Hello and welcome to The Download. I'm your host Dave Richardson, and it is one of our favorite times because we have the fantastic, fabulous, phenomenal—I even went off the Fs and went to PH. But Sarah Riopelle. Sarah, how you doing?

I'm good. How are you? That's a lot of F words for a Monday morning, but anyway.

We got to build you up because you do such a fantastic job, going back to the F. Managing Portfolio Solutions at RBC Global Asset Management. And one of the things that we always want to remind investors is, as they think about perhaps individual investments that they're making, the most important thing they want to remember is how everything fits into a portfolio and the positioning of their overall portfolio within their financial plan. And someone who never forgets that is you, because you're always thinking from a portfolio perspective. And that's whether someone's fairly conservative or someone wants to be more aggressive. But you always want to think of everything in the context of how it all fits together.

Well, a portfolio is a selection of a bunch of underlying strategies. You can't get overly focused on one particular strategy if it causes you to make decisions that's going to impact the whole portfolio. Some people get very focused on one aspect of their portfolio, the equity weight and what equity markets are doing, and they forget that they actually own a lot of other different things within the portfolio that are helping to smooth out that return profile.

Yeah, and over the long haul, what's going to determine your returns more than anything else or your success investing is going to be your overall asset mix to begin with.

Absolutely. Strategic asset mix, which is the one that you decide at the beginning of your investing journey is the one that's going to generate the majority of the returns over the life of your investments. And diverting from that is going to be pretty impactful. It's important to focus on that long-term time horizon and those solutions that you put together with your advisors, because deviating from that over the short term can actually have a pretty detrimental impact.

Now we're sitting here on Monday morning, it's Memorial Day in the US, and lots of scuttlebutt. Over the weekend, at the tail end of last week, and it continues that Iran and the US are having fruitful negotiations and making some progress, and maybe a deal is in sight. Price of oil is down. But from an investor perspective at this point, you probably want to be a little bit skeptical, or don't overreact to that optimism quite yet?

I was going to say cautiously optimistic maybe is a good way to put it. The last time I was here on the podcast, I think it was mid-March, we talked about the geopolitical risks and the impact of the war in Japan and what it could have on oil prices, commodity prices, earnings, inflation, those types of things. We've had a lot of—you said scuttlebutt, I like that word—a lot of progress or lack thereof potentially over the last several months. We were cautiously optimistic that we are going to get to a resolution at some point in the next few weeks or months. Is the current conversation and the news out over the weekend the end of it? I don't know at this point. I think there's still a lot of pieces that need to come together to get there. So the key risk is how long is the Strait of Hormuz going to remain closed. How long will it take for things to get back to normal once it does eventually reopen? If the blockades are eventually lifted, it's still going to take several months to normalize some of that energy supply chain. So don't underestimate that. With energy prices staying higher for longer, we have to start thinking about the impact that that could have on inflation numbers and whether or not we want to look past those or whether or not the market wants to actually incorporate some of those into the pricing in the market now. That's why we're seeing bond prices—which we'll probably talk about in a moment—move as they start to think about the impact of inflation. Our base case for the US economy is we're going to avoid recession this year, even with downgrading growth a little bit on the back of this energy shock. We do see a number of important growth tailwinds, so positive aspects to growth from the stock market wealth effect, from fiscal spending, accommodative monetary policy, and then the AI spending and productivity gains. So we think all of that stuff is going to be positive catalysts for the economy, which will offset some of this near-term pressure from inflation.

Yeah, you just need to get some kind of a resolution, and hopefully that happens. Now, you did have a little bit of a slip there. You said war in Japan. I know you meant Iran.

I'm sorry.

Those who are regular listeners to the podcast, by the way, you can subscribe to the podcast. We'd love you to follow us. Also on YouTube, where you can see the fabulous Sarah Riopelle in person, and the way we run the cameras is they largely keep them off me, some of the feedback we've gotten. But if you listen to the podcast regularly, we're very big proponents of vacationing in Japan right now for currency reasons. And the stock market there is fantastic.

Yeah, absolutely. Strong returns there. And every time I talk to somebody about their vacation plans, 50% of the people I talk to are going to Japan on vacation. I think there's 3 people on your team that are away actually right now in Japan, which I thought was kind of funny.

Unbelievable. I was with some people on the weekend, they were going to Japan too, and the people that come back just go, wow, it's so cheap. I didn't know it was that inexpensive. Well, that's because the currency's been cut in half over the last how many years?

Exactly. So I haven't been yet, but we do have an office there. We have investors on the ground in Tokyo now as of about 6 months ago. And so I am planning a visit there probably in the fall to visit the new people there and get to know how things are going there.

Well, you're going to love it. I went about 10 years too early, but it was fantastic. So if we looked at one of the interesting stories over the last year has been Japanese government bonds, and then we've started to get a little bit interesting here on some of the US, and then because of that, the follow-through on that is Canadian bonds, and we've seen the whole yield curve really rise, as you mentioned, with the war running probably longer than was initially advertised. And so energy prices have stayed elevated for longer. You're starting to see it creep through in inflation. What are you thinking about the bond market right now?

Well, that's the key thing. So the rise in bond yields is all about repricing of inflation expectations. And because until now, the market was underpricing the risk of higher inflation. So with the energy shock, as you said, lasting longer than initially expected, it's become more likely that we're going to have an impact on the inflation readings. And so investors are looking for more compensation to reflect that expectation of higher inflation. So since the war started in Iran, the US 10-year bond yields up about as much as 73 basis points to a high of about 4.67 last week at some point. And so with that move in yields, we believe that bonds are actually now more fairly priced. Downside is more limited, absent any economic surprise or further increases in inflation expectations. And so we think this might be a good opportunity to buy some bonds in here. And so we have changed the asset mix a little bit in recent days and moved some cash to bonds to take advantage of that change in pricing. The tailwind from the one big beautiful bill in the US is expected to fade into the summer. Positive economic surprises typically result in mean reverting after this strong run in bond yields. And so we think this might be a good place to put some money into the bond market because the path for yields from here is probably lower, meaning lower yields, higher bond prices. So we've had an underweight in fixed income for a number of quarters. We're still underweight, but we're just reducing the size of that underweight, given the pricing opportunity.

Yeah, and despite what's happened already with bond yields, if we look at the 10-year—and again, our regular listeners will know we focus on that 10-year US Treasury as probably the most important bond in the global marketplace—you've really been running between 4.20% and 4.80%, over the last several months, and there's been some opportunities whenever you've popped up into this 4.50, 4.60, 4.70 range to get in there and nibble. And then as things play out, it seems like the overall bias, because of a lot of factors behind the scenes in the economy—you mentioned AI—that could actually be disinflationary. And so until proven otherwise, it seems like you're sort of capped at the high end on yields.

Agreed. And it's also about balancing near-term versus long-term. Near-term potential impact, pressure on inflation, but longer-term the inflation numbers could change because of the AI trend. So it's about finding that balance between near-term opportunities and where you want to be positioned for the long-term. That's how we trade the asset mix. We have focus on our long-term investment time horizons, but we look for near-term opportunities to make small adjustments.

Yeah, that's a great way to manage your portfolio if you think about it. The way you might think about what you're doing with bonds right now is you're taking a little nibble right here in around 4.60, and then if yields go lower, that's great. You've made some extra money on the trade. If not, you've still got space to get another little nibble if it's at 4.70 or 4.80, or heaven forbid, if it gets up to 5.00, you'll have an opportunity to do that. And so you've got lots of flexibility and you're not overextending yourself in any way. As Stu likes to talk about, dollar-cost averaging. In a way, and you're doing that when you're managing a multi-billion-dollar portfolio as opposed to multi-hundred-dollar portfolio, same kind of idea.

Yeah, we really believe in the idea of small measured moves or bets consistently over the long term is going to help us generate the basis points of alpha that we want for our clients in a risk-aware way in terms of not introducing too much volatility into the portfolios.

Excellent. So that's the bond market. So a couple of opportunities creeping in there, and so something for investors to take a look at and see how that might fit in their portfolio. Or, as we often like to say, for people who have a lot of stuff on the go, why not let somebody like the phenomenal Sarah Riopelle manage their money for them? But what are you looking at in equity markets? Is anything interesting happening there? Changing every day, but always some opportunities there.

Lots going on for sure. Equity market continues to hit new highs. It seems to be looking past the near-term challenges and focusing on those long-term opportunities, which, as we said, we are encouraging all of our listeners to do as well. Stock markets did sell off in March on the back of when the war in Iran began, but quickly sort of looked past that to other long-term drivers in the market. Essentially the AI theme in the market is greater than the Iran concern. And so it's really driving what's going on in markets right now. Powerful recovery in stocks since March, all driven by this AI theme. Mostly by semiconductor names, less so by software names. And so that semiconductor theme is actually not just in the US, it's actually flowed through to the emerging markets as well because we have some really big semiconductor names in the EM space. So that market, that region has performed extremely well over the last several months. So basically the AI theme is so big and the opportunities there are so big that the market seems to be batting away any other concerns that might be happening right now. And that's not such a bad thing, I guess, because we're getting strong markets. But the risk-off, risk-on trade that we sometimes see where money flows into the equity market and out of the equity market has shifted into something more of a rotation within the market itself. So money's not leaving the equity market as a whole, but when you get a risk-off trade, it moves out of the AI stocks and into the rest of the market. And when you get a risk-on trade, it moves out of the rest of the market and into the AI stocks. So it's this rotation within equities, which is actually allowing the overall market to continue to hit new highs on a consistent basis. So where do we go from here? I think investors need to be mindful of valuations in the AI names. Because they are pretty robust given recent gains. There are more so in some other areas of the market. So in emerging markets, some of those semiconductor names that I mentioned have had extremely strong moves, wondering how sustainable they might be going forward. Within the US market the US market is less volatile than emerging markets, so that's good. And then the valuations in the US space are not as robust as they are in some of those other regions. So as a result of that, we're looking at some potential changes within our equity regional bets. We still are overweight stocks relative to bonds by a little bit because we do believe that there's the potential for continued increases in the equity prices and on a relative basis we think they can still perform better than bonds. Within the regions inside the equity market, we're looking at possibly making some changes there to take advantage of some of the recent strength and shifting some weight from one region to another. But that is a work in progress, so I don't really want to give specifics at the moment.

Very good. And what I love about the way we've tracked along in this particular discussion, it was completely by accident, it was not planned, but we've highlighted the difference between your strategic asset allocation and your tactical asset allocation, which is really important because as we say, that big picture strategic asset allocation, which is sort of your longer-term positioning cash/bond/stocks within then each of those categories—so bonds, for example, where you could be largely in government bonds, you could be largely in shorter-term bonds versus longer-term, or you could slide out to higher yield, you could take more risk in credit in the bond market. Same thing in equities. You could be in very risky equities, you could be more oriented towards tech or more dividend-oriented stocks, or you might be more in Canada than the US, you might be in Europe, emerging markets. There's all kinds of things you can do on a tactical basis to, again, as you say, make these little bets here and there and try to generate those incremental returns that if you make a little bit here and there, you start adding them up over time and it becomes significant in the performance of your portfolio.

Right. And so what we talked about earlier is that your strategic asset mix is going to generate the majority of your performance over the long term. And the tactical asset mix where we make those small changes around the strategic weights is going to just add those incremental basis points of return. So we're looking for opportunities to add a little bit more return on top of what we would get from the strategic asset.

Yeah, and whereas you're managing your strategic asset allocation you're going to be on top of it a little bit, you're going to be making changes here and there, but the tactical moves you're making within your portfolio, that's where you really have to be on top of the portfolio because you're sometimes making very short-term moves to pick up that little bit of an edge. And so you've got to be paying attention to what's going on if you're doing that inside your portfolio.

Well, you have to have the access to the information first of all. We have an enormous amount of information coming at us every single day in terms of what are the markets doing. What's the economy doing? What are the different equity regions doing? What's going on in the high yield bond market? So lots of different people who are paying attention to this on a day-to-day, hour-to-hour basis so that we have the information that we need to make those tactical decisions within the portfolios. And when new information comes in, we have to be able to change our minds quickly and adjust those positions within the portfolio. A constant attention to the detail.

Yeah, and this is always the decision you're making between doing it yourself—which a lot of people like to do, and there's nothing wrong with that—versus hiring someone to manage money for you. And the distinction between the people who do it themselves versus the people who hire someone. You really need 3 things to be a do-it-yourselfer. You need to have the time, the ability, and the desire. A lot of people have the desire, but the capability and time is often the issue. Sometimes it's even a capability thing. I mean, lots of people get finance degrees and work in the financial sector or have had an interest in the sector for a long period of time, so they've got a good idea of what they're doing from an investment perspective. But then that last piece, that time piece, is what stops you from being able to be on top of things minute to minute like you have to be, to be successful managing that money yourself.

Yeah, absolutely. And we have an enormous number of people who spend all day, every day, and not just during market hours or business hours, overnight and on weekends as well, paying attention to what's going on and looking at those signals and seeing whether or not there's new information that would cause us to change the positions within the portfolio. So we actually had information coming in yesterday as some of the discussion around the potential Iran deal came in, and we actually loaded a poll into our group chat to ask people if they thought that this shift in tone around the agreement between Trump and Iran, was positive or negative. Anyway, so we had a whole conversation going on on a Sunday afternoon talking about it.

It's always remarkable when I'm over at our office in London, England, and you see people in the office working. The market in Europe opens at 9:30 in the morning, just like it opens here, but that is 1:30 in the morning in Vancouver. And what, 4:30 in the morning, so when people are generally asleep in Toronto. And then Japan and Hong Kong are a complete another place with even tougher time zones for Canadian investors. So it's one of those things where sometimes having somebody managing—it's part of your money anyways—is a good idea.

Yeah, well, I get up at 5 o'clock in the morning. We don't have to talk about that. First thing I do is check my emails, and it's usually just making sure that Asia is trading well and there's nothing going on there that I need to sort of tackle before I get out of bed.

Yeah, I'm not a morning person, which is why I like it that there's morning people like you who are doing those things for investors. So Sarah, as we talk about that, because a lot of things in flux—and we'll try not to go over 2 months between your visits again, because it's always good to catch up with you—any final thoughts on what you and the team are thinking about as you're looking out at a crazy world right now?

The only thing I wanted to comment on is having a lot of conversations about alternatives within the portfolio. We've been doing some marketing over the last couple of months with some of our advisors. Talking about different aspects of the portfolio. So today we've talked about cash, stocks, and bonds. So those are our traditional asset classes. We also have an allocation to alternatives within the portfolio. We think that that's a good diversifier. And we talked about having different types of bets across different markets and asset classes and regions so that you can diversify the outcome of your portfolios. And alternatives is another asset class that really helps us there. And so we've been looking at making some changes there. We expect to roll those out over the coming months. So you might see some adjustments there. But I wanted to just mention quickly about the diversification benefits of adding Alts to the portfolios. There's lots of different things that we have to look at when we're looking at adding new asset classes impact on risk and return, how well it diversifies out the other things that we already own, liquidity and capacity and fees and where we're funding in from. So lots of things to think about, but we’re really excited about the opportunities there and some of the things we're working on in that space. And I think it's a really important aspect of the event. We talked about a total portfolio solution or a portfolio of securities that our clients are putting together for themselves. So I do think that alternatives are an asset class that people should consider, but they should carefully consider it because there's a lot of factors that they should think about before they add alternatives to the portfolio.

I'm kind of excited to hear about that because you probably don't know this, but I've begun making fairly significant effort into the art world. I'm painting, I'm sculpting. I'm right-handed, but I'm doing everything left-handed, so it gives it a unique look. So this might be something that you'd be interested getting the investors in on. Speaking of F's, I got an F in art in grade 6, and I think it was just because my teacher didn't understand me.

Well, maybe abstract art is popular for some people, so maybe you found your niche.

But that's probably not what you're looking for when you're talking about alternatives in a portfolio.

Well, we did talk about liquidity and capacity, and I'm not sure whether or not you could provide sufficient liquidity and capacity for the needs of our clients. We'll see though. Get painting and we can talk later.

Okay, excellent. Well, Sarah, thanks for coming down again and great to see you and hope everything's going well with you and the family. And we'll have you on next month.

Perfect, thank you.