{{r.fundCode}} {{r.fundName}} {{r.series}} {{r.assetClass}}

Welcome to the new RBC iShares digital experience.

Find all things ETFs here: investment strategies, products, insights and more.

About this podcast

This episode Stu Kedwell, Co-Head, North American Equities, compares three broad categories of value stocks. Stu also explains how external factors, like enhanced stimulus and vaccine development, may provide the boost needed for them to bounce back. [6 minutes, 56 seconds] (Recorded October 21, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson. We’re a day late again. My fault! Busy schedule this time of year! Well, this guy is pretty busy too, Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management. So once again, it’s (S)Wednesdays instead of (S)Tuesdays. But Stu welcome, and sorry to keep messing your schedule up.

Thanks for having me, Dave. We’ve done this so often; we may have to make it (S)Wednesdays.

I know. It’s all on me. So I apologize to all the listeners and certainly to the expert here. But enough apologies! Let’s get into something that at least will reward people for their patience. I’ve heard you talk a little bit recently — and we hear lots of talk in the financial media — about growth versus value; and value certainly struggled relative to growth. But you look at the value area itself as not just one big monolith of value stocks. You can break those value stocks into two or three different buckets. Can you explain that to the people listening? Stu: « It’s a very good question. People look at the charts. And if you had the performance of a group of value stocks and a group of growth stocks on a chart, it looks like the river never converge. One goes upwards to the right and the other one is gone downwards to the right. When you think about a value stocks, there are some stocks that get lumped into that bucket and they have serious flaws with their business model. And we do a pretty good job at removing those. And you can tell when a business has a serious flaw. If its return on capital declines through time, that means that the existing business is not generating enough cash flow and any money they put to work in it gets less and less return. So that one we can screen out reasonably quickly. As for the other baskets of value; there are three things that we think will unlock those stocks over time. There’s one group, like the financial companies, that are highly dependent on the interest rate environment, bottoming and then hopefully rising a little bit. There’s another group that’s very dependent on stimulus because although they have quite good business models, people are uncertain until we get a vaccine. Will consumers have enough money to pay all the bills and what have you? And then there’s the third group of value stocks that need a vaccine. That’s what unlocks those. So when we think about those three businesses, we think in each case, in the fullness of time, there’s going to be opportunity in each of those. The good thing about the value situation is that you start with fairly low expectations. And the second thing is, when recovery takes place — and we’d rather see it sooner than later —, it’s kind of an option that doesn’t expire because we do know that recovery will eventually take place. So when interest rates start to bottom and eventually increase, it’ll be very good for many of the financial businesses that we own. When we get additional stimulus, it’ll help shore up the balance sheets and make sure that the businesses in that group are going to make it through. And then the vaccine group is a little bit trickier because those are things like airlines and hotels and things like that. There’ll be a cadence to how those businesses recover, even post vaccine. My view is that a lot of personal travel would bounce back quite quickly. I look at my family and they would be itching to go have a weekend in a hotel somewhere. But for business travel and things like this, it’s possible that some habits have changed and that could take a little bit longer. But in each of the cases, you can look at the horizon — some people think of a vaccine in the first half of 2021 —, and say twelve to eighteen months from now, each of those baskets of stocks probably has a little bit more room for improvement over time. That doesn’t mean that the growth stocks are then destined for a major fall. Many of them are very good businesses, but there are some where they have extremely high expectations, married with very high valuation. And that can be a little bit tougher on a security. And we’ve kind of gone through the portfolio and look for those on a case by case basis.

Well Stu, I can tell you that my wife is looking forward to the return to normal of business travel because I’ve been at home way too much from her perspective. And that could be more common across the broader economy than some people think. But I think what’s interesting about what you’re talking about and what investors can learn from it, is that you’ve done this assessment, you’ve put a plan together, you’re prepared. You understand what’s going to drive these different segments of value stocks. You know what to look for. And again, you’ve almost got a plan for how you might play through those different stocks. Is that a good way of describing it? Stu: « One hundred percent. You would know from our discussions in our prior podcast that we’re all about planning and trying to envision a whole variety of scenarios in advance. So we have a mental playbook in our head about how this could unfold. And those three baskets are a central part to that playbook at this juncture.

And that’s not just for a professional investment manager like you Stu, but for any investor. And this doesn’t mean that you’re doing like Stu and his team would, who are in many senses working 24/7, analyzing opportunities, or at least the broader team that Stu works with. But it’s putting in a little bit of time and perhaps even with an advisor that’s helping you lay out where the opportunities are going to come from an investment perspective. And what are those key points in your life that could change or alter your investment decisions? About that planning and preparation; what we’re trying to do with this podcast is give you those insights into what professional investors do, the way they think about a process to be successful, and give you ideas of how you can employ that in your own life, the way you invest, whether you’re very hands-on or more hands-off. So Stu, again, that’s just fantastic: look deep, deep into your mind as a professional investor! Thank you. And we’ll see you on the next podcast, OK? Stu: « Thanks again for having me, Dave.


Recorded October 21, 2020

RBC Global Asset Management is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

This report has been provided by RBC Global Asset Management Inc. (RBC GAM Inc.) for informational purposes as of the date noted only and may not be reproduced, distributed or published without the written consent of RBC GAM Inc. Additional information about RBC GAM Inc. may be found at www.rbcgam.com. This report is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM Inc. takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Past performance is no guarantee of future results. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. You should consult with your advisor before taking any action based upon the information contained in this document.

Any investment and economic outlook information contained in this report has been compiled by RBC GAM Inc. from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM Inc., its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM Inc. and its affiliates assume no responsibility for any errors or omissions.

All opinions and estimates contained in this report constitute RBC GAM Inc.'s judgment as of the indicated date of the information, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates and market conditions are subject to change. Return estimates are for illustrative purposes only and are not a prediction of returns. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. It is not possible to invest directly in an unmanaged index.

A note on forward-looking statements:

This report may contain forward-looking statements about future performance, strategies or prospects, and possible future action. The words "may," "could," "should," "would," "suspect," "outlook," "believe," "plan," "anticipate," "estimate," "expect," "intend," "forecast," "objective" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.

® / TM Trademark(s) of Royal Bank of Canada. Used under licence.

© RBC Global Asset Management Inc., 2020