Transcript

I'm here with Brad Simpson. He's the Chief Wealth Strategist at TD Wealth. They've just come out with their quarterly investment strategy publication-- a great publication, really interesting. And you start things off with a quote that I think kind of sets the theme for the entire thing. And you say, "the only man I know who behaves sensibly is my tailor. He takes my measurements new each time he sees me. The rest go on with their old measurements and expect me to fit them." That's from George Bernard Shaw. Why did you start with that?

Thank the universe for Shaw. At the end of the day, we think that we are in a time -- I think our name of our publication says it all, "Grand Distortions." We are of the belief that we are in a generation of change in the financial marketplace, and this change requires a whole new way of doing things. And one of the things that we tend to do in portfolio management is kind of stick with our knitting, what we've always done.

So it's kind of going back to the tailor and saying, I've changed. The world's changed. And I need to have a new attire to prepare myself for the environment that I'm in. And that's really it.

And it really comes down to, I guess, making sure that it's tailored -- you talk this tailored for you. And there's what's happening in the world, but it's got to make sense for your life, in terms of the risks that you're managing at the same time. So you go through this. Again, you talk about the market. Then we talk about the tailoring side of things.

But let's talk a bit about the world we're living in right now in terms of the market today. And you talk about where are we now? So where are we now?

Well, I think a starting point to that is that at the asset allocation committee, which I'm a member of, we set a group of themes that are always going on about 18 months. So we literally have five themes right now that, I think, in a really good way, frame our thoughts and thinking today.

So our starting point on that is yearning for yield. And yearning for yield is really this idea that investors, if you had a GIC in 1980 or 1981, it yielded 13 and 1/2%. Got $100,000 in that, your income was $13,500. That same investment in terms of deposit today, you might be getting 1.25% for it, where you're getting an income of $1,000, $1,250. That's rate shock. And so yearning for yield is this notion of really getting that tail end of folks doing whatever it is to find something that will produce an income for them.

Second thing is rarefied air. Rarefied air is looking at equity markets globally. And again, with on the backs of monetary policy pushing up most of the industrialized nations' stock markets, really, to their all-time highs and as we know, we've discussed in the past, most other financial assets too, from real estate to art too. So really, that's the rarefied air piece of this.

The third notion, the third of our themes is the Trump

Not to interject, but what I really loved about the chart that you have on this thing is you have Trump fear and Trump hope. And it looks as though we're kind of stuck in between right now.

Yeah. Yeah, back in November when he was elected, how the market turned into this hope phase, where we would have a new cycle of growth and a new pro-business government, if you will. And if anybody's been watching the television or following the news the last few months, thus far, their accomplishments really can kind of get down to nothing. And interestingly is that there's really such kind almost low hope or thought towards the change they could accomplish, that TD Economics actually isn't even taking the impact of what they're going to possibly put in place and giving that consideration in the forecastings right now.

So on the one hand with Trump, you have this notion that there's this world of possibility, and then the market is really traded off of that. And now we're kind of at this place, well, maybe nothing's going to happen. And this middle point is like a neutral, right? It just is want not really of not knowing what to do from here.

You've mentioned the five -- so yearning for yield, rarefied air, Trump effect. Stuck in neutral was another one that you talk about.

Yeah, and stuck in neutral is really this notion that on the one side here is, if you look at the halfway through 2017, things are pretty good. The industrialized nations, their economies are all kind of growing around 2%. Their markets are particularly strong. And then in some of even in those industrialized nations that were a little bit of laggards in the past are really starting to perform really well. And in particular when you look at Europe, you see Germany performing well.

You see France really starting to surprise and perform well. And so on the one hand, manufacturing is strong, if you're looking at the purchasing managers index and the surveys that are coming in from there. Credit conditions are still very favorable. And yet growth still is only 2%. And so kind of stuck in neutral is the reality is while you we're doing all these things, the fact is we still have this issue of demographics in these industrialized world.

We still have these mountains of debt that we've created. Today on balance sheets of federal reserve boards, our central banks around the world, it's over $25 trillion now. So then you kind of throw that into the mix, where any time there's any thought of inflation, and it just kind of peters away, right? And growth is hard to come by.

So one hand, we have these things that we're doing to get things going. But ultimately, stuck in neutral is that there is some embedded things that are causing things to not go like they used to.

The fifth one you talk about here, as well -- again, stuck in neutral, yearning for yield, rarefied air, Trump effect, and global a-go-go, just in terms of looking outside North American borders.

Yeah, and then the last piece is -- that still your equity allocation is a major part of your portfolio. And there's no secret that most Canadians have an incredibly domestic-oriented portfolio. And for the last six months, we had been speaking an awful lot about trying to move out from that and try to add positions in the United States. We still think that is a good place to be.

We have reduced our allocations across our platform in the United States, though. And we've really taken some of those proceeds, and we've taken some of the proceeds that we've reduced in allocations in Canada, and moved into international markets, particularly focused on Europe. And that's, again, really about in an earlier stage of return around compared to the United States.

They really didn't start this monetary cycle till about two to three years afterwards. And so now they're starting to see the early stages of that benefit. And valuations there on a comparable basis are much better.

When you put all that together, you talk about, again, from the wealth asset allocation committee, to having a cautious stance at this point, just given how well everything's pointing right now.

Yeah. No, so ultimately, I think the starting point, and it really leads our document, is that when we meet is ultimately we're trying to come down to, are we in an environment should you be really defensive? Should you be cautious? Is this the time to become a little bit more assertive, or is this a time to be aggressive? And we're cautious right now. And cautious doesn't need to be worrisome or calling market tops or anything of that nature.

It's just looking at the inputs of what's gotten us to where we are today. We think it's just time that you have a little bit of sober second thought and think about perhaps taking this time to readjust your portfolio.

Now, we've talked about this before as well. But when you take a look at the ingredients of what's happening in the world, that you need to bring it back and go, what does this all mean for me? And you talk about -- we've talked talk about the risk priority plus portfolios, the idea of risk. I think the one thing that's really interesting is that people may not realize that the traditional allocations -- fixed income, equity, those types of things -- you may be incurring a whole lot more risk than you are aware of because that risk bleeds between those allocations.

Exactly. Right. Yeah. And so what we've been really focused on in the last decade, particularly in the pension universe, has been this movement between building investment portfolios that have a broad category of asset allocations. And that can be equity, and that can be fixed income, but also use of absolute return strategies, use of private capital.

But that's still not enough. And you still have to get to this notion -- so think about a great diversifier along the lines of typically in an asset allocated portfolio was real estate. In fact, my team was just doing a portfolio review for a family that almost 50% of their investment portfolio was ultimately in real estate.

In our view of things, they were looking at this, well, this is good diversification. And our view is that real estate equals equity. There's nothing more, nothing less. And that's what a risk factor approach to investing means.

And why does real estate equal equity?

Ultimately, it is an investment that is a structure like an equity investment, right? It has its ups and downs, its revenues, its dividends that it pays out, which is ultimately very much an equity structure. And if you look at a portfolio, say, of real estate during a crisis like 2007 and 2009, yeah, it performed like that. And that was a big surprise for many.

So what we're seeing is that if you think about that, you go that that real estate has equity risk. Equities obviously have equity risk. And the fact is that if we had a big correction in an equity portfolio, many of those listed companies, where you have investment grade bonds, and your fixed income would also have an impact on them as well. And that's really what risk priority management is about and allocating like that. And it's not something that, really, universally we're seeing more and more of. And there's a fascinating section at the Canadian Pension Plan that actually discusses all this and says that this how they're allocating.

So we know it's a movement that we think that we're one of the leaders of. And we think it makes an awful lot of sense.

I've only got about 30 seconds left, but for the risk priority portfolios, and there's a number of them, what do they do, just in layman's terms, that address this risk issue, so that you don't have that real estate/equity problem or something like that.

Yeah, well, the bottom line is we still have the allocations there. But the first thing is, is knowing how to build a diversified portfolio is to understand the risks that you're taking, right? And so I think for us, the starting point is that if we can acknowledge that if I own a stock and an investment grade bond from the same company and one side of that gets hit, the other one will get hit.

They move together.

They'll move together. So really, for us is that saying that we are looking at building an investment portfolio, that just saying how much I have in fixed income and equity isn't enough. Ultimately, we have 10 different models that we're running, that all can be customized and changed because we also think that in 2017, having something that is finished and done that's kind of down from and set upon in front of a client is long over. We live in a world where we very easily can sit down and meet with somebody with one of our professionals and custom make something for the person sitting in front of them.

So for us, it's a starting point, back to our tailor analogy, right? We send out the cloth, right? But ultimately, you're going to take those tapestries, and you're going to take that tapestry and get it to fit the client. And that's really what our whole process is all about.

Brad, thanks very much.

No, thank you.

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Chief Wealth Strategist: A Time Of Grand Distortions - Seeking Alpha