Hello, and welcome to the Download. I'm your host, Dave Richardson. And happy New Year to one of our favorite guests, Sarah Riopelle. Sarah, how are you doing?

I'm good. Happy New Year to you. Are we still allowed to say that at this part of January? I don't know.

Well, it's one of those ones where I think we're starting to creep into the second half of January. Maybe we shouldn't be saying happy New Year, but we haven't had you on the podcast in the new year. So for the podcast listeners, it is kind of happy New Year and it's kind of happy to see you anytime. I think we can go with it, but next time, no.

Okay, well, that's good to hear. Happy New Year to you. And I'm happy to be here.

The big thing for what we're doing, at least in the early part of the new year, is we're trying to get a look at what's coming in 2023. So is it going to be a happy New Year?

Well, it's interesting. The past year was certainly difficult for investors as we saw that swift reset in valuations across many asset classes, particularly stocks and bonds. Both stocks and bonds were down at the same time. It made it a difficult period for balanced funds and balanced-type investors, particularly challenging for some more of our more risk-averse investors who have more conservative portfolios that had higher allocations to bonds. Because people expect volatility in equity markets, but they don't expect as much volatility in fixed-income markets or from bonds. So, looking back, it was a difficult period. But when we look forward from here, we actually consider 2022 to be a bit of a year of reset because we reset those valuations in both stock and bond markets, and it's actually positioned us quite well for looking forward into the future. The outlook appears to be much better. Forward returns are much better than they were a year ago. For example, if you look at the expected returns for a balanced investor, it's risen to 7% from as low as around 4.9% about twelve months ago, which is what we had penciled in then. Lower starting points for both stocks and bonds mean higher expected returns going forward and that's true for our more conservative portfolios as well. We do need to remember that there are always risks on the horizon. There are always things that we need to monitor. There are near-term challenges to the outlook, given the risk of recession, the uncertainty around the outlook for corporate profits. But when you take that into context of a longer-term view, we are feeling more positive on the outlook now than we were six or twelve months ago.

Yeah, and we had Eric Lascelles on late last week and he was talking about the likelihood of a recession. And Stu Kedwell, who's a regular on Stu’s days, he was sounding a more positive note, particularly around fixed income, but a little bit concerned about equities and the potential that a recession and lower earnings haven't been fully reflected in valuations. So, it's going to be interesting to see your take again as you're looking for more of a portfolio construction perspective, how that all comes together in the various portfolios, and then most commonly the sort of 60-40 balance portfolio that people have been looking at. We had this big sell-off in bonds last year. As you say, I think this is something you've always got to keep in the back of your mind, but again, I think the investor has learned over the years, as more and more people invest directly or indirectly in stocks and bonds, that you're going to get volatility in the stock market. There's no question about that. That's part of what being a stock investor is all about. And I think investors, if I look at Canadians in general, they're getting comfortable with the ups and downs of equity. Of course, they'd rather have up than down. But fixed income is a little bit different and certainly to see fixed-income markets like that. So, we've seen a lot of investors, as rates went higher, start to embrace the higher rates you can earn off cash or cash equivalents, cash-like investments. Is Stu on the right side or are you sharing a view that we're likely past the worst of what's happened in fixed income and in the bond market? Or are you still expecting some parts to be better than others? How are you managing the portfolios around fixed income this year?

Yeah, it was unprecedented volatility in fixed-income markets. Bond investors had to endure the worst sell-off that we've seen in decades. And it probably felt even a little bit worse because those investors had benefited from above-average returns over many years and leading into this historic sell-off in the bond market. A year ago, we felt that bond investors did face some significant valuation risk because yields were historically low and our forecast was for yields to rise, which indeed happened, but it happened much more quickly than anyone expected. So I think today bond investors face a very different scenario, one where bond valuations are much more reasonable and the future returns are much more robust than they were just, say, six or twelve months ago. The gap between where interest rates are and where our models suggest that they should be has narrowed a great deal over the last year. So yes, there's still some uncertainty around inflation and the plan for central bank rate hikes, but so far, our central bank has done a good job of bringing inflation down and we're seeing more positive readings over the last couple of months. So we think that the need for significant tightening appears to be fading. In fact, if you look at expectations for central bank rate hikes, at least for the Fed in the US, we're expecting another small hike in February, another one in March, and then in the back half of the year, the market is actually pricing a cut in. So we are getting closer to the end of this cycle. At these higher yield levels, bonds, we think, are going to offer greater protection against falling stock prices in the event of an economic downturn. So they can do that ballast in a multi-asset portfolio, which is what they've traditionally been able to do, and that just didn't happen to work as well over the last year. But we think that that relationship between stocks and bonds can reassert itself looking forward. We recognize that if inflation does not respond and remains elevated, there is a potential for higher yields in the near term. But we do, as you said, think the worst of the pain in the bond market is likely behind us at this point.

Yeah, and really important, I think, what you said in there around valuations, that you've seen a normalization in valuations around fixed income, which means, as you look forward, that bonds will not have to have that snapback that we saw. Of course, rates dropped and had to drop way too low during COVID and the lockdowns. So they were going to normalize. That meant rates rising, that was going to be tough on fixed income. But now that they've normalized, first of all, there are some more attractive coupon rates in the bond market, so you can actually earn some income off fixed income, which is what we like, particularly if we're retired or we're looking to generate income off our portfolios, but also that you can actually get some upside if the economy slows down as we expect and rates actually start to turn the other way. Not back to zero, but maybe actually fall a little bit.

Yeah, that's totally true. We have a chart that we look at 150 years of bond yields, and we have a long-term average on that chart. And where bond yields are sitting now are back to their long-term average. And so that valuation risk that we saw within the bond market over the past couple of years definitely seems to have been resolved. And so we are starting from normal valuation levels from here. And so bonds can behave a little bit more normally than perhaps they have in the past five years or so.

Let's continue to look back a little bit because that's a lot of good forward-looking stuff. How did you manage through this? When you look back at 2022, as someone who manages portfolios, you've got stocks and bonds, you're diversified all around the world, you're holding all kinds of holdings. So you're faced with this year where stocks are down almost 20% and bonds are also down almost 20%. You never see that?

No.

How did you manage through that? And when you look back at it, are you comfortable with the decisions that you made through in managing the portfolios?

Yeah, for sure. We have a tactical asset overlay on the portfolios. And what that does, it means that we're looking at the markets and constantly looking for opportunities to increase or decrease our weight in stocks and bonds where we think that we can add value to the portfolios. And so given the volatility in the markets last year, it gave us more opportunity to tactically manage the portfolio. So we were particularly active over the past year. We had quite a few trades that we did in the portfolios tactically. If I had to summarize it in a general theme, we were buying bonds as yields rose, so we went into 2022 with a significant underweight in bonds in all of the portfolios, and as yields were rising, we were reducing that underweight in the portfolios. And then we were also de-risking from the perspective of we had an overweight in equities going into 2022 and as the year progressed, we were decreasing that equity weight because risks were increasing within the markets and we felt that it would be prudent to bring that weight down. We're closer to neutral than we have been for quite some time as we're increasing bonds towards neutral and decreasing stocks towards neutral. And we've made a number of trades within the portfolios over the last twelve months to reflect that. One significant change I wanted to mention is that in early October we actually reversed course on the equity weight and we added back some equity weight to the portfolios because we felt a lot of the valuation adjustment that was necessary had already happened and we felt that things were looking a little bit more robust or a little bit more positive for equity markets leading into the back part of the year. So we added a little bit to equities at the beginning of October, which turns out to be was a positive value added for the portfolios because equity markets have done well since then. When I say we were particularly active in portfolios, we can trade the portfolios at any time. And one example was a trade that we actually did on Canada Day on July 1, because the Canadian markets may have been closed on Canada Day, but the US markets were open. And so, our team was working that day and putting some trades through the portfolio because bond yields were moving significantly at that time and we felt that there was an opportunity there. So we're watching the portfolios all the time, making those adjustments where we see the opportunities to add value and being able to trade quickly in all of the various portfolios is, I think, definitely an added advantage for our clients.

Yeah. And you would argue you're more active than you've ever been in terms of the portfolios. And that has to do with, again, just technology, effectiveness of executing strategy. You can just do things faster than you could before, and you did more last year likely than you've probably ever done within the portfolios that you oversee?

Yeah, for sure. And we make sure that we have lots of tools available to us, whether it's trading actual underlying bonds or underlying securities and underlying funds, whether we're using futures and ETFs and other types of derivatives to trade within the portfolios. We have lots of tools and levers at our disposal to be able to trade quickly and efficiently in markets. And as you said, technology is an added tool as well for us, so that we can have the ability to trade within the portfolios in different time zones and different hours and in different locations. And so, lots of flexibility to be able to do that. And as you said, certainly looking back ten years into what we were able to do and the timeliness of some of those trades back then, it's significantly better now than it was because of the technology that's available to us.

Well, I get texts from people whenever you're on and they say that it always sounds like I'm very intimidated when I'm talking to you. The listeners should know just how powerful you are referred to as the 150-billion-dollar woman. Is that what we'd be at today, or am I underestimating your power?

You're underestimating it by a few billion dollars or so, but it's okay. We can round it to 150 and go with that.

She has her hands on about as much money as anybody in Canada. And she has a fantastic follow on LinkedIn. So I'd encourage you to track her on LinkedIn because there's always lots of words of wisdom and one of the favorite things for people who did follow you last year, you put together or published what you call your top-ten investment truths. Any updates after a year like last year to that list that you want to share with the listeners? And of course, they can track you on LinkedIn. You've got another piece on 60-40 portfolios, which is around what we're working on today in terms of view. Anything changed on those ten investing truths?

Maybe just the focus. So the list is always worth keeping in mind. It's funny, people only ever ask me about my top-ten list during volatile markets. When everything's quiet or everything's trending upwards, I don't seem to get asked about that very often. Anyway, I think different markets bring different pieces into focus. I think the one right now for 2023 is to focus on where markets are going, not on where they have been. 2022 was a challenging market for many people, but we have to do our best to put that in the rearview mirror and focus on looking forward and what opportunities are available in front of us and not be sitting on the sidelines because you're still traumatized by what happened in 2022. And the other one, I would say, is extremely difficult to successfully time the market. It involves making two decisions: when to get out and then when to get back in. And especially that one, when to get back in, is usually going to happen when things look unusually bad, at the very worst time, it's probably the best time to get back in, and people have a really hard time doing that. So I really believe a good investment plan can withstand all types of market environments, and it's important to stay invested as opposed to trying to time the market. And one of my colleagues here says the goal should always be to outperform over time, not all of the time. And so I really believe in staying the core, staying invested, focus on those investment plans that you so diligently put together with your advisors, as opposed to letting your emotions drive you and trying to time the market.

Yeah. 2022 is certainly a year where valuations mattered and quality mattered. And again, when you try to push for those extra returns, at some point you get hurt by it. And this past year was one of those years where stretched valuations on fixed income and in different parts of the fixed-income, or really all the fixed-income markets, and certainly different areas of the equity markets, those who stretched out paid the price. So it was that kind of year.

Yeah, for sure. And it was a one-year return that was unusually difficult for people. But when we look at historical returns, when you push them out to 3-, 5-, 10-year rolling returns, they're almost always positive for a balanced-type investor. And so being overly focused on what happened over the last twelve months may prevent you from taking advantage of some of the opportunities that could lay ahead of us over the next twelve months, or even 2, 3, 5 years, depending on time horizons for clients.

Yeah, I was explaining the difference between gambling and investing to one of my daughters last night. I was driving her back to drop her off at university and she's taken business. If you play blackjack at a casino, the odds are in favor of the casino, about 50.2 to 49.8%. So if you gather your money and play and play and play forever and ever, you're ultimately going to lose. For investing, as you say, you get out to five years, and very rare, historically— and things can change in the future—, but historically, you get out to five years, balanced portfolio is always positive. So investing is something that if you play and play and stay and stay, you ultimately win. And that's an important difference. That is, I think, lost sometimes, particularly on young investors, but something that professional investors understand and use to their advantage as they're managing portfolios like you do.

Yeah, and I have a chart that I use as a visual when I do presentations sometimes, and it's the long-term return of a 60-40 balanced portfolio. And once you look at it over a 30- or a 35-year time horizon, and we've had a lot of difficult periods in markets over that period, but it's hard to really pick them out on the chart when you stretch it out to that long-term return series. And so sometimes it's about taking a step back and looking at things from the perspective of a long-term investor and saying, okay, that was a difficult period for sure, but it's not one that should be shifting me off of my investment plan. Because when I look at it, historically, we've had those difficult periods in the past, but the chart is still showing strong performance from a long-term perspective.

Yeah. And again, like you say, you've got your tactical asset-allocation models, and there's going to be times where you're going to make tactical changes to a portfolio. But it's all done in the context of driving returns to outperform over time, not all the time. There's just going to be some times where the approach is not going to be favorable. Markets get irrational at times, as we know, but over the long haul, they are rational, so that's where you can try and outperform. I've been intimidated, obviously, to loving everything that you do and talk about Sarah.

Yeah. I don't think it's possible to intimidate you, Dave.

Anyways, Sarah, to you and the family, have a great 2023. We're looking on the professional side for you to have a really spectacular 2023. Everyone's hoping for that. All the 150 billion, or way more than that, you're managing. And I know how busy you are. So, thanks for your time again.

My pleasure. Thank you.