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Stu Kedwell, Co-Head-North American Equities, joins Dave to discuss the fallout around the Archegos hedge fund default. Stu also highlights how this event serves as an important reminder for investors to look beyond near-term bumps and maintain a long-term perspective. [6 minutes, 36 seconds] (Recorded March 30, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson, and it is (S)Tuesdays, and we welcome Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management. Stu, welcome back.

Hi Dave. Thanks for having me, as always.

Lots of comments in the notes on the podcast. That (S)Tuesdays is becoming quite an event. I know it's still fairly subdued in your house, but just so you know, out in the rest of the world, it's a pretty big thing.

When the Weather Channel's been on for a while, then you flip it over to Stu’s Days, right?

Exactly. And let me tell you Stu, the topic for today is one where I'm glad it is (S)Tuesdays, because it's one of those complex situations that pops up in the news. And I think the typical investor just kind of shrugs their shoulders and says, what is this all about? Should I worry about it? Should I care? What happened? That's the events around this hedge fund in the U.S., that's sort of, I guess, for lack of a better term, blown up. I think as we were talking before the taping, you've got an interesting perspective on it in terms of what happened and the lesson we can take away as regular investors. So, what happened and what are your thoughts?

There was a fund in the United States that had a handful of positions and was using an extraordinary amount of leverage. And when one of those positions started to go against the fund manager— I believe it was likely Viacom or a very large owner of Viacom—, they announced an equity issue in the middle of last week that didn't go very well. And when that started to tumble, it affected the amount of leverage that he had on the whole portfolio, in all likelihood, by accounts. This leverage led to some margin calls and some unwinding in the names that were involved, and a very significant amount of volatility around them. And it's going to result in some significant amount of losses for some of the banks that had provided the leverage. There were some European and Japanese banks that have come out and said how much they might be on the hook for. In and of itself, it's a very interesting story, not so much because of the securities that were owned, but because, as we move into the second phase of a bull market, after a very robust year, one following last year, we move into year two and liquidity is abundant. There is always the possibility for behavior in the market that might leave some of us scratching our heads. But when there's abundant liquidity, people will use leverage in a manner that might be totally inconsistent with what we would ever do. We're not even leveraged investors in the first place. But it reminds you that when you're building a portfolio and when you’re owning securities— and it's also a bit of a case for active management— when you look at the securities you own, you want to be very comfortable that you could own them regardless of the price activity in the very short-term period of time. So, what it means for an active manager sitting there, he’s saying: I own these securities, this is how I think they'll be successful over time, this is the way the business has to unfold, this is the way the valuation has to unfold. And this will drive our ultimate return, even if we get into a period where one of our co-owners or a shareholder we don't know may be doing something with the position that we would find quite surprising. So that's created a fair amount of discussion in the marketplace since our discussion last week.

Yes. And it creates, I guess in the mind of some, a reluctance to want to invest or a fear that something's happening in the market that somehow makes it unfair. Or something that I should avoid. I think your message is really that over the long term, all of these things sort of wash out and that you don't need to worry about these things that happen from time to time if you've got that long-term perspective and obviously, if you're not leveraged.

Yes. If you have the longer-term perspective and you have a business that can compound its way out of any time of near-term difficulties or near-term volatility. One thing that we always look for is, are we going to own the same percentage of the company over a very long period of time, which means that the company doesn't have too much leverage, that they might have to issue shares at an inopportune time. And are we confident in the investment case that we've laid out in our minds so that we can ride out the daily changes in volatility as well. And these are really important elements. And, they're so crucial when you're sitting down with your advisor, that you've properly measured your risk tolerance so that you're kind of finishing the third leg of the stool, that we're working together to say, I'm going to own these businesses, the businesses are going to compound, I've got it measured properly in my portfolio so I can withstand the volatility. And if anything, I can use tools like dollar-cost averaging, or what-have-you, to turn that volatility into my favor over that longer period of time.

Yes, exactly. You've got an overall plan that takes into account your risk tolerance, the amount of time you have to invest, what your objectives are. And then you stick to that plan and you can use things like this. If you've got that plan in place, you know where you're going. You can use these types of things to your advantage as opposed to it being a negative for you. It’s such a great advice.

One hundred percent, Dave. It's a very long game. Some days it feels like we play it in small increments, but it's a long game.

Exactly, and Stu, again, a great Stu’s Days topic, something for people to take away as they're watching things that are unfolding in markets. Thanks again.

Take care Dave.


Recorded: March 30, 2021

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