Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson, and it is time for our favorite. You got to have a favorite, right? Don't tell Stu.
I was going to say you probably said that to everybody.
Well, you know what, I try to be straightforward with stuff like that, but I have to admit, sometimes I do extend my favorite. I've got two daughters, right? And the one daughter will say, am I your favorite? And I say, yes. You're in a two-way tie with your sister. So they are technically all my favorites. But so is Sarah Riopelle, who runs portfolio solutions for RBC Global Asset Management. We could put whatever title we want, managing director, superwoman, whatever we want. Well, we could do that. No? You're much more modest than that. But we always like to get Sarah on when she's doing something inside of her portfolios and with her overall asset mix. And this is at the tactical asset mix level. So this is the general, I guess. Why don't I let you explain it? What is your tactical asset mix? How do you think about it and how do you think about making changes in it? Since we probably haven't covered that in a while. We've covered the actual changes; we haven't covered what you've got and then why you're making these moves.
Sure. So all of the funds have a strategic asset mix, which is the neutral positions, and that takes a very long-term view. And that's how much do we want to own in stocks and how much do we want to own in bonds. But then the tactical asset mix you're referring to is we're looking for shorter-term opportunities in markets to move around those strategic neutral weights to go above or below our equity weight, for example, or above or below our neutral fixed-income weight, where we see opportunities and we think we can add value by trading that. So we're looking at the tactical asset mix. We're looking at the economy and the markets, what's going on, what's changing, where are the opportunities to see whether or not we can move the weights around to add some value.
Yeah. And as we've been talking over the last several months, you've been sitting in pretty much a neutral position for almost two years now. You've done some tactical moves in the fixed income, the bond portion of the portfolio, as yields have gone up and down, because we've been in a range for a while. It's amazing how much value you can add through even what seems like a small tactical move. We had you on, I think a couple of weeks ago when you took a half % from cash and moved it into fixed income, and then we had this big move down in yields, and then you went back. And it's incredible how much value that can add if you can consistently make these good tactical decisions. And you don't even have to be right every time, but if you're right more often than not, you can add a lot of extra value for the person owning your overall portfolio, right?
Yeah. So far this year, yields, US 10-year as an example, have moved between 4.8% and 4.2%. So there's a pretty wide range there in yields that you can actually tactically trade. So buying and selling between 4.80 and 4.20 can actually add a lot of value to the portfolios when you're trading the asset mix. And then looking at the equity rate, you're right, we have been neutral equities for quite some time. We were concerned about valuations, especially in the US equity markets. We talked a lot about the Mag7 and how it's been driving returns in the US equity market in particular, and valuations just looked a little bit too robust for our taste. So we would be neutral equities for quite some time. We've had a sell-off over the last couple of weeks, as you know. There's been a lot of conversations and concern and uncertainty, volatility around the policies coming out of the US government and tariffs in particular. Tariffs are on, tariffs are off, tariffs are big, tariffs are small, tariffs on Canada, China, Europe. It's just all over the place. And with all this uncertainty, it's causing a lot of anxiety with respect to the markets. And therefore, the equity market has been selling off on the back of that. And so we stepped in last week and actually decided to add to our equity weight for the first time in quite some time. And I just think it's important that we have been waiting for an opportunity to start building our equity weight up. We really have a view that over the long term, we would like to be overweight equities because we believe that over the long term, stocks will beat bonds. And so we have been looking for an opportunity to build up that equity weight. And we started to see that last week after a 10% plus sell off in the US and started to take advantage of buying stuff on sale.
Yeah. And then you think about it, this could be one of two things. It could be the start of maybe adding and accumulating a little higher weighting of equities in the portfolio, or it could just be something very simple, that equities are down 10%. We'd expect there to be a little bit of a bounce here with people looking for value. We see some value here, so we add 1% of our portfolio. And again, when you're adding 1% of your portfolio, this isn't 50 bucks. You're throwing into equities. This is hundreds of millions of dollars or billions of dollars. So these are not small decisions you're making, but we might just add 1%, and then we see the markets recover somewhat over the next couple of weeks, and we take that 1% back. It could be either or depending on how things play out, but it gets you into at least a position where you can start to add to your equity holdings. Have I got that right?
Yeah, that's totally right. The thing about tactically managing an asset mix is that you have to be constantly reviewing your assumptions and your forecasts, and you can't get anchored on a prior view, because tomorrow or next week, we are going to get new information that we are going to have to consider, analyze, digest, and see how that's going to impact our forecast for inflation, economic growth, earnings, and valuations, and bond yields. So basically, I reserve the right to change my mind. You can never sit here and say, oh, we've added 1% to equities, that's the beginning of us building up a bigger position in stocks, because next week we might get new information that would have us change that view. And so that's the important thing about managing the portfolios and having an eye on the economy and the markets is not getting too anchored in one view, constantly be reviewing the data coming in and the assumptions that we've made and making sure that we're adjusting our positions accordingly.
But it's an analytical, objective review.
Data-driven.
Data-driven. You're right. I got to get up with the cool messaging style of the uncool kids. There you go. Cool now, which I hope anyways. But anyways, the idea that, what I look at, as I look at the way Canadian investors in particular have been behaving through, really when the tariff started to take center stage towards the end of January, and we've really seen a lot of Canadian investors take a very cautious stance from there. As markets started to reflect some of the concerns around tariffs, some of it was a correction to some extent from high valuations, which we've talked a lot about on other episodes of the podcast. But the market's falling, and what we saw then is an acceleration in the redemptions or an acceleration of people taking risk off the table when we talk about non-professional investors. And then, lo and behold, I read the note from when you started last week, when you're making that data-driven decision, not emotionally-driven decision, to add at that exact point. I always highlight this, and what we want to do, again, through this podcast, is we want to highlight the way professional investors think about the billions of dollars that they're managing. Again, how they are data driven, not emotional when they come to that decision. And sometimes it is really hard to do because it's not like there's not a whole lot of stuff going on behind the scenes with the tariffs in the US and all kinds of other things that make you just want to jump full force right back into the water. Yet, again, the data said you do it, so you did it.
Yeah. And you know what? It's uncertainty about the future will push investors and clients to become very nervous and very cautious, thinking there's going to be a better time to invest later. But it's important that to earn a higher return, you need to take on some risk. And most clients do need to earn that higher return in order to meet their investing goals, whether it be retirement or what have you. They need to earn a return higher than cash over the long term to be able to meet those goals. And as I said, you need to take some level of risk in order to do that. So one of the biggest mistakes that investors can make is not taking enough risk to earn that return. And stocks sell off and to us that improves their return potential, and we can buy them at a lower price, and that gives us a higher long-term return potential. That's the way that we look at it. And so we view the recent sell off in stocks as taking advantage of buying stuff on sale. So I really think the key to investing success is to find that right balance of risk and return for your needs. And I expect that many of our investors, although they're very nervous about the current environment, are probably not taking the right balance of risk and return right now, if they're sitting in cash or in a zero-risk portfolio. Then they're giving up return in order to achieve that comfort level of risk. And so I'm not sure that is the right balance right now. And so remember, at the end of the day, long-term returns are the only ones that matter, and you have to survive a series of short-term returns to get there. So don't lose sight of your long-term investment goals by becoming too emotionally anchored to short-term volatility.
And this is just the thing. If we're looking just two weeks ago at US stocks, for example, the S&P 500 in the US, and we say, well, from that point, where stocks were at their current valuations with the way we expect returns to flow over the next 10 years, my expected return in US stocks would be X. Now, a couple of weeks later, the market has dropped 10% Again, we're still expecting to get to that same point in the future. So therefore, my expected return after the 10% drop is higher, and actually significantly higher, than before the 10% drop. And that's one of the reasons why with a small, a little nibble, you might want to take advantage of that.
Yeah, exactly. And so to your point, it's about not letting the emotions drive the decisions. It's about letting the disciplined data-driven approach and making objective decisions on what's going on in the markets and taking advantage of the opportunities as they present themselves.
Exactly. So, I need a new winter coat and a new pair of gloves. I'm just waiting. The sales are just about to start. I wait for it to go on sale, and then I buy it for next winter, because hopefully all the cold weather is behind us here, and in November or December next year, I'm going to put on my new jacket, I'm going to put on my new gloves, I'm going to look really sharp, and it's going to be cold in Canada, I'm going to be glad I did it. This is another way to think about, I want to buy stuff on sale. When that opportunity presents itself as long as you know over the long haul, with stocks, I think over the long haul, things are going to be very good. If I can buy it at a bit of a discount now, a little bit on sale, that's going to be useful for me long term. And again, this is what professional investors do, and it's so important to watch. And you're the professional of the professionals, so that's why we always like to check in when you have an asset mix move. And then the other thing, Sarah, thematically, we talked last year a lot about the Federal Reserve making their first move, their first cut in interest rates. The Federal Reserve, the first time they raise interest rates after a long period of them being steady. And then when they stop raising interest rates, and then the point where they start lowering interest rates because that sends a signal to the market. So this is that first increase in your equity weighting after several decreases in your equity weighting. Do you take it as a signal, or again, it could be a signal, or it could just be a nice tactical move we're taking because the jacket and gloves are on sale right now?
Yeah, I mean, I would probably lean on something I said earlier, which is I reserve the right to change my mind. And that's just because, as I said, with a highly volatile market and our scenario analysis, there's a fairly wide range of possible outcomes from here. Our base case would suggest that you'd want to build an equity position from here, but that's not to say that if one of the other scenarios starts to take on a higher probability that we wouldn't change our minds from here. So I reserve the right to change my mind.
We're a couple of days on this addition of equities. The timing two days in looks really good.
Don't jinx it, Dave.
Sorry. Timing on the shift to be underweight US and a little bit higher weights on Europe and Asia. That's worked out pretty well. So let's hope you stay warm as the weather continues to heat up. But, Sarah, thank you. Thank you again for coming on, talking about the asset mix change, talking about the rationale behind it, some of the key rationales around how you structure your portfolio to begin with, that constant idea of diversification and the value of diversification, portfolio investing. You do it so well, Sarah. Thanks for joining us.
Thank you.