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About this podcast

Stu Kedwell, Senior Vice President and co-Head of North American Equities at RBC Global Asset Management, sits down with David Richardson and provides insight into his investment process, how to understand the way a business evolves over time, the value of investing in dividend-paying companies and the importance of following a consistent approach.


Hello and welcome to Personally Invested. I’m your host, Dave Richardson. Today we finally get to sit down with someone that I think is one of the real forward-thinkers in the Canadian investment industry, and that’s Stu Kedwell, Senior Vice-President and Co-head of North American Equities with RBC Global Asset Management. Stu has had a very interesting career. How he started with RBC and how, through his path towards his current role, he ended up working with some of the great, great minds, some of the most intelligent minds in the history of the Canadian investment industry. And one of the things you’ll remark about with Stu is his incredible humility, his intellectual curiosity—and that belies the fact that he himself is probably one of the smartest people you’ll ever listen to. I hope you enjoy the discussion.

Stu, welcome to Personally Invested.

Great, thanks Dave.

This is far, far, far too late in coming. We were hoping to get you on as one of our first guests, but our schedules just haven’t connected. So, it’s my oversight in not having you, or missed not getting you here earlier. But it’s great to have you here.

Well, thanks for having me.

And so, Stu, when we have someone on the first time, we always like to get a little understanding of how they got to where they are—your illustrious childhood and early career—to get you to the point of being one of the most important investment managers in Canada. And so, where did you grow up?

I grew up in Toronto: born and raised. My mom used to say I always lived within laundry distance for a good part of my life. And then I went to Queen’s University.

That’s a very good school. You know, I went there too.

Doug and I joke because Doug went to Huron College, which is where my whole family went to. I was the first to go to Queen’s, and I don't hold it against him, and he doesn’t hold it against me.

Excellent, excellent. And then, so you graduate and then what’s your first step out of school?

My very first step out of school was to come work for the Royal Bank. About 23 years ago, I started at Dominion Securities in their trading program: the Generalist Training program, which was 6 months in corporate finance, 6 months on the bond desk, 6 months in research and 6 months with private clients.

That’s where our personal paths deviate, because I wasn’t smart enough to be on the Generalist Program. You had to be one of the super-smart kids to get on to that.

Well, it’s actually funny. You know, I think I got pretty lucky in many respects. I had very little finance background. I’d washed windows and sold futons and worked in a copy center, before I got my job. I always remember they asked me if I owned any common stocks and I said I owned Minnesota Mining and Manufacturing because my grandmother had given me some shares. And the person interviewing me said: “Oh, 3M?” And I said: “No, Minnesota Mining and Manufacturing.” And he said: “That is 3M.” And I was pretty certain the interview process was over right then, but I made my way through.

Yeah, you took the smart route because most people know 3M but a lot of people don't know that 3M is Minnesota Mining and Manufacturing, so you were ahead of the curve then.

That’s right.

So you get into Dominion Securities, and you start off, again, Generalist Program, which, for those listening is a program that RBC runs—I think a lot of firms run—they bring in top students and sort of move them around the organization to learn about it, because they’re going to go on to great success, they’re pegged early. And so you rotated around. Where did you get to?

Well, probably the two things that really struck me, or three things that struck me when I was there was there: you spend about eight weeks on the bond desk, and what you do is you keep the inventory up to date for the bank’s trading desk. And it’s all been automated now, but back then it was a very manual process and the traders were maintaining very large inventories of bonds for the bank to be active in, and they would buy and sell these bonds and you had to make sure that their inventory was up-to-date so that they knew exactly where they were positioned and whether or not they were exposed to anything.

This job, by far and away, taught me the intensity of the capital markets in a manner that’s very hard to describe. And I think about it a lot because I would wake up in the middle of the night: “Did I miss a trade? Is everything squared off?” There was a couple of days where you made a mistake and you learned that your mistakes have real consequences. But just around certain economic events and watching how the market would react to them, it really gave you a flavor that there was a lot of intensity to the day-to-day movements, the minute-to-minute movements, in markets and there was things to be taken from those movements. So it was really beneficial.

In my other rotation I was particularly fortunate because I worked for George Lewis in research, where we did economic value-added analysis on a variety of companies. And this was really like learning what happens to the capital inside of a company: they generate cashflow. What type of return do they earn with it? What do they do with it? Are they productive with it? So, it was great when I was working for George, but it was also really helpful to really understand how a business evolves over time. And we spent a lot of time studying, back then it was Loblaws, which was a real economic-value-add-oriented company. And that was very helpful.

And on my next rotation I worked for Doug McGregor. There was a period of time where I’d worked for two other people that were involved in running the bank, so just for background, George Lewis was the Head, he ultimately became the Head of RBC Wealth Management, one of the biggest wealth managers in the world, and George is arguably the smartest person I’ve ever met. He must have a 170 I.Q.—just a brilliant guy. And Doug McGregor still runs Capital Markets at RBC.

That’s right.

Exactly. So, I was lucky because I got to work for those two. Then I went to work for Doug McGregor, and that was the real estate investment banking arm, and that was right when REITs were starting. It was the mid-90s and there were two big REITs in Canada. One was CREIT, one was RioCan and then Canadian Apartment REIT was just going public at the time, and a handful of others, and it was really when income-oriented investing started to come to the capital markets in the form of real estate investment trusts, which had largely been an institutional private market business. And that was something I got to see very early in my career. And, also, hugely value-added. My last rotation was to work for Doug Raymond, who is now my partner.

So, it was a great a great two years—it was, I called it, like the MBA of RBC. I couldn’t believe I got paid. I just drank it all up and learnt and learnt and learnt, and it was fantastic.

And that’s so important—it was going to be my next question –is the association with Doug, who you’ve worked with for how many years now as your partner?

Well, 21 years.

21 years!? And it’s such a great partnership.

Yeah and it’s a great partnership, it’s a great friendship. He’s been hugely important to me on a variety of levels. That all began back then.

He’s actually too funny to have on the podcast

That’s right.

That’s why we didn't have him down today.

Yeah, that’s right. I think each of those three people were such students of capital markets too, that was the other thing that, different elements in each one. But… You know I really learned a lot. And a lot of the other people at Dominion Securities. The list of people I’ve learned from, is too long to mention on a podcast. But this kind of endless curiosity that many of them had about the different roles that they had and how businesses worked, and how to make money in the stock market. I was very fortunate.

And this is a… just an ongoing theme with this podcast with all the guests we’ve had on thus far, and I think you’re maybe the best representative of that: just that intellectual curiosity, the people who are successful as investment managers, they have to have that almost endless desire to learn and to understand everything that’s going on around them and around the world and it just feeds right into what they do, at managing people’s money.

Yeah, I know it’s interesting you say that. I just got back from vacation and one of the quotes I saw in one of our stops, which I thought was fantastic is: The cure to boredom is curiosity and there is no cure to curiosity. It just goes on and on and on.

So… you and Doug. And we’ll spend the remainder of the time on have a pretty… a pretty solid and longstanding view of how you invest and your responsibility as an investment manager, it’s documented. You’ve written it all out. So, when you talk about… so we… we’ve talked about how you got here, but how did that build specifically into the philosophy for investing you have and an outline sort of…what are your principles that you think are so important to be successful managing other people’s money?

Yeah, fantastic question. I think between Doug and Dan we have to give some credit. When I started in the business after my rotational program, I quickly joined Dan’s investment strategy.

Dan Chornous: the Chief Investment Officer at RBC Global Asset Management.

Doug and Dan have been the biggest influences on my investment process and it’s a kind of two-fold: From Doug the major learning is that “more things can happen and will happen.” And that the stock market every day is trying to discount, and by “discount,” I mean, price-in a whole variety of potential outcomes. And each day when price moves, it’s reweighting those probabilities of what could take place. So, you know you need to really have a very broad idea in your head of what could happen. And once you became comfortable that volatility was just the stock market’s way of sorting that out, then it was a lot less stressful.

And then, from Dan what I really learned was there’s all these little factors that put the odds in your favor and improve probabilities on this, improve on that, improve on this—there was no one kind of magic bullet to being a successful investor—it was using as many tools in your toolkit as you can imagine and really try to gain an edge across each one of those little aspects, was if you married the two and you took a very consistent approach to the stock market and were very open in what you think could happen, that you could kind of constantly tweak the portfolio to have as much positive optionality as you could, relative to the long-term outcome that you’re trying to achieve.

So, Doug is my partner on a daily basis and that’s what we’re doing inside the funds. But definitely Dan has had a very influential role as well because he’s very evidence-based and it’s very much like: How do we put permanent gain into the portfolio? How do we recast the data so that if we consistently apply that, the odds of our success go up?

Yeah. And then, you’re probably best known for the work you’ve done in terms of managing dividend-stocks in Canada. And I know you’re a firm believer in dividend-investing. Why do you think that’s such an important thing, not just for Canadian investors but investors all around the world, to keep in mind as they’re building their portfolios?

Well, I think if you have a strategy that’s filled with dividend stocks, you’re owning a set of businesses that have a certain degree of stability to them. What they’ve demonstrated is that the business can produce excess cashflow, above and beyond the needs of the business. And, you know, that’s very powerful because the excess can be distributed to shareholders, some of the excess can be distributed. Some of the excess can be reinvested in the business. Some of the excess could be used for share buybacks, if the assets are cheap in the price of the stock market, or they can be used for a strategic activity through mergers and acquisitions and what have you and…

And good dividend-stocks normally can offer you each one of those four potential positive outcomes. I think, from pretty early in my career, in watching other successful investors, the real important thing to success in your portfolio, whether or not it’s an investment strategy or your own personal portfolio is: you’re compounding your money over very long periods of time. My dad, early in my life taught me the rule of 72: take the return, put it the 72—that’s how many years it will take for your money to double. When you look at dividend strategies and you find a bunch of good companies that are yielding in the neighbourhood of 3% or 4% and you think you can get a pretty good idea about how those dividends can grow at, say, fiv-ish plus percent over long periods of time. Then

You have this group of businesses that, with some degree of stability, should be able to compound between say, 7% and 9% and you should be able to double your money at least every 10 years. And maybe it was at the time I was younger, but even now, like when you have two or three potential doubling periods left in your life, you know that could become quite lucrative over periods of time.” Like water on stone” is one of our favorite sayings. You know: just to let some kind of pound away for you as time progresses. And then, of course, the great thing about the strategy, as well, is that it's great for compounding but also when you get into retirement, and you’re very focused on the purchasing-power of your money, and you’re collecting the dividends from that business, but if they’re still growing, and even though you may be then using a portion of your 7% to 9% return.

If they’re growing, they’re protecting the purchasing power of your money. So, if your stock price is going up and down and it has a little volatility but you’re getting good current yield and it’s growing by 5% or maybe 2X inflation. Then, as someone who’s retired, you don’t have to worry about that degradation that often happens to people when they hit that stage of their life. So, obviously, I believe in it, and both parts: for both accumulation and decumulation. I think it’s a very powerful component of a portfolio.

And I know from hearing you speak over the years: one of the interesting philosophies you have (and we’re taping this on August 15th, 2019). Yesterday, the yield-curve in the U.S. inverted for a little bit of time: the 2-year treasury bill and 10-year treasury bill inverted, which triggered a lot of fear that a recession is coming somewhere down there. We’re not going to get into the recession forecast because we’re investing for the long-term, and I know you think about it that way. And you’ve talked before about how you think about recessions, and that recessions are going to come, but we don't know exactly when. But recessions are going to come in my lifetime as an investor. And how do you play that into messaging around how people should think about investing long-term?

Well, it’s a great point. It relates back to that rule of 72. We know that we might compound in the neighbourhood of 7% to 8% over a 10-year period of time, but we also know that the likelihood of any one of those years being 7% or 8% is very low.


So, people say: “Well, how do you think about a recession?” And I just say: “Well, I expect to see one if not two in every 10-year cycle of investing.” And I mentioned when, with some of Doug’s philosophies and, if you’re willing to believe that, there’s a wide range of outcomes at any given point in time. It’s distressing, Right? And by that I mean: “you’ve thought about all sorts of things in advance, and recessions are kind of like that: the economy grows, excesses build up. Sometimes they have to get washed away, sometimes it’s washed away through a slowdown, sometimes it requires a little recessionary activity.

But when you think about those long-term statistics, about earnings growth and how stocks compound and things like this, you go back through history and you look. Even if we were on the eve of a very significant recession, it doesn’t really derail the 10-year potential for the stock market. So, we tend to think about it in those terms: that there will be slowdowns, there will be periods, too, where the economy grows above trend. And we have to be prudent in both of those periods of time. The way that we do it within the portfolio is this range of outcomes: we run them for each scenario or each company.

So, sometimes companies are trading at a more elevated multiple on a very cheery consensus, and those are stocks that we’re trying to take from the strategy. And other times you have very good companies that are trading at a very attractive valuations because their business is under a bit of pressure at that juncture, and those are the stocks that we want to add to. We think about the stock market in exactly the same way when it comes to asset mix in a portfolio, and when we want to add and subtract money to the overall stock market. But all of that should be additive to the long-term return potential of the stock market, If we just stay the course, we should get what’s available over the next 10 years, and if we use our investment processes, we should be able to add to that. Some of it is behavioural, some of it is mathematical. There’s all sorts of tools in the kit.

But normally, it involves putting more money to work when people are concerned, and taking some money when people are very enthusiastic.

Yes, and your success speaks for itself, in terms of any of the investment portfolios that you’ve been involved in managing. Just one last question. I know you have a very firm belief that it’s important for investment managers (professional investment managers who are managing publicly available investment funds), that the investment manager has a stake in the investment portfolio that they’re managing, I know this is a really big thing for you. Why do you think it’s so important that the investment manager invests in the portfolio that they’re managing for other people?

Well, there’s many reasons for it. First and foremost: you absolutely have to eat your own cooking.


You couldn’t possibly prescribe a different medication than one you take yourself. So, it’s very important. I have an investment portfolio; I have an investment plan just like everyone else. And I think our products, our strategies, are going to get us there over long periods of time. I think the second thing, too, is that as an investor, you have to acknowledge that your co-investors, who are your unit-holders, that investing can be emotional at times. And a lot of the reason to long-term success is acknowledging that emotion during some of these elevated periods and then also being able to explain what’s going on in the portfolio and how you thought about it and it’s my money alongside yours and this is how we’ve positioned for further upside when things turn or what have you, and that kind of notion of partnership, I think, is very important to can be somewhat emotional. So you want to be on the same plane as they are.

Yeah, well it’s fantastic and along with your reputation for the success you’ve had managing money, and your intelligence, which we talked about in the introduction, it’s your integrity, I think, that is a real hallmark of the way you and your team and the people you work with manage money. So, great to have you here. Again, it was far too long. Hopefully, we’ll get you back, and thanks for your time.

OK, well, thanks very much.

Thank you for listening to Personally Invested. If you have suggestions for future podcasts, please email us at rbcgampodcasts@rbc.com.


Recorded on August 15, 2019
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