Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by—let me get this straight, Sarah—the Managing Director and Senior Portfolio Manager and the Global Chief of Staff at RBC Global Asset Management. I've always said when I'm out on the road talking about titles in the firm, that we're allowed to make up our own titles. So I always go to my mom because my mom is going to be the most generous in creating a flattering sounding title for myself. I used to have the longest title in the firm and now you have surpassed it by several characters.

Well, yeah, you can thank my new boss for that. He's the one that chose that for me, and I graciously accepted it.

Hey, just on that front, I know this is a huge passion for you, all joking aside, and that is talking to young people who want to get into this industry. I've never met anyone who's so gracious with their time, not only to come onto this podcast and put up with me, but to sit down with people and help them understand what career paths are like in the investment industry. Everything that's going on with AI, and I'm sure we'll talk a little bit about that today. We've talked about it a lot on other episodes of the podcast, potential impact on the labor force. We might already be seeing some of that impact, and it's obviously going to have an impact in this industry as well. What are some of the things that young people are asking you, or what are some of the things that you're advising people today. Maybe they're like my daughter who's in business school. She'll graduate within the next decade, and she might be interested in a career in this area.

It's interesting you asked that. I'm actually doing a lecture at TMU for a class on Monday, and that was one of the topics they asked me to talk about. So I actually queried ChatGPT and asked it for its view because they're all very concerned that AI is going to eliminate the role of an entry-level analyst. That's for sure a risk, but it's more about transformation than elimination. And so, the nature of those jobs is going to change because it used to be a lot of time spent on data collection and manipulation. AI can do all of that for them. So now, their roles are going to be more about judgment and analysis of the data. And so, what they need to do is just make sure that they don't look at AI as a threat but actually look at AI as a tool and learn how to use AI in their roles and in their daily lives and come in as an AI expert to get into those roles. And then they'll be much better positioned than if they just double down and think that they're going to become Canadian equity analysts in the traditional form. That role just is not going to exist going forward. So they really have to embrace AI as a resource, learn how to use it, and that's going to help position them better.

Yeah, I think regardless of where you may think that AI is going to take the world, the direction that we're heading—and I think the one thing we'd say is it's coming faster than anyone would have anticipated, so, you need to be aware of it—but the best advice you can give anyone, which is what you've given, is get comfortable with the tools and start to learn how you can use them to be more effective and efficient. And then layer on those innately human characteristics that allow you to differentiate yourself from a machine. And those are really important things because I'm not planning on ever leaving my wife for a robot. It would just be terrible.

Agreed. She would be pleased to hear that. It's about human and machine. We've long talked about how our investment philosophy here is it really embraces the concept of human plus machine. And I think that's just even more important now. So the machines are becoming more and more robust and critical and powerful, and that's great, but it's not going to eliminate the human element. We still need the human judgment because the machines can be wrong, the data can be incorrect. So you still need the interpretation and the judgment from the human element. And to your point, which you mentioned earlier, which is also important, is that the human skills—communication, judgment, analysis—those are all things that young people, those soft skills that young people should really lean into and perfect. And that's going to position them better as well.

Yeah, that's great advice. And again, congratulations on your entire career. I mean, we've known each other for 25, 30 years and it's just been amazing to watch. And I can't think of anybody better for this role. Again, all joking aside on the length of the title because it is a little long, but it's a suitable title for someone with your incredible talent and again, just passion for people moving ahead. I just always loved that about you. Anyways, that's an aside. And let's get into what we wanted to talk about and that was what's going on in the world. And of course, your world is managing large, diversified portfolios. So, you've got a new descriptor for the way you think about managing portfolios. And I think it's just a great line. By the way, it's very similar to the line for my hometown here in Port Credit: always active, always on.

Yeah. And I think that's really important in this kind of environment. The market environment and economic environment has always got lots going on, but it feels like right now there might be more volatility and more risks on the horizon than we've had in the past or had for some time. So the escalation of the war in the Middle East is obviously a new meaningful economic risk that we really have to monitor. It's not like the Middle East tension hasn't been around for a long time, but the escalation is something that we need to be watching very closely. The Middle East is a key source of energy for the world. So we're seeing a significant increase in the price of oil. That's going to have an impact on economies around the world. The key question is how long is this going to last? And markets are grappling with that answer right now. The good news, leading into this conflict, is the global economy was actually on a fairly strong footing. Inflation was coming down. Growth was fairly robust. And so our base case right now is that we believe that's going to continue because the work that we've done on these types of acts of war and these types of crises in the past is that they usually do have an impact on markets, but not a lasting impact. But the caveat there is only as long as it doesn't have an impact on growth and inflation. And so that's what we're watching very closely. So our base case is still continued growth and moderating inflation. But I would say the range of outcomes is probably quite a bit wider than it was before. And the bear case scenario is one of slowing growth or inflation rising from here because of the impact that this is having on energy prices.

Did the numbers that came out yesterday around producer price index in the US—I think by anyone looking at them, you'd describe them as kind of hot—did that shift any of your view at all off the base case or the most likely outcome here?

Not so far. So far, the data is supporting the base case, but we are cautiously monitoring all of these data points coming in. The Fed announcement yesterday and the ECB announcement this week has also given us some more information and more data points that we need to consider. We are tilting a little bit more towards the bear case than we were, say, a week or two ago. And so, watching things very closely and considering ways to reposition the portfolio. So that «always active, always on» approach is very true right now. Like every day we are watching data come in and seeing how we would want to adjust our outlook and/or adjust the positions in the portfolios.

So have you been making any adjustments in the portfolios over the last month?

Absolutely. One of the key things that we did actually is that when the war in Iran broke out over the weekend at the beginning of March, we actually came into the office on Monday and pulled the asset mix committee together to talk about the events over the weekend and what happened. We were actually quite surprised at how calm equity markets were that day, on that Monday. We thought that they would have reacted a little bit more because uncertainty always creates an outsized reaction in markets. And so we actually had some positive equity market drift in the portfolios. And what that means is that we were above our target equity weight. And so we took advantage of those calm equity markets on that Monday, and we actually got that positive equity drift out. So we sold stocks to get that weight back down to our tactical target. We probably sold about a little over $1 billion worth of stocks that day. It was a combination of using funds and actual securities and also using futures within the portfolio, so using derivatives overlay to help us get that equity weight down. And it turns out, given the reaction that we've seen in the days since then, that was actually a positive move on behalf of our clients.

One of the things, as I look at the comments on the podcast—by the way, we look at everything you feed through. If you do a review, if you subscribe to the podcast or you're watching us on YouTube. I also ran everything through AI to take a look at. One of the things that it suggested that we do on the podcast more frequently is when there's a financial term tossed out, that we define it, particularly for new listeners. And so, portfolio drift. What do you think is the best way to explain that to a novice investor? Because they all have a portfolio and it too will drift, and they need to think about this as well if they're not letting you manage their portfolio for them.

Right. So every client or every individual usually has a target asset mix. And for us, our target asset mix is 60% equities if you're a balanced investor. Our current tactical weight is 61% equities because we actually kind of like stocks right now despite some of the volatility. Our longer-term view is, we like stocks. We're a little bit above our neutral weight in stocks. But what happens is markets are moving all around all the time, and it's going to push the actual weight in your portfolio away from your target weight. So when I talked about drift, our actual weight in the portfolios was 62% in stocks versus our target of 61%. So we were about 1% higher because of this drift. We drifted 1% higher than what our target weight was. So when we came in and wanted to correct for that drift, we actually sold 1% out of equities to get the weight back down to that target weight of 61%.

That's a great explanation. And then I just wanted to throw on that just for Sarah, because most of us aren't managing a couple of hundred billions of dollars as Sarah does. I certainly have a lot less than that. So when Sarah just kind of tosses out, we drifted 1% away, you were moving about $2 billion around at that point in time, right? Because 1% of 200 is $2 billion. So this is not minor, and this whole sense of what you're doing when you're managing portfolios. And it's not just you; it's a team of people that work all around the world. You are always active and always on. And the fact that you came in the office on Monday after the weekend didn't mean that over the weekend things weren't going on as you were monitoring, evaluating, analyzing, and getting ready for what you were going to do when markets opened on Monday morning?

Yeah, for sure. Obviously, we have instant messaging within the firm, so we were all messaging each other over the weekend and saying, I saw this article and this person said this. And so we were all very up to date. We were actually in London that week, so we had the benefit of time zone as well. So we were 5 hours ahead of North America. So be able to digest some of that information before everybody came in Canada and we had the asset mix committee meeting. So, «always active, always on» is a great description. We believe in a concept that our former CIO always talked about and that's every basis point counts. We are always looking for ways to generate that 1, 2, 3 extra basis points of performance on behalf of our clients. And constantly monitoring and managing the drift in the portfolios and the cash positions and all of the different ways that we have to look at the assets within the portfolio, doing that on a constant basis allows us to squeeze out every basis point of performance that we can on behalf of our clients.

And then Sarah, maybe we can reflect again, since some assets have moved, certainly there's been some currency moves and obviously oil, some of the commodities, have gone in different directions. Oil, gasoline, natural gas, up. Gold, copper, silver, down through all of this. So you talked about that big picture asset mix, which is big picture stocks, bonds, and cash. But that's not the only way you're active. Again, I wanted to highlight $2 billion. So that's big, that's active. That's more active than I'll ever be in my entire life. I'll never have $2 billion, and most people won't. But underneath, there's stuff going on as well beyond that.

Yeah, absolutely. So the high-level asset mix, as I mentioned a moment ago, we have a small overweight in equities and underweight in bonds. Beneath that, within fixed income, we are also considering weights in investment-grade corporate bonds and high-yield bonds. Within the equity positions, we currently have a preference for non-North American equities. So we're underweight the US and Canadian equities, and we're overweight Europe, Asia, and emerging markets because we believe that the valuations and the prospects for growth in those areas of the market are more favorable. That positioning hasn't worked out as well over the last week or two because of the conflict in Iran. However, we continue to believe that at this time, the fundamentals in those markets have not changed that much and that valuations remain supportive. And so we're still comfortable with our positioning within those equity regions. At least for now. I have reserved the right to change my mind because, as I said, we're constantly looking at new information as it comes in to see whether or not we do need to make a change in those positioning. The other thing you mentioned was currencies. We also do hedge out or manage our currency positions within the portfolios. Our biggest currency exposure is the US dollar. Despite some recent improvement in the US dollar, we still are holding on to a longer-term bearish view of the US dollar. And so we have hedged out some of our US dollar exposures within the portfolio with that prospect in mind. So we do actively manage the currency exposures within the portfolios as well.

And that's an important point. Perhaps this was a surprise, maybe you can comment on this, but the flight to quality in this. Generally, when you see a conflict like this which is going to affect oil immediately, but then has the risk of spilling out into the broader economy if those oil prices stay elevated for a long time, because oil is such a big part of the economy in every sense. Energy is something that we need in every aspect of our lives. But the idea that the flight to quality wasn't to gold, it wasn't to fixed income, it was to the US dollar, which is really interesting because I know that your view has generally been that the US dollar longer term is weak, but it's reflective of how short-term events can move markets even in an overall longer downtrend.

Right. And so there's cyclical versus secular. You can have a longer-term bearish trend, but then have a shorter-term positive movement, and it doesn't mean that the longer-term bearish trend has to be dismissed. It just means you're getting a temporary movement. The gold is an interesting one. If you just look at how far the gold price had moved leading up into this, it's not surprising that it has sold off on the back of this. Yes, it's normally an inflation hedge. But if you just look at how far gold prices had risen up until the point of the Iran conflict and reflect on that, well, I guess it's not that surprising that it's had to come down a little bit, because it got a little bit ahead of itself in my view. The bond market's interesting. It's just the market contemplating the impact that this could have on inflation, the impact it could have on the Fed rate cut cycle. Leading into this, we had one, maybe two cuts priced in. Now we have none priced in anymore. So they've taken them off the table, but it's changing rapidly. That's not to say that a week from now we may not put another cut on the table. I'm not sure. So it's about things changing quickly. It's about staying on top of the information, the data as it comes in, but also balancing the mid to long term with the near term. Because some investors get overly focused on near-term changes in markets. And frankly, you just can't control what's happening in markets on a day-to-day basis. But what you can control is how you react to those changes in markets. My advice is always to try to stay focused on the long term because many clients and investors are not invested for the next day or week or month. They have long-term investment time horizons where they're invested for the next several years or even decades. So what happens today or tomorrow in markets should not cause them to make poorly timed decisions that will take them away from that well-thought-out long-term investment plan. The way I like to look at it is try to change the narrative in your head a little bit. And while near-term uncertainty is not comfortable, try to look at it as an opportunity as opposed to a risk and try to limit how much you react to that near-term volatility by making poorly timed decisions, as I mentioned earlier.

Yeah, it's a great point. Having been in this field for over 30 years and watching investors across Canada and seeing statistics every day on the investment decisions that Canadians are making broadly in aggregate. I'm disappointed to see Canadians who were piling money into the markets, both stock and bond, in January and February through the RRSP season as markets were doing very well, and then we've started to see some shakiness in markets, and now we're seeing some money coming out. Not a lot, but I would hope to see—and that mindset is so important—if you're not using the money tomorrow, you want to step back and say, what opportunity is this creating for me? And there's some real opportunities that are always being created by volatility. And again, most people or a lot of people react with fear. To not completely dismiss both of our careers, as being not particularly useful or accomplishing what we hope to accomplish. We do see better behaviors. We see investors, the average investor doing more of that focus on the long term, getting a financial plan, sticking to their strategy. But we still do see those emotions play in. And if anything, I love having you on here because you always have that diversified portfolio approach, long-term thinking. It's at the core of your beliefs and the way you invest. That's where people need to sit and, as you say, get that mindset around, wow, things go down, this is actually an opportunity for me.

I don't know if my own personal experience helps to reinforce that at all, but I have never sold a dime of anything in my own personal investment portfolio. I have every unit or every share of Royal Bank stock after 28 years at the bank that I have collected over the years. And I have every unit of the mutual funds that I own in my RRSP and my TFSA. It's all still there. I never touched a single one of it. I know «set it and forget it» is not really a good theme to close on here, but it is something to think about. For me, I live and breathe these markets every single day, and I know how impactful some of this volatility can be, but you know what, I just put it behind me, focus on long-term. I don't need the money for another 15 years or whatever. And so if I have a 15-year time horizon, then there's no point in reacting to what's going on today unless I have some spare cash on the sidelines and I can go and put some money to work in the market because prices are cheaper now than they were two weeks ago.

Yeah, and one of the things that this particular crisis points out, which you should always have in the back of your mind, and it demonstrates the value of diversification, because you've seen, particularly over the last couple of years, different assets flying up some down. But again, if you've got a diversified portfolio, something like this happens, you look at a portfolio overall because of what stock markets, bond markets have done, they've kind of weathered the storm.

Yep, and you're going to get that smoother investment experience. And if we can deliver that smoother and more consistent investment experience for our clients, that'll hopefully keep them invested and help to offset some of that concern and angst over the volatility.

Yeah, and so, at different times, you'll see articles in the newspaper, and it's something that I can say to Sarah, if I want her to roll her eyes. There are many things I can say to Sarah that will make her roll her eyes. It's just my nature and character. But if I really want to go right for the jugular, get those eyes rolling, it's that the 60/40 diversified portfolio is dead. Sarah, that's what they say. I was reading it all through the last couple of years in the Wall Street Journal and the Financial Post and all these papers. Gotta be dead, right?

It is absolutely 100% not dead. And I will challenge anybody who has that view to look at the performance of the portfolios. Even the last 3 years, we've generated double-digit returns from a balanced portfolio in each of the last 3 years. I would say it's far from dead. If anything, I think these types of market environment reinforces the need for taking a diversified and multi-asset approach to investments.

Yeah, that's why I tossed it out there for you. Even for myself, we're in the business and we even sit there and we're always analyzing, and particularly the portfolio managers. I'm a little less analytical than you would be, but you're very analytical. You're always thinking, oh, maybe this is something happening here? But I really think the last month has been an unbelievable reinforcement of the value of diversification, portfolio investing, and that the 60/40 portfolio and what you manage for people is just a phenomenal way to have active investment management, not ignoring what's going on around the world in the short term, but focusing on generating the right results over the long term and doing it in a way that's going to be more comfortable and more likely to keep on your path to success.

Absolutely. That's a great point to leave on, so I won't belabor this last point, but that being said, the 60/40 portfolio has to evolve over time to make sure that it stays current and that it incorporates new asset classes as they become available to you. So for example, alternatives or private market types assets. And so, you have to make sure that you're constantly reviewing the 60/40 portfolio to ensure that it remains relevant and current based on the current market environment and the new investment solutions that become available to you. And that's exactly the way that we look at the portfolios here.

And that's exactly the way that you do it. And it will continue to evolve as we move forward with AI and with all this new talent that's in school right now and is ultimately going to come through your office, and you're going to place in roles managing people's money in the future. So we'll end on a positive note here in a world full of turmoil. But again, in portfolios that have proven to kind of ride through this pretty well, and if the most likely scenario plays out, we're still set up for what we would think is a pretty decent year in markets.

Yeah, agreed. That's a great point. Let's end on that.

Let's end on that, Sarah. I get to see you quite a bit next week, so always happy about that. We'll be in front of a bunch of advisors and they'll be listening to your wisdom, but as I say, you're always so generous with your time. Thank you very much and we'll see you shortly.

Thanks.