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Dale Jackson

Personal Finance Columnist, Payback Time


It’s been quite a ride on equity markets with the TSX Composite and S&P 500 up about seven per cent and 11 per cent respectively since September. That’s on top of a tripling of global equities since the 2008 market meltdown.

So, what is that nagging twitch in the back of your mind? Maybe it’s the fact that the same 2008 market meltdown wiped out half the value of global equities in a matter of months – and markets tend to go down after they go up.

If you need the markets to grow your retirement savings but don’t want to risk losing what you have, consider market-neutral investing. The ideal market-neutral strategy generates a specific return and eliminates risk regardless of which direction the broader markets are moving, but that’s an ideal – like the Holy Grail.  

The investor needs to decide how much growth to target and how much risk to take. Naturally, the higher the target, the more risk is required. In theory, a two per cent return goal can be assured by investing in guaranteed investment certificates (GICs). At the other end of the scale, while more risk erodes the certainty of meeting a return target, it can also result in better-than-expected returns.

Most investment advisors can initiate a market-neutral strategy to certain degrees. Some advisors operate exclusively within this sphere. Strategies vary from holding long and short positons simultaneously to fixed income, technical analysis, or algorithms. One market-neutral strategy simply holds rental properties and distributes income to investors.

Market-neutral mutual funds are available on the Canadian market. Over the past 15 years, the average global neutral-balanced fund has returned an average 5.5 per cent each year – pretty consistent with a modest return goal. However, returns range from 3.1 per cent to 8.6 per cent – so, management matters.

Fees also matter since they are deducted from overall returns. The annual management expense ratio (MER) on global neutral balanced funds range from two per cent to 3.85 per cent.