Hello. And welcome to The Download. I'm your host, Dave Richardson, and I'm joined by one of our favorite guests, Sarah Riopelle, who leads portfolio solutions at RBC Global Asset Management. And Sarah, that looks like the office you're in?

It is. I've been starting to come into the office a little bit more over the last couple of weeks. And so, I'm here. There are actually quite a few people here, so we're excited at getting things back to normal.

And how does that feel? You feel safe, comfortable, traveling downtown and going into the building? All the precautions? Just for anyone listening, aside from being interested in investments, interested in ultimate return to work.

Yes. Absolutely. No issues at all. Everybody's being very respectful, lots of protocols in place. And so, it's been great.

Excellent. And not only have you been a little bit more active getting into the office, so that's a change, but we talk to you about general positioning of portfolios, and on that front, you've had some activity there. Some of it is related to the reduction in bond yields that we've seen over the summer, and that's created a change in your overall asset mix. Why don't you talk about the change and what led to it?

That's absolutely correct. Global bond yields have fallen significantly over the last quarter. Some of the concerns were slowing growth, expectations that central banks would maintain their accommodative monetary policies, at least for now. Given that, according to our models, we now have significant valuation risk in sovereign bond markets as a result of those fallen yields. We think that the odds are tilted towards yields moving higher from here. As distortions from the pandemic fade, we think the bond yields are going to begin moving higher and face further upward pressure as the Fed and other central banks begin tapering that massive bond buying program that they've put in place. So, we expect bond yields over our forecast horizon to go up to about 1.75 from their current level of around 1.30. And so, what rising bond yield means is pressure on total returns. We expect low to slightly negative returns for sovereign bonds over our forecast horizon. Given all of that, given our expectation of rising yields over the coming quarter, we took advantage of that recent decline in yields to make some changes to the asset mix. In July, we trimmed our fixed income position by 1%, put the proceeds into cash. We did the same trade again in August, sold half a percent of fixed income, put the proceeds into cash. So, we took advantage of that decline in yields and that increase in bond prices to increase our already underweight position in fixed income within the portfolios.

We've got a mix in terms of listeners on this podcast; the very sophisticated investors, experienced investors, and also, we love having our new investors who are trying to learn about investing. And always important to remind listeners that when yields go down, the value of the bond goes up. So, when those yields go down, we're taking advantage of pricing going up and taking some profits off the table.

Exactly.

Exactly. As we highlighted in other appearances by you and with other guests that we've had on the podcast, that really effective and active management of a bond portfolio over the last eighteen months has been absolutely critical. Lots of focus on stocks and stock markets hitting all-time highs, but effective bond diversification and active management have been very critical in terms of portfolio returns. So, as we look at the environment we're in right now, how are you positioning your portfolios? And what can investors take away from that positioning?

Well, we've seen a really impressive economic rebound after last year's deep recession, and that's now behind us and the extreme dislocations that we saw as a result of the pandemic are moderating. The economy is slowing, but we believe the growth remains robust and consumers are well positioned to support the expansion. If we balance the risks and opportunities, our asset mix continues to favor a bias towards risk taking. So, we're overweight stocks and underweight bonds within the asset mix. We acknowledge the economic recovery is slowing after that strong rebound, but our assessment is that we're in the early to mid-stages of the business cycle. We still think there's several years of growth ahead. We've already talked about our view on bonds, so turning to stocks, we remain overweight stocks because we think they have better upside potential, especially relative to fixed income in the asset mix. The S&P 500 reached a new all-time high over the past quarter. It's doubled since it's March 2020 lows, and it's already close to a 20% gain so far this year. So, we've seen a rapid increase in stocks. It's pushed our composite of valuations to its most expensive reading since the technology bubble of the late 90s. And while the degree of overvaluation has been concentrated in US Equities, we are starting to see some indexes outside of the US move towards higher levels as well. At these valuation levels, profit gains are going to become critical to keeping the Bull market alive. Earnings have indeed been excellent so far. S&P 500 profits are on track for their best recovery on records, already surpassing their pre-pandemic high, and we expect them to grow at above average rates over the next several years. The positive backdrop for stocks. Although valuations are elevated, we think that stocks can still deliver modest returns given low-end interest rates, transitory inflation and those strong corporate profits that we just talked about. So, we're looking for a mid-single digit returns in North American Equities and slightly better returns elsewhere around the globe over the year ahead. So, the question might be: why did you put the proceeds of your recent asset mix changes into cash? Well, we want to keep a modest cash position to cushion against any volatility that we might see over the coming months and quarters, and also provide us with opportunities to put money to work should they arise.

It's too bad the podcast listeners can't see the view that I see over your shoulder. Which is, I think, a nice analogy to what you do, because looking from your office, whenever I visit you— or used to—, you could look straight out west and see the storms on the horizon. And that's what you do. You position portfolios to take advantage of opportunities but also manage the risk when there's risk rising, in this case, out of the west behind you. It's such a critical role that you play, and you're one of the best. So, Sarah, always great to see you. Really great to see you, actually. Hopefully we'll have you on again soon.

Yeah, that's been great. Thank you so much.