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Stu Kedwell, Co-Head of North American Equities, shares his thoughts on recent headlines – from the Biden administration possibly raising capital gains tax, to the takeaways from the federal budget. Stu also explains his process of managing portfolios amidst the ever-changing news cycle. [9 minutes, 47 seconds] (Recorded April 22, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson, and I am joined for another late edition of (S)Tuesdays with Stu Kedwell, on a Thursday. Stu, welcome back. We were hit by some technical issues that I think many Canadians suffered from this week. That pushed us back a couple of days. But glad to have you back.

Great. Thanks for having me, as always.

And Stu, we now can officially tell all the listeners that this is a fully vaccinated podcast! Well, I guess not fully, but we got our first shots anyways, right?

That's right. This is a first shot vaccination class.

So you'll be glad to hear your favorite investment manager got his shot and is doing well because he's here. And your somewhat likable podcast host is also doing fine. I'm only about two hours after my shot, so we'll see how things go. So Stu, as I was getting my shot. And we were talking last week about government programs; all the different government spending programs and big announcements are made, generally on the government side or central bank side. What it means for investors and how investors react. Then this afternoon, a leak out of the Biden administration that they're looking at raising the capital gains tax in the United States. Of course, we had the budget in Canada earlier this week. We had the Bank of Canada out yesterday, sort of tapping us on the shoulder and saying, hey, interest rates may not be this low forever and ever. And then there was another announcement or a rumour out of the U.S. that Biden is going to announce a 50% reduction in greenhouse gas emissions by 2030, which would be a significant acceleration on what they've done prior. So you've got all these announcements. Stu, you're sitting there in the office this afternoon, managing billions of dollars; what do you do when you hear all this stuff flowing, all this news flow? Does it dramatically change your outlook? Do you make trades right away? How do you react to this stuff?

That's a great question. I think that there are two things that we have to always evaluate when it comes to these types of announcements. The first is, thematically, is this different than what we thought? And thankfully, normally the answer to that is not too different, because in many of these big issues, they get discussed for some time before we actually see the headlines. So the first question, thematically, is this a whole lot different than what we thought? I would say, so far we haven't seen anything that's thematically a whole lot different. If we take it just through what you mentioned, the first idea from Governor Tiff Macklem, will interest rates rise going into the future when the recovery takes hold? Yes. We had an idea that would probably happen. It might have surprised people a little bit because he talked about the back half of 2022. But I don't think that's well outside the realm of expectations. The second thing is the Biden administration being very aggressive on removing carbon from the economy. Again, is it more aggressive? Maybe, but it's directionally what we are in line for. So, thematically similar. Moving to some of the other things around taxation, I would say the capital gains tax, thematically, we know there's going to be more taxes to pay for this. Maybe a bit of a surprise because people had been discussing it more on the corporate side. So we'd be having a discussion around that and involving Eric [Lascelles] and the economists, and getting to the bottom of what type of taxation drives a different type of outcome in the economy down the road. But on the surface, again, a bit of a surprise there. Yes, probably. But we knew it was going to have to get paid for to some degree. In Canada, same thing; the budget, there was lots of spending. There wasn't the same type of headline tax discussion. But there was some tax discussion around some companies structuring, companies that use debt to purchase things, where they position that debt. The government of Canada thought that they could raise five or six billion by closing some of these loopholes. So we want to make sure that that five or six billion isn't coming disproportionately from the companies we own.

So, I guess you'd say, for lack of a better term, that whenever one of these announcements comes out, there is some number crunching, and some additional investigation and fact finding that you and the team have to do to make decisions about all your different holdings across various portfolios?

One hundred percent. I think we've talked in the past that managing money is a very iterative process. And so there's numbers to crunch. There are new scenarios that will unfold. Quite often when you get a headline like this, again, you don't always have all the details. In a couple of cases, the government has said, we're going to have a consultation period. So we'll be having discussions with companies, industry experts, tax experts around what are the new goalposts on how these conversations could take place and how will our companies fit in the mix. So that iterative process just keeps on truckin’.

Yes, and I think what caught my eye and why I wanted to talk to you about this today was the minute that leak came out of the Biden administration in the US, we saw the Dow Jones Industrial Average drop about 1% from where it was, almost immediately. Clearly people reacting to this. What I wanted to profile is, it's not as simple as all that. Again, you're already anticipating some of this stuff as you're watching a portfolio and then it's about making the right calls around it. There's very rarely an announcement like that that's going to make you wholesale sell something immediately. Is that a good way of thinking about it?

I think that's bang on. The scenario-based approach forces you in advance to think about as many things as you can. Sometimes there's something new, but often it's made you think of all these things. So you're tweaking at the margin. A capital gains tax probably causes a little bit more of a trigger right away just because there are pockets in the market that do have some speculative activity. And the price to play in those areas might go up a little bit here if capital gains jumps.

Yes, exactly.

But for a long-term compounding investing, when we look inside our funds, we don't normally distribute that much capital gains each year. Normally when they establish capital gains taxes, they still want to reward people who want to finance businesses and what have you. So, again, we'll have to get through the detail. But it's not surprising that the headline reaction is, let's go away and think about this and maybe it'll pressure some of the short-term speculative activity.

Yes, and as always, and what we try to do with (S)Tuesdays in general is highlight for individual investors the way a professional thinks around any of these different issues and any themes that are building out in the market. Because it's often that difference between the way a retail investor and a professional investor reacts, which is the exact reason why it's useful for a lot of people to hire a professional investor to manage their money. Just all the tools that are around you to support the number crunching, as I said, around these types of decisions.

Yes. We're very fortunate to have a very big team that is hanging out in every spot of the world. We just finished our investment policy committee right before our podcast here and had a discussion around it, and made sure we're now thinking in different directions. But yes, we spend a lot of time thinking very broadly about all sorts of things and one of the lines— and we've used it here before— is the long nose of the stock market. So the stock market sniffs out good news before it takes place. It sniffs out bad news before it takes place, sometimes. It's always sniffing.

Exactly. And we pointed out many times that you've got that great sniffer and now it's protected by the vaccine. So, no worries for your investor. You're going to be in good health for the foreseeable future. But my arm is getting sore, so I'm going to go lie down. And thanks for joining us again today Stu.

OK, thanks very much, Dave.


Recorded: April 22, 2021

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