Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by our very, very, very good friend, Sarah Riopelle. Sarah, Happy New Year. Welcome back.

Thanks. Happy New Year to you. Are we allowed to still say that? I guess it's only the 7th of January, so we can still say it.

Well, you're the analytical one, and you generally know a lot more stuff than I do. So I would think that you would have a defined cutoff for when you stop.

All right, let's go with the 15th. The 15th of January, you can't say it after that.

Can't say it after that. It's the first time we're seeing each other. I think the 7th is not too far in.

That's fair.

That is fair. So everything's good? You had a good holiday season with the family and a Happy New Year and everything?

Yeah, it was great. I took a couple of weeks off and just was relaxing at home and hanging out. And this is funny, I actually got a little bit bored because I don't do relaxing very well. So I was pretty much itching to get back to work and get back at it.

Those of you who subscribe to the podcast or follow us on YouTube, you will know that that is not a surprise that Sarah gets bored when she doesn't have something to do. Now, even still, and I think that's relevant to the conversation, you're never really 100% away, are you?

No, I'm not. I spent two weeks at home with family, away from the office, but I was still reading the paper and checking the Bloomberg and going over emails and just always mentally thinking about what we should be working on and stuff like that. So there's always something going on.

Yeah. And we've been talking about this. So Sarah, as you know, we're doing this, and the focus of this particular conversation is going to be a quick look back at 2025 and then to look forward. And we're doing this with several investment managers over the first couple of weeks of 2026. And one of the things I was doing with the setup on the first podcast that we taped was the idea that portfolio managers are wired a little bit differently. So I'm glad we did get into this conversation that there's never really that complete separation from the office. And I made it akin to being like an Olympic athlete. Olympic athletes are just 100%, as particular as their training. So think of someone coming up to the Winter Olympics right now for the last several months. And then certainly as you go through January. I think February 6 is when they kick off in Italy. There's a whole regimen and process that's followed all the time. And it's very difficult to wind yourself off of that because you're so focused and you have to be so on top of everything that's going on. Particularly you, because you're not just managing in one specific area, you're managing gigantic portfolios that are diversified. Some have more stocks than bonds, some have more bonds than stocks, but they're invested all over the world. So you really need to be aware of everything that's going on at all times.

That's right. This is cliché, but the markets never sleep, right? They don't go on holidays. And so as long as the markets open. And like you said, there's multiple asset classes, multiple markets around the world. It's not just bonds and stocks. We've got the alternative assets in the portfolios as well. We have the currency hedging program. Just because it's a holiday period for us as individuals doesn't mean that the markets are not trading and therefore the portfolio performance is moving, and we have to keep an eye on them all the time.

Yeah, my wife is like the markets. She never sleeps. That's because I snore. Apparently, I'm causing a lot of issues there. So I'm going to go get that checked out. But that's not what the listeners are here for. They're here to listen to your view of 2025. So when you look back at 2025, how do you assess the year? What do you think of the year? 20 years from now, when you look back at 2025, what are you going to think of?

Yeah, well, it's definitely an interesting year. So the markets were quite volatile during the year, despite the strong finish that we got in the end. The first half of the year was dominated by conversations around tariffs, and that created a lot of uncertainty. As the year progressed, it became more and more clear that many of Trump's more extreme tariff announcements were actually more like negotiation tactics to try to get to quick trade deals with various different countries. The economy continued to grow. We had massive capital spending around AI, and that helped to boost earnings in the corporate space. We had declining short-term bond yields that also helped performance. And so government bond yields traded in a fairly narrow range throughout the year because of easier monetary policy but somewhat offset by increased government spending and firmer inflation. And so the US 10-year yield did decline toward the lower end of its trading range towards the end of the year, around 4.1% in the US as Fed cuts came in to start to help support that softening labor market. Equity markets found their footing later in the year. Most major markets finished 2025 at or near all-time highs. In the US, that performance was driven by positive earnings growth. Really, all that AI theme was really dominant in the US market. But we also saw the rest of the world showing good equity market performance driven by multiple expansion in those areas. So the S&P 500 had a return of 12.7% in 2025. Despite the fact that, to me, that sounds like a pretty strong return, that actually put it in the middle of the pack relative to many other markets. So the Canadian equity market was the top performer at over 30% return, and Europe and EM were not far behind at 28%, respectively. So then we saw positive returns in both bonds and stocks, which means that balanced investors, which is where I spend most of my time, they were rewarded with another year of double-digit gains with around 12.5% or so for a 60/40 balanced type portfolio. So that's roughly double its historical average, and the third consecutive year that we've seen double-digit returns for those types of portfolios. So all in all, we’re really pleased with how things ended up.

Yeah. And we look at that, your positioning through the year. By the way, for those who don't subscribe, please subscribe because we have Sarah on regularly. And we talk about asset allocation and not just at the stock and bond level, but then within stocks, where you’re allocating your assets there. And for quite some time now, you've been a little bit concerned about the US because of higher valuations and a little bit more positive on Canada, Europe, and emerging markets. So you had your portfolio's position that way throughout 2025, and it paid off.

Yeah, that's correct. It's not that we were trying to bet against the US market because we do believe that this AI theme and the US market dominance is a real thing and not something that we want to bet against. We just thought that the valuation on a relative basis in markets outside of North America was much better. And so the potential returns there were better, which is why we had the portfolios tilted more towards international stocks and away from North American stocks. And as you mentioned, that really helped us with performance during the year because the better returns came from the markets outside of North America.

Well, as you said, the double-digit return in the US, it was still a very good year, an above-average year for US stocks. But because there was some catch-up in other parts around of the world and from a currency perspective, we saw some gains in other currencies relative to the US—I think over the 12 months, the US dollar index, not against the Canadian dollar, but against a basket of currencies, was down around 10%—so for Canadians investing in the US when the US dollar is weak, that hurts your returns. So another reason to be a little underweight the US. And then again, you're not doing anything extreme around, under and over weighting. You're just moving a little bit here and there to enhance the overall return of the portfolio.

That's right. And we've also had a bearish view on the US dollar. And so we've actually been hedging out some of that US dollar currency risk in the portfolios as well. So that's just another one of the levers that we have at our disposal to help to generate returns in the portfolios.

Yeah. And I know when I was out speaking in the latter stages of 2024, talking about 2025, one of the things that I was educating investors about was what happens in the 12 months following the first Federal Reserve rate cut. So when the Fed moves from a tightening cycle into waiting and then starts to ease, historically, you have a better-than-average year in bond markets with a fairly narrow range of results. You typically have a positive above-average year in equities as well, although there can be a big range and there can be quite a bit of volatility. So coming into the year, it wasn't that surprising with the Fed Reserve. The old saying, don't fight the Fed. It's not that surprising that we had a decent year in equities. But what did surprise you about 2025?

The main thing for me—well, there's probably two main things. One would be the speed at which markets recovered following Trump's April Liberation Day message. The month of April was actually quite amazing in the fact that the market sold off 10% in a single month but had recovered the entire amount before the end of the same month. And so if an investor panicked and sold at the lows in April, they actually locked in a loss of about 14% and missed the recovery that happened two weeks later. So it does not pay to panic in the face of volatility. It's really more important to stay invested. I think the second probably surprising theme for me was the resilience of US equity markets. You talked a little bit about that. We came into 2025 cautioning people about the potential for a selloff given high valuation. Putting the Fed aside, we were concerned about high valuations in the US market after strong returns in 2023 and 2024. There was a variety of risks worth noting, tariffs being one of them, which we talked about, but there was a government shutdown looming. We had a lot of geopolitical risks on the horizon as well. At the time, it was hard to imagine that equity markets were going to deliver another year of double-digit returns, but that's exactly what they did. And looking forward to 2026, can we expect more surprises? Absolutely. That's why markets are interesting and fun. That's why markets are volatile. So the one thing I know for certain is that market volatility is not going to go away. The key is how you react in the face of market volatility. This is a quote that I think Stu Kedwell has used quite a bit. You've had him on the podcast. He may have stolen it from someone else, but I'm going to attribute it to Stu Kedwell. He says, you can't predict, but you can prepare. And so that's something that I'm really focused on for the next twelve months.

Yeah, it really is not just a surprise in terms of, as you say, how quickly markets bounce back. But as you suggest, it's a lesson for investors, again, to not panic, to make sure that coming into something like this, you are not too exposed to areas that are going to be particularly volatile if you cannot manage the volatility or process the volatility psychologically within yourself. And that's what you do, what you talk to investors about having a portfolio approach to investing. You're well diversified across stocks and bonds, even when something like that is happening, like the early part of 2025. You're not feeling the full brunt of the downforce, so you're much more likely to stay with your strategy. And then when it recovers, you recover just like everything else. And I really think that for most investors, that makes so much sense, but it’s always a lesson to not panic as those things are happening. They're going to happen over time. And generally, the best thing to do is to stick with your overall plan.

Absolutely. And it's also to remember your time horizon. Many of our investors and of our clients are not invested for the next month or six months or a year, even. They have longer-term time horizons, 5, 10, 15 years. And so what happens today or tomorrow or next month in the market should not be something that causes you to divert away from your well-thought-out investment plans because those were built on something that you're trying to achieve 15 years in the future. And so I would try to change the narrative. The way that we look at it when we're managing the portfolio is, in a selloff in the markets or in periods of volatility, we try to look at it more as an opportunity to buy stuff on sale. Everybody was all excited about the Boxing Day sales after Christmas because they wanted to go buy some stuff that they saw before the holidays, but now it was going to be 50% cheaper than it was. Why don't you think about the stock market the same way? Well, here's an opportunity. The market's down 10%, so I have the opportunity to buy some of the stocks I wanted to buy earlier, but I can get them 10% cheaper now. So it's trying to flip that narrative in your head a little bit.

It's the only business I know that when you put a 50% off sign up on the window, that people don't crash the doors. People run away from investments when they're down. And if you can program yourself, particularly for those of you who are younger listening to this. And of course, for me, younger is 50 and under. But maybe we'll take it back to 45, Sarah. I don't know where you would draw the line. But if you're in your 20s, 30s, even your 40s, and you're planning to work well into your 50s, you've got an extended time horizon. If you're still earning income, the best thing that can happen is for there to be a correction because it gives you the opportunity for your next buy to come in lower. If you can get the psychology around that set in your mind, just like when you're shopping for things on sale, you'll do much better over the long term as an investor.

Yeah, I absolutely agree. I know it's emotionally difficult for people to do, but I feel like if we can keep reinforcing that message, maybe we will get through to a few people.

Now, for older guys like me, I like a sale at the store. I'm not sure I love a sale in the stock market. But are we going to be seeing things on sale in 2026? Or what do you think we're going to see as you look out over the new year?

Yeah, well, the year is certainly off to an interesting start with the situation in Venezuela. It's an interesting development from a geopolitical standpoint for sure, and something that we're watching very closely. But in general, these types of events do not have a lasting impact on the markets. So our base case is for the economy to continue to expand in 2026 and for inflation pressures to moderate. A no-recession rate cutting environment like the one that we're in currently is generally quite positive for markets. So as always, there's risks to watch. The lofty expectations around the AI theme, particularly in the US, is something we're watching very closely because we have very high expectations for what those companies can deliver from an earnings perspective, and we're paying very high valuations for those. And so any misstep there could cause some volatility in markets. But I would say that the backdrop is generally positive. After three strong years in the markets, though, and these heightened valuation levels, we do believe it's prudent to moderate our risk-taking somewhat, which is why we reduced our equity weight a couple of months ago. So we still have a small overweight in equities, but it's just a little bit lower than it was before. I am reminded of a quote. I think this is a Dan Chornous quote. So this is me quoting all of our senior executives on the call. But he says, we’re staying at the party, but standing by the door. So I thought that was a good way to describe how we're thinking about risk taking at the moment. So we expect sovereign bonds to offer cash-like returns with modest valuation risk over the coming 12 months or so. Fixed-income investors looking for higher returns could look to corporate bonds in their portfolios. But the compensation that they're getting for taking on that additional risk is quite small, so they should be prudent there. The key to continue equity market performance is going to be earnings growth. Margin expansion has helped to convert modest revenue growth into pretty good and strong earnings growth in the double-digit levels over the last year. And if profit margins rise by 1% next year, as they did this year, we can see double-digit earnings growth in 2026 as well. So generally, I would say the backed up drop quite positive, although we do want to be prudent about how much risk that we're taking. So we are moderating some of our risk taking within the portfolios.

Yeah, I should mention, where you kicked off the interesting start of the year, the city of Mississauga has reassured me that my house has no value from a global defense perspective. Although I did find some precious metals digging around in my wife's jewelry drawer. So hopefully, nobody takes a particular interest in my property over the next few months. But as you're describing your position, it does sound like where you've been for a while now, because in that bond market in particular, things have been steady as she goes because you're just not being rewarded for taking risk at all or very little. So you don't take risk unless you're rewarded for it. And we've been sitting there, Sarah, for about six months. It's been quite a while.

Yeah. If you're speaking to Dagmara, who's our head of fixed income, and our allocations to high yield bonds, for example, are as low as they have been in quite some time because, as you said, we're just not being compensated to take the additional risk in the high-yield market relative to the sovereign bond market. And so we've been reducing those allocations. And that will change in the future, and we will look for those opportunities. But at the moment, we're just standing to the side a little bit and waiting for those valuation levels to improve.

Yeah. So right now, you're not rewarded for picking a great fixed income or bond manager, but you will be at some point. Things tend not to stay this stable or static as long as they have. So you'd have to think, again, with everything that's going on, that at some point, avoiding that risk will be a value, and then being able to take advantage of it, when you are at that point going to be paid for it, will be important to driving better fixed-income returns in 2026 than it was in 2025.

Yeah, absolutely. We talk a lot about diversification. When we focus our conversations around high-level asset mix diversification—so stocks, bonds, cash, and then we talk about equity regions as well—but diversification within the bond market is also very important. So your allocation between government bonds, investment grade corporates, high yield, emerging market, convertibles. We spent a lot of time looking at diversifying our exposures to those various areas of the bond market as well in the portfolio. It's just not something we talk about as much because those are generally managed more inside the fixed income teams. And so it's not something we spend a lot of time talking about.

Yeah. I mean, stocks are more exciting, more interesting. They move around a little bit more. But bonds are really at the core of an average Canadian. Their portfolio is somewhat tilted towards bonds if you look at an average investor. And so bonds are very important. And then that idea—we talk about this all the time, but I think it's the most under discussed element of an investor's portfolio—is getting diversification in fixed income. 2025 was not a year where you needed a ton of diversification, but most of the time, and at some point, maybe very soon, that additional diversification and being able to get into the far reaches of a market that is bigger than the stock market is going to be really important.

Yeah, absolutely. I totally agree with you. And it's something that we spend a lot of time on. We're closely watching our allocations within the fixed-income positions in the portfolios and looking for those opportunities to build out those positions when they present themselves.

And something you mentioned earlier, which is another thing in the management of a portfolio that I think most investors neglect or maybe even just dismiss is currency. And you spend a lot of time thinking about currency in the portfolio as you manage.

Yeah, that's right. Our biggest exposure from a currency perspective is the US dollar. And we have a very strong bearish view on the US dollar that we have had for quite some time. And so we want to make sure that we're taking advantage of all of the levers that we have available to us within the portfolios. And so we make sure that if we have a view, like we do right now, that we're implementing that in the portfolio. So we have been hedging out our US dollar currency exposure over the last 12 months or so within the portfolios. I haven't checked today, but I would say we do it from a risk budgeting perspective. I think we've probably used up about 70% of our risk budget in terms of how much of our US dollar exposure we've hedged out so far. We're not 100% hedged yet relative to what our targets are, but we are well along the path.

Yeah. And as volatile as equity markets were during the tariff scare at the front end of 2025, currency markets were even more volatile through that period.

Yeah, absolutely. There's two ways of looking at managing portfolios. One is generating alpha, and one is protecting alpha. I would say, looking at the stock market, you're looking for ways to generate alpha within the portfolios. And when we're managing currencies, we're hedging out our currency exposures. We're looking to make sure that we are protecting the alpha that's within portfolios because of our holdings within US equities and bonds, for example.

Yeah. So you look at last year. We wanted to be looking a little more forward, but looking back, it does speak to what you want to think about going forward. I think most people came in the last year with a favoritism or a recency bias towards being in the US and being in US tech. There was not a lot of thought about currency or the idea that a more aggressive US government on a number of fronts, even economic, with tariffs, would generate perhaps a stronger US dollar. So you saw a lot of portfolios out in the marketplace, a lot of portfolio managers positioned overweight US and maybe not managing currency at all or maybe even preferring the US. And you think of where you were, underweight US and hedging out US dollar exposure. And that's where you see that gap in returns that comes from getting those key decisions right—more often than not, because you're not always going to be perfect—and how that impact can impact returns pretty significantly in a one-year period.

Yeah, absolutely. But it's also important to note this. Our CIO, Dan Chornous, talks about «scratching out the inches» or «every basis point counts», «many small things, not one big thing». These are some of the themes that are really core to our investment philosophy. And so everything that we just talked about are just examples of small things that we can do consistently over time to generate that strong and consistent performance for our clients. We don't have one big bet in markets. We're doing a bunch of small things within the portfolio, hoping to get a few basis points of return here and there, alpha here and there, on behalf of our clients. But if you’re doing a bunch of small things, each generating their own few basis points of alpha within portfolio, then you're going to generate lots of performance relative to our benchmarks or relative to our peers and generate strong results for clients.

And one of the great things about investing is that you get that little bit the one year and then you get a little bit more the next year, it compounds over time in that power of compounding. So powerful over the long term. Sarah, anything else you wanted to share for investors just to think about going into the new year? Anything that you do at the front of any given year with your own investments or with the investments that you manage for people?

Well, I saw the financial planner before the holidays, and I'm pleased to report that I am fully funded on my retirement planning. So everything is going well, probably thanks to three strong years in the funds, because my retirement savings are invested in the funds along with all of our clients. So things are going well there. So pleased to say that. One thing I wanted to say. I talked about with my planner. It's not a problem for me, but it's something that she's faced quite a bit with a lot of her client conversations, is that cash levels still remain very high. I can't help but worry about the impact that this might have on our investors or our clients' ability to generate the returns that are sufficient to meet their investing goals. Despite strong returns over the last several years—like I said, three consecutive years of double-digit returns—we are still seeing record-high cash levels. And so while the markets might be volatile, many investors, they're trying to escape that short-term volatility by hiding out of the market or in cash-like investments. And they just don't realize the long-term impact that that could possibly have on their investment results. Because sitting on the sidelines in cash, it might feel good right now, but it's not going to feel good in 5, 10, 15 years from now when you haven't been able to meet your retirement goals. So that's a big opportunity cost for peace of mind, in my opinion. I just want people to just think about that. People tell me they can't invest now as markets are near all-time highs, but that's probably what they said at the end of '23 and the end of '24, and here we are at new all-time highs. And so I just don't know if waiting is really the right thing to do. For all of those people with those long-term time horizons, let's say greater than five years, and they're sitting in cash, I just want them to take a step back, give some serious thought as to whether or not they're positioned appropriately to meet their long-term investment goals. And if they don't know the answer to that question on their own, then they should seek some advice from an advisor that could potentially help them put them on the right path. I'm pretty sure we had the same conversation 12 months ago when we did this review conversation. But unfortunately, the cash levels have not really changed all that much. And all of those people sitting on the sidelines have missed another strong year of market performance. And it just hurts me to the core to know that that is happening.

Well, again, I keep coming back to it. Maybe I'm overly obsessed with my age right now because I turned 60 this year, Sarah.

Oh, my goodness. I shouldn't feel so shocked.

I'm a little fazed by it. But just what you figure out when you get older, and when we talk about compounding and the power of compounding, is it's those later compounds. So you double, double, double, double. And Stu Kedwell talks about this all the time. It's those ones later in life. Those are the really big ones. For someone like me, at my age, over the last three years, the markets have been so fantastic that being a participant in that has driven really that life-changing last little leg as I head towards my retirement years. And I think that the thing that saddest to me and you who have been involved in trying to educate Canadian investors and help investors take advantage of financial planning and investment planning and professional asset management, all these things that are at the core of what we do. It's more that I feel bad for people who miss opportunities when they're there. So I get exactly where you're coming from with your comments. This year, and as you say, last year as well.

Yeah. I agree. And maybe if we keep talking about it and repeating the same message, even if we just get through to a few people along the way, then our job is done.

Well, so we're starting a new podcast called The Daily Sarah. It's no longer the Download. We're going to do The Daily Sarah. It will be a daily Sarah reminder to take a look at your cash and get a financial and investment plan in 2026. Sarah, always great to see you. Just fantastic stuff. I know you'll be joining us several times through the year, and we'll look forward to those opportunities to catch up and give you the opportunity to share your wisdom with Canadian investors.

That's great. Thanks so much.