Hello and welcome to the download. I’m your host, Dave Richardson. And today, I’m joined by vice-president and senior portfolio manager Sarah Riopelle. Sarah, you manage a lot of large portfolios at RBC Global Asset Management. Perhaps for clients who are thinking about their own portfolios, or maybe they invest with you, you’re coming through a period where investors are seeing negative numbers, much more so than they’ve seen in a very long time. So could you talk a little bit about how the portfolios were positioned going into this crisis and what have you been doing as a portfolio manager to adjust portfolios that you’re managing in the last few weeks?
Yes, for sure! I think it’s probably a good idea to take a step back and look at the environment before the crisis hit. So the night before the crisis, we had a stable and favourable economic backdrop. The global economy was delivering mild growth, low inflation. We were benefiting from interest rate relief in the US. Bond yields were historically low and equities, while valuations were high, those levels were justified, based on low interest rates and the fact that earnings were growing. And we thought that a recession was unlikely! Based on all of this, our portfolios were positioned with a tilt towards equities. The next day, basically, all of those facts were suddenly and dramatically different. And that’s the nature of a black swan event, which is what we’re in, currently. So we are about to experience the fastest bear market in history. If we assume March 23rd was the low for this cycle, that would mean that this bear market lasted only thirty-three days, from peak to trough. And if you compare that to the historical average, since 1870, a bear market has lasted on average about 639 days, or almost two years. So you can see the whole thing happened very quickly. Thinking about the portfolios, when we entered this environment, we had higher allocations to risk assets, such as equities and corporate credit. And given the sudden change in the outlook for the economy and the speed and the size of the decline in markets, repositioning the portfolios to a more defensive stance was challenging because things were moving so quickly. So we shifted our focus to positioning the portfolios for the recovery, because we wanted to be able to take advantage of the opportunities as they presented themselves, both in terms of prices and liquidity. And since it’s impossible to predict when the absolute bottom is going to come, we were incrementally adding to our equity and credit positions as the market sold off. While we wanted to add to both equities and credit, we found that the best opportunities are really showing up in the credit market. And we wanted to take advantage of that at a time when liquidity was available in those investments. So we slowed the pace of our equity buying so that we could add to our credit positions. And what we were doing there is increasing our overall corporate risk — our overall allocations to companies —, but we’re doing it on the bond side of the portfolio rather than through the equity side of the portfolio, so we can manage the overall risk of the funds. So overall, we remain underweight fixed income and overweight equities, with a little bit higher allocations to credit than we did before. And we believe that the portfolios are really well positioned for the recovery when it does come.
And I think this is a really important lesson for investors overall who are managing their own portfolios. That is, if you’re an investor — not a gambler or speculator —, what you’re trying to take advantage of, at times like this, is the ability to reposition your portfolio. So maybe you get an unexpected event like this, a black swan, as you described it. But what’s important is that you’re positioning your portfolio, you remain very rational in your decision-making, — not emotional. And you look out across the market, you identify where there are opportunities to position your portfolio to recover and to work well for you, not just in the coming five or six days, or next day, but the next year, three years, five years, 10 years. And that’s how you’re ultimately successful as an investor.
Exactly. It’s about looking forward and looking to the future and making sure that you’re positioning the portfolios now to take advantage of that recovery. It’s really important, as opposed to panicking in this stressful environment. That’s when you make the wrong decisions, in a lot of cases.
And one of the best people to work with to make sure that you’re bridging from the emotional and panic to the rational and mathematical, is a really good financial advisor. Sarah, thank you again for your time today!
Thanks very much.