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The investing landscape has changed considerably over the past couple of years. In today’s low interest rate environment, how should investors be positioning their portfolios? In this episode, Sarah Riopelle, Vice President & Senior Portfolio Manager, Investment Solutions, shares her views on markets and how investors can evolve their portfolios for the future – from revisiting your equity allocation to the importance of fixed-income diversification. [7 minutes, 32 seconds] (Recorded February 18, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson, and I'm joined today by Sarah Riopelle, who is responsible for the various portfolio solutions that are offered by RBC Global Asset Management. Sarah, welcome back. Always great to have you here.

Great. Thanks for having me.

So, Sarah, we had your colleague Stu Kedwell on (S)Tuesdays, on Tuesday. We were talking about how you got together with your colleagues from around the world for the RBC Investment Strategy Committee meetings last week. And you had some interesting discussions. Stu shared his perspective on what he took out of the meetings and some of the things that you and your colleagues were talking about. What were some of your big takeaways from your discussions last week?

Sure. Thanks. Here's hoping that we have a consistent message with what Stu told you yesterday, or on Tuesday. So, I would say that we have similar themes that we talked about over the last few quarters, looking at vaccine rollout and the timing of what not might happen. Looking at the economy, the economic backdrop is pointing to an early cycle. The outlook has more good than bad, from an economic standpoint. And so that's good. We have very easy financial conditions, lots of stimulus in the system, lots of liquidity. And so that's supporting markets as well. I think some of the key discussion points that we had were the timing of the vaccine, as I mentioned. Also, inflation is something that we're watching closely and then the potential for value to outperform growth as a style over the coming quarters, because we've seen some initial signs of that over the last few months and that would be a significant shift, if we start to see value outperform. I would say equity valuations are elevated, but we expect earnings to improve over the coming twelve months. We think that's going to be supportive of equity. So, we still prefer equities over bonds in the asset mix, even despite the low level of bond yields. We still think that bonds still have a place in the portfolio as a stabilizer and as a diversifier. So, still important to maintain those bond allocations. But on a tactical basis, we prefer stocks over bonds.

Yes, and that is pretty consistent with what Stu had to say.

Oh, thank goodness!

That’s good! One of the main objectives of having an investment strategy committee is having everyone walk away with a pretty consistent theme on how you want to move forward. So, there’s a checkmark for Dan Chornous, who sits at the top of that committee, and then you, of course, who's such a critical part of that team. But one of the things I wanted to specifically touch on today — because you you're fairly active on social media —, your LinkedIn profile is, in my view, a must read for Canadian investors. And so, I wanted to profile a piece that you just recently posted about the way you need to continue to evolve your thinking around portfolio construction as an investor. Could you give us a synopsis of what you talk about in the LinkedIn post?

Sure. I think that the key thing there is that constant evolution is a must. When you're looking at your financial plans and looking at your investment strategies, the environment changes so you can't rely on something you said five years ago; it’s not necessarily going to be the best way to position your portfolio going forward. The key point right now is the low level of interest rates and the fact that you're not going to get the same returns out of the bond portion of your portfolios as you may have had in the past. Also, we’ve had strong returns out of both equities and bonds over the last several years and now the expectations for those asset classes may not be as high as we have been able to experience over the last few years. You have to moderate your return expectations and then make adjustments to the asset mix in the portfolios to reflect what we think the future outlook is. So, some of the things that you could do there is diversify outside of Canada and do more diversification or allocation to more global market. Revisit your allocation to equities. In a low interest rate environment where you're not going to get as much out of bonds, you might want to consider increasing your equity rate, which is something that we did within the portfolios last summer. You can find income in equities. If you look at the difference in dividend yields relative to bond yields, there's some benefit in seeking income from the equity side of the portfolio. What else? Look for alternatives to fixed income. Traditional fixed income may not generate the returns that we have seen in the past; so, to look for alternatives to those strategies. Add some uncorrelated asset classes. Some examples for us could be real estate or liquid alternative type fixed income strategies. Then the key point is what I said earlier: you need to continue to hold bonds in a portfolio. Just because of low interest rates and because we might have different return expectations for bonds doesn't mean you abandon them completely. They still offer stability. They still offer the benefit of diversification. They still offer liquidity and they still offer income. And so, these are all key reasons why you want to continue to hold bonds in the portfolio. But you might want to consider diversifying within fixed income to other types of fixed income strategies. Not just government bonds, but consider incorporating investment grade corporates, high yield emerging market bonds and other strategies like that.

Yes, and we talked a lot about this over the last couple of years on this podcast around fixed income diversification. For whatever reason, on the stock side of people's portfolio, the equity side, people have been more comfortable and seem to follow the idea of diversification, at least geographically, in their stock portfolio, and have even gone beyond that in terms of sector and style diversification as well. But on the fixed income side, we see a lot of Canadians sticking with a more traditional way of thinking about the bond portion of their portfolio. And, as you're suggesting, it's so important that investors, particularly where we're headed and because of where we've been, need to have that similar thinking around diversification in the fixed income portion of their portfolios. Is that right, Sarah?

Yes, absolutely. The concept of diversification applies everywhere within the portfolio at the asset class level: within the asset classes, within equities, as you mentioned, the equity regions and then within fixed income, the different types of strategies that you can invest in within fixed income outside of just government bonds.

Yes, and Sarah, you obviously know I have a bias. I think that everything you do is pretty great. But this piece, I think, as I said, is a must-read. Anyone who's listening to this podcast, it's really a nice in-depth piece on the way you need to think about managing your portfolio in today's world, and the world that’s coming. So, Sarah, thanks for that piece and sharing that piece with everyone. And thanks for coming on the podcast today.

For sure. Anytime. Thanks.


Recorded: February 18, 2021

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