Finding balance in uncertain times: A discussion with our Portfolio Managers

[Greg Sweet, 0:54] There is no question that the recent market volatility and uncertainty has been challenging long-term investors. And with that in mind, our goal today is 3 things:

First, we want to reinforce and commit to provide you ongoing sound investment advice, we want to share some thought leadership from our portfolio managers at 1832 Asset Management and really just think about how we can, you know, digest some of the current market environments, macroeconomic environment that we're in today, and the impact that has on markets. We want to reassure and guide you to help you stay invested and stay the course during market volatility to ensure that you remain on track to achieve your long-term financial goals.

Today I've invited a panel of portfolio managers to join us for this discussion – talk a little bit about the recent volatility and provide some perspective on the pathway forward. Let me introduce you to our panel, we've got Craig Maddock, Vice President, Senior Portfolio Manager & Head of the Multi-Asset Management Team. We've got Jason Gibbs, Vice President, Senior Portfolio Manager & Co-Head of Equity Income and Romas Budd, Vice President, Senior Portfolio Manager and Co-Head of the Core Fixed Income Team.

What are tariffs and what do they typically mean for the economy? What were the driving factors that led to tariffs being imposed on global trading partners by the U.S. administration?

[Craig Maddock, 2:37] Very simply, a tariff is a tax on imported goods. So, you can think of a tariff operating like a sales tax. It's going to be paid to the government of the country that's importing the product. We also call these import duties – anybody who's traveled probably have seen duty free stores, they're quite popular when you're crossing the border, and that allows you to get a tax break or a tariff break when you're buying that. And of course, that means that good or whatever product you're buying is cheaper because there's no tariff on it.

In our day-to-day lives, any good or product that's made outside of the United States may be subject to a tariff. So, for instance, a lot of our food comes from around the world, right, U.S. or Mexico. And depending on that tariff rate that Canada places on U.S. or Mexico that will impact the cost of, well, our weekly grocery bill. So therefore, if tariffs go up, our costs go up. That's really the simple answer.

Another way to think about it is a lot of the stuff we buy comes from China – you think of stuff coming from China that maybe you buy an Amazon or your clothes that you get from your favorite clothing retailer. Many of these products are subject to an import tariff. So, if the cost, to use that example, the cost of the product coming into Canada is $100 and the tariff rate is 10%, then the company that's bringing that into Canada is going to pay $100 to buy it, and they're going to pay $10 to the Canadian government as a tariff.

The you got a markup. So, let's just say they had a markup of 20% before selling it to you. So now the cost of this good is actually $132 to you. But let's just say the tariff rate went up and it went up to 25%. Well, now the importers still going to pay $100 for the item that they're getting from outside of Canada, but instead they're going to pay $25 to the Canadian government. And if they still need a 20% markup, which they probably will, you're now going to pay $150 for the same item. So, previously it was $132 and now it's $150.

Now you might still make the purchase, let's face it, that's a price increase of 13%. That's a lot of inflation. If you think about it, if that was applied to almost everything we buy or a lot of things we buy, you eventually might need to make different decisions around what you can afford to buy. And if everybody in the country is facing that same dilemma, that higher inflation as a result of a higher cost due to the tariff rate, well, that's going to slow down the economy. And of course, if it went down, it's going to help grow the economy. Now, it's a lot more complex than that, but in essence, that's kind of how it works.

Now on the U.S. scenario specifically, right, so tariffs are, they're used pretty much by all countries, right? I don't think there's too many countries that don't use tariffs in order to influence trade, and they do so to protect their domestic industries. So, they're not new. Tariffs aren't new. They're not rare. In fact, they're extremely common. They're used to help manage global trade. There's actually an entire industry that supports like the classification of goods for tariff rates that allows countries to be really precise around how they apply tariffs.

What's new right now is the use of tariffs as a mechanism for profound change, right. President Trump's been known for saying that tariff is the most beautiful word in the dictionary. Why? Because he believes tariffs are a catch all economic tool that's going to help the U.S. achieve many goals. Among them, he's talking about, number one, bringing manufacturing jobs back to the US. Number two, raise revenue to help pay off the budget and reduce tax burdens. And three, reduce the trade deficits and restore the balance of trade. Let's face it, the U.S. has the largest trade deficit in the world – 2024, the U.S. had a goods trade deficit of US$1.2 trillion against the rest of the world. That's close to 4% of its GDP. So, I get what he's trying to address. And he argues that the U.S. has been taken advantage of by its trading partners – they've imposed higher tariffs or unfair practices on American goods. And his goal is to use tariffs as leverage to force other countries to lower their barriers or accept new, more favorable trades to the U.S. However, there are competing forces at play that suggest that what he's looking to do might be impossible to achieve all of these with just a change in a tariff policy.

And here's why, right. So, the U.S. has now made imports more expensive by increasing tariffs and quite substantially in some cases. So, in theory, U.S. consumers are going to be more motivated to purchase products made in the United States. But there's a risk that the policy shift, if it's, you know, too dramatic, right, happen too fast or it's too extreme, there is going to be potentially unintended consequences, such as, people might just stop buying stuff, right, costs go up, as I mentioned, goes up from $132 to $150. Maybe eventually you go I'm not going to buy that anymore and that's a cheap item, put that on a car, or a very large purchase, that may be fundamental to the way you think right?

The other challenge is that if that same item, let's just use our $100 item or $132 item today, that same item let's just say in the U.S. was available for purchase from a manufacturer that made it in the United States previously. So, you could exchange for that product. Well, let's just say that product in the past was $140 in the United States and now the new foreign one that's coming in with the tariff is $150. Well, why would the domestic producer not raise their price to at least $150? But of course, if that happens, then the price of everything goes up, not just the imported goods. That in fact actually happened in President Trump's first term, but on theoretically a smaller scale because the magnitude of the tariffs were much smaller.

The other thing is other countries aren't static. They've imposed counter tariffs, right? And that's going to make U.S. exports more expensive for their consumers, which will also reduce consumption of U.S. products by foreign countries. Canada has done that, and in addition, many Canadians have retaliated on their own, just saying buy more Canada or avoid buying stuff from the U.S. just because of the extreme new policy coming out of the United States.

But of course, you've got trading partners like Canada going to rethink its relationship with the U.S. and maybe look for more favorable trading partners that will have better tariff policies and that's going to be a good opportunity, but perhaps also a challenge for Canada as we try to rethink things, right?

So, I'll say as we dig into the complexities of global trade, it's difficult to see how the current trade policy from the U.S. administration can really achieve all of the goals that they've proposed. But I think fine tuning that approach through time, maybe being respectful and considerate of how global trade works, it's feasible to see some improvement in all of these areas as possible. I’d say it's a really fragile relationship, so getting the balance right, is the key.

Markets do not like uncertainty and uncertainty is very high right now due to tariffs. This has led to significant volatility in both equity and in fixed income markets. Can you provide some perspective on the volatility we're currently experiencing across equity markets?

[Jason Gibbs, 10:17] So, Greg, it's a very good question. I mean, one, I would acknowledge that this has been a major event this year clearly and markets always react to surprises. So that's kind of the first thing I think for many to understand. The level of tariffs that were announced were much higher than anyone expected on April 2^nd, so markets reacted to that.

And I guess the second part, and I'm sure Romas will probably get into it a little bit, the United States as a debtor nation, that has kind of come into question. And as Craig said, the United States basically buys more than they save. So, they require savings, kind of like someone who runs up a credit card bill, guess what, you have a trade deficit and you have to finance that. So, the U.S. dollar has kind of come into question a bit the last little while.

So that's kind of acknowledging what's happening, but what I would say, is just focusing on markets and investing, so not talking about politics or having a personal opinion, we've been in this a long time, and I've been in this a long time, and I'll tell you one lesson that's hit me right in the head seemingly every year is a lot of life is quite random, right? I think you have to accept that much of life is random. So, you have to figure out what is in my control and what is not in my control because guess what, every week, every month, something's going to happen that's not in your control. So, when it comes to investing, you have to really focus on what can I control, how am I going to act?

And I kind of think back, to start in the 1980s, I'm sure we all can talk about this going through the decades, things that have happened that no one expected. I remember the early 1980s where a lot of Canadians were losing their homes because interest rates got close to 20%. There was hyperinflation. We go to the market crash in 1987, the tech bubble and the tech crash, 9/11, the great financial crisis, and of course COVID. And I'm missing a lot obviously, but you know what they all have in common? No one expected them but as an investor the best companies always find a way to get through. They adapt, they’re what we call anti-fragile in the sense that they have pricing power, their customers need to use their product and they  get out of it on the other side.

So, I always say with it, with investing, particularly with equities, Romas is going to talk about fixed income, but if you are investing in wonderful equities, right, wonderful companies that are stocks, you have to think of them as long-term investments. And I can't highlight this enough that in a world that's become so short term, you have to almost mentally think about your investments, almost like a car or maybe your house. And if you own a wonderful house in a wonderful part of Canada, you know storms are going to happen, something, other things will happen as the years go by, but you'll take care of it and that house will be fine over time if you take care of it.

And then I guess finally Greg, I would say think of the long term, but finally, in terms of what not to do, I always go back to the two greatest investors, for me, my heroes are Charlie Munger and Warren Buffett, and you know, Warren Buffett's going to hold another annual meeting tomorrow, god bless him, at the Berkshire Hathaway. He's been the same CEO of that company for many, many decades. And you know, there's a company that's actually held in extraordinarily well throughout this year, very quietly. So, you should follow people like Warren Buffett and Charlie Munger.

And what they always said is that markets are emotional because they reflect people. What you do not want to do is buy at the high, buy at euphoria, and sell at the lows cause they will always be there, there will always be euphoria, there will always be lows. And as Charlie Munger used to always say, he used the inversion principle, which was, you know, think about what not to do in life or think about what's a mistake in life and what not to do and you know, don't do it.

So, you know, with investing and I'm not perfect and you know there's always going to be imperfections, but what you should not do is market time, right? And we'll get into that a bit later, but don't get into market timing because no one gets it right. I've been doing this a long time, you’ll hear people that say they can do it, they're lying, all right? They can't. It sounds good. If they could do it, they wouldn't tell you how to do it. Market timing does not work. Selling into a panic like those who sold the first or second week of April, you know, it's not looking good right now. And again, I've seen that so many times in my history because markets reflect what everyone already knows.

And I'd say don't radically change your plan and process. It's just like if you own a house, right, you have a plan, you've got a process, you maintain it. Don't, you know, don't start flipping your house because a storm happened, you know, or selling your house. Just stick to your plan or make sure you're comfortable with your plan. And I always say, you know one of the founders of our firm when I started, Ned Goodman, said he's never met a rich pessimist. Chronic pessimism really doesn't work in investing and stick with the optimists, and we always make it through in the end even though there will be storms.

What are some of the risks and opportunities in fixed income markets today?

[Romas Budd, 16:27] All right, thanks Greg. And just to go back a little bit to emphasize what Jason mentioned about staying in the market, being diversified, we haven't talked a lot about that yet. But it really is interesting because his point about April 2^nd and the first couple weeks of April, I think we had the biggest down day, now this is stocks, not my area of expertise, but it was so dramatic. I got to mention it because Jason, like I said, kind of went there, but biggest down day in decades and the biggest up day in decades.

So, if you got out and didn't get back in, for long term investors that can be, you know, significant hit to your long run performance. And the volatility nowadays kind of says you should be in with a diversified portfolio rather than out, but anyway, let's put that to the side.

So, on the bond market, I think we're going to talk about the central banks in a moment, but just to kind of, a little bit of a background, we know the Bank of Canada cut rates seven times, so Canadian rates are quite a bit below the U.S. That's one of the opportunities by the way, we'll talk about it in a second. The Federal, U.S. Federal Reserve, which the U.S. central bank cut rates a couple times, August, September, but then they stopped ok? So, they've gone to what we would call reactive mode, they're waiting for more data, but they're not doing anything. Bank Canada got very aggressive, rates have come down.

So, when we talk about in Canada, risks versus opportunities, we are active managers, tactical managers, like Scotia Canadian [Income] Fund, for example, is not an index fund. And in our opinion, lots of risks are in index fund type products. And those are the areas we're avoiding being active managers. So, I'll give you some examples. The duration, which is a measure of your price risk of a bond and how much it moves depending on how much interest rates move. You know, we're looking to be slightly below where an index fund would be. We're worried, in Canada at least, that we're more in a trading range versus a trending market and yields continue to go down. So now we've kind of got to the lower end of the trading range, that 3.5% level. The [bond] universe yield in Canada is, we feel, is moving between about 3.5% and 4.5%.

So, the risks, you don't want to be an index fund, so we're avoiding being too aggressive on interest rates here. But let's look at that range itself. Just to back up for a second. You now are getting income in your fixed income portfolio. So that's something new. So that's one of the opportunities. But the risks are still, there are still some risks as I said, the long end of the bond market we are also avoiding ok, versus an index fund. We're likely to go into the slowdown in the economy as Craig has mentioned. So, we are hedging corporate portfolio and the credit exposure in the fund. But one of the real opportunities we see being active tactical managers, is actually U.S. yields versus Canadian yields.

Normally to get the kind of additional yield we can get by buying some U.S. bonds in the portfolio, which is 100 to 125 basis points or a percent to a percent and a quarter, you used to have to go overseas, you used to have to go to Australia or to the U.K., but right now you can get it in the U.S. market. So that, you know, when you mention opportunities, that's one of the things we're doing as active managers.

So, you know, the risks are where we're avoiding – long-term bonds, that's bonds over 10 years. The opportunities are we're looking to add some exposure to the U.S. and pick up that extra percent in yield. But having said that, versus 2020, for example, in the pandemic, yields are up, so people should be owning more bonds, you're getting income, you're getting insurance against a bad economic event, as Craig talked about, and you're getting ballast by having a fund like Scotia Canadian [Income] Fund within a diversified portfolio. And by ballast, I mean bring down the volatility of your portfolio, having an asset that's less correlated with the other risk assets in the portfolio.

What role can central banks play in supporting the economy and what challenges are making these policy decisions more difficult today?

[Romas Budd, 21:43] It's a difficult environment, no doubt about it, because, as Craig and Greg, you mentioned the tariffs, that's going to slow growth. But it also increases the price level. Now, whether that gets translated to wages and a long-term inflation issue, that's a little bit, you know, that's still up in the air, the jury's still out on that part of it. But it's a bad combination, right? It's slower growth, they want to cut rates for that. But prices going up, they don't want to cut for that, and, in fact, they may have to hike. They're not likely to do that, but I'm saying, that's the kind of the pressure that builds on them if prices are going up. So, they're caught, a little bit, between a rock and a hard place.

Mind you, in Canada, we did take the window of the last year of cutting quite aggressively. The Bank Canada was worried about a lot of the mortgage renewals that we were going to see in Canada and what that would mean for the residential housing market. So they had an opportunity to cut and they did. But we're probably pretty well done for now. The U.S. still has room to cut, but we're going to have to see how the summer goes with growth and inflation.

So, it's a little bit tougher environment generally speaking now in Canada and one of the reasons we prefer owning some U.S. bonds within our fixed income portfolios right now. We've got that added risk of fiscal, the fiscal side, in other words, what is the government going to do on the spending and receipts and taxing side, and what does that mean for the deficit.

So, at this point, and we heard just like half an hour ago I believe, the new Prime Minister, the continuing Prime Minister Carney has announced the tax cuts are going ahead on July 1^st. So, as a bond investor, you know I'm ok with that, but I don't want to be in 30-year bonds because we don't feel we're getting paid for that.

So again, as active managers we're coming down the curve and we're focusing more on that 1-to-10-year part of the curve where we think is the sweet spot and again preferring U.S. to Canada because we don't feel there is much of a fiscal risk, of fiscal expansion happening in the U.S. right now. As far as, like I said, the Fed is on hold for now. The Bank Canada's done a lot of cutting and they're probably on hold right now as well.

[Greg Sweet, 24:11] And a little bit of dry powder in back pockets in the event that there would be a, you know, a need or a catalyst to make some of those policies.

[Romas Budd, 24:19] Right, that entirely could be the story later this year for sure.

As managers of our portfolio solutions that combine equity, fixed income and alternative asset classes, how are you navigating this current environment across asset classes?

[Craig Maddock, 24:39] Yeah, as you said, our team manages, you know, complete portfolios or an all-in-one portfolio. Generally, we're trying to maximize the chance that a client meet their long term objectives. Like Jason was referring to earlier, it's you know, if you focus on the long term and where you want to go, our portfolios are built to try to match up with someone's goal or objective. And ideally you buy one of our portfolios, you leave it alone and you're going to do great.

But to bring that to life, we use a process we call total portfolio management. So, we try to take that long term view and combine asset classes. So, whether it's bonds, stocks or alternatives. But even within that, we use a variety of sub strategies. And then when we're thinking about things, it's really taking that long term, that 10-year view, and if we can figure out how to best position a portfolio for the next decade, those can become your anchors of the long-term success, which gives you that confidence to ride through any volatility in the markets.

Now to be fair, we're talking about tariffs and uncertainty right now, that you know, we do feel the dust will settle and there will be some new direction that emerges from these policies. And as that happens, there may be some opportunity to shift our portfolios in a way for the long term to take advantage of some of that.

But right now the uncertainty is just so, what we just went through that with Romas, around some of the issues around fiscal and monetary – there’s a lot of uncertainty right now, it doesn't make sense to make radical shifts to your portfolio Especially now, talking about market volatility, right, you could think you're going to make a decision and a policy changes and the markets react very differently in the short term. So that is not a prudent time to be trying to really adjust your portfolio.

We also rely on shorter term time horizons, so within asset classes, so in the components of the portfolio that Romas would manage for us, or Jason would manage for us. We often think of those as more like a three-to-five-year time horizon.

Right now, Jason in some cases might think of a stock holding a stock for forever, right? Find a great company, maybe have that willingness to hold it forever. But generally, the strategies, the sub strategy we look at, we think they typically need like a three-to-five-year time horizon to really make sure that the environment works out for them, right? You need to have that patience, at least in the form of a number of years for that to work.

Case in point, if you think back a few years ago or even up until the beginning of the year, our U.S. growth strategies have been doing fantastic over the last few years. But so far this year they've really struggled. And now our international value and our Canadian equity strategies and our bonds are doing really well, providing the, what Romas said, the ballast in our portfolios, right. So, when we work together with other portfolio managers like Jason and Romas. It's going to make the portfolio work together much better.

And then ultimately our process is really, and this is picking up on what Jason talked about, being rational and disciplined, right? We need to stick to our principles no matter how crazy things might seem at any given time. But the only way you do that is you actually prepare your portfolios in advance for both really strong markets and of course, unfortunately, really weak markets because we know those are going to come and go. As Jason said, they're not surprises. They're surprises when they happen because we don't know exactly when they're going to happen or what happened, but it's not a surprise that they are going to happen, right. And that's the key to building a diversified portfolio and having a diversified portfolio perspective because in essence, we're already pre-prepared for anything that might come. Not exactly, but you've got the right parts of your portfolio. And I think that's an important piece and maybe right now with what's going on, we’ve seen U.S. exceptionalism happen in the last few years, maybe it is time for the rest of the world to kind of pick up the torch, it get passed on, and let some growth show up in other areas, let consumers take on for other areas, and let's see the benefit of a well diversified portfolio really come to life.

What are some of the equity opportunities in the current landscape?

[Jason Gibbs, 29:12] Thanks, Greg. That's a great question. And, I kind of go back to, I always think of Warren Buffett and others. I always go back to, and our team goes back to a couple things.

One, compounding is the miracle of finance. So, you kind of have to go back to your high school math almost and remember when they all taught us about compound interest being a miracle. Some things change, some things don't – that has not changed. So, you always have to remember that. So, the greatest risk, and Buffett and Munger would talk about this, is interrupting that. That's a huge, huge risk. It's a huge mistake.

I'll give you an example, you know, talking about a very long-term holding, Microsoft, ok. So, Microsoft, we all use it. The technology we're all using now, it's just ingrained in everyone's lives. So, I'll tell you in 2000, the year 2000, Microsoft traded pre-split around US$20 a share. It's earnings per share [was] around a buck, so about a dollar earnings per share for Microsoft. 2024, so let's fast forward to 2024, it's now earning over US$12 a share and the stock price as of today was around US$435. That is compounding at work, and that's a quality company at work.

What happened during those 25 years? I don't have to remind anyone on this call, or on this panel. A lot of good stuff, a lot of bad stuff. A lot of storms, a lot of blue skies, a lot of clouds, a lot of sunshine. What happens though, that stock turned over I don't know how many times because the biggest mistake people make is they say a recession is coming next week because someone wrote about it in the newspaper that's free. So, I'm getting out and then they get back in when the price goes higher. And again, I don't pretend to be perfect, and no one will be perfect, but those are huge, huge mistakes.

So, I think, Greg, when you talk about what our team does, we don't go around trying to predict macro events with respect to stocks because one, no one can predict the future, two focus on the company. I'm constantly telling people that talk to me about stocks, tell me where it's going to be in five years, tell me where it's going to be in 10 years. Is it going to be better or is it going to be worse? Are more people going to use it or fewer?

And we also have a thing, Greg, well it's not just us, I mean others – price is what you pay, value is what you get. So always remember that you can pay whatever price you want today. You may be massively overpaying, or you may be massively underpaying. You'll find out in terms of value is what you get over 5-to-10 years. Stocks often are, certain stocks, can be very overpriced, very underpriced.

What I will tell everyone on the line, short term versus long term, you got to be careful because a lot of the people that are in stocks right now are speculators, ok? And you can't get into that. What I mean by speculators is they buy a stock today and hope it goes up next week or next month, and if it doesn't, they get frustrated. That's no different than going on some gambling app. I'll tell you, you might get some fun with that, but you will not win, ok? You will never win. The house will win. Focus on value because not many people are focused on value. I mean, there's a toll road in Toronto called the 407 where the government sold it, around Microsoft being US$20 a share in 1999, for $3 billion because they wanted a short-term win. You know what that's worth today? $41 billion. Price is what you pay, value is what you get. Let the compounding do its thing.

So, you know, very quickly Greg, to sum that up, what we do during times like this is we focus on our values. And I always say you get, I've said this forever, you get two or three times a year as a stock investor where there's some gifts that are given to you. It's like Christmas, it's like, wow, they're giving me a gift. You got, what we get paid to do is be there. You got to be, put everything aside, cancel all meetings and be there and that's what we did post April 2^nd. There were a few gifts and then you're able to buy during those times. They don't last that long.

I should also say, I always say that, you know, the way I've always taken this type of a job, I'm a massive, massive personal investor in these funds ok, that's very important to understand. This is not where I'm doing this, and I hope it works out. You know, like everything that I get is like in these funds and that's very important to me and I learned that from people like Warren Buffett when I started.

So, you know to sum up, I guess for clients on the call, for those in the call, like I often say, when you go through times like this, be careful with the news, be careful with the media, be careful with those telling you to do this or that. It sounds boring, but often the best thing to do is nothing. Ok, Just make sure you're ok with your plan. Buy lower if you want, but often the best thing to do is nothing, to let those stocks compound like Microsoft did over the last 25 years.

What should investors be doing today to ensure that they continue to make smart decisions with their long-term investments?

[Craig Maddock, 35:09] Yeah, I think we've all alluded to it already. Market volatility is normal and that's really important for people to understand, it's normal. The market is always going to experience periods of volatility, the ups and the downs, they're going to be different, but we know at some point in time we're going to experience it. I think that's the real key thing. And that kind of goes to what Jason was saying, that if you know that up front and you prepare for it with building a good portfolio and also prepare for it mentally, that's the key. The sound principles of investing don't change when those periods hit, you don't do anything different. You might take advantage of some opportunities that come, but you don’t change, fundamentally change your philosophy or strategy.

Jason was talking about the history, right, yeah, I've been in the markets working with clients or investing on their behalf through the periods of some of the most volatile markets, right? And while I learned it early on that, and I have to be honest, it wasn't until I experienced it many times myself that my confidence grew. And what makes the most successful investors, as Jason was talking about, we all, we've all studied, you know, the brilliant minds of the past of investors, but when you when you look at it, it's actually quite simple. If you select the right strategy, so getting that right up front, right, making sure you understand picking the right portfolio for you. That has, in my mind, the one that has, that to me should be the one that has the highest probability of meeting your long-term goals. That should be, if you can figure that out, then stick with it through thick and thin.

Now most of us need an advisor to help us figure that out. And then more importantly, most of us, even me, benefit from an advisor to deal with the mental side of that. So, you don't get pulled away from fear and greed, right? And those are the pressures or the things that are – that volatility that's going to be in the market, you're going to hear someone that, oh, I made so much money on this thing, and yeah, then later they didn't, right? And you don't hear about the ones that lost a whole bunch, right?

So, the concept's really easy, but it's not that easy in practice because we're getting bombarded with headlines all the time. So, to me, like, yeah, don't be afraid to talk to your advisor if you're anxious about this. They're there to help you through those challenging times. And like a good coach, they're going to help you feel more confident about your investments, about your plan and reassure you that sticking with your plan, is in fact, the right thing to do. We're obviously doing that today. It's a little easier for us to sit here from this perspective and say it. It's a lot easier for your advisor to work with you directly and have those kinds of conversations.

So, I think it's time like this that, it also reminds me why I love active management, right? You've heard about Romas and how he thinks differently than the bond market, right? And in my opinion, thinks smarter than the aggregate bond market. You heard how Jason talks about individual, picking individual companies. He talked about Microsoft and his unique understanding, everybody understands Microsoft, but Jason understands how Microsoft actually makes money and sees how we can use that to compound wealth through time. I think it's those types of things that, if it's done right in your portfolio, and that's part of selecting the right strategy up front for you. And then my team and my colleagues, we're going to work tirelessly to make sure that those investments are positioned for success going forward.

And by virtue of that, we kind of take the burden off your plate. You don't have to think about what's going on all the time. We will take care of those pieces for you. And then maybe, you know, this period of volatility, Greg, it will pass.

[Greg Sweet, 38:36] So, that's great guidance. I think it's about borrowing your confidence, borrowing the confidence and finding confidence in the experience that you as active managers have that really will help our clients continue to make those sounds smart decisions as we move forward.

We also appreciate the fact that not every client is in the exact same financial situation, right? Some people are accumulating wealth towards retirement, some are in retirement looking to draw upon their wealth, and you know, a really good planner has the ability to help provide strategies specific to that individual client’s circumstances so that they can navigate through the realities of today without compromising the opportunity in the future. And making sure that not only are we achieving today's objectives, but we're making the decisions that help us achieve those long-term objectives that we have for ourselves and our families that, you know, last beyond, you know, the headlines of today.

With the Canadian Federal election settled, do you think this is going to provide markets with a sense of clarity and how might this impact the Canadian economy?

[Craig Maddock, 40:03] Yeah, so, Mark Carney, while he was sworn in as PM and now he's been voted in, which I think is good, it gives us, good in a sense, that it gives us continuity. His first days as PM, he was like over in the U.K., right, his old stomping ground. And I think that showcases his ability to prioritize Canada's position globally and maybe ensure we have good allies for peace and trade. We think about where we are in the world right now.

It's a minority government. So that's a unique challenge perhaps, but I think, I'm confident that Canadian politics are actually functioning quite well. I think Parliament can work together for the greater good of Canada. I kind of got a sense of that from going through the election process. There's already been talks about getting the provinces to work together as an example. And you know, by July 1^st in Canada, they'll sort out some of the interprovincial trade barriers that, you know, really kind of festering in the background for Canadians for years.

There's also action underway to try to reassert Canada's role as a leader in supplying natural resources. So, you put those things together, it's like, yeah, I actually I have a renewed sense of confidence in Canada and I actually started to feel pretty good about our long-term future.

[Greg Sweet, 41:13] I think the couple comments you made, just the interprovincial trade barriers and the removal of that or removing many of those, the economic impact that can have for the Canadian economy is quite significant, right? And then the opportunity we have to truly leverage our natural resources, again provides huge growth potential and opportunity for the Canadian economy as we focus forward. And it's nice to know that we're through the election, we've got some certainty. And now we're in a position to take action that will be in the best interest of Canadians and building Canadian good and strong.

What is your definition of value when you talk about that price versus value relationship?

[Jason Gibbs, 42:01] Sure, it's a very good question. So, it can be a long answer, so I'll have to very quickly summarize it. It depends on the business, it depends on the industry, but very generally when you're talking about a great business that turns into a great equity, you have to focus on what we call free cash flow. So, that's just simple, what are your revenues? How much do you earn that business? So, think about a utility maybe or a real estate company, Microsoft, Apple, the revenues that come in, less the costs that are required to maintain the business, salaries all that, all that stuff and then any capital expenditures that they may have. And then at the end of the day, just like an individual that has savings, at the end of the day, what do they do with it?

The best companies have so much cash flow at the end of the day. They'll raise their dividend, they'll pay a dividend. So, you'll often get 5, 10, 20% dividend increases, which is a huge compounding benefit. They will buy back stock, right? So, if they have 100 million shares out there, they may buy back some of their stock. So free cash flow is very important to us.

So, you can get into what multiple do you pay for that free cash flow or you get into price earnings ratio. If it's a real estate company, it's, you know, what type of multiple do you pay for the cash flows that real estate creates every year? What has the private market paid for it? What will the private market pay for an office building or a retail building? And you look at book value. So again, I can't get, I can go out forever.

But basically, in our team, we have over 20 specialists, depending on what the sector is and their job every single day is to figure out what's the value of this business. And one of the benefits, like I was talking about, it does happen a couple times a year, price gets way out of whack with value because of human emotions, because people say I don't care what you tell me about value, I don't care, I'm out. That's where, you know, your best buys can come.

Given the rhetoric of a U.S. recession, what might that mean for Canada and the Canadian companies your team thinks about and invest in?

[Jason Gibbs, 44:38] I'll answer that, and always remember when I'm answering, I'm answering as an investor. Not as an economist, ok? So I talked about compounding being one of the miracles of investing that you have to understand. The other part of investing that most people have trouble with is the concept of discounting. What that means is the market is one of, the stock market, the bond market is one of the greatest, probably the greatest auction market in the world with millions, hundreds of millions of buyers and sellers every day trying to discount what they already know. Ok, that's very important.

So often what happens is people see there's going to be a recession coming and I better sell. Remember, the market is very, very smart. The market will move well ahead of that. So, you can look at any type of data. Stocks will tend to move higher well after a recession may or may not come. So, it gets back to never market time based on that, that can be a huge mistake. Stocks will kind of move away from you. Stocks are always looking to the future, beyond the future, a year or two years away.

But having said that, to directly answer to your question as an individual, I mean, I've gone through many of these periods, every year someone predicts a recession. I mean maybe Romas, you can talk about it as well, every year someone predicts a recession and they tend to happen once or twice every 10 years. And when they do happen, it tends to be no one predicted it, I hate to say. But again, recessions can certainly be negative for a lot of companies, but the best companies again, make it through. Going back to value, it's free cash flow. You as an individual, you will make it through recessions if you have savings, if you look out for your spending. The best companies have a way of making it through and you have to think longer term.

If good companies are going to pivot, adapt and weather storms, why not buy an index fund? What is the value of active management over passive?

[Craig Maddock, 47:17] Yeah, I think it goes to the heart of both what Romas and Jason have said. And we add another layer on top of that, which is which index do you buy, right? So, when we're constructing portfolios, the extra dimension we have to add is how much stocks do we want, how much bonds do we want, do we want to use alternatives? There's a whole host of additional decisions, which is, you know, do you just buy an index, you have to pick which index are you buying. So, in and of itself, that's an active decision.

But to get to the heart of, you know, why would you not use a passive versus an active? I like the fact that Jason's out there with his team trying to figure out what the value is that they should pay for a company, right? And then understanding how compound growth works, that is a much more, I have a much higher degree of confidence that Jason and his team can figure that out and get a better portfolio of stocks, one that will deliver a more probable return for what I'm trying to do in my Portfolio, then assume that the index is going to naturally do that for me.

I'd say that's even more the case in Romas’ particular instance. In fixed income, not owning the stuff that's not good is a huge win, right? So, Roma's talked about, you know, picking the parts of the duration curve that he doesn't want to own because they're not priced right. That fits into credit as well, there's parts of the credit market you may or may not want to own from time to time. And making those decisions are far more important than just buying blindly, buying the index and hoping that it works out.

So, I'm not suggesting you can't make return from the index because we all know the indexes have generated return through time. So, to [what] Jason [said], that will allow you to compound wealth through time if the index continues to go up. But if you have a choice of working with professionals who are actually going to do the work, understand the companies and follow that disciplined approach, I think that's a much better win most of the time.

Is there currency risk associated with overweighting U.S. bonds?

[Romas Budd, 49:24] Great. Well, this one's actually pretty straightforward. We don't take currency risk. So it's rare that, well, I shouldn't say we never do, but it's very rare.

So, when I talk about having U.S. bonds in the portfolio, us, as institutional professional managers, we have access to derivatives of the actual underlying security. In other words, we don't have to buy the actual U.S. treasury bond, we can buy the futures, which is essentially a derivative of owning the bond and what that allows us to do is separate out the currency decision from the bond or income decision and that's exactly what we're doing.

We don't convert Canadian to U.S. and we don't have U.S. dollar exposure on the currency side.

And that's actually important because it's a good question. When you have currency risk in portfolios, it changes your overall volatility of your portfolio as well and most people don't want to have that kind of volatility in their fixed income or their bond portfolios. I mean that's, the bond portfolio is there to really to offset volatility in other parts of the portfolio. So, we try to stay away from currency risk. So, when I talk about owning U.S., we do through futures, we don't have a currency risk component to it.

The notion that the current bout of market uncertainty and volatility being different this time continues to challenge investors. What are our thoughts on this?

[Jason Gibbs, 51:53] Yeah, I know it's a good question, Greg. And trust me, like we're all human on this, on this call and on this panel. And sometimes I ask that question, right, even though I've been through it a number of times. What it always is, I guess the simple answer is, it always is different. There’s always is something that happens that no one was expecting and that is just, that is life.

I would suggest a great book for people to read, if they're looking for some weekend reading, is Fooled by Randomness, an old book that I've probably read five different times. Nassim Taleb gets into this idea of a randomness. But I then always go back to, we are all human and therefore the machinery that we're all working for, does not change, right? So, it's always a different story, but how it acts out is always the same.

And that's why, you know, again, we're not perfect, but that's where experience can really help because how it acts out is people in markets tend to go along the cycle of emotion because we are emotional. And what that means is you get to a stage of euphoria. So, the question actually about the economics and markets, when I do get word is when people are euphoric. And they're like, my God, this economy is awesome, it's great, it's never going to stop. That's when you should get a bit concerned, ok? So, in euphoria, people pay, tend to pay way too much and that can get you in a lot of trouble.

And then something happens that people weren't expecting and it then, remember the emotions, it turns into despondency, denial. And then it always goes into some sort of I give up. And that's again, seen it time and time again, that can cause enormous damage to your long-term portfolio, because I think Romas talked about it,

those one-day rallies, we had one a few weeks ago where the markets were up something like 8 or 10% in a day. If you miss those one days, you may have destroyed your portfolio for your whole life. It's such a dangerous thing to do.

So, I guess, to your question, it's always different. There will be something different next year, there'll be something different in five years, but the way markets react is the same. And you have to do as much as you can to build a stronger temperament as you can to deal with that because we do get through. I always say like that the pessimism never wins. Even though many take comfort in pessimism, optimism is what always wins. At least that's the way I invest. And I think it's a better way to go, to go through life and expect it, but we always, we always get through. That's the way I look at it.

And again, the best at this that I've ever seen, is speaking tomorrow on Saturday and it's a simulcast, Warren Buffett, right, doing his annual meeting again and, you know, 95 years old and I've read everything that he's written and you can read everything that he's written. He's seen it all and I still listen to him every time he speaks, and you can learn a lot from people like that.

What's the one thing you want our audience to walk away from this discussion with?

[Romas Budd, 55:34] Ok, sure. You mentioned index funds and active management and I'll just touch on it very quickly for bond funds. As we said up front, what do you need your bond fund for? You need it for income, ballast – reduce the volatility of your portfolio – and insurance, in case something really goes bad in the rest of the portfolio or in the economy.

So, think back 2020, interest rates down extremely low, 0-to-1%. Some people could have made the argument back then that really all you were buying was insurance. So, let's go to the lowest cost solution. But that's not the environment we're in now. Rates have gone up quite a bit. Like we said, we're going into 3.5, 4, 4.5% range. So now you've got income and ballast along with the insurance, ok. So, I'm just going to put that out there – that's really important for active management and, as Craig said, avoiding overpriced areas is important too, which you can't do with an index or passive product.

Second thing, if you just bear with me, Greg, just for a moment, we do feel interest rates are in roughly a sideways channel now perhaps moving down very slightly, but that's actually a very good environment for fixed income investors. Most people don't realize a sideways or even gently rising interest rate environment is good over a 5-year period. When we talk about long term investors, they end up with a higher total return than if rates went lower. You can reinvest the coupons received within the portfolio at higher rates, the maturities get invested at higher rates. So, in fact you end up with a higher total return over a longer period of time.

So don't get worried, if you think interest rates, while they might go up a little bit, go down a bit, long term investor can win from both of those scenarios. The only more difficult scenario is when interest rates spike higher dramatically quickly and that's not our base case scenario at all at this point. So, we think it's a very good environment right now for active management and like I say, the total return versus a few years ago and the reasons you own the portfolio are very solid right now.

[Jason Gibbs, 57:56] Yeah, Greg, you know, I'd say, I'd try to sum it up and say owning a wonderful business, either your own business or an equity over the long term and just leaving it alone unless something changes with the business, but usually just leaving it alone is the best way to grow and maintain your wealth.

[Craig Maddock, 58:24] I think we've said this throughout, but it's really the most successful investors, Greg, long term, stick with their plan. So, if you don't have a plan, get a plan. [If] you're on your plan, stick with your plan. Don't get caught up in all the noise of the market, I don't know, I think there's some hockey to watch.

[Greg Sweet, 59:03] To our clients joining us live and those that are going to be watching the recording, thank you for investing your time in this discussion today. I encourage you to work closely with your advisor, with your financial planner during periods of volatility. As we heard today, the best action that we can take is to revisit those goals, revisit the plans, start a plan if you don't have one, and then just think about how your portfolio is helping you achieve those long-term financial ambitions that you have for yourselves and your families. Focus on the things that you can control and allow our, you know, active managers, our portfolio managers here on the call today, you know, manage through the headline noise and make smart decisions with the companies and the securities that we're that we're investing in. We're fully committed to be here with you long term through all market conditions and we want to say, generally, thank you so much for spending your time with us today.