Hello and welcome to the Download. I'm your host, Dave Richardson. And I apologize for what ended up being about a three-week hiatus for us here on the Download as I ended up doing a little bit of personal travel as well as business travel. I got nine countries in, in eighteen days, including five new ones. But the reward for all of you faithful listeners is that we have a very special guest today on the first podcast back, and that's our old friend — well, our young friend — Sarah Riopelle. I better be careful on that, Sarah.

Yeah. Old by tenure, but young by age.

Exactly. Because when we started working together back in kindergarten and we spent twenty-five years working together, that just gets us right to about the right age, coming around thirty.

Yeah. Congrats.

You always got better marks than me, which is why you're the guest with all the smart commentary, Sarah. Here we are at market highs again. We are recording this on Thursday, March 21. So, happy spring as well. We look at what we've been watching and always good to start, maybe even taking a look back. And so good performance in 2023; very different from 2022. We're going to get into where we are now and looking forward, but what are you thinking about the last couple of years and what we've learned from it and what investors should take away from what we've seen?

The strong performance so far in 2024 is just a continuation of the last few months of 2023. I remember I was a guest on the podcast here at the end of 2022 when we were talking about what a tough year it was for investors then. We had rampant inflation. We had central banks aggressively hiking interest rates. Both stocks and bonds were down in 2022. So fast forward, and it’s a very different environment now. We had a very strong year for both stocks and bonds in 2023, resulting from some pretty big changes in the macro view. Economic data has come in generally better than expected. Inflation is continuing to move in a favorable direction. Investors are encouraged by the idea that interest rates have likely peaked and the next move for central banks is likely to cut rates. And so, the fixed income bear market that we saw over the course of 2022 and part of 2023 brought valuations back down to more reasonable levels and actually made bonds a solid investment opportunity now more so than it has been since the 1980s, because yields and valuations have gradually moved up for the last several decades. So good value in the bond market from here, we believe. And then shifting to the stock market. Most of us focus on the US stock market. You just mentioned the market hitting new highs. That's the S&P 500 hitting another new high this week. And what you have to take a step back and look at is the breadth of the US market, because if you take the S&P 500 as the bellwether US market — or the example of US equity stock market performance — it's really being driven by a core group of stocks which we call the Magnificent Seven. I don't have to explain to anybody on this podcast what those stocks are, but those are the seven big technology stocks in the US and they're really skewing US equity performance. So if you look at 2023, the Mag Seven returned 76% during the calendar year, and the other 493 stocks in the rest of the 500, outside of those stocks, returned 12.5%. And so those big seven stocks drove it to a strong return of 26% overall for the index, but it was very concentrated in those seven stocks. I think it's really important to recognize the lack of breadth in the US equity market and that there are some challenges going forward there for those stocks to meet very lofty earnings expectations. And if they are unable to meet those lofty earnings expectations, we could have a bumpy road ahead for the S&P 500.

Yeah. And we've talked a lot with some of the other guests about the Magnificent Seven and the impact that that's had on US returns or US index returns, and some of the challenges that that presents for the market. And does it broaden out or do we see those stocks fall back and what that does for returns? But even if we look beyond that, Canadian markets are kicking around all-time highs. Actually — since we suggested you're not even thirty years old — you won't know that the Japanese market is hitting all-time highs that we haven't seen since the late 1980s and early 1990s. Europe as well. If you look at different indices in Europe — and we've also talked on the podcast about the Granolas, which is the European version of the Magnificent Seven, which has driven some of those indices to all-time highs. And then if I just look at a regular old 60/40 balance portfolio over the last twelve months, again, let's just say that the return there is around 15% on a balanced portfolio. And then I go and look out at what Canadian investors are doing. As I often tell people, I have the unique benefit of being able to see what a huge portion of Canadian investors are doing every single day; where they're making their decisions around where to place money. And we still see over the last twelve months, Canadians are sitting on more cash. So they're sitting outside of bond and stock markets, they're sitting in cash, and interest rates are higher. So you can understand some of that for more secure investors, or even some that just want to sit on the sidelines and take a look. But they’ve missed 15% in a balanced portfolio. They've missed markets climbing up to all-time highs. What is ultimately the impact for these investors who are sitting in cash and waiting for something, some cue to jump into this, and now you can look back and say, wow, I missed this. Even new money moving into the market or being invested right now is predominantly in cash. So it's nothing I've seen in the thirty-two years I've been in this industry.

Yeah, I share your frustration. In 2022, we had many investors move to the sidelines. The market volatility was just too much for them to handle, and they moved out of the markets and moved to the sideline in cash instruments. 2023 was a much stronger year, but they still seem very focused on what happened in 2022. So even with stronger performance in 2023, it hasn't really changed their behavior as of yet. In my view, it's really important for these clients to focus on the long-term investment horizon and on where the market is going over the long term, not near-term or short-term prospects in market, because the majority of our clients are invested for the next five, ten, fifteen, twenty years — not the next six months. Dan Chornous has a saying: you can't get there from here. And what I mean by that is, if you are sitting in cash for an extended period of time, you are not going to be able to meet your return goals in retirement or the goals that you set out for your investment plans for whatever you're saving for. You can't achieve those if you're sitting in cash for an extended period of time. And as you said earlier, we have done some analysis and we looked at cash rates over various quarterly periods in 2022, and what the subsequent one-year return was for a balanced portfolio — or even a conservative portfolio, which is more heavily tilted towards fixed income —and the spread of returns between staying invested in the market versus sitting in that so-called guaranteed cash investment was significant, as you said. You own 15 on a balance fund versus 5 on a cash rate, and you're missing out on a lot of return by not sitting invested in the market. So I'm not here to speak badly about cash. Cash is a viable investment option for many of our clients, depending on time horizon, risk tolerance and return expectations. But it's not the right investment for all of our investors, especially if they have long-term time horizons. So it's really important to not let your emotions drive your decisions. Short-term volatility or short-term movement in markets should not cause you to abandon your well-thought-out long-term investment plan.

Yeah, I spent yesterday afternoon in the dentist chair. Paying for some of my mistakes in the past with a painful afternoon of drilling and filling, and then also finding out some bad news that I'm going to be back doing some more of that. But you have to go in and do that because the pain will get greater in the future and the downside is greater if you don't. And the challenge you have when you sit on the sidelines or move money to cash, is: when do you get back in? Generally, the best time to be investing and putting money to work in the markets, bond and stock markets, is when pain is at its highest point. I just wish a lot of investors had gone to the dentist like I did about a year ago to get the fillings done. It was not pleasant, but you can see that after a bad year, if you're going to get back to scratch and back in line for your plan, you sometimes have to make that decision at the toughest point. Sometimes it is. It's like your tooth being drilled. It's like holding your nose in the middle of a really bad odor. But it oftentimes is the best time to make that move. Now, bond yields have moved 75 basis points down. Bonds stock markets have done okay. Market calls around recessions are now turning more towards soft landings. And so now, when do I make that move? Now I'm buying something that's more expensive. And this is just that conundrum that investors have, unless they do more of a planning approach where you determine how you're going to invest, and then you just dollar-cost average, invest regularly and stay in. And we're taping three podcasts today, so I'm getting all my preaching out of the way early. So sorry you have to listen to that, and sorry to the listeners as well. But again, I've been around this business for such a long time, and I'm in it because I really think that investors can do so many things very easily to be successful. And over and over again, we see cycle through cycle through cycle, despite the best efforts of giving advice and more information out there, to continue to do the same things that they've done in the past.

Yeah, I agree. The right thing to do is to buy stuff when it's on sale or cheap and sell stuff when it's expensive. And unfortunately, when it comes to the stock market or markets in general, investors seem to have the opposite approach. They panic when things are tough or cheap and sell it. And then when things get expensive, there's this fear of missing out. And so they're buying things that are expensive, so they kind of behave in the opposite way. The one thing that I say quite often — and you and I have been doing this probably an equally long time — and it’s a saying that Habib Subjally, our head of global equities, has: it's time in the market that matters, not timing the market. And so I think it's really important to just have a well-thought-out investment plan, put your money to work and let it sit there. Not worry about trying to time the market, because from years of experience, I would say it's next to impossible to successfully time the market on a go-forward basis.

Yeah. Or maybe taking away from pain and odor on the negative side and thinking more about a positive side of how I benefit when I do things at seemingly a difficult time: actually, I need a new pair of gloves. I don't have a really good pair of gloves right now, unfortunately. We had a very mild winter here in Toronto, although it looks like, as we start spring, similar to the last couple of years, winter is coming in spring. But I didn't buy the pair of gloves back in December. I'll probably buy it over the next month or so, and I'm likely going to get them 60, 70, 80% off on clearance. Will I be able to use the gloves this year? Well, hopefully not. It's going to be warm enough through this season anyways. Spring will come, it'll be warmer. But I do live in Canada. I know that come next October, November, December, I'm going to be loving my new gloves that I got at 80% off. And that's when you want to try and find those opportunities. You just apply the same thing you do in buying other consumer goods, to buying your investments and thinking about how you're going to buy those investments. Anyways, I'm sorry to be doing this on the recording today, but I've just spent the morning going through a lot of different numbers around investor behavior and financial planning and markets, and I just feel like I need to share, if we're going to add some value here. So what's more important now, Sarah, is your thoughts on where we are now, where we're going and how do you have portfolios positioned right at this point in time?

Yeah, well, there's lots of uncertainty; but there's always lots of uncertainty in markets. Lots of risks on the horizon. It's just a matter of monitoring them and adjusting your positioning as different risks come to the forefront. So right now, I would say the key drivers are probably inflation and how the Fed will respond as interest rates have such a big impact on the economy as we've seen over the last couple of years. Yesterday we had a Fed meeting and the Fed kept interest rates unchanged, indicating that rates are likely to start coming down soon. But we expect the timing and the degree of future rate cuts is going to continue to depend on economic data. So we've had a couple of hot inflation prints over the last two months, but the Fed didn't seem overly fussed by that in their comments after the meeting. And inflation does continue to trend downwards, which is positive. We believe that the odds, as you said earlier, of an economic soft landing, have improved. So we've actually adjusted our own probability forecast to 60% chance of a soft landing and a 40% chance of a recession. So that's down from as high as 70% chance of a recession a couple of months ago. The important thing here is to say that there is still a 40% chance of a recession, which is an above-normal chance of recession. So we're not out of the woods, but we are certainly moderating our expectations and are more hopeful that a soft landing is on the horizon. We're more constructive on bonds, as I said earlier, because of that valuation concerns that we had when bond yields are at 1.5%. We pulled a lot of that out. There's still potential of a negative return if yields were to rise up to 6% as an example, but that is not our base case scenario at all. So I just want to be clear on that. Yes, it's possible, but we don't believe that it's likely. We believe that yields will likely fall from here, which is positive for the bond market. And then looking at the stock market, as I said, we do have some concerns about valuations that are built into the stock market, with many markets around the world hitting new highs, and so we're more cautious there. So how do you bring all this together? Well, not very exciting, but we're neutral in the asset mix at the moment. We don't actually have any tilts towards or away from fixed income or equities at the moment. And we talked about opportunities earlier, so we are looking for opportunities to add to our tactical weights in the asset mix. Right now, our focus is probably on the bond market. We see that there's quite a bit of value in the bond market over the next twelve to eighteen months, but we're looking for better opportunities to build up that overweight in fixed income. So we did have an overweight earlier this year, as bond yields moved, as Fed expectations were being adjusted. We took profits on that overweight and pushed ourselves back to neutral for the time being. And we are looking for opportunities to build that overweight back up over the next few months.

And your cash position?

It is neutral as well. So we're neutral on everything at the moment.

The rhetorical question of the morning.

Cash will be a source of funds to buy stocks or bonds going forward, if that helps.

So if we look at any of the changes you've made recently. I know since we last talked, you were doing a little bit in terms of your cash and bond position, but anything else you've been doing lately that would be significant in the way you're managing portfolios?

We spent a lot of time on this podcast talking about the near-term view. I think that's a very important context. But I also want to dial people back into the long-term view. And the way that we build the portfolios has a very long-term view in terms of which asset classes should we own, how do we diversify the portfolios and all that. And so we've been building out our alternatives bucket over the last several years. We added the Canadian Core Real Estate Fund about five years ago. We added the BlueBay Global Alternative Return Bond Fund a few years ago, which is a liquid alts fund. And then last fall, we actually added an allocation to infrastructure. So we launched the RBC Global Infrastructure Fund during 2023, and we funded it at the end of 2023. And so we now have allocations to that asset class within our portfolios as well. What we're trying to do here is about correlation and diversification. We're trying to find asset classes that are uncorrelated, meaning that it moves differently than the traditional asset classes of stocks and bonds, and that can help provide diversification benefits and help cushion returns when the other asset classes are potentially not doing as well. And if you look at the two-year return of those three asset classes I just mentioned — liquid alts, real estate and infrastructure — they all have generated positive returns over the last two years in an environment where stocks and bonds had much more volatile returns. They did what we expected them to do and provided that diversification benefit in an otherwise volatile market. And so, I just thought it was important to mention some of the work that we've done on evolving the portfolios over time and taking advantage of the breadth of solutions that we have available here, and make sure that we're putting all of our best in class solutions within the portfolio so that we can successfully generate those strong and consistent returns for our clients.

Well, that's fantastic. Again, that diversification point and looking at different assets that you can blend into your portfolio is a really important evolution of what you're doing in terms of the portfolios you build. And that should pay off really well, I think, for investors over the long haul.

Yeah, I mean, there's a lot of comments about the death of the 60/40 balanced portfolio. You can read articles on that all of the time. And I just think that they're just so overblown. And the reason that they come up is because in 2022, stocks and bonds both went down at the same time. So clearly, if they're going to be positively correlated, then diversification no longer works. Well, in 2023, they were both up at the same time and nobody was complaining about that. And so we never said that stocks and bonds would be negatively correlated all of the time. When we want them to be negatively correlated is when we see equity market volatility. We want bonds to step in and provide that balance in a multi-asset portfolio. When yields were at 1.5%, bonds had a harder time providing that role. But now that we've reset valuations and moved bond yields up to more reasonable levels from a historical perspective, they can step in and provide that balance in the context of a multi-asset portfolio. And then you think about the alts positions that we just talked about, that's just another lever that we have as well. That's just providing additional diversification benefit. And so that traditional 60/40 balance portfolio, as long as you're evolving it and you're adjusting it to market events, and as the market evolves, you need to make sure that your portfolio is evolving as well, and you're adding new uncorrelated asset classes over time, then it can continue to deliver on the expectations that we have for clients. And so I'm doubling down on the 60/40 balance fund as opposed to abandoning it like many others might be.

Well, I know something else that you're doubling down on, and we'll just wrap up with this and we're going to take a little shift away from markets and some really important work that you do. And I just want to thank you on a personal note, but I think for everyone across the country, you do a tremendous amount of work supporting women in the investment business and trying to make it easier and supporting women getting into portfolio management and the investment industry. I know it's a passion of yours. Also supporting women who are making investment decisions. In many households like mine, women are the driving force behind the investment decisions that are being made. And you were at an event on Tuesday night which you call «Women and Investing» with some colleagues. And what were you talking about and what was the experience? Because I know from what I heard, you had a certain number of tables set up and then people kept coming. So people are looking for this. Women are looking for this information. How did you feel about the whole evening and why is this so important to you?

Yeah, I love those events. It's really important to empower women to take ownership of their investment plans and the investing decisions within their families. Many women feel like they want to leave it to their partner to do, or they don't understand enough about the markets to be able to make investment decisions. And we're just trying to give them advice and tips on how they can take ownership of their own investing journey, where they can seek advice, to be able to ask the right questions and get the answers that they need to feel more comfortable taking ownership of that on their own. And so we had a room full of women of all ages and we had great conversations about why it's so important for them to be involved and to ask questions and to seek advice. And it was just a wonderful evening. And as you said, it's something I'm very passionate about. And we'll continue to volunteer my time and my services any way that they need me.

Yeah, that's fantastic, Sarah. And I've got two daughters and they idolize you. One might even share a name with you. We won’t get into that, but anyway, Sarah, thanks for that. Glad that was a great evening and thanks as always for joining us after our long hiatus. This was a good high point to start with.

Well, thank you so much for having me.