Hello and welcome to The Download. I’m your host, Dave Richardson, and I’m really pleased to be joined today —we haven’t checked in with her in a while and she manages tens of billions of dollars for investors across Canada — Sarah Riopelle, who manages all the portfolio solutions at RBC Global Asset Management. Sarah, welcome back.

Thanks for having me.

Lots of stuff has gone on since we last chatted. Of course, you are watching this stuff 24/7, every day. So let’s talk about what you’re doing and what’s on your mind to help investors make sense of everything that’s going on. As we look into 2021, what’s on your radar right now?

Well, I think the coming year will bring heightened uncertainty and therefore more volatility, and more muted return expectations. While the initial stages of the pandemic were met with massive fiscal and monetary policy responses and mandated shutdowns, action to address the second wave that’s occurring right now is happening with less urgency. Governments are being selective in tightening restrictions and closing businesses in hot spots, rather than forcing entire sectors to halt operations as they did earlier in the year. As a result of that, the economic damage from the second wave should not prove to be as severe as the first. Recovery is still underway now, albeit at a slowing pace versus a few months ago. So much of the outlook, in my opinion, hinges on the development of a vaccine. But we’ve seen some good progress in recent weeks, so we’re cautiously optimistic on that front. We continue to expect stocks to outperform bonds in this environment, although, as I mentioned, we do expect more volatility going forward. There are varying impacts of the pandemic on different economies and markets. So it’s really important to take an active and globally diversified approach to your investments, which is what we’re doing within the portfolio. The events of this past year have really served as a reminder about the need to be prepared for a broad range of investment scenarios and investment outcomes, both good and bad. I really think that diversification is at the core of our approach to portfolio construction, the key tenets of investing. I’ve talked so often about how important it is to have a globally diversified portfolio. But it’s not about setting it; it’s forgetting it. Daily movements will cause ways to move away from their desired targets. You have to actively manage those allocations on a day to day basis to make sure that the portfolios remain properly positioned. So actively managing the portfolios is going to help to provide our clients with resilient outcomes and deliver strong risk adjusted returns over time.

I think that something we emphasize quite a bit on this podcast is the importance of diversification and relying on or being involved in active management of your portfolio, particularly in times like this, and focusing on it from the perspective of an investor, not a gambler or speculator. So, in terms of the portfolios themselves, given that outlook, how are you managing your portfolios right now?

Managing multi-asset portfolios is much more complex today than it has been in the past. The challenge is not only working through all of the short-term market noise to determine what’s important, but also to ensure that the portfolios are positioned to continue to deliver results, especially in this environment of low interest rates and lower expected returns. Keeping portfolios current as market conditions change is key, and a variety of changes in the economy and capital markets indicate the need for a close attention to asset allocation right now. Investors need to rethink the traditional role of sovereign bonds in a multi-asset portfolio. In the past, they provided insurance, income and liquidity. But we think that those types of investments might be less effective on that front in the coming years. But that doesn’t mean we should abandon sovereign bonds in a multi-asset portfolio. It just means we need to rethink the allocation for them. So, a recent change that we made was to reduce the bond rate and allocate that weight to equities instead. You also have to make sure you’re diversified within fixed income, so own lots of different types of fixed-income products within your fixed-income allocation. So I think investors need to re-evaluate their portfolios to include other asset classes and strategies that can mimic the prior benefits of sovereign bonds while contributing to portfolio returns. Here are some of the things that we’re doing: we recently increased our allocation to real estate; we continue to leverage our global fixed income capabilities with the addition of an absolute return credit fund, which is our first allocation to liquid alternatives within the portfolios. These are just a couple of examples of how we’re evolving our asset mix and diversifying our risk exposures, given the current environment and our return prospects going forward.

Yes, a couple of points that are so important Sarah. A lot of people just think of diversification with respect to stocks, and equity. The equity portion of your portfolio. It’s just as important in terms of fixed income. If you can efficiently add in alternatives, as you mentioned, such as commercial real estate, it’s an added value and an added diversifier. Of course, many of us have real estate in terms of our own personal property, our own home or maybe a vacation property or something along those lines. So just given all of what you said, what do you think investors need to keep in mind?

You know, I think the key is to not abandon your investment approach simply because things have changed. It’s true that the environment that made multi-asset portfolios so successful in the past is not what we’re expecting in the future. But that doesn’t mean you abandon the approach. What you do need to do is evaluate, evolve, renovate your strategies to ensure that your portfolios will continue to meet the risk and return goals that you’ve set for yourself. Remember that sovereign bonds offer a number of benefits and a balanced solution, as we talked about: insurance, income, liquidity. Yes, for an environment of lower bond yields, but that doesn’t mean that bonds don’t still have a place in the multi-asset portfolio. As we talked about, with diversification, there are so many different layers of diversification that you can have within the portfolio: at top level, asset class strategies, manager diversification, diversification within fixed income. And it’s important to take that active and globally diversified approach to make sure that the portfolios remain well positioned. And just one last thought with you: as I said so many times in the past, we have to really encourage our clients to ignore the short-term noise in markets and stay focused on their long-term investment plans.

Yes, and that was really my comment around being a real investor, which I know you are, and you are extremely disciplined in following that type of approach and not being a gambler or speculator. And we’ve almost gone from the period in February and March when there was emotion and panic with the virus, and the market sold off 35% and people got too pessimistic, as we bounced back so quickly, the news of the vaccine, markets going to all-time highs again. It’s almost that over-enthusiasm for where we are right now, which often causes people to make mistakes. And that’s why that prudent professional guidance that you have, which is why I love to have people like you on to interview, because you look at this through a professional lens and you stay even-keeled through the ups and downs of markets, correct?

Yes. It’s about taking advantage of opportunities as they become available, but taking a very prudent, risk-adjusted approach. We have a risk budget for the portfolio so that we make sure that we don’t allocate too much of our risk budget to any single bet within the portfolio. So we keep thinking small-measured changes, small-measured bets. That’s scratching out the basis points of Alpha for our clients without taking these big bets in the markets. I’ve been doing this for too long to know that you’re going to get it right and you’re going to get it wrong. Make sure that when you do get it wrong, it’s not going to hurt you too badly. Just make those small-measured moves around your strategic asset mix, and that’s enough to generate the returns that we’re looking for.

Excellent. Well, Sarah, thank you for your time today. That’s some great advice and an interesting outlook. It’s always great to have you on and we look forward to having you back in the near future. Thank you.

Thanks for having me.