We created the fixed income pools to recognize the difficulty that most investors will have in fixed income markets over a very long period of time going forward. Yields are very low right now and likely to rise for maybe years - could be a decade, could be longer - as we get to historically normal levels of interest rates. The returns that you're going to earn through that period are probably below those that you've embedded in the savings plans, so how do you add to that? The traditional way of boosting returns above yield would be to anticipate interest rate movement: sell bonds before they go down, buy bonds before they rise... but the testing that we've done on that is that is a really low predictable source of returns. A more predictable and stable source of returns is to accept additional risk premia in your fixed income exposure so rather than owning all sovereign bonds, how about blending in a little bit of provincial bonds, or even some investment-grade securities or with even a smaller amount, how about some high-yield securities, securities outside of this country. Maybe some emerging market debt, maybe emerging market local currency debts. There's quite a rich palate of risk premia available to blend together. When we do that, we get higher returns or yields into the portfolio that reflect the additional risks that you're taking, but by blending it through financial mathematics, or optimization, sometimes you can get higher returns with lower levels of volatility and that's actually our goal.

Fixed income is not what it used to be twenty years ago, fifteen years ago, or even ten years ago. There has been a massive evolution in fixed income over my career. I would say there are three key drivers that I would highlight. One is the growth in the stock of debt, particularly in the era of quantitative easing since the financial crisis, but remember, interest rates were low even before. If I look between 2003 and 2018, so the last fifteen years, the global stock of debt has grown from 100 trillion dollars, roughly, to 250 trillion dollars so one factor is abundance of debt. The other factor which is also aided by low interest rates is an increased number of issuers. Even if we look just at sovereign issuers, for example emerging market countries, the emerging market sovereign index in 2003 had 32 countries in it. Today it has 67. Again, a huge increase in the breadth of the index. That's a sovereign example, but the same applies to corporate. And finally, over the past 15 or 10 years in particular, the growth in data availability and computing power has created massive opportunities for analysts to dig deeper and be able to extract more information from the data to help them make decisions to add value. The abundance of these opportunities has created more opportunities for tactical asset allocation and active management in fixed income despite the drop in interest rates that accompanied these events. Generally, I would say that fixed income management became more specialized over that time, and fixed income portfolio management has more opportunities to add value than at any time in my entire career.

These pools were developed to really recognize the intersection of two incredibly important developments in the firm over the last decade. The first one was the mergers that we've been through that increased our capabilities and access to markets beyond Canada. Phillips, Hager & North, and subsequent to that BlueBay, gave us exposures within Canadian markets to deeper credit resources, and outside of Canadian markets with of course credit but also sovereign markets we weren't involved in, emerging markets. These are all things we can blend together to optimize portfolios and get them to a better place. At the same time of course, we have always invested heavily in the organic development of our staff. We've placed people in London, and so pulling those two pieces together, we have capabilities we didn't have before and many more people involved in those capabilities. We've seen something like a 33% increase in our staff in the last 10 years involved in this type of activity. The second thing was our skills in blending and our understandings of what we were going for have really ramped over the period. This was based on the success we had in distributing balanced and multi-asset long-only type products. We have about 125 billion dollars in this firm now of multi-asset product, and that requires a few things. Number one, strategic asset mix. What do I intend to blend together, what's my goal, and what would my average exposure be to those things. To get that right, you need to understand financial mathematics, obviously, but you also have to have access to those risk premia or markets to blend together and then you have to ask yourself, "What's my cost of accessing those markets?" and your scale, if you know what you're supposed to do and you know the amounts you're supposed to do that at. Scale is important in pricing. It defeats many programs if you don't have scale. The second piece of that is tactical asset mix and we have a very strong capability here, with risk, investment policy committee, PH&N balance fund committee... Because we've always been involved in time-varying exposures, whether it's bonds, stocks or cash, or all the rich exposures that you have within each of those asset classes, we've got capabilities to tactically manage those assets. Of course, the third piece now is, as you move out of the sovereign bond markets, you're accepting credit risk that you weren't accepting years ago with just Government of Canada bonds. We're very deep in credit analytics. So, I think those things pulled together made it possible for us to produce this type of a solution in a single ticket.

We use multiple levers in the multi-strategy pools and fixed income portfolios. Let's start with a description of our credit abilities. We go through the entire range of credit opportunities from investment-grade to high-yield and emerging markets and we have deep credit teams doing analysis on the ground in several locations globally. Another lever would be a decision about investing within Canada or outside of Canadian fixed income markets. The management of a yield curve, or yield curves actually since we're investing outside of Canada, active currency management and of course, interest rate management duration decisions. In these pools we can look through to the individual holdings and manage and appreciate the exposures to each of these risks and manage this at the entire fund of fund levels if needed by amending the tactical allocation within funds or overlaying them. Let's not however underestimate the importance of the structural policy that's embedded in these pools. That policy takes advantage of the fact that these funds are chosen because they are complementary to each other. In addition to that, you have operational efficiency that means a lower transaction costs and ability to rebalance, so only when we have these three elements together (active management, strategic policy, and operational efficiency) can we appreciate all levers that are embedded in these pools.

These solutions were developed to respond to what I think is a pressing need across our client base, individual or institutional. Sovereign yields, the traditional source of returns for fixed income portfolios, are low and will be low for a long period of time and it's highly likely that they will be far below levels that most of us have embedded in our return expectations since we built our savings plans. These solutions actually allow us to leverage the resources that we've accumulated in this firm. The first one is a robust ability for strategic asset mix. That is, what's my goal, what should I be blending together to achieve that goal, where do I go to get those things I want to blend, and what does it cost me to gain access to those markets? As we've grown our capabilities and our exposures, we can lend those to our client base. The second piece of that is tactical asset mix. Even if I know what I should on average hold, what should I hold right now and what exact amounts across that rich palate of risk premia that I'm blending together? The third piece is, once I move outside of government bonds, I'm accepting some type of credit risk, however large or however small, so you get returns to analysis that are much more important now as far as risk management and can actually produce higher returns on their own. Then finally, even if you are capable of doing all those things, do you have the time to be costly hovering over all of those positions and optimizing those exposures to get the highest returns and the lowest volatility, and the avoidance of the greatest draw-downs at all times.

Pools give advisors opportunities to achieve better results for their clients. They allow access to broader diversification, a relatively higher yield, active currency management and of course, some interest rate management. What we shouldn't underestimate is the difference in transaction costs. Pools have access to institutional transaction costs in fixed income markets which are much, much lower than what is available to advisors when they buy individual bonds, so it becomes a much more efficient portfolio. Finally, pools use actively managed funds and I believe that active management, in particular in credit markets, is the best choice for the clients because you're taking advantage of credit analysis and you can distinguish in your allocations between more creditworthy credits and less creditworthy credits, not to say crappy credits. In addition to that, in particular at this stage of a cycle, I think taking advantage of pools with active credit management in them and very cheap execution costs makes a lot of sense.