable with inflation. So I think the risk is to higher inflation. And it’s kind of being priced into bonds, but maybe not to the same extent that we are expecting. 

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There’s two things to think about here in terms of where we are, in terms of the economy and the credit cycle. Are we going into a recession? There’s kind of two trains of thought here. One is that if you look at the corporate credits, our corporate credit team tells me that earnings are very strong. There’s really a very low probability of defaults over the medium term. And even with the volatility around tariffs — whether the tariffs are going to be implemented or not — the corporations are very strong. 

Now, if you take a step back from the corporate credit side of things, and you look at the labour market, the labour market in the U.S. is starting to maybe show some signs of weakness. The jobless claims number is continuing to go up every single week, not to levels that you’re worried about yet, but the trend is something where we’re probably at a yellow light. “Let’s kind of keep an eye on them and see whether they continue to get worse or not.” But not at a “OK, we’re getting a recession!” level. 

The payroll data continues to be relatively strong, and so you really haven’t seen too many signs of that hard data mirroring the soft data, the sentiment data, that has been looking not terrible, but not great either. There are some signs of maybe a recession on the horizon. We don’t think it’s coming this year as we’re past the first half of the year already. We’re running out of time for there really to be a recession in 2025. But if you kind of say, what’s the probability of recession over the next 12 months, I would say we’re in a little bit higher than average, probably 60% probability of recession in the next 12 months, where it seems like the markets are pricing in a 40% chance of recession. So, we’re kind of inversed flip-flop on what markets are pricing in. 

There are some worrying signs, nothing where we are advocating for selling credit, especially since that corporate credit is continuing to remain strong and earnings are going to remain strong. But something just to keep an eye on, something to have your hand close to the ready button, and ready to make potential moves, depending on whether the data worsens or strengthens from here. 

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Canadian fixed income and the Canadian economy overall is at a very interesting place here relative to the U.S. And I think most of that’s because the U.S. is trying to decouple themselves from not only Canada, but everywhere else around the world. It used to be that a lot of the developed economies would move along with whatever the U.S. economy did — or at least that was the case over the post-World War II era — and I think that those correlations are still going to be relatively high, but I think the correlations of the future, at least over the medium term, are going to be lower. 

To the extent that, OK, the U.S is going to go into recession, you know, 60% chance of recession, I would discount that level from a Canadian fixed-income side, and maybe look at Canadian fixed income being a potential buying opportunity to move into those types of non-dollar trades, whether it’s in Canada or anywhere else around the world. 

* * * 

Because we’re at an interesting point in time, I think there are pockets of opportunity for fixed-income investors through the end of the year. You’re looking at something like structured credit, whether it’s in residential mortgages, commercial mortgages, asset-backed securities. While those spreads have come in and tightened, we think the probability of default is relatively low, and those spreads still give you some advantages over your investment-grade corporate bonds or higher up the credit stack in your high yield, your double-B high yield. You get some more yield, similar amounts of risk, similar amounts of volatility. So we think that’s a very good opportunity for investors. 

Also, given the moves in the U.S. dollar versus the global markets, we think it could be a good time to invest in some non-dollar names. Start legging into those trades. But certainly that’s a potential opportunity, given the market outlook for the dollar, and really try to take advantage of some of that volatility that happens in the non-dollar names, whether it’s in the sovereign space or in the local currency emerging market space. 

And finally, given our outlook for things, we do think that The Fed is more likely to cut rates, not necessarily over the short term, but we think that The Fed is more likely to cut than to hike. And so, have a little bit more of that exposure to the lower end of the Treasury curve, and less exposure to the longer end of the Treasury curve. 

The Treasury curve, on the long end, hasn’t really reacted too much to the Congress passing tax cuts, and a $5 trillion debt ceiling adjustment and the idea of deficits continuing to expand, but we think over the long term, certainly, that pressure is going to continue to push up longer term interest rates higher than they would be if the U.S. Congress got their fiscal house in order. We don’t think that that’s a very likely scenario — at least until they’re forced to buy the bond market — but certainly, that upward pressure on long-term interest rates would force that move, but it’s going to be significantly higher from here. 

So if you were to look at the Treasury curve, we like the short end of the curve. We don’t like the longer end of the curve. And if you are at a place where you can buy shorter-duration assets, we think that those two-year type assets, whether it’s the two-year Treasury curve or shorter duration structured credit, it’s going to do well in that scenario where the shorter end of the Treasury curve rallies and the Fed is cutting rates, whether it’s from a idea of recession coming or the idea that The Fed is just trying to, kind of, more normalize rates. Certainly the Fed is more inclined to cut rates very slightly from here versus raise rates. 

And so those are kind of the places we like in the market today. Picking and choosing, I think the volatility that we saw in the second quarter could continue here over the rest of the year, and provide some opportunities to pick up some relatively cheap bonds, and try to take advantage of some dislocations in the markets to provide good yielding, good spreading assets with very lower amounts of risk.

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DoubleLine® is a registered trademark of DoubleLine Capital LP.

The views expressed in this material are the views of DoubleLine® as of the date of publication unless otherwise indicated, and are subject to change at any time.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Michael Sager, managing director and CIO of the multi-asset and currency management team, CIBC Asset Management 

* * * 

We’ve certainly experienced a slowing in global GDP growth in the past couple of quarters, and that’s been led by a weakening of activity in the U.S. economy. Overall, though, activity, whether in the U.S. or in the global economy in aggregate, has remained resilient and probably a little bit better than was thought likely at the onset of the tariff war in spring of 2025.  

So that’s the broad situation. It’s slower growth than would have been the case, but it’s okay, and that means that it’s okay for equities and risky assets, broadly speaking. Tariff risks and related policy uncertainty emanating from the U.S. certainly remain high and are important drags on activity by themselves over the next couple of quarters.  

And if we think about where that drag on growth from tariffs and uncertainty is going to be biggest, well, it will be the U.S., which sounds kind of counterintuitive but makes sense when you think about the fact that it’s the U.S. that has chosen to fight a trade war on all fronts. And so the biggest hit to growth will be in the U.S.

Elsewhere — and this is why we’re still relatively constructive on the global economy — the impact on economic activity from tariffs, that negative impact, is likely to be mitigated by higher fiscal spending in Canada, in Europe and China, as well as more policy easing from central banks. So as a result, we do expect the global economy to avoid a recession, and as I said at the top, that economic conditions will remain broadly supportive of equities and risk assets, even though we are in the middle of a slowing. 

* * * 

So let’s turn to Canada and think about how the election, and the results of the election impacted the outlook for the Canadian economy. I think the bottom-line conclusion is that the results of the election are likely to be positive for the economic outlook in Canada. Right now, economic activity is weak. We don’t get the data for the second quarter until well into Q3, but Q2 is likely to be the weakest point of the cycle for Canada. GDP is very soggy. The unemployment rate has risen quite meaningfully.  

So I think it’s clear at the moment, the economy is not doing particularly well. But there’s reasons to think that we’re on the cusp of a gradual improvement. Certainly, tariff risks remain. But here we continue to think that a trade deal with the U.S. is coming, which means that the aggregate tariff rate applied to Canadian exports to the U.S. actually will be quite low.  

In addition, we do think there’ll be significant policy support. There is continued positive real-wage growth, and both of those will be important tailwinds to economic activity, helping the Canadian economy to recover and growth to strengthen as we move through the next four quarters.  

And so specifically, as a result of the election from a couple of months ago, we’re going to get quite significant government fiscal policy support, and that support will be quite targeted, which makes it particularly impactful. For instance, we’ll see more government spending to at least partially alleviate housing supply constraints, targeted spending to improve infrastructure and productivity, which has been very poor for a number of years, and targeted spending to help diversify away from Canadian reliance upon the U.S. economy at least at the margin.  

So if you put all of those together, yes, there’s a negative hit to growth coming from tariffs, but we think the policy to support fiscal and more Bank of Canada rate cuts will probably almost offset that negative tariff impact, and will be an important tailwind to the recovery that we expect. That recovery will likely be very helpful to Canadian equities, relative to U.S. equities for instance. 

* * * 

We’re not calling for an abrupt change in the status of the U.S. dollar. In fact, if you look at the broad usage of the dollar in international transactions over the last quarter century, it hasn’t changed. So despite repeated calls for a loss of global dominance, the dollar is as dominant as it ever was. But at the margin, clearly, something is happening, and investors have grown more concerned regarding the quality of U.S. policy making, the sustainability of U.S. government debt and other factors.  

And you can see that concern in a breakdown of traditional correlations, whether it’s between the level of the U.S. dollar and the level of U.S. Treasury yields. A clear break in that relationship. Or in the correlation between returns to the dollar against the Canadian dollar and local equity returns. Again, a clear change in the correlation. So at the margin, something is deteriorating in the status of the dollar. But we don’t want to over emphasize how big that change is in a short period of time. So that’s one aspect.  

And then, the U.S. dollar is clearly expensive, even though in the first six months it weakened by about 10% on a broad basket. It’s still expensive and likely to weaken. The U.S. economy is losing its cyclical growth leadership. The Fed is likely to become less hawkish, and the rest of the global economy, as I already talked about, is likely to recover faster than the U.S. over the next few quarters. Put those pieces of the puzzle together, they suggest a weaker dollar. So that’s our outlook.  

And so we think about the Canadian dollar today, we’re trading at $0.73 today, being the 10th of July, we think that the Canadian dollar can easily appreciate to around about $0.78. So [a] high single-digit increase in the value of the Canadian dollar against the U.S. Again, that relates to what’s happening in the underlying economy: a gradual slowdown in the U.S., a gradual recovery in Canada. Same story in Europe, where we expect the euro to continue to strengthen, for instance. So the outlook that we have for a weaker U.S. dollar is symptomatic of our view for the cyclical economic outlook. A strengthening rest of the world, and a weakening U.S. economy. 

* * * 

Our view of a modest growth rate for the global economy this year is broadly positive for equity markets and risk assets. So that’s the first opportunity. Definitely keep invested and stay focused on the opportunity that equities broadly offer.  

Within that there are, of course, relative opportunities. We think that Canada and EAFE are relatively attractive. Within the U.S., we like tech. We think that along with the global economic cycle, we think the global tech cycle has positive legs still. And, really, the most dominant place to get access to the up tech cycle that we expect remains the Mag Seven.  So U.S. tech remains positive. We’re neutral on the remainder of the S&P, the 493, as it were.

So U.S. tech, we’re positive. Canadian equity, we’re positive. EAFE, we’re positive. Less attractive from fixed income, given our view on the economy, although within that U.S. Treasuries are probably more attractive, given that there’s a bigger opportunity for yields to fall in the U.S., given the backup over previous months, and therefore for prices to rally.

* * *

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Greg Zdzienicki, vice president, client portfolio manager, equities, CIBC Asset Management 

* * * 

The low-volatility effect is a term that’s used to describe the observation that stocks with lower price volatility historically have generated higher returns than stocks with higher price volatility. 

And this was first researched by academics decades ago as an anomaly of conventional asset pricing theory. It observed that stocks that have lower price volatility historically have generated higher returns than those with higher price volatility. And investing approaches that sought to exploit this low-volatility effect started to gain a lot of prominence, particularly after the 2008 global financial crisis, as investors sought a less volatile investment experience. 

Low-volatility strategies offer a defensive investment approach, and they can lower a portfolio’s sensitivity to movements in the overall stock market, also known as beta, thereby reducing their overall volatility and enhancing risk-adjusted returns over the long term. 

* * * 

Low-volatility strategies are protected during significant market dislocations. You know, if we go back over the years and take a look back to the tech bubble, where we had a valuation issue, multiples got expensive, MSCI World Index was down about 20%, the S&P Global Low Vol Index was actually up about 3% during that period of time, really protecting on the downside. 

If we fast forward to the financial crisis in 2007 to 2009, and this was an issue that was caused by a debt crisis, we had the MSCI World Index down about 32%. Low-vol strategies down just less than half of that during that same period of time. And if we move forward to 2022 when we saw volatility come back, the MSCI World Index [was] down about 13%, with the S&P Global Low-Vol Index down only 1%. 

So during these market dislocations, whether it was a valuation response by the markets, whether it was a response to a debt crisis, or whether it was a response to a pullback in volatility, like we saw in 2022, low-volatility strategies have protected on the downside and offered investors diversification while maintaining long-term equity market exposure. 

* * * 

So far throughout 2025, we’ve had a number of different investment environments. We started off the year with a lot of volatility. In January, when tariffs were announced, the market did see a tremendous amount of volatility. The performance of low-volatility strategies during the tariff troubles that we saw in the beginning of 2025 was exactly what we’d have expected it to be. 

In Canada, low-volatility strategies were down about 2% to 4%, whereas the index was down about 12%, 12.5% during that same period. In the U.S., we saw a very similar type performance: S&P 500 down 18%, 19% during that period of time, whereas low-volatility strategies were down closer to 6%. And in international markets, we saw the same phenomena as well. When we look at international markets down about 13% during the tariff trouble period, the low-volatility strategy is down closer to 5%. Across all regions, whether international, U.S. or Canadian, we saw low-volatility strategies perform exactly as expected, protecting investors on the downside. 

* * * 

At CIBC, we combine our low-volatility strategies with dividends. And by combining dividends with low volatility improves the sustainability and visibility of a portfolio’s cash flow stream. So the largest impact to these low-volatility strategies, of course, is going to be volatility. As the VIX moves up or the volatility index starts to move up, these strategies tend to show their defensive characteristics. These strategies that are coupled with dividend-paying stocks also tend to resemble characteristics of quality, high cash flow and good profitability. 

* * * 

Low-volatility strategies play a very important role for long-term strategic asset allocation. 

First of all, they have a smoother return profile. So allocating the low-volatility equities can lead to a more stable return profile, aiding investors in achieving those long-term goals, while protecting capital during market downturns. They also have enhanced diversification. This tends to improve diversification when integrated into various investment styles, be it growth, value or core. 

When added to a portfolio, low-volatility strategies improve capital preservation and recovery times. They have the potential to provide better capital preservation, and they facilitate faster recovery in uncertain market conditions, making them an attractive option for risk-averse investors. And low-volatility strategies have historically outperformed during market corrections, providing better risk-adjusted returns, lower downside capture, which makes them a valuable complement to traditional portfolio strategies. 

* * * 

By using low-volatility strategies for risk reduction, clients are still maintaining long-term equity exposure. Whereas an allocation to fixed income can provide risk reduction in a portfolio and smoothen out a return profile, it does not provide that long-term equity exposure that some investors need in their portfolio to achieve those long-term goals. 

Low-volatility strategies, by their nature, tend to invest in more defensive industries. When we look at the sector exposures and say, at a Canadian low-volatility dividend ETF, there’s going to be significant exposure to areas like financials, utilities, consumer staples, communication services. These are areas of the market that tend to exhibit these lower-volatility characteristics. These are also areas of the market that tend to have better cash flows, higher profitability and tend to pay dividends. Areas of the market, for example, information technology, consumer discretionary, materials in Canada will be underrepresented within a low-volatility ETF. 

If we take a look at the U.S., we do see a significant difference between the exposure to the broad market and a low-volatility dividend ETF. And that is what really drives that diversification benefit. Low-volatility ETFs in the U.S. will be overweight consumer staples, overweight financials, overweight utilities, and will have a meaningful underweight to areas such as consumer discretionary [and] information technology. 

So particularly in the U.S., where we’ve seen a lot of leadership from the Magnificent Seven or the Great Eight — we saw technology lead and becoming substantial part of the index — low-volatility ETFs in the U.S. are going to look very different than the benchmark, again, continuing to deliver those diversification benefits and protection during downturns in the market. 

Internationally, we will see very similar type exposures, and again, we will have less exposure to areas like technology, materials and consumer discretionary.  

When we look at low-volatility ETFs, and we take a look at the market cap that they invest in, if it’s Canada or an international ETF, the majority seems to be clustered in that $10 to $50 billion market-cap range. In the U.S., we’re probably more in the $50 to $100 billion, with significant exposure as well in companies over $100 billion.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Greg Gipson, managing director and head of exchange-traded funds at CIBC Global Asset Management 

* * * 

AI has the power to transform ETF strategy. It’s really along three main dimensions. First, what goes into the ETF or the security selection. Two, how do you put it together, or portfolio construction. And three, how to monitor the ETF, or risk management. 

On the first part, in regards to what goes into an ETF, it’s important to remember that many AI processes, machine learning, etc., are really focused on pattern recognition and data analysis. So AI is able to process large amounts of data, unstructured data and alternative data sources, which just really enables a richer and more contextual approach to selecting the components that go into an ETF. 

On the portfolio construction side, there’s many existing approaches around portfolio optimization, risk-based optimization. Machine learning models can really add value to how you put things together or how you build a portfolio, and enables you to really have a real-time adaptation to what’s going on in the market, and is able to improve the responsiveness to which portfolio managers can adjust their holdings. 

On the risk management side, this is another important aspect for ETFs, and really for all funds in that, again, AI focused on that ability to recognize patterns, identify correlations, identify anomalies in data, and really act as an early warning sign for the human analyst or the risk department to understand what underlying risks are in the ETF, what underlying risks exist in the market, and the negative impact that that could have on the performance of the ETF itself. 

* * * 

Innovation in asset management, as it relates to incorporating artificial intelligence or machine learning, really has the ability to transform the way that businesses are run. 

So, first and foremost, if you think about the types of techniques that AI encompasses, many of them have been around for decades. 

The difference now really is twofold. One is the massive, massive increase in the amount of data or information that is available to investors. And two is the computing power, so the ability to process those large amounts of data. And what that enables asset managers, portfolio managers to do is really have a much richer or more thoughtful, more inclusive approach to predictive analytics, and really focusing on developing and designing customized solutions for investors. 

So that ability to really focus on the areas of the market that are driving performance, the ability to stratify investments, to really allow that targeted approach, targeted exposure, for investors to gain access to. And from an overall business perspective, obviously there’s the cost efficiency output, where really allowing the automation of processes, automation of data, automation of trade execution, automation, automation! Automation as the ability for business to scale systematically is more efficient than scaling through human capital.  

* * * 

The opportunities in ETFs for investors as it relates to AI are along a number of dimensions. So clearly, the easiest one would be investing in an ETF that is focused on investing in companies that would benefit from the AI revolution. 

But maybe a bit more detail on that is really the ability for AI to discern or distill the areas of the market that are driving performance. So think of these as thematic ETFs, where an AI or machine learning-based process is able to determine those securities that have a particular correlation or particular exposure to something like AI or something like data centers. And then that understanding allows the ETF manufacturer, ETF manager, to create a vehicle — an ETF — that then is offered to investors to gain exposure to an area of the market that they may otherwise not be aware of. 

Another opportunity in ETFs for investors is around the processing of data. So, as we mentioned earlier, there are massive, massive increase in the amounts of data. It’s often fragmented, it’s unstructured, it’s alternative, it’s sitting in spreadsheets or PDFs. And really what AI allows is that automation of data consumption, and then also clean and efficient and structured way of analyzing fragmented data. And this is particularly important in areas where information is more sparse. So if you think of areas like emerging markets, if you think of areas like commodities, right? Because often this data sits in an environment that’s not necessarily conducive to a systematic review or incorporation of the data into a process. 

* * * 

Integrating AI into ETF portfolios, or really any investment management process faces a number of unique and specific issues that need to be addressed. First and foremost is what goes into the model. So think of this as data quality. So the old adage “garbage in, garbage out” would apply to AI model use as well. 

So as important as the machine learning or AI-based approach is, I would argue that even more important is data acquisition, data cleansing and data storage. So just having a structured database that the machine-learning techniques or AI techniques can then access is paramount to success, and paramount to gaining recognition and appreciation by the end user. 

Another challenge that AI faces is in how it analyzes data. This is really focused around that black-box mentality. And one of the main challenges that these types of techniques have — or really any quantitative process can have — is around transparency. So there’s a field of AI called XAI, or explainable AI, super interesting, and it really seeks to provide more of an explanation as to what the model actually does. And this is important, because without understanding what the model does, interpreting the output can both be challenging, and also lead to incorrect assumptions about what is being recommended. 

A third challenge that any business faces is around implementation costs. When implementing artificial intelligence into an investment management process or ETF portfolio construction, one should not underestimate the cost associated with acquiring data and structuring data. I would again say that this is the single most important facet of a successful artificial intelligence or machine learning process is in data, data, data. 

The actual mechanics, the actual software or processes to run these types of analysis is increasingly commoditized, but the costs upfront to be ready to use those types of techniques should not be underestimated by any business or any user. 

* * * 

In my opinion, the outlook for integrating artificial intelligence into ETF portfolio construction is truly exciting. I see that the next wave of really building and developing, curating unique solutions for investors lies in the ability to leverage artificial intelligence, leverage the power of machine learning to create a more customized solution that meets individual investor needs.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Pablo Martinez, portfolio manager, CIBC Asset Management 

* * * 

To provide an update on the target date maturity funds that were launched about a year and a half ago, what we can say first is that those new funds performed greatly and performed as expected. Clients were able to profit from higher yields from corporate issuers, and also from the capital gains that are derived from purchasing bonds at a discount. 

Clients must understand that those funds were created to profit from a specific opportunity, which arose from an increase in bond yields in 2022, and a favourable fiscal treatment of capital gains. The window of opportunity is still good for those funds but as rates remain relatively stable, discount bonds become scarce as they come to maturity. Clients should have a contingency plan to move funds when the favourable context is no longer there. 

We are in 2025, and the 2025 sleeve of target maturity fund will be closing at the end of November. The fund itself will close and money will be sent back to our clients. We have to understand that most of the capital gains from the discount bonds have already been realized. The bonds in the portfolio now are all trading very close to par. So it would be a good time to deploy the funds into other strategies, whether it is in the longer sleeves of the fund — so we have sleeves in 2026, 2027, 2028, up 2030 — that is one opportunity that’s still there. Those funds are still trading at a discount, and provide a good GIC-equivalent yield. But again, there’s other strategies that we can provide, one of which is in fixed-income pools. And those provide greater diversity in asset classes or in geographical region, and a longer term approach. And also we have, obviously, the good old corporate bond funds, which provide a higher yield, great diversifier as well, and also goes longer into the yield curve and provides a bit more yield. 

* * * 

The performance for those funds will vary depending on the manager, and also the sectors that are being taken. In our case — in the case of the funds that we manage — what we look at is not just the name of the issue or the sector of the issue. The prime decision that we take will be on the GIC-equivalent yield. We derive that yield basically with two things: first will be the overall yield of the portfolio, but also the discount of the bond. 

So when we combine both, that’s how we get the best GIC-equivalent yield for the portfolio, and that, we believe, is what distinguishes us from the competition. It’s our capacity to source bonds that are trading at a discount, and also being able to buy them at the best possible price because of competition. 

* * * 

The later sleeve of the funds provide, obviously, the greatest yield on a GIC-equivalent basis. And it’s quite interesting to see that for each year we have a different set of bonds, some of which offer better yield and a better discount than others. 

For example, when we look at the sleeve for the five years that we have available right now — 2028 and 2030 — that’s where we have the best combination of higher yielding bonds that are trading at a discount. Unfortunately, it depends when those bonds were issued. So the years 2027, 2029 still provide good opportunities, but there’s less of a good combination of both and that’s why we’re seeing a lot of the funds go into the ’28 and ’30 sleeves of the funds. 

2026 is very popular, but what we’re seeing in 2026 is that this fund is being used maybe to provide an alternative to money market instruments, as it provides a higher yield, and those funds obviously are very liquid. 

* * * 

If I can provide an update on the fixed-income market, off the bat what we can say is that global bond yields have been very volatile since the beginning of the year. They’ve reacted strongly to the initial volley of decrees from the White House, and also to the daily tweets from the President. 

But we believe that the big break higher in yields came on what is being called now Liberation Day. On the day that President Trump announced that they were actually going along with imposing tariffs on main trading partners, we have seen rates increase quite materially and quite quickly, mostly on the back of inflation fears. You know, if U.S. imposes tariffs, it leads to higher prices for consumers. 

So already inflation was at the higher end of the central bank’s tolerance band. When you add to this tariffs, well, obviously you’ll get an inflation scare. Add to that the fact that the U.S. budget doesn’t really show any kind of fiscal constraint, and also that the DOGE initiative is not really having the desired impact on reducing government spending, well, you have the perfect recipe for higher yields. 

That being said, the yields moved up, but they remained within our trading range. The reason for this is that the break higher in yield was limited by fears of economic slowdown that would result from lower international trade. So the bond market is seesawing between those two themes: tariffs-induced inflation and slower growth. 

On the corporate bond side, corporate bonds did suffer at the announcement of tariffs, along with other riskier asset classes. But all the lost ground has been recovered as the White House is walking back their aggressive stance initially taken on tariffs. As tariff uncertainty remains in the market, it leads to a very volatile bond market that doesn’t really trade on economic fundamentals, but a lot of it on headline news. 

So our base case scenario still remains that tariffs will be imposed on trading partners. But nobody really knows the magnitude of the tariffs, and which industries and countries will be impacted. So right now, the market is undecided on which will impact rates the most. Will it be the inflation impact of tariffs, or the growth slowdown that might result from lower global trade? 

The positive spin here is that markets now react much less to the headlines, as it did earlier in Trump’s mandate, as participants realize that we have to set aside the daily reality show from the White House, and concentrate on what is the ultimate goal of this administration, which basically is increasing revenues from tariffs to finance a low tax base to corporations and consumers, and also to try to get the deficit in order. 

* * * 

How did the Bank’s June announcement impact fixed income? Well, actually, most of the Bank’s decision was already priced into the market. If we had looked at the futures market right before the announcement, that was priced at about 95%. And reading the comments and listening to what the Bank is saying, we can see that the Bank realizes that the confidence numbers from consumers and businesses are still very low. Most of the consumers and businesses remain very concerned about the trade war. 

So the Bank of Canada wants to make sure, even though confidence is low, they want to make sure that inflation remains contained before dropping rates. Because we have to remember, even though overall inflation is very well within the Bank’s tolerance rate, core measures of inflation remain above 3%, and they’ve been increasing slightly lately. So the Bank doesn’t want to repeat the same mistake it did in 2022, when they underestimated the inflation spike. 

The Bank still has ammunition to drop rates if need be, but they will use it only if necessary, as rates are not that much of a weapon in a trade war environment. Even if you drop the overnight rates, well, that won’t really boost confidence from consumers or businesses. It’s really fiscal measures that are a better tool, not monetary ones. 

* * * 

One key risk that we’re looking at, obviously, is the uncontrolled spending by the U.S. government. A lot of the reason why the Trump administration was put in the White House was to get the fiscal house in order. And in what we’re seeing now, it is not really happening. So when you combine uncontrolled spending by the U.S. government with the protectionist economic policy, well, there’s a risk that this would result in the loss of confidence in the Treasury market, and we’ve seen sign of this. 

And when you get a loss of confidence, that would normally lead to higher yields. Investors will require higher interest rates to invest in the U.S. Treasury market, and that would be very detrimental to U.S. growth, and also to the debt sustainability of the U.S. economy. That being said, a buyers strike for the Treasury market is not our base case scenario, but the risk of this happening has increased materially in the past few months. 

There still remains some places in the market where we can continue to find yield, and that for us is still in the corporate bond markets. So although corporate bonds underperformed early in the year with a drop in the equity markets, the rebound has been just spectacular so far this quarter. 

We believe there’s still good value in the corporate bond market, but we have to be aware that some sectors might be more at risk. Those sectors, of course, which are at the center of the current tariff negotiations, and the first one that comes to mind is car companies. So we have to be aware that the risk patterns have increased for some of the sectors, but the overall corporate bond markets remain a place where there’s still good opportunities.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Aaron White, executive director and head of sustainable investments at CIBC Asset Management 

* * * 

Let’s start with the biggest trend facing the sustainable investment landscape today: the changing regulatory and policy environment around climate and ESG policies. 

Over the past decade, we saw a surge in commitments to net-zero goals. But over the last year, we’ve seen a noticeable shift. Some companies and market participants, like asset managers and pension plans, are pulling back from their net-zero pledges and/or their affiliations. This is largely due to the lack of clarity around the regulatory frameworks, and uncertainty in how they may be held accountable for ambitious targets that they might not meet. This is compounded by unsupportive policy and legislation that is rising in the United States, creating further uncertainty for industry participants. 

This important reaction for investors is now more important than ever to understand corporate and industry action under a backdrop of less clarity. Evaluating how participants are reacting to the material impacts to their business or portfolio, and not simple checkmarks for their targets, commitments and affiliations. This is much more complex, and requires a significant amount of attention to direct action at the company or the plan that you’re evaluating. 

This brings us to the next important trend: concerns around continued policy support for the transition to a low-carbon economy. 

Governments worldwide are grappling with competing priorities, the economic recovery from Covid and rising inflation, energy security and climate action. The question is, will policy support remain strong, or will we see a continued rollback in incentives and regulations? For businesses, this uncertainty makes long-term planning incredibly challenging. And for investors, [it] creates greater uncertainty around the realities of transition risk in portfolios. 

Meanwhile, we’re also seeing in the United States, diversity, equity and inclusion initiatives are coming under fire. Some industry leaders are questioning the impact of these programs, particularly in light of the political and social pushback. Organizations are pivoting to measuring how DEI initiatives deliver positive financial outcomes, and ensuring that these efforts are creative to business and investment success. 

It’s clear that diverse sources of thought drive better decision-making. And so, as investors, we’re increasingly having to understand how our portfolio companies are reacting to this legislation and pushback, and ensuring that DEI policies remain positive and accretive to the business success in this new environment. 

And then, finally, there’s also COP30, the next major United Nations Climate Conference set to take place in Brazil later this year. As countries prepare to submit new nationally determined contributions — or NDCs — there’s growing concern that we’re falling behind on global climate goals, while waiting to see whether COP30 will bring ambitious new targets, or whether we’ll see reduced ambition in the face of political and economic pressures. All this while the United States has pulled out of the Paris Agreement and, in essence, the COP process.  

The stakes could not be higher, and we approach significant milestones in our ambition for net zero, and the outcomes will shape the trajectory of climate action for years to come. 

It’s clear that we’re at a crossroads in sustainability policy, and the decisions made today — whether it’s doubling down on disclosures and transparency, strengthening DEI initiatives, or setting bold climate targets — will have significant implications for companies and investors. As investors, it will be important in this environment of uncertainty to remain measured in our approach, and to stay focused on portfolio materiality. 

* * * 

We’re currently focused on three major opportunities that investors should be looking out for in today’s market. 

Firstly, nuclear energy is in the midst of a renaissance. As part of the energy transition, policy makers are pivoting focus to nuclear energy to play a significant role in a secure pathway to net zero. And the market is anticipating that project capacity will nearly double by 2050. 

Several intergovernmental panel on climate change scenarios also call for similar or greater amount of nuclear energy capacity growth by 2050. And as of 2022, nuclear power has displaced nearly 70 gigatons of emissions globally, and with supportive policy will be a key driver for further emissions reductions moving forward. 

We saw this policy commitment at COP28 with 20 countries, including Canada, committing to tripling nuclear energy capacity by 2050 by mobilizing investment, ensuring strong oversight and safety standards, and supporting the development and construction of necessary infrastructure. 

Domestically, we’ve seen policy support accelerate through the inclusion of nuclear energy in Canada’s Green Bond Framework, and, more recently, a roadmap for increased investment in the Canadian nuclear industry released by Natural Resources Canada in March of 2025. 

While concerns around accidents and waste management remain a challenge for this sector, both operationally and optically, these risks are declining. Nuclear power plants have been operating for approximately 60 years across 36 countries, resulting in over 18,500 cumulative reactor years around the globe, with very few safety incidents. This does not mean that oversight, innovation and risk management should be ignored, but rather underscores the improvements that have been made in recent decades. 

As the nuclear energy industry evolves, there are potential implications and opportunities for companies across several sectors, including utilities, materials and industrials. Mining enrichment and delivery of uranium will be critical services as demand increases, with additional opportunities around infrastructure build out, power plant construction and waste management. 

We believe Canada is in a unique position to benefit from these trends. As the second biggest producer of uranium globally, higher demand for nuclear energy domestically and internationally should benefit local communities by creating jobs, contributing to GDP growth, accelerating emissions reductions and bolstering domestic energy security. 

The second area of opportunity we’re seeing for investors is around the emergence of the Indigenous economy in Canada. New government policy support — including loan guarantee programs to unlock equity participation in major projects — will spur incredible contributions from Indigenous communities to the Canadian economy. Nation-building infrastructure projects and the unlocking of Canada’s critical mineral deposits will go through Indigenous lands and communities. 

This will mean that governments and companies will need to actively bring Indigenous communities to the table, and support participation in the economic benefits of these projects. Now more than ever, we as Canadians will need to reaffirm our commitment to the United Nations Declaration for the Rights of Indigenous People, and ensure that project approvals appropriately incorporate free and prior informed consent. 

And finally, possibly the most exciting development for investors related to the energy transition is the growth and maturity of the carbon management industry. 

First, it’s important to understand the difference between compliance and voluntary markets. Historically, investors have thought of carbon markets as, effectively, the compliance markets, which are cap and trade systems across the developed world that set emissions caps on industry, and create a trading volume of credits for those that overproduce their allotment or underproduce their allotment. And there have been the development of derivatives markets to trade in these futures contracts around some of these credits. 

But what we’re really talking about here is the growth in the voluntary markets. And the voluntary markets have had a poor representation for their contribution to the climate transition as a result of the dominance of avoidance credits, which are essentially preserving existing land or forests, as an example, to produce a credit that has low cost and has no additionality. 

But what we’re talking about here is the emergence and growth of the carbon dioxide removal market. And this industry will need to scale to as much as 10 gigatons per year of production to meet various net-zero scenarios, meaning that this will become one of the largest commodity markets by volume in the world by 2050, and beyond. 

The market is saturated across various degrees of approaches, including nature-based solutions, which range from projects like afforestation through to biochar (burning of organic material in low-oxygenated environments), through to enhanced rock weathering, which accelerates a natural process to store carbon in soil, all the way out to novel and technology-based solutions that you may think of when you think of the CDR market, which are large fans pulling air in and condensing CO2 to be stored at a storage facility. 

These projects are all maturing, and all starting to pass first-of-a-kind and demonstration projects. 

And alongside that, we now have major buyers who are active in the market, entering off-take agreements with these developers. These buyers are the likes of Microsoft, the frontier conglomeration, which includes members like Stripe and Shopify. And these actors are creating the financial incentive for investors to come into the market to finance these projects. 

We believe that this market has now reached the maturity where it’s ready for investors to scale, and we believe that debt will be an essential component of this, and we are seeing some very exciting opportunities around the CDR market. 

* * * 

There is debate in the industry today as to how emerging markets will contribute to the climate transition, given that developed market economies have benefited in the growth and prosperity associated with utilizing fossil fuels as a core part of the energy mix to drive growth throughout the industrial revolution, and the information age. It is now being asked of emerging market economies to take a different approach, and one that may be more costly and less effective in terms of real, immediate growth. 

And so throughout the COP process, there has been significant amount of debate in terms of how the global south will participate in the global transition; how they will ultimately be responsible for the costs of managing the physical risks that materialize as a result of the climate crisis; and lastly, how developed economies will support the emerging markets in terms of the energy transition and building a low-carbon economy that facilitates the same degree of growth opportunities that were presented for developed markets. 

This is an extremely complex issue, and one that is sure to be at the top of the discussion point at COP30 in Brazil. We may see some resolution as it relates to transfer payments. We may see some resolution as it relates to how developed economies will support emerging markets in their development of a low-carbon energy system. But this is definitely something that we, as investors, need to monitor as it will be a critical component of whether or not we can achieve our net-zero ambitions because we need to bring the entire world together within this process.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Robertson Velez, portfolio manager, CIBC Asset Management 

* * * 

Let me talk about the current economic environment in light of the tariffs, and its impact on the tech sector. In my view, the challenging environment we have seen over the past few months was due to the uncertainty, particularly about significant policy changes in the U.S. and the impact that they have on the economy. 

Over the past few months, we have seen the administration put on huge tariffs — as much as 145% on China — then reduced and deferred them significantly. And at this point, we are not even sure if the tariffs can be implemented as they are now. So the main point is that the concerns are about the uncertainty rather than the technology thesis. So it’s important to look through what’s happening and filter out the signal from the noise. 

It has been the goal of the past two U.S. administrations to bring manufacturing in key technologies back to the U.S. The only difference is in the approach.  

The Biden administration used the carrot. For example: using a massive subsidy program like the CHIPS Act to bring back semiconductor manufacturing, which would have had to be paid for with taxes or inflation. 

The Trump administration is using the stick through tariffs on foreign imported goods, which is effectively a tax to incentivize specific capital allocation. The end goal is the same, which is to bring manufacturing back to the U.S. 

If we look past the noise at what this would mean to the U.S. technology landscape in a few years, technology such as AI becomes even more critical, not less, because of the need to improve productivity in the U.S. to remain competitive in global markets. 

* * * 

There are always many factors impacting the tech sector. So let’s talk about some of the existential threats beyond tariffs. There is a current belief in the U.S. administration that they can control the competitive landscape for technologies like AI through export controls of key technologies. So many export control restrictions have been put on U.S. companies and their allies, restricting them from selling key technologies to China. 

Beyond the short-term view of lost sales, I think there is a bigger risk that China will develop these capabilities on their own, without relying on American platforms, making them a bigger competitive threat longer term. Necessity is the mother of invention, after all, and China has demonstrated significant capacity for AI innovation, even in the face of significant export controls implemented so far. 

Longer term, the biggest risk to the tech sector is disruption itself. By its very nature, tech tends to separate winners and losers through the creative destruction process over time, and it is important to be on the right side of the technology adoption trends. The current theme in tech is AI, which is both the biggest potential opportunity and disruptor. 

I don’t think we talk enough about this because most people assume AI is good for everyone. But it is important to recognize which businesses will thrive with the adoption of this technology, and which will be disrupted by it. 

This isn’t as easy as it sounds, because practically every company claims to embrace AI, and investors assume that AI is just good for everyone. But without some kind of competitive advantage enabled by AI, this would just mean added costs for companies to stay relevant. 

Not all companies will be able to achieve competitive advantage through AI, and our job is to identify those with competitive advantages. 

* * * 

So, in terms of the AI revolution and what it means for investors, about 80% of the portfolio is invested in the AI theme. Let me talk through these three themes. 

We own the fundamental core of AI, such as semiconductors and infrastructure. There’s a view that having run up so much over the past two years, it would be difficult for these companies to continue to grow, especially in the face of advancements in the cost efficiency of AI algorithms. Our view is that as the costs of implementing AI come down, the demand for AI actually goes up, not down. And this is supported by the continued growth in CapEx guidance of the major hyperscalers, like Alphabet, Meta and Microsoft. So examples of companies in this theme are Nvidia, which remains the core AI infrastructure play, and Broadcom, which benefits from AI-related connectivity solutions, as well as custom chips for AI. 

Secondly, we invest in enterprise software and tools where AI applications are used. The challenge with enterprise in using AI is not just AI itself, but in migrating its large stores of data to a form that is useful for AI training. We believe that the market for data migration tools will be as big as the AI market itself. So we invest in companies that have access to enterprise data that can use AI to significantly improve productivity. 

For example, Microsoft Copilot can access enterprise data to augment its Office suite. ServiceNow uses AI to incorporate data to enhance workflows. And Salesforce uses enterprise data to implement agentic AI to replace human functions. 

Third, we invest in direct applications of AI to the consumer. This could take many forms, such as AI enhanced search engines, better enhanced recommendation engines or analytics, or new consumer-facing applications. 

For example, Google and Meta uses AI in all its consumer-facing products to improve monetization. Apple uses AI to augment its smartphone products. 

So these are some of the opportunities ahead, and I believe we’re still at early stages of this AI adoption curve. 

* * * 

So what challenges remain? 

The biggest challenge in any adoption of new technologies is acceptance. Most industries are very resistant to change, and the tech landscape is littered with products that fail to get consumers and businesses to change behavioural patterns. 

For example, virtual reality largely failed in the past to achieve mass adoption because people didn’t want to wear a bulky headgear for their entertainment. And many businesses still run on mainframe today because of the difficulty in getting large institutions to transition out of old systems. 

AI has an advantage in that it adapts well to human behaviour, and it has gained traction in many applications that are an easy replacement for human functions, such as in contact centers and in coding. More complex tasks, however, are more difficult to penetrate due largely to issues of trust. 

As AI is proven out in various fields of endeavour, however, such as in robotaxis or in humanoid robots, I think we will soon see an inflection point in AI adoption. And I think that this is a huge opportunity over the next decade, of which we are still at early stages, probably the first two or three years of this AI adoption curve. And over the next decade, this will be the biggest opportunity in technology. 

* * * 

So, what is my outlook for the tech sector? 

My outlook over the medium and long term has been positive all year. Even ahead of the U.S. Liberation Day announcement, I had said I was cautiously optimistic on tech, ahead of what we knew would be very disruptive trade policies. 

I’ll give you some context for my optimism. The technology sector is driven by cycles. We can look back at massive tech cycles in the past, like smartphones and PCs, and we generally see a period of about a decade when we see massive growth as the technology is adopted. We are about two years into the current technology adoption cycle of AI. We have seen massive spending by the large hyperscaler companies in AI infrastructure, which I expect will translate into adoption in enterprise and consumer applications. And we are still at very early stages in the proliferation of AI. 

So, let me talk about the current environment. We have seen a lot of challenges over the past several months due to uncertainty about U.S. trade policies. But looking past the noise, we believe that AI remains the most important technology to invest in over the next decade because of its potential to massively change the way we work to improve productivity. And I think that we are still very early in that cycle, and the opportunities are still ahead of us.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Meric Koksal, managing director and head of product at CIBC Asset Management 

* * * 

Last week, in the first installment of our two-part Exploring Alternatives series, we heard from my colleague, David Wong, on the evolving investment landscape and purpose of incorporating alternative investments in portfolios. Today, in part two, I’ll be taking a deeper dive looking at some of the specific classes of alternatives, their features and benefits and how they can benefit a client’s portfolio. 

* * * 

There are many options to look at when it comes to alternative investments. Specifically, we can start off with private equity. 

Private equity is effectively investing in the ownership of private companies. This can come in a variety of forms. It can be venture capital, where the investment is in early-stage companies. It can be growth equity, where investment goes into more established companies, and buyouts, where the manager is acquiring controlling stakes. 

A second popular version that you will hear about is private credit or private debt. This is where the managers are lending money directly to private companies. Again, this can take various forms of lending, sometimes referred to as non-bank lending. 

A third fairly wide category is real assets, where the investments are in physical assets like infrastructure, real estate and natural resources. This can come in both equity or debt format. 

Last but not least we have hedge funds. Although sometimes considered separately, private investment funds that use various strategies and are not publicly traded fall under the broader umbrella of private markets. 

For the purpose of this podcast today, I will be specifically focusing on the funds investing in private assets, private equity, private credit and real assets. 

* * * 

Going into how each strategy can benefit a client’s portfolio. This comes in various forms, and the opportunity cost is a very important question in relation to the benefits that private market exposure can bring. 

Tying it back to what David mentioned in part one, investors can look to move some of their equity or fixed-income allocation to privates. Private equity can be considered for a portion of that equity allocation. The private equity investment can provide clients with enhanced returns. David shared some examples in part one last week. The relative pickup in returns in these private investments typically come as there needs to be a liquidity premium that the clients should demand. 

You also get an opportunity to invest in various stages of a company’s development. In public markets, you’re typically investing in the company when it’s a relatively mature company with a steady revenue stream. In private equity, you get access to companies either through venture at very early stages or in a little bit more mature stages. But in either case, there is more risk involved, and that is why they tend to deliver higher returns than what you may see in public markets. 

Moving on to private credit or debt, this category of private investments can be a great fit for the fixed-income portion of the portfolio, as at their core, these strategies effectively aim to pay a steady income to clients, typically on a monthly basis. And this income tends to be higher than what investors can achieve in public markets, even in the high-yield space. To give you an example, the typical income that you would expect in a private credit fund currently is around 10%, or even in low teens. 

Moving on to real assets, real assets can play a crucial role to create a well-diversified asset allocation, acting as a complement to the traditional equity/fixed income mix. Another additional benefit with infrastructure real estate or agriculture-linked investment is the hedge they provide against inflation. As the cost of living rises, the value of these physical assets, and the income they generate tend to increase as well. 

In all of these three – private equity, private credit and real assets — clients can not only enjoy returns that can be enhanced versus comparable public investments, but they also tend to be uncorrelated to public markets, which means adding them to your asset allocation typically reduces the overall risk or volatility of the portfolio. And at the end, clients end up achieving enhanced return with lower volatility, which means through this asset allocation, they achieve better risk-adjusted returns. 

This is one of my favourite stats when it comes to private markets: almost 85% to 90% of companies by count are held privately. So when investors are looking at only public markets, they’re really getting exposure to about 10% to 15% of what is available for investment out there. This means introducing private markets into asset allocation allows them to access part of the investment universe, which is diverse across industries and geographies. 

* * * 

When considering if privates should be a part of the asset allocation, the questions are not that different from other investments. A few key ones that come to mind: what are the investment goals of the client? Is it preserving capital, targeting growth, creating consistent income, or a combination of these? As I previously outlined, there are different private funds that will fit each one of these goals. 

A second question, and a very important one, is what is the time horizon for the client, as well as liquidity and cash flow needs? This is especially important as privates don’t offer the same liquidity profile as public investments. Public markets offer intraday or daily liquidity. As much as they have evolved, private investments still currently offer quarterly liquidity to a limit that varies by the type of investment. So this is very important when considering investment in private markets for clients that have very specific and constrained daily liquidity needs. And when it comes to time horizon, these investments should be considered as longer-term holdings versus a short-term tactical allocation. 

A third question that comes to mind: what is the client’s risk tolerance? Given the liquidity profile we just talked about, private investments are typically considered medium or high risk. This should be taken into account with regards to specific client risk profiles. 

A couple other questions that are particularly important and specific to private markets are, what is the client’s investment knowledge? This is still a new area for advisors and their wealth clients. There’s a lot more information available, but it is not as easily accessible as public investments. So really getting the clients up to speed before moving a significant allocation to private markets is very important. 

Last but not least, fees. It’s a question that should come up with every single investment. And as transparent as the fees are, they are not as straightforward as a traditional management fee. A lot of the investments that you will see will involve a management fee, as well as what’s referred to as performance fee. They do tend to be different from what you would see in public markets, so it’s very important for advisors to educate their clients as to the impact these fees will have on their returns. 

* * * 

Advisors, just like in any other investment, should do their research to see if private alternatives is the right fit for their clients. There’s a lot of great educational pieces available from various sources, and these tend to cover all the benefits, as well as the nuances that are involved with these private investments. 

So if advisors can map out how these investments can fit within the client’s asset allocation and how they can be additive in their path of reaching their goals, I think that sets the strong foundation to introduce these. 

It is very important to note that these are longer term investments with less liquidity versus public comparables. I personally think it’s very critical for advisors to provide regular updates to their clients once these private investments are introduced in the portfolio.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.