Transcript | Investing in the 2020s

Sarah Widmeyer: Welcome to Conversations on Wealth, a podcast dedicated to helping Canadians with your total financial picture. I'm Sarah Widmeyer, Director of Wealth Strategies at Richardson Wealth. And I'm happy to welcome back Craig Basinger. Chief Investment Officer at Richardson Wealth. Thanks for being here today with me. 

Craig Basinger: Oh, thanks for having me. 

Sarah Widmeyer: As Craig said in an earlier episode of Conversations on Wealth, if there's any one constant when it comes to capital markets and investment markets, it clearly is change. Investing in the 2020s may prove this time and time again. Craig, can you provide a bit more detailed background and why you believe investing in the 2020s is an important topic for investors. 

Craig Basinger: Yeah, thanks, Sarah. And thanks for having me. My team has a bit of a dual role. We manage money, so let's just say that we have some skin in the game. But we also provide a lot of macro asset allocation advice and services to both our firm's Advisors and their clients. And I've had the enjoyment of being involved in asset allocation services since I got into the industry in the 1990s when I developed my first mean variance optimization model. I think I was sitting on the dock up in Muskoka. But don't worry, we're not going to get into the math on this discussion, unless you really want to.

Sarah Widmeyer:  Oh, come on, don't tempt me. 

Craig Basinger: But I think it's safe to say the 2020s, as far as a decade goes have really started off unlike any other decade. I mean, that's pretty much a no brainer at this point. We've obviously endured and continue to endure a terrible global pandemic, which is still lingering. We had a recession, unlike any other, but also an economic recovery that was fueled by - I mean, I'm an economist by education - it's been fueled by so much accommodative policy both on the monetary side and the fiscal side that it is literally an experiment when it comes to stimulus. And we haven't had equity markets that suffered their fastest bear market in the history. And this is for the S&P, which dates back to the 1920s. And also one of the fastest recoveries in history. We've seen the asset prices of many commodities, and other hard assets, such as our homes that have been appreciating faster than any of us had ever expected. And this is all in the first year of this decade. But all these things I just mentioned, they're pretty short term. And we don't believe this decade will be defined by the pandemic. The bigger story for investors, we believe is a number of important long-term trends that appear to be changing direction, many of which could have a dramatic impact on portfolios in the decade ahead.

Sarah Widmeyer: So I sure hope you're not about to tell me that it's different this time or this decade. Those seem to be the last famous words of many great investors of your.

Craig Basinger: Yeah, you know, saying it is different. It certainly usually puts the nail on the coffin of certain investor's track records. I've also noticed publishing books that say that you've been beating the s&p for a number of years in a row is also pretty much the sign that you're about to go in the other direction. But clearly, you've got a good point. And I think it's fair to say and I believe you started with this is that markets are always changing. They always have been and they always will change. The technology in markets changes, the participants change, their behavior changes, how people invest changes, the list goes on and on. And sometimes this change happens really slow, gradual, you barely notice it. Sometimes it happens a lot faster, and it can be disruptive. And I think a great example is technology. 
I started in the industry in the 1990s and that makes me what I call middle aged when it comes to investing tenure. But at the beginning of my career clients used to contact us with the telephone - remember those - and ask Can you give me a stock quote or research on a company. Fees, we charged fees at the transaction point when people traded. And today technologies enabled platforms, such as Robin Hood, that makes trading near costless. And technology has also enabled strategies from hedge funds, quantitative algos, cryptocurrencies. All of these were not possible a few decades ago. And they've changed because the environment's changed. And it is clearly made a lot more strategies available to investors. And the rise of ETFs is another good example. This is new tools that put increasingly downward pressure on pricing, which again is very good. And the advice business has evolved as well. We've moved beyond just the transaction point for charging fees to a more holistic service model. And the participants - investors - have changed they now expect and deserve, in my opinion,  not just thoughtful portfolio management services, but tax, financial planning, insurance. These are all integrated into the delivery of advice today.

Sarah Widmeyer: So it's funny while you were talking, I was thinking of fax machines I was thinking of, I remember when email first came in, and people are afraid to open email, because be aware they've put a Read Receipt on it. They'll know you opened it. And if you don't respond! It's amazing how far we've come. So while markets are always evolving, what is so special about the 2020s? (And I feel like Barbara Walters when I say that).

Craig Basinger: One of the hardest things when it comes to investing in my perspective, is trying to look past the short term - what's going on today - and focus on longer term trends. It isn't easy. We're humans, we're all wired to react immediately, look at what's happening in the short term, what's happening out the window, what's happening on the news. But the fact is, when I say long term, I'm talking 5, 10, 20 years. These longer term trends have a much, much bigger impact on portfolio's performance and risk, even if they are very gradual. And we believe a few of these big long-term trends are either beginning right now or recently, or they're changing direction. And we think this is going to accelerate into the 2020s.
One obvious one is the rise of clean tech. You know, this trend started a decade ago with a few stops and starts, but appears poised to have a much increased impact in the 2020s. And while not as exciting as electric cars and wind turbines, because that is exciting, rising yields and inflation is even a bigger deal from an investment perspective.
Inflation and yields have been largely trending down since the early 1980s till a few years ago, and that is what I would call a mega trend. If you start with bond yields - yields started declining for decades reaching lows that rivaled any period in history recently. North American yields got to as low as they were in the 1950s then moved even a little bit lower during the depths of the pandemic. European yields went negative a few years ago proving that the zero barrier is, well, not a barrier for bond yields. And we believe the yields seen during the pandemic will prove to be the lows for that long, long cycle that started so many decades ago. And yields have not recovered from the pandemic induced lows and are back to where they were before COVID hit. Where they go from here in the years ahead will likely determine which portfolios are well positioned and which ones are not.
Underneath yields is inflation. And we've been in a deflationary environment for quite some time. And inflation has followed a very similar pattern to yields falling for much of the past few decades remaining very low over the past 10 years, and recently have started to see some inflationary signs. Higher commodity prices are getting a lot of headlines. The global economy continues to reopen. This is all good news. Consumers are increasing demand for durable goods or services. This is helping fuel some inflation. But much of that could prove temporary. We believe to really understand inflation, you need to take a longer term view.
The past decade or two witnessed subdued inflation for a host of factors. Globalization fed lower prices. Demographics simply lead to more savers and borrowers. Technology also helped make people more productive - that's deflationary. However, as we move into the 2020s, the growth and globalization is slowing. Moving manufacturing to lower labor jurisdictions appears to have been largely played out globally. Plus demographics. We'll see millennials starting to have a bigger impact on the economy as the retiring baby boomers have a lower impact. Millennials are increasingly getting into that household formation stage demanding goods and also demanding financing to borrow to finance these goods. And this is all inflationary. Technology's still going to remain deflationary - autonomous cars and the like. But the long term suppressors of inflation appear to be fading. And we didn't even talk about for the fiscal stimulus that's going on, and also policy. More and more government policy - and rightfully so - is focused on addressing income disparity, which is a huge problem and focused on climate change, which is another huge problem. These are great policies. But make no mistake, they are all inflationary.

Sarah Widmeyer: Yeah, there's so many questions I have, as you're talking, I'm thinking about the rising Canadian dollar, we're seeing the dollar above 80 cents right now. We're seeing gas prices, back quite high again. I'm wondering about interest rates, and what's going to happen with interest rates rising. And I know, this is all topics for another call. So we need to book another call, Craig, but it's confusing. You see the dollar go up. You're not sure if that's a good thing, if that's a bad thing. Certainly no one's traveling right now. So, we're not we're not getting a better Canadian dollar per US. But sounds like a really full decade and lots of things to unpack.
Higher yields higher inflation, that would have an impact on everything from portfolio construction, performance and even long-term financial planning. So let's talk about portfolio construction.

Craig Basinger: Yeah, sounds good. And you're right about the strong Canadian dollar. It's ironic that this would be the perfect time to go to New York and have a nice dinner. I know. Yeah. Great.
So higher yields or higher inflation could have, if this trend continues throughout this decade, and potentially beyond, could have some very material impacts on portfolios. And if these things are changing direction then this is going to increase a new kind of risk into portfolios. And it's worth noting that almost every Portfolio Manager, Advisor, Analyst, myself included, working today has spent their entire careers in a declining yield and falling or low inflationary world. You have to find somebody who's, let's say, older than middle aged as far as investor tenure goes to find somebody who's been actively investing in an inflationary environment. And many really successful strategies that have worked for the past 5, 10, 20 years. Many of those have benefited from this trend. I mean, take everybody's favourite, everybody loves dividend investing. I mean, that's sort of the bread and butter of our industry, especially in Canada. Canadians love dividends more than any other country that I've seen. And full disclosure, we manage a North American dividend strategy, but it's not lost on us that rising yields will be a headwind for these dividend strategies.

Sarah Widmeyer: So it sounds like advice is going to have a much bigger impact on portfolio returns. And the ones in the advice giving position are going to have to be a lot more creative. And scenario planning, adept at scenario planning, looking at different types of outcomes with different types of factors. And imagine the potential impacts of these factors in more imaginative and creative ways, as opposed to simply relying on history. And you're right, most of us have not seen interest rates at 19%. Have not seen that kind of inflation that you're talking about. So it's going to be very, very interesting.

Craig Basinger: Yeah. And, I'm not convinced we can ever get back to 19%. It's possible, but it's the direction that really matters. And the problem with when things change direction, which is what we believe is happening now or happening in the decade ahead, it does make it a lot more difficult.
What if we designed a strategy today that would have performed really poorly for the past 20 years? Nobody would want to invest in that. And yet, if the strategy performed poorly to the falling yields, and falling inflation, it may just be that kind of strategy that would work really well in the decade ahead. Now, for the record, we're not suggesting that you find some really poor performing strategies and go and invest in them. It's a little bit more complicated than that. But it gives you an idea. If we are at one of those TSN turning points when it comes to inflation and yields, then a lot of the strategies that did work in the past are going to be challenged going forward. And I think people need to focus on that.
Much like home renovating has clearly become a very frequent pandemic pastime, perhaps it's time to renovate a little bit of a better investment processes as we go forward. If the tides have turned on these key trends, those that evolve with the times, or are more forward looking, can often do much better than those that are not forward looking. For instance, the approach to asset allocation for much of our industry still remains anchored in a framework that was developed half a century ago, back when the world was simpler. And the variety of options and strategies available, doesn't even compare with what is available today.

Sarah Widmeyer: So can you give me an example of any approaches that follow a more traditional framework? 

Craig Basinger: Yeah, I'll give you a couple. Incorporating alternatives. We're firm believers in incorporating alternatives into portfolios. Unfortunately, from what we hear most often is people have just taken the traditional asset allocation approach and they've bolted alternatives onto the side. I don't know how many times I've heard, we allocate 10%, 15%, 20% to alternatives just attached to the side of the portfolio. This is essentially taking that 50 year old asset allocation framework and trying to use it for today's evolved world. Alternatives come in such a wide variety. Some are diversification tools, some vol management tools, some are aggressive growth tools, some are income, some are credit - the list is so long. You can't just bolt them on to the side and expect that to be an optimal kind of outlook, or a given optimal type of result. Or even look at equities today. Equities existed 50 years ago, 60 years ago when this framework was developed but the breadth is so much wider today as far as the tools. You can own an equity investment strategy that is similar to the broader market. Hopefully you get it at a really low fee. But there's also some that are much riskier - emerging markets venture capital. You can find some equity strategies that are more bond-like. Or even look at bonds. These range from high yield - these are companies that I don't want to say they're on the cusp of going bankrupt but high yield used to be called junk bonds. There's was a reason for that. One of the greatest marketing ploys ever was renaming them high yield. But nonetheless, I mean, they're much more closer to equities and bonds can go all the way then to sovereign bonds, where, you know, the risk spectrum is much lower, but much very different.

Sarah Widmeyer: Okay, so Craig, let's help some people here. Life has become more complicated and investing is no different. So what are your thoughts on portfolio construction as we head into this potentially different time?

Craig Basinger: A very useful lens that we have found for constructing monitoring managing portfolios is to separate investments based on what we call the core and the diversifiers. So the core is your traditional exposures such as equities, such as bonds. Call it the plain vanilla stuff that is often low cost, low maintenance a lot easier to put together. This core is properly constructed to have some tilts on the global equity side credit duration, and you then pair that with diversifiers. Diversifiers have a key purpose, such as volatility management to reduce broad market exposure. Diversifiers can include a tactical component to add a tactical asset mix to your portfolio. They can include alternative income, inflation hedges, which we think will become increasingly popular, but essentially pieces of the portfolio that are designed to diversify and help address certain key risks in what you see coming forward.

Sarah Widmeyer: Okay, so are you suggesting that an investor abandon traditional asset allocation bucketing?

Craig Basinger: No, not at all. We're more suggesting, in addition to the traditional approach, as far as bucketing things based on their asset class is that you also add a purposeful approach that helps define what each investments purpose is towards the overall portfolio. And this really encourages people to start thinking and portfolio construction and start thinking about how everything works together. And not just Is this a good investment is this a good investment. This is more holistic, the ingredients in the meal that matter more than the actual results versus the individual ingredients. And as an example, XYZ manager may provide broad market exposure with higher dividends, another manager may provide sort of a long, short alternative type strategies. And these are all designed to give a specific purpose into the portfolio into the overall mix. And this framework we've found really helps on the monitoring of performance and attribution. Because you can look at a manager, you know what their job is, you know what their purpose in the portfolio is. And then you compare that to what's going on in the market, and it can really give you a good lens - are they doing what they're supposed to do for this portfolio? And this brings us all the way back to the beginning for the 2020s, we believe incorporating a few strategies into the diversifiers bucket that would benefit from rising yields or rising inflation may prove to be very prudent for your long term results in the decade ahead.

Sarah Widmeyer: Make sense. Thank you.
Any closing thoughts?

Craig Basinger: I think just think of things holistically and don't be afraid to imagine that the world is changing, don't get stuck in the past. We're an industry that unfortunately does a lot of performance chasing and looking forward as a much better strategy for creating wealth.

Sarah Widmeyer: It's also an industry that keeps innovating. And I think that's the other key takeaway that I heard, as you were talking is that we keep innovating, we keep evolving to meet the market conditions that we have. And so your point is well grounded that traditional asset allocation, it still makes sense, but add in some of the innovative evolving thinking around diversification and diversifiers. So I think that's great. So thank you. 
We're very lucky to have Craig here to discuss how investors can approach the 2020s and evolve with the changing environment. If you have any questions about the ideas brought up today or would like to review your portfolio to ensure it's well positioned for the decade ahead, please reach out to your Richardson Wealth Advisor. To learn more about market movements. Visit our website to find Craig and his team's daily, weekly and monthly market insights. And remember to follow Richardson Wealth on LinkedIn for the latest in wealth strategies. Conversations on Wealth is available wherever you get your podcasts. Thank you all for listening. Thank you, Craig. And join me again for my next conversation. 

Craig Basinger: Thanks, everyone.

The opinions expressed are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Past performance may not be repeated. Richardson Wealth Limited is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.