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Sarah Riopelle, Vice President and Senior Portfolio Manager, Investment Solutions, explains the recent tactical shift in her portfolios and why she has added to equities. She also talks about recent volatility and how she is positioning portfolios with the longer-term in mind. (Recorded September 9, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson, and as always, I’m pleased to be joined by — any time we can get -- Sarah Riopelle, Vice President, RBC Global Asset Management. And for lack of a better description, Sarah is responsible for the various portfolios and portfolio weightings at RBC Global Asset Management. And Sarah, you announced yesterday a shift in your tactical asset mix. We were talking to you earlier about strategic asset allocation change that you had made through the summer. But this is a tactical move. So, a smaller move, short term. What move did you make and what was the thinking behind the move you’re making at this time?

That’s right. Well, the tactical asset mix reflects our shorter-term view of the markets. And so the change that we made was to boost our equity allocation and we sourced that from fixed income. What are some of the reasons behind that? We expect the economy to continue to rebound as lockdowns ease and as the threat of the virus diminishes throughout the world. Although growth will likely slow from the initial stage that we saw as the recovery began, we think that a gradual improvement in economic activity should be supportive of further corporate profit growth, which is supportive of equities. There are a number of risks that could challenge our base case. Some of these include renewed virus outbreaks, US/China trade tensions and uncertainty around the upcoming US presidential election. Obviously things that we need to watch closely. But against that backdrop, we’re seeing that monetary policy will likely remain highly accommodative, via ultra low interest rates, to support the economy and financial markets. And with that backdrop, we expect sovereign bonds to deliver mid-single digit to slightly negative total returns in that type of environment. And at these low levels of yield, sovereign bonds offer less of a cushion in a balanced portfolio against a deterioration in the outlook, if we do see some of those risks come about. So as a result, we’re lowering our bond weight further to reflect this low, total return expectations for fixed income. On the flip side, talking about equities, the strong rally in global equities that began in March has extended through the summer. A number of markets have now completely erased their prior losses, which is good news. With the S&P 500 now decidedly above our measure of fair value. Therefore, we have to reduce our forward return potential. Most markets outside the US, though, remain attractively valued according to our models. And so in the aggregate, global equities, we think, are reasonably valued. Profits are down significantly due to the pandemic, but the loss of earnings will not have a lasting impact on markets because we think that earnings can rebound quickly and analysts actually expect profits to reclaim their pre-COVID levels sometime during 2021. While we recognize that we do have elevated valuations and optimistic investor sentiment, this does leave the equity market vulnerable to a correction in the near term. We were focusing on the longer term and we believe that longer-term stocks offer superior return potential versus bonds. As a result, we added to our equity weight, at the expense of the fixed income weight. So for a balanced investor, we’re sitting at about 62% equities — relative to that strategic neutral position of 60% —, and 37% fixed income, with the balance in cash.

And so, given your current strategic asset allocation, as you mentioned, balanced at 60%, moving from 61% to 62% in terms of equities. You’re still pretty close to what you would describe as your neutral weighting in a balanced portfolio. You’re not way out there in terms of an overweight with equities from your perspective?

That’s correct. So we’re maintaining a small overweight in equities relative to the neutral, because of our belief that stocks will outperform bonds over the time horizon. But we do not have any large scale bets on equities at this time, given that valuation risk I mentioned.

And you’re not overly concerned about making this call heading into that US election, in the last two months before that ultimate decision by US voters is made?

Yes, we’re probably going to see increased volatility in markets over the next couple of months as we head into the US election. But we’re very focused on long-term prospects for stocks, profits and valuations, and that’s what this asset mix is based on. We expect near-term volatility, but we are positive on the long-term prospects.

And again, you’ve always got to keep it in the context of what is your benchmark weighting, your neutral weighting in a balanced portfolio at 60% going to 62%. Not a big stretch, but again, reflective of a longer-term view that equities are preferred to fixed income.

That’s correct.

Well Sarah, thanks for explaining that decision. Those are always important decisions. We love to share them with investors to help frame the decisions they’re making in their own portfolio, and no one does it better than you. So thank you for your time.

My pleasure, as always.


Recorded September 9, 2020

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