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With all that has occurred in markets over the last few months, it’s essential that portfolio managers make decisions to ensure portfolios withstand the highs and lows. For long-term investors, it means their investment plans may look a little different now. In this episode, Sarah Riopelle, Vice President and Senior Portfolio Manager, Investment Solutions, details the recent strategic asset allocation changes she has made within her portfolios, and how these adjustments will open up opportunities for investors over time. (Recorded June 25, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson. And I’m really happy to be re-joined after a little bit of a hiatus by Sarah Riopelle, who’s a senior portfolio manager who runs all of the portfolio solutions programs at RBC Global Asset Management. And that’s one of the things I wanted to talk to Sarah about today, because as we’ve gone through the pandemic, the crisis in the global economy, the economy in Canada and the US, and we’ve seen all the volatility in markets — and not just equity markets, fixed income markets as well. Sarah is taking a look at the positioning of the portfolios that she runs and has made a strategic asset allocation call that I think would really interest a lot of investors who listen to the podcast, because it may be something that you want to take a look at in your own portfolio. So, Sarah, welcome. What have you done and why are you doing it?

Thanks for having me. Earlier this month, we shifted the strategic asset mix to include more equities and less bonds. And so if you use a balanced profile as an example, we moved our neutral equity weight from 55 % to 60 % and lowered the bond weight by the same 5 %. And we made similar changes to the other risk profiles that we manage as well. So as a reminder, the strategic asset mix is the most important decision that investors are going to make and it takes a long-term view and doesn’t change very often. That said, no single blend of assets is going to remain optimal over a long-term savings program. So periodic changes are required as the market environment changes. And a variety of changes in the economy and capital markets over the last little while indicate that we are at one of those points in time now. And so we’ve made some changes to our strategic asset mix. So the most important factor for us is that interest rates are at historically low levels. The US 10 year yield fell to a 150 year low in March. And we don’t think that interest rates are going to rise for a long time because there’s a variety of secular pressures that are going to keep them depressed. That includes aging populations and an increased preference for saving versus spending. So in an environment of ultra low yields and highly accommodative central bank policy, we’re expecting low total returns from sovereign bonds for quite some time. And we think that they’re going to be much less effective as an anchor for balanced and multi-asset solutions. So as a result of this, we think that investment plans should be renovated to ensure that return targets can be met over an appropriate time horizon. And return expectations for balanced portfolios can be improved, we believe, by increasing the portfolio’s risk profile and by adding new assets to the current solution set. For many, the first step in that could be boosting their equity exposure. So if bonds are expected to contribute low single-digit returns, then adding weight to equities whose returns are closer to 7 % over the longer term, is going to help boost those returns for a balanced portfolio context. And our analysis shows that a small increase in the equity weight in a balanced portfolio will lead to a bit more volatility, but also higher returns so that the risk adjusted returns actually improve. So ultimately, we think that investors are reasonably rewarded for accepting a journey that is a little bit bumpier in the short term, but it will help them to capture additional returns in the long term.

Yeah, and I think the other thing that we should always mention is that the way you position your portfolio is really an individual decision and takes some thought and planning. So make sure that your taking in all the factors that are unique to you and your own financial situation before you’re making decisions. But this is more of a big picture: decisions around just a general positioning strategically of an asset allocation over the long term. And I think you’re also looking at just overall expectation around returns to be a little bit lower and inflation to be a little bit lower. And so overall, this works out in terms of real returns in around what we’ve been experiencing lately. Would that be safe to say, Sarah?

Yeah, that’s correct. The returns we’ve experienced over the last few decades are not what we expect over the coming decades. So you have to lower your return expectations. And with that in mind, we’re making these adjustments to try to help investors achieve something closer to the returns that they’ve achieved in the past.

And I really like the way as well you positioned the different type of experience that an investor would have in this type of strategic asset allocation versus where you’ve been before; a real important consideration for all investors. Sarah, thank you very much for that update. Interesting times and a move that doesn’t happen very often, I know, in your world. Thanks for coming on to discuss it.

Thanks for having me.


Recorded June 25, 2020

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