Hello and welcome to The Download. I'm your host, Dave Richardson. And we have a new guest on today. Very excited about this because I actually had some friends of mine attended a conference a couple of weeks ago, and I was supposed to go and attend, but I had to go get some dental work done. So it's a long story. I think if you've been tracking the podcast, you know about my dental woes through the summer. So everyone came back from this conference and I'm like, oh, was there any highlights? Was there anything that you really liked? And they said, this guy, Joe, he was awesome. He was so amazing. You should really have him on the podcast. And so that's what we did. We invited him. And it's Josef Turnbull, who is a portfolio manager specializing in US equities. Josef, welcome to the podcast. Thanks for accepting the invitation. And congratulations. What was so fantastic about your presentation? Or are you going to save that and share that over the next 10 or 15 minutes? We're going to see what makes you so fantastic.

Well, thanks very much for having me. I've been listening intently to some of the podcasts, and they're great. And also my colleagues have joined you. And so I’m very excited to make my first debut. I told my children I was preparing for a podcast, and they thought that was pretty cool that Dad, out of his boring day, is doing something neat like a podcast. So I've hopefully got a couple more young listeners to the show. I think for the presentation, it was just more of an update of the US equity markets. And there's so much going on all the time with regards to what the Federal Reserve is going to do with interest rate cuts, what the election outcome might look like and the implications to that. And as we’re rotating around from the mega-cap tech names into more of the average stock, the broadening out of the actual market, and how that's really been a nice tailwind. There's lots going on there, but it was juggling this short-term volatility ahead of some of these big catalysts in the marketplace. And then pair that with the longer-term opportunity that we continue to see in US equity market. So that was the gist of it. And I'm sure we'll hit on some of the highlights as we continue our conversation.

Absolutely. But the first thing I'd like to do, if you don't mind, since it is your first time on the podcast, I find portfolio managers always have such an incredible story. One of the reasons why we wanted to start this podcast to begin with, having spent a lot of time with portfolio managers over the years in the role that I play, I always find their stories interesting in terms of how they got there. And in particular, whenever you talk to people in a role like yourself, just the breadth of knowledge, how well read, the number of things that you're keeping track of just to stay on top of everything that you need to do so effectively. And one of the things we try to get across is the difference between me as an average investor and you as a professional investor, the amount of things that you do, with all the resources you have as well, on top of what I might do as just an average everyday investor is so different. So Josef, why don't you share your path to this role? You bought your first stock probably when you were about two years old and started trading options actively in your in your teens. But why do you love doing this? And why are you sitting in the chair that you're sitting in right now?

Yeah, that's a great question. I came at money management through equity research for a number of years after school. I studied economics, and then went into a sales-and-trading role where I got to really understand the market machinations, if you will, and what moves the market, and really broaden my understanding across the entire stock market. Then after going back to school, I thought that investing is where that just fits with my core, with what I'd like to do, equity, also research on individual companies, but also with getting exposure to the market and actually making some of those bets. I grew up playing a lot of competitive sports, and I think there's no better barometer of competition than every day. You're judged, the scoreboard is there with regards to how the portfolios are doing. That really leads me to be on the forefront thinking about the stock market and all these companies that we cover and assimilating all this information, as you mentioned, on a daily basis. You do truly have to love it. I read very broadly, and I don't just read business books. I'm reading all sorts of different things, whether it's from health and the longevity of some of these new drugs that are impacting us for the next 15, 20 years. AI is another big theme in investing and also reading a lot about how to get to understand it. There's just so much there. And if you're a curious person, this is no better place to do it and just absorb all this information. So it's been a great journey. I’m coming up on my 10-year anniversary with RBC Global Asset Management. So that's been an exciting time.

Well, congratulations. And that's actually the term that I was looking for. So I'm glad you brought up the idea of curiosity. And what I always say with portfolio managers and, again, people like yourself, it's just an insane intellectual curiosity, always wanting to learn more about such a broad range of things. And that's why it's always fascinating. I think that's why the podcast is doing well, because we get to talk to a lot of interesting people. And then the other point you made on the competitiveness. We have other portfolio managers that have a sports background or even Eric Lascelles, for example. He's an incredible economist, but he went to Princeton on an athletic scholarship. It's not uncommon to have that competitive instinct. But let me take it to the next step on that. Does it feel like you're working in isolation or how does the team element in your experience, playing on teams — you’re playing on some teams, I'm making that assumption — how does that come into it as well? How are you working together with other people that you're making investment decisions with every day?

Well, I think that's one of the big elements that separates our team from a lot of our competitors. We have such detailed knowledge in so many different silos across the stock market, by sector, by asset class, now with our mid-cap products, and obviously with the bond and fixed income people as well. We sit in a big open environment, so there's constant discussion going on, which makes sometimes taking that time for a call with a company or an analyst to investigate something more difficult. But the amount of information and energy that's around our group is really fantastic. We get to have these great sector meetings on a weekly basis. We'll run through all the opportunities and risks from our analyst team. And it's been a great collaborative environment where we're all learning from each other. We're all pushing each other to be the best that we can be. I think that the results speak for themselves in regard to how that's been working over the last number of years.

I know so many people on the team, and you really get that feeling. Actually, I got to get Brad Willock, another great athlete. I think he was a professional volleyball player at one point in his life. Olympian. We should absolutely talk about the Olympian thing. And what he probably doesn't know is we've had a height restriction on the podcast up until recently. So let him know we got to get him on because that height restriction has been lifted and we can go well above 6 feet now with guests. So we're in good shape for him. So Josef, that's, again, not an unusual background and just a mindset that you see out of portfolio managers. When we look, though, at US equities in particular, we have so many people who say, look, it's so hard to beat the S&P 500. Instead of hiring a professional investment manager like yourself, why don't I just stick and invest in the index? I may save on the cost of investing. But I'm sure you would share a view that an active manager can still add all kinds of value relative to the index. Why don't you talk about your thinking as you come into it with probably the most difficult benchmark to beat anywhere in the investment world. And then you've got to go out with that competitive spirit and add value around the whole US equity complex for investors. How do you approach it and why do you think what you do is so valuable for the people who invest with you?

Yeah, that's a great question. There's no better example, I think, than what's been happening in the last year or so, in regards to the extreme concentration that's been happening, just given the Mag7 and the AI theme. Some of these companies are just fantastic. There's no other place in the world that has the quality of these types of companies, the Mag7, and it's been great. But when a very small group of stocks represents 30 or 35% of the entire stock market, you're not getting a diversified pool of assets. You're getting very concentrated. And we like to talk about a boat. If you think about a fishing boat, we’ve got seats on either side. In order for you to have a nice afternoon in the fishing boat, you'd have to be balanced across the entire boat. You have one person on the left, one person on the right, someone at the front, someone at the back, and you're able to manage any waves and anything that the sea might throw at you. It's a similar analogy to what's going on in the stock market. I think if you just look back what's happened with the Mag7, the reference being that everything is on one side of the boat, and it doesn't take a very big wave or some uncertainty to topple that. We don't want that. We want to have a nice ride for a long period of time. We're actively looking for situations where expectations are too high, the stocks have run too high, the expected returns have gotten too low, and moving into areas of greater opportunity with greater upside and balance that and make sure we have a well-diversified portfolio that's going to do well regardless of what the stock market and the economy throws at us. There's a lot of unknowns every day, but we feel that's the best way to do it. We feel that's the best way to outperform the stock market. We do own, obviously, a lot of these companies because they are very high quality. But as they got higher and valuations were more and more stretched, we've been a bit more discerning. We don't think every company is going to do equally well. So we have our bets in certain areas that we're more focused on. And obviously, if we just own those companies in a very concentrated manner, we would have missed out on this great rotation that's happened with the average stock now reaching all-time highs. Some of the Mag7 stocks are down quite significantly in the last period of time. And we're able to provide a lower volatility longer-term performance for our clients. So we think this is going to end up being the way to do it and way about beating the benchmark over the long term.

I love that boat analogy. I'm going to steal that if you don't mind. I'll attribute it to you most of the time. But it's so right. You're on the boat, you want to get somewhere fast — because we would all love to get rich quick — but if you end up somewhere along the way hitting the wrong wave, and because you're not balanced, because you're taking too much risk, you're concentrated too much, everyone's off the side of the boat and you're swimming around in the cold water — likely perishing, by the way — that's not the right way to do it. There's a smarter way to do it. You can still get there, but it's a much more comfortable and safe ride along the way. And that's a big part of what a professional investor will do. A lot of times I find individual investors like myself sometimes disregard the risk, or I'm thinking of the risk, but I don't really know how to quantify it or understand it fully, whereas a professional investor really does almost start with the risks and then work back from there. I think for some of the listeners here, most of our listeners are in Canada — and by the way, if you're listening, please subscribe. Hit the subscribe button. Give us a review. We're starting to get a lot of listeners, so we need to make sure that we're coming up on the algorithms that they run on all these places where you can get the podcast. So please subscribe. Apparently, the marketing folks told me I'm not doing enough of this. So I'm going to start to do that. Sorry, Josef, for that sidetrack. But a lot of the Canadian listeners will remember the Canadian market back in the 1990s. It was several tech stocks. But the real focus and the big one — because I can't think of too many situations historically where you've had a bigger concentration in one company — was Nortel Networks. At one point it was almost 40% or maybe a little bit over 40% of the Canadian index. And again, you say, oh, I just buy more of that. It's never going to stop. But usually at some point it stops. And well, the boat would have been almost leaning sideways to begin with, and then just a little wave can knock that over and you continue that experience. Now, it's not the same, but you learn lessons from things like that.

Well, sure. The only way to deal with volatility or the proverbial wave is to have a diversified portfolio, have a longer-term time horizon, invest at regular intervals. I know Stu talked about the dollar cost average. It really does pay off, and it doesn't pay off more than during periods of volatility. I think there's a lot of opportunities. I had a sports analogy, there is a lot of fat pitches that you can be hitting when there is more volatility. You highlighted something earlier about how we think about these periods of time, how we think about risks. We have this saying that we always look down before we look up. We always want to understand the risks of what we're getting into versus the upside. Everyone always says, oh, well, there's lots of upside. Well, nothing comes for free. Reward is always associated with some level of risk. If we can buy stocks and move into opportunities, where we're much more skewed to the upside versus the downside, then that's where we want to take those fat pitches. And that's where we want to move across the boat to make it a more balanced, more comfortable ride than just peering over the edge of the boat to try to see something interesting and then end up swimming.

Yeah, probably no more fat pitch than my clumsy ask for more subscribers on the podcast. But I get what you're saying in terms of the volatility creating opportunity. And just when we briefly talked before — and we had Stu Kedwell on a couple of days ago — that's what you're thinking, we're in a period of heightened volatility. And again, how do you think about managing through that? Is that your expectation? And how long do you think that volatility lasts? And why is that volatility there from your perspective?

Yeah, I really do think that's the main focus of the market. September is typically a little bit more volatile than others, and it certainly lived up to its reputation for seasonal weakness here. And there may be more to come, and it continues to be a fairly unsettled macro environment from now through the election, and we have one more FOMC meeting in November. So this next seven or eight weeks could feel a little bit more volatile. The equity markets are struggling with the two biggest variables that seem to be impacting pricing, and the direction of the market for that matter, Dave: what will the Fed do in September when it starts its easing cycle and who's going to win the election. And unfortunately, both currently feel like a bit of a coin toss at this moment. There are equal rational arguments for either side of the Fed to go quicker or to go larger as there is for whether it's going to be Kamala Harris or a Trump in the White House. It's really close. We're not going to get those answers quite yet. They're coming to ahead. The market remains very data dependent, and I think we're just going to lurch from one economic report to another as we try to digest the extent of some of the slowing that's happening in the stock market and pairing that with what kind of monetary policy response we're going to see from the Fed. That probably leaves the stock market a bit more volatile here in the near term, and us maybe a little bit more defensively positioned through the rest of the year. But this transition we're seeing from the mega caps into the revival or resurgence of the average stock is giving us some opportunities to rotate away, as we discussed. I don't think the volatility is going to continue for that long. Once we have this idea of what the rate cycle looks like, and who is in the White House and what their economic policies are going to be. As we look forward to 2025 and 2026, the US stock market continues to look like a pretty interesting place to continue to invest, and it has been for the previous decade. So the macro backdrop is still pretty reasonable. We're really focused on very narrow, short-term things that do have implications for pricing, just given where valuations are. But the economy has been quite resilient despite having very high interest rates. The growth rate is still decent. It's a bit slowing, but it's still decent. Consumer corporate balance sheets are really strong. They're in good shape. The jobless and unemployment rates, not that high. We have the Fed who's to deliver a series of rate cuts over the next year or so. It's still a very friendly foundation for equities, and that's what gets us more jazzed up than the near-term volatility. We are seeing some opportunities to put money to work in different areas than the previous three months, this average concept of the average stock. Depending upon which way the coin toss goes, different areas are going to perform better than others. Again, that just brings it back to why we want to have positions across the market, have a very balanced and minimize the impacts of volatility, because we are seeing it only in some pockets. And so if we have a diversified view of where we want to continue to position the portfolio with an eye for the longer term, we think we're going to come out quite well and very well positioned for coming out the other side, where we think the US is going to be a great place to invest long term.

And as we said before in the podcast, human beings express emotion, different emotions, when they get into a period of particular uncertainty. I'm worried about my job. I'm worried about my family. I'm worried about my health. Markets express that emotion in a period of uncertainty through volatility. And that uncertainty right now, just in this next little two-month window, as you mentioned — the Fed and the election, exactly where the economy might be right now versus where it'll be a year from now, etc. — the uncertainty is particularly acute, so that's where you see that volatility, and it does create opportunities. But again, your positioning is fairly neutral, or are there any little areas where you think there's particular opportunities or even holding a little bit more cash than you might normally hold just to take advantage of that volatility?

Yeah, I think some of each of those buckets. Cash levels are a little bit high. And whilst it's maybe some defense in the near term, it's really an optionality for longer term outperformance. We have the dry powder available for when these opportunities present themselves during shorter term, shorter bouts of volatility in the marketplace. And that's really what it's used for. And that cash rises from some of these tech stocks that have got to levels that we just couldn't make work, and expectations got way ahead of themselves. And so that's what we do. We have another analogy, Dave: goal posts. I think about a football goal post. And the one side of it being really expensive and the other side being really inexpensive and cheap and great value. And in a number of stocks, we were way on the one side of the goal post. Our shoulders were touching the goal post, I think. And so as we get to those scenarios, we tend to rotate out, raise some cash, looking for other opportunities. As far as what's going to look well, you think about historically, we did a lot of research about the stock market and the history of rate cut cycles and what happens and election cycles and what typically happens. No surprise that, going into those big events, there's a lot more volatility and the stock market can be a little bit weaker. But as soon as those events happen, as you mentioned, it's a very near-term thing. We have a rate cut decision next Wednesday, September 18th, and then we have the election in early November. Once those periods come and go, the stock market typically rises. And that's why we're very excited about what the long term holds. And we're not really focused on the short term. We are in the sense that things are slowing in the economy to a small degree and what the response of the Federal Reserve could be. But really, we're thinking about what the earnings power and the free cash flow generation capacity of all these companies through '25 and then in '26. And so I think we look about what does well post a Fed interest rate cut, or a bit more, it depends on if we're going into a recession or not. And if we're going into a recession or slower growth, which is what we've seen so far — the market's fears are anyways on slower growth — it tends to be the dividend paying stocks that do really well, more interest rate sensitive stocks continue to do very well, and again, it ends up broadening out away from tech into more a broader number of sectors. Correspondently, if this soft landing or goldilocks type of scenario continues to emerge where growth is decent and rate cuts do come, then there's going to be this more rotation back towards cyclicals like financials and discretionary, industrials and some tech, which is why we don't really know which way it's going to go. So we have a little bit of a smattering of both. We probably are tilted slightly a bit more on quality and defensive and more dividend paying stocks at the moment, but equally, we have some opportunity for upside if that presents itself.

Yeah, it just seems like everyone we talk to, that that word «quality» is so important right now. And you say, well, what company's quality versus not? Well, there's a very strong distinction as an analyst. You can find the companies that you would describe as quality — quality earnings, quality growth, quality teams of management — versus companies that, for whatever reason, don't have all of those characteristics of a high-quality company. But that «quality» word keeps coming up in discussions I'm having with investment professionals.

Yeah, I think if you think about the long term — and there's lots of data to suggest and support that — quality companies that can generate lots of free cash flow and generate great returns on the investment they're making across their asset base tend to do well over the long run. We think about free cash flow and the growth of free cash flow is such a fantastic compounding element where you can sit there owning a high-quality company that generates prodigious amounts of free cash flow, and with a strong management team, as you mentioned, giving that back to you in the form of share buybacks and dividends at a great rate of return. You can just compound your wealth over a period of time. You need to have that long-term mindset. And that's the companies that we like. We buy all sorts of companies, but I think by our nature and our longer-term outlook, wanting to provide a better ride for our clients over the long term. Those are the companies we typically will lean towards. Sometimes their valuations are such that we have a harder time finding more opportunities. But that's not necessarily the case today. There are some great businesses, some high-quality businesses across many different sectors that are set up really well, and that's where we're spending all our time on.

Well, I think quality is the right word to describe your first appearance on the podcast, Josef. You lived up to expectations. That was some fantastic stuff. We love analogies here, by the way. That's all we go for. I'm sure we got a few sports fans out there. I know I'm a big one. And so that's going to be great. By the way, what's your favorite sport and what sport were you best at when you were playing it?

Oh, that's a great question. I had two main ones. I played every sport under the sun. I think the two I really loved were hockey — I played a lot of hockey, and I have a few bumps and bruises and scars to show for it. But as I was reading a book about a former NHL player, some people make the NHL, some people don't. I certainly was not on the path to go to the NHL. But no matter what it is, all paths in hockey lead to beer league hockey, or men's recreational hockey. So that's where it's led me. My other big one, which I was probably best at, was lacrosse. My mother was over for dinner this past weekend, and my son is, no surprisingly, a big hockey player, a big lacrosse player, and we were rushing out to lacrosse, and she said, oh, my God, it's such a rough sport. I don't know why we let you guys play that so much. But we loved it. Fast pace, a lot of action. It is a bit rough, but it was a fun thing to do in the summer when you weren’t playing hockey, for sure.

Yeah. So you got Canada's two official sports covered. I was actually watching a guy there — as we finish up, and we got to get back to work — but this guy on CNBC yesterday, and he's running a relatively new professional lacrosse league in the US, and they've done an interesting business model. But he was talking about some of the metrics around lacrosse and how much of an emerging sport it is in the US. It's really big, particularly in the northeast, I guess on the Atlantic coast in the US, at the university level. So maybe we will see a professional Turnbull with your son playing in the not-too-distant future, and with lots of people watching, too.

Yeah, it's been exciting. It's It was a great sport. It was the fastest-growing sport when I was a kid, and we played here in Toronto, indoor lacrosse, so box lacrosse. There's nowhere to hide when you're out of range.

Violent? Is that the word?

I think that's how my mother would describe it. But we talk about high school, which we started moving into more field lacrosse, and that's referred to as more the gentlemanly game. It's quicker, a lot more scoring. This is what this professional league is more about. And it's really exciting to watch and fantastic to play. And it's great to see my two daughters also play girls field lacrosse. It’s always exciting to see them running around having fun.

Oh, yeah, that's awesome. Well, Josef, thanks again so much for accepting the invitation. And hopefully you'll join us again in the not-too-distant future and all the best to you.

That'd be great. Thanks so much, Dave.