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This episode, Sarah Riopelle, Vice President and Senior Portfolio Manager, Investment Solutions, talks about why she recently adjusted the strategic regional equity weights across her portfolios and the benefits of looking beyond Canadian borders for investment opportunities. (Recorded August 20, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson. I’m really happy to be joined by a frequent guest on the podcast, someone you’re all very familiar with, Sarah Riopelle from RBC Global Asset Management. Sarah, welcome back.

Thanks for having me again.

So, busy summer for Sarah! We haven’t had her on as much as we’d like. And it really leads to a lot of the work that Sarah and her team have been doing through the spring and summer. We talked on an earlier podcast about some rethinking that Sarah had done around the portfolios that she manages, with respect to a strategic asset allocation. And given the economic global market background that we’ve seen coming out of COVID-19 and looking forward, they had increased their equity exposure. But the next set of work then gets down to regional allocation. So not just at the asset mix level, how you’re building portfolios, but right down to regional allocations in equities and fixed income. And Sarah, maybe you could update us on all that work and your thinking around it.

Yes, absolutely. Back in June, we moved the strategic asset mix. As you said: more equities and less bonds. And since then, we’ve also made some adjustments to the regional weights — that’s the allocation between Canada, U.S., international, emerging market equities. And we couldn’t talk about the changes back in June, because we were actually making adjustments to the portfolios at the time, and we were in the market trading. Now that we’ve completed the trading in all of the various portfolios, I can talk to you about that now. The key message is that we’re continuing on the path we’ve been on in recent years, and that’s to globalize the portfolios. So while Canada remains a great place to invest, it represents only 3% of the global equity market. So shifting more into global equity markets provides us with a broader opportunity set, and allows us to better diversify our exposures. So what did we specifically do? For a balanced investor, we reduced our weight in Canadian equities from 19% to 15% strategically, and we allocated that to equity regions outside of Canada instead. There are a number of reasons why we made these changes. I could go through the list. As I said, it provides us with a broader set of investments. That leads to greater diversification. GAM has significant capabilities around the world. And these changes help us leverage all of that talent that we have in those seven different offices around the globe. We have better alpha potential in markets outside of Canada. There’s greater capacity in global markets. We do have some concerns about the long-term growth prospects and competitiveness of the Canadian economy. So we have to consider that as well. Our long-term expected returns for the Canadian equity market relative to other regional markets favours a little bit more of a shift away from Canada. And then there’s the concentrated nature of the Canadian equity market that can lead to greater volatility, since we’re very reliant on the prospects for resources and financials. So these are some of the various reasons why we decided to make this change. Also, recent performance of Canadian equities has reinforced that decision. So last week I published a LinkedIn post talking about the benefits of taking a globally-diversified approach to your investments. And in that piece, I showed that there’s been a significant divergence in results between the best and worst segments of the market, particularly this year, so far. Canadian equities in particular have had fairly weak returns. And that’s because Canadian equity performance is highly dependent on the outlook for interest rates and commodity prices, which are in turn tied to growth in the global economy. Given the weak global economic environment, it isn’t surprising that Canada has underperformed. So these changes are really just another example of our efforts to continually optimize and evolve our solutions to take advantage of new ideas and new thinking in terms of asset allocation.

We’ve had Stu Kedwell and Scott Lysakowski on this podcast before talking about some of the limitations of the Canadian market. We’ve also talked at length about some of the home country bias that’s exhibited by Canadian investors and their exposure to the Canadian market. But, I would take it from this change is that although you’ve shifted the strategic allocations to the target benchmark allocation, you could still extend your Canadian exposure on a tactical basis if you thought the Canadian market was poised to do particularly well over a particular period of time? Is that not correct?

Absolutely. We still have that flexibility to make those adjustments on a tactical basis when the time is right to invest more in the Canadian market.

You think of periods — perhaps we’re even already moving into one — where you’ve got weakness in the U.S. dollar, broadly and specifically related to the Canadian dollar. And perhaps a rebound or strength in some commodities -- we’ve seen strength in gold. There will be times when the Canadian market is favoured, and you’ve got the right expertise to make the decisions around when you might want to allocate back to having a larger Canadian exposure.

Absolutely. There’s lots of moving parts, lots of considerations. And so we’re monitoring all of those developments on an ongoing basis. And we’ll certainly make those changes if and when the time comes.

But it certainly does send a message to Canadian investors to at least think about their global exposure, and their fairly large relative exposure to the Canadian market. So we thought that this would be a great opportunity to bring Sarah on and update you on some of her most current thinking. Sarah, as always, great to have you, and a fantastic update.

Awesome. Thank you.


Recorded August 20, 2020

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