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Being effectively diversified has taken on new meaning, and 2020 was no exception. Structural changes in the economy and markets means that what has worked over the last decade may not continue to do so. Sarah Riopelle, Vice President and Senior Portfolio Manager, Investment Solutions talks about why evolving your approach to diversification is vital in today’s environment and how she is positioning portfolios for long-term success. [7 minutes, 21 seconds] (Recorded January 14, 2021)


Hello and welcome to The Download. I’m your host, Dave Richardson, and I’m joined today by Sarah Riopelle, who has been on the podcast many times. You know her, she is responsible for all of the portfolio solution programs at RBC Global Asset Management. Sarah, I hope it’s not too late in the year to wish you a happy New Year. I hope you and your family are well.

Yes. All good here. Happy New Year to you.

Excellent. So, let’s start talking about the New Year and beyond. Current environment? You know, it’s an environment of heightened uncertainty. And I think we’ve talked about before, looking forward with interest rates at historic lows, markets in many cases at all-time highs, but that points to perhaps muted return expectations. Has your view of the traditional asset mix in portfolios changed because of that? What are you doing inside the portfolios right now?

Great question. Anybody who’s talked to me before, including you on this podcast, knows that I fundamentally believe in the power of taking a diversified approach to your investment. So, I still believe that’s the way to go. 2020 was a good reminder of the need to be prepared for a broad range of outcomes, both good and bad. And that diversified approach is going to help you with that because it’s going to help to provide smooth and consistent returns over the long term. That served investors well over the last 30 years, and I believe it will continue to do so. But that doesn’t mean we don’t need to adjust your approach and be constantly reviewing how the asset mix is set up with an eye to the future. So, the last 30 years has provided a good backdrop for a diversified approach. But that doesn’t mean we shouldn’t be changing how we look at asset classes and diversification going forward, because the optimal asset mix of the last decade is not the same asset mix for the next decade. The reason is because we expect mediocre or low to negative returns from bonds. So, you need to adjust your strategic asset mix, and take that into account, which we did last summer when we increased our equity weight and sourced that from bonds. On the tactical side, we’re seeing higher equity market valuations, low bond yields. That’s going to mean lower total returns and more volatility going forward. You need to adjust your approach there as well. That said, bonds are still an important component of a multi-asset portfolio because they provide income, they provide liquidity, they provide insurance in a portfolio context. We think equities are going to outperform bonds, but we do need to lower return expectations due to where valuations are currently sitting and due to the earnings potential from stocks going forward. A key theme for us for 2020 was “evolve and renovate.” We were really taking a close look at the portfolios and at the asset mix and at the underlying funds and strategies to make sure that we can continue to meet the risk and return goals that we have set for ourselves and for our clients.

Renovation is a big theme for everyone in this work-from-home environment. Just as many people have around the house, they need to think about that from a portfolio perspective as you’ve done so. If we’re looking ahead just in 2021 and beyond, is there anything in particular you’re thinking about or that’s on your radar for the coming year?

Well I think I can break that into two pieces. That evolve and renovate theme, I think, continues into 2021. We made a number of changes to the portfolios over the last year, including adding the second tranche of the real estate fund, including adding the BlueBay global alternative bond fund. We’re looking at some additional changes for the coming year to continue along that theme. But then looking on the other side to the economy and markets, which is probably what your listeners are more interested in at this point, since we’re at the beginning of the year, the economy, I think, may encounter some hurdles in the near term because we’re still grappling with this pandemic and the impact on the economy. But the recovery is progressing. We see a better outlook for 2021. We are watching the potential impact on inflation from the blue wave, as we call it, in the US. That means that Democratic control of all three branches of government could lead to higher taxes, increased fiscal stimulus, possibly higher minimum wages; these are all potentially pushing inflation higher. Higher inflation is not our base case at this point, but it’s certainly something that bears watching because rising inflation is going to have an impact on the valuations in the prices of a variety of different asset classes. Central banks, no urgency to raise rates. They’ve said that they want to keep interest rates low for a while. Bond yields are below our estimates of fair value, so we do see valuation risk there. While we look for yields to gradually rise over the longer term, there’s a number of factors that we think are going to limit the increase in yields over the near to medium term. So, low single digit to slightly negative returns on the bond side of the portfolios over the year ahead. Switching to stocks; obviously, it was an impressive rally off the lows in March, and that was due to the massive stimulus that was put in place. That was due to the gradual reopening of the economies. And then most recently, that was due to the starting of the roll out of vaccines. Investors are optimistic. They’re looking ahead to the recovery in earnings that is now just beginning. The S&P 500 or large cap U.S. equities are the most fully valued of the markets that we follow. But there’s a number of other markets that are actually showing attractive valuations. As a result of that, we’re tilted more towards international markets and away from North American markets in the asset mix. Further gains in stocks from here we think are possible and likely, but it’s going to depend on above average valuations. But we think that can happen because there’s limited investment alternatives. With bond yields as low as they are, people are looking for a place to earn some return. So, with limited investment, alternative stocks should attract more capital. As a result, we are expecting sort of mid to high single digit returns from equities over the coming year. And we remain overweight stocks in the asset mix as a result.

Wow. I don’t think we could squeeze a whole lot more in about five and a half minutes! That’s a great synopsis. You’re clearly on your game here early in the New Year. Thanks for that. We’ll hopefully be able to check back with you, on a semi regular basis to try to see how your thinking around this evolves. So important, just where you started, thinking about your portfolio and the importance of diversification. I think that’s the thing that never changes. The other part about the renovation and renewal is about how you look at things in time. So, again, we’ll check in with you and see where your thinking is evolving, as we go through what already looks like another interesting year. So, Sarah, thanks for your time today.

Great. Thanks for having me.


Recorded: January 14, 2021

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