Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by portfolio icon, Sarah Riopelle. You like that? Is that better than the previous nickname?

You come up with a new one every time. I like it.

I know, but I don't think we've ever really gotten to the right one for you.

Keep working on it.

We'll keep working on it. I'll toss it out to the kids; they usually come up with good ones. You work with your kids as well. Sarah runs portfolio solutions at RBC Global Asset Management. I like to check in with Sarah on a regular basis to get her thoughts on positioning of portfolios given what's happening in the market. There's a lot happening in the market. We're a month into the New Year and we're off to a volatile start. I can't say that was particularly unexpected, but it is a lot of volatility relative to what we experienced last year. What's driving this and what can investors expect for the remainder of the year?

Yes, it's certainly been interesting times for sure. When we take a step back, look at the bigger picture, we still see the economy in a fairly decent shape. Much of the damage from the pandemic has been repaired. The labor market is strong, but inflation is running hot. It's against this backdrop that there's really not that much reason for this extremely stimulative monetary policy that we've had in place for such a long time. Central banks are now being forced to respond, and that's the shift that we've seen over the last few weeks. It's that more hawkish tone from central banks that's impacted markets as investors digest what it means for valuations and for asset prices. Why is this a problem for the markets? Well, the Fed needs to deliver just the right amount of tightening to tame inflation, but at the same time keep the economy from falling into recession. It's sort of a balancing act there. The Fed announcement this week? They indicated that they could start raising rates as soon as March. That's sooner than many originally had expected. All eyes are on the Fed, watching if they'll make a policy error. Now some people are saying that maybe they have already made a policy error by not tightening soon enough as inflation started to run a little hotter. Markets will likely remain volatile during the period of transition into this new monetary regime. Add to that a few other risks that we're watching: Omicron, obviously; China presents another major source of uncertainty with stricter regulations, slowing growth, highly indebted real-estate sector; and then geopolitical tensions, Russia and Ukraine is a good example. Tensions continue to mount there and could be a source of volatility for markets going forward. Lots on the horizon as usual; uncertainty never goes away. There's always something that we're watching that could potentially worry investors and maybe a little bit more so now than we have seen in the past.

As soon as the Fed starts to get involved, at least in the way that they could potentially get involved, it makes markets nervous. As you say, you're really at that part of it where they're going to start that tightening process. Did they make a mistake? Did they go too far? And not engineer that soft landing, where they slow down inflation, but you still have good economic growth, so that risk is out there. Given all that— we last spoke in December—, has your outlook changed a lot?

Not really. Financial markets have to digest all this new information, and we've seen some significant adjustments in both bonds and stocks since we last spoke in December. The U.S. ten-year has risen over thirty basis points since the start of the year, to about 1.8%, reaching its highest level since the pandemic. Our models suggest that yields should remain low, although they could gradually rise over time. We're thinking of closer to 2%, potentially, as a forecast going forward. The hawkish central banks have caused a significant rerating and equity valuations, particularly in the most expensive segments of the market, like technology and growth stocks. That selloff appears to be more of a rerating of expensive growth companies rather than an actual deterioration of the economic outlook. I think that's important. Even with the recent selloff, though, we think stocks remain fully valued, particularly in U.S. large-cap equities. However, on a relative basis, when you look at the total return prospects for stocks relative to bonds, we still prefer stocks in the asset mix. A couple of changes that we've made recently as we actually moved some cash into bonds as yields rose, to narrow the underweight there a little bit. Still underweight, but just a little bit of a smaller underweight than we were before. The volatility that we saw this week with equity market selling off, we actually took the opportunity to buy some stocks to get ourselves to correct for the drift and get ourselves back up to our tactical targets. We really think that the sentiment indicators and breadth indicators are showing us that the market is likely oversold in here. So we think it's a good opportunity to pick away and buy some stocks.

Sarah, you're a huge proponent of a portfolio approach to investing. You still think that, even as we move into this new year, nothing has changed in terms of that core philosophy; using a portfolio approach, with stocks and bonds and lots of diversification, is a great way for investors to position themselves for the long haul as they try to reach their financial goals.

Yes, absolutely. In fact, in an environment of market volatility, you want to take a multi-asset diversified approach to your investments because that's going to help to smooth out your returns over the medium to long term and provide more consistent results for clients and keep them invested.

Okay. So let's summarize how you've gotten the portfolios positioned right now.

We're overweight equities, underweight stocks, a little bit of an extra cash position as looking for opportunities to invest in the markets.

Okay. I think one of the things that we've seen in this particular pullback— and you alluded to it in your second part— was around how a lot of this correction has been concentrated in a particular area of the market. Because technology, right-open technology, and high growth stocks, some of these exciting new stocks, companies at the core that have fantastic ideas, incredibly innovative, likely going to be great businesses at some point down the road— at least some of them will be—, but just crazy valuations on them. Was why I was asking about this diversified approach; when they're in there buying individual holdings, sometimes investors tend to get really excited about those areas that are going up and growth. Whereas when you're managing portfolios, you're much more disciplined in that; you're going to have some exposure there, but you're going to have a lot of other things that, in the event what's been happening happens, the portfolio has enough diversification to hold up and withstand the losses in that area.

Yes. It is absolutely okay to look for those opportunities and have investments in those, the technology sectors, the growth sectors, the stuff where there is some potential significant returns, but as part of a multi-asset portfolio. Those positions have to be scaled to the potential risk and volatility in those segments of the market. We totally believe in a diversified approach; you can have allocations to those parts of the market, but they shouldn't be your entire portfolio because that's where you're going to feel a lot of pain when they get through periods of volatility like this.

Now you've been out in public, because you're a high-demand public speaker. You've got a great LinkedIn account for people to follow. You're always putting interesting stuff up on there. One of the things that you've been talking about, I think it's really important for investors to key in on right now, as they're making their financial plans: because the last decade has been so good, both on the fixed income and particularly on the equity side, as we move forward, expectations around returns for a conservative or balanced investor are likely not where they've been in the past decade and even historically. What are your thoughts on that?

Thank you for that, because we actually have a LinkedIn post that's just about to go to print probably today or possibly on Monday, on lower-expected returns going forward. We've had such an extraordinary period of returns over the last decade since the financial crisis and I think we're at a turning point in markets now where we just don't think that the return environment going forward is going to be as robust as it has been in the past. We think that returns are going to be lower, potentially below historical averages. Investors need to adjust their expectations accordingly. That doesn't mean we just have to accept them, though. What that means is that you have to revisit your asset mix, revisit your portfolios and how they're built, because the optimal asset mix of the last ten years is not necessarily the optimal asset mix of the next ten years. You have to actually renovate portfolios to prepare them for the future. I think we're at that point now.

Even if you think of it as how we'd invest through the business cycle. We have Eric Lascelles on from time to time, and we take a look at his analytics in terms of where we sit in the business cycle. Typically, when you're sitting in the middle of the business cycle, you'd be at more of a neutral position. But because of where we're sitting in fixed-income markets, it's a bit different this time in terms of that exposure to equity, because that is where, if you're going to get returns, you're likely going to get them?

Yes. We're expecting probably low to potentially negative returns in sovereign bonds, a little bit better returns, sort of mid-single digits, for corporate credit, investment grade corporates, within fixed income, and mid- to high-single digits for equity markets. If you put that all together from the perspective of a balanced investor, we're thinking in the range of 4 to 5% going forward, which is below the long-term historical average of 7% for a balanced investor. Still positive returns, but lower than we've experienced in the past. The reason that we're positioning our asset mix the way it is is because of the relative return prospects of stocks versus bonds. Even though valuations are quite full in here, we still think that the return potential out of stocks, even at these valuation levels, is still superior to what we can get out of bonds. That's why we're still overweight equities in the asset mix.

Excellent. Well, I know you're very humble and I know you've got a great team working with you, but nobody does it better, Sarah. I love hearing about what you're doing within the portfolios that you manage. It's a pretty significant responsibility that you have. We won't say the exact dollar figure, but it's a lot and you always have interesting things to say. It's great to have you on again. Thanks for your time.

Thank you so much.