Vitali: Hello everyone, and welcome to another episode of Portfolio Manager Views. My name is Vitali Mossounov and with me I have a very special guest, Julien Palardy. Julien is the managing director and head of TDAM’s quantitative investing team. Now, some call him the Quant, others call him the brain. And Julien, I think he called.....
Julien: I call myself the “nerd”...
Vitali: The “nerd” ... He calls himself a nerd. But in any case, we know that he's absolutely brilliant and he runs a team at the leading edge of quantitative analysis here in Canada that I think many people, frankly, don't know about. And so with that, Julianne, I welcome you to the show and look forward to a great conversation.
Julien: Thank you. It's a pleasure to be here.
Yeah. How are you feeling about the markets so far in 26?
Julien: I would have met this scanner special. So last year was a good year for quite a few of our funds. Even though it doesn't show like this in periods of high market concentration, we have a tough time. Last year was not as bad, even though in the U.S. it was pretty clear that like the the the Megacap rally kept on going outside of the U.S. it was actually much better because if you look at the let's say, the average stock of MSCI EAFE compared to the cap weighted index detect, cap weighted EAFE performance has been extremely strong.
Julien: But the gap between the average stock in EAFE and the average stock in the U.S. was massive. It was like 15% or something like that. So, well, obviously, in the U.S., we had a tough time, but outside of the U.S. was pretty good. And that allowed us to offset some of the pain that was incurred in the U.S..
Vitali: Indeed. And I have to acknowledge what a different 2026 it is so far compared to 2025. I mean, you said it the last year was still more so about the Mag Seven and you saw them outperform, I think in Canadian dollar terms 17% to 11% versus the equal weighted S&P. But then the story of international, right. Wherever you went, Japan, Europe, just MSCI EAFE, the returns were stronger, the breadth was better.
Vitali: But this year, it's I think many don't realize you look at the U.S., the markets are flat-ish. International is still running away with it. But in the U.S., under the surface, the breadth is better. And it's really now the Mag Seven weighing you down. Yeah. And everything else is working. So it's been, I would say not even three months, not six months, but three years of needing to be very thoughtful and deliberative because when AI, well, gosh, we're now what, three and a half years into into the GPT era.
Vitali: But when I burst onto the scene initially it was quite easy, I suppose. Everyone said, Well, you must buy NVidia and for a while sell Alphabet. But it became increasingly complex with different parts of the supply chain arising as bottlenecks and power and optics. And I think from our perspective, having a team of research analysts and portfolio managers, it's been a more exciting journey than ever because you really have to roll up your sleeves and do the work and figure out where is the opportunity and where is the market gotten it completely wrong.
Vitali: I mean, you remember Alphabet, how everyone thought they were finished and again, it must be more than double.
Julien: Yeah, they picked up quite a bit actually. I think among all the companies in that space, they're the ones that are typically probably the cleanest play because they rely a lot on their own hardware. They rely on Gemini as well. They have like it's pretty much all encapsulated what is within the same company. While for Microsoft, OpenAI, NVidia, they all have different pieces and like from an accounting perspective, also it draws a picture of it because some of the stuff that should be treated as cost is actually profit margin that goes to NVIDIA and then goes back into a product, get that gets bought by Microsoft, then it falls on their
Julien: book with the full profit margin of Nvidia. So it it becomes trickier to follow the cash in those circumstances while Google is all like one company. So you have a pretty clear view of what's going on there.
Vitali: And so what a transformation for the markets that you and I have observed because, you know, I recall 2020, especially 21 even before that, when it was the digital company, the software company that was solving some vertical market, that was solving some point solution within an enterprise. And so to hear those views is very refreshing because of course the ... your insights and expertise help all of our investment teams surface opportunities.
Julien: And to be honest, like there are only views and very personal views about at the end of the day, I think the market right now is in a very blurry spot where nobody knows where things are going to go and nobody has a crystal ball. So they're shooting right and left and they're asking questions later or doing the analysis later as well.
Vitali: Baby with the bathwater....
Julien: Yeah, entirely. Yeah. To be honest, like, I'm not sure what I would be doing if I were ... well, I am a portfolio manager, but at the end of the day, our process is systematic, right? If you're a fundamental PM that has been betting for a long time on SaaS companies and you see them down by 20%, 30%, what do you do like and you stick to your positions and you think things are not going to change or you you pull the trigger and you liquidate.
Julien: So it's it's a tough position to be in in those circumstances.
Vitali: But you have to adapt that. And yeah, that's that's the nature, that's the great, great responsibility that comes with this role. And yeah, I think we haven't ... we don't observe the best portfolio managers merely saying this is my view and I'm going to carry this view to my grave. I have not seen that be a successful approach, but the dynamism of the market demands adaptation, but it also demands occasionally making the big call and saying there's as yet as you point to, perhaps there's an intermediate period of time where I have a very the perception from the market within some risk parameters, I am prepared to put a stake in the ground on this.
Vitali: Yeah, easy to say, very hard to do.
Julien: And it's tough to make decisions within a short time frame where you don't have full information on what's going to happen in the future. Because let's be honest, all those companies are insanely profitable right now. We have no idea where they're going to go when, when let's say agentic frameworks or even their margins. And as a reminder, like Anthropic is also a software business.
Julien: So all those guys that are like trading at well not like Anthropic but let's say Nvidia, a big chunk of their, their moat, let's call it this way or like maybe six months ago people were talking about CUDA as being there. Now CUDA can be read and quickly and Anthropic most of their growth and these guys are not open source like their go source same thing for Open AI a lot of that can be rebuilt probably overnight but I think people are going to value more the speed and the speed at which those companies can deliver new ideas and they're going to value less...
Julien: the old stuff that's been there for ten years and has been closed as software. So that's that's my feeling where things are going. Maybe it's ... people are moving a bit too fast and there's no because so it's not clear at all where it's like things are going to be ten years from now.
Vitali: And then of course, there is the other part of the market as we're watching the actually don't like the acronym “Mag Seven.” I don't know how that's stuck with everyone because they're such different companies, but I call it the clouds, the big tech, the platforms as they are spending hundreds and hundreds. And so we've seen these CapEx announcements from Google and Amazon.
Vitali: There's really it's just a scorched earth policy. There is no free cash flow left and right. They are spending everything they have. And even then, some include the capital leases to build data centers more or less by deep use for NVidia, which are taking 30, 40% of these CapEx budgets, you can't fault... In fact, you have to applaud portfolio managers who are able to go into the analysis of these supply chains and figure out the bottlenecks and the beneficiaries.
Vitali: I think it's just amazing when you see companies like a Corning in Fiber Optical and many others around the world say a Lumentum in optics and lasers go up 1, 2, 3, 400%. And it's not a commentary on whether today's levels are appropriate. It's overvalued, undervalued. The market will decide, analysts will decide. But the fact of the matter is there has been this enormous rerating.
Vitali: And for those that had done their work, an opportunity to pivot to where the money is flowing quite literally and make significant contributions to portfolios and the dynamism of the market is is meaningful.
Julien: Yeah, people need to move fast to pick up the opportunities. Yes. Which I think really impacts your team more than mine, like in our case, all the data I guess crunch to machines, but in your case you actually need to figure out who's supplying whom.
Vitali: And and that's what people signed up for. They love doing that. Now, in your case, though, you have a repository of data like no one else, and that data spans, I suppose, geographies and it spans various parameters and profitability and price. And and so as you guys look through that data and this market introduces noise in the actual values of share prices.
Vitali: What is the response of of your models? I guess I'd like to learn a little bit more how you're set up, even structurally and what today's market environment means for your team and your strategies?
Julien: Yeah, there's a few things there. So the first thing is that we tend to thrive in broad markets. So when there is a lot of action across lots of companies as opposed to a handful of companies, we tend to do better because we bet ultimately on a large number of stocks or in our investment universe and our entire investment universe, and we're going to have like 6000 names approximately for our products, and that's the S&P 500.
Julien: It's going to be limited to 500 names, but at least isn't going to be seven names or it's not going to be ten names. Right. So we want good breadth. Yeah, exactly. We need Edgar. I need Brad because we cannot short stocks in our long only mandate. So and for our models to work, we need to be within certain risk parameters of the of the benchmark.
Julien: So if we want to be able to outperform the benchmark and unfortunately, when there's no breadth and when the benchmark is highly concentrated, it's tough to stay within those limits and at the same time generate value. So you're going to have a lot of names that will have very small weights and the index and you cannot underweight them.
Julien: You can nearly only overweight them and then the Mag Seven will need to compensate for that. So you have a natural bias against those guys. And then when the market is concentrated further, it gets worse. It gets more difficult for quants. But actually any active manager is in the same situation.
Vitali: Sure, I see it.
Julien: So this is the right.
Vitali: Environment for for for you and your team and our clients. And these strategies.
Julien: Is getting better. That's saying like the more the concentrated the market becomes, the better it's going to get. So the best environment for an index like the S&P 500 would have been like ten years ago or during the 2000s, it was like the golden age of quant pretty much. So that was the best environment you were getting like that, the concentrated slowly the concentrating market and things were widening and you could spread your bets.
Julien: You could add value across a large number of names and win consistently against cap weighted indices. Now, it's been more difficult in the last couple of years, so things are getting better there. But also generally speaking, we have a lot of data, but across a large number of names as well. So there's going to be markets where it's going to be easier to add value.
Julien: Let's say the small mid-caps in the U.S. or globally, typically those bets will be less correlated with the individual names. We're going to have more breadth to to exploit ourselves.
Vitali: Working in this environment.
Julien: Exactly.
Vitali: Would love to learn more about the low vol strategies and specifically how they would perform in such an environment.
Julien: For sure. So we launched this and 2009. So we were indeed the first ones to come up with this in Canada. And my predecessor, Jean Masson, was highly involved in this. And our Yuri Bogdov on my team is also was also highly involved in this. And those strategies are built on an absolute basis. So from the moment we launched those funds, we don't care about what the benchmarks looks like, which is amazing as a story when you're a Canadian investor invested in the TSX and you have three sectors and exposures and you show investors a portfolio that is actually much more diversified across names and across sectors.
Julien: It makes for a good story. And I mean.
Vitali: Not just gold?
Julien: No exactly ... like it's a good story, right? Because people were reluctant to go outside Canada. They were stuck with this concentrated index in the U.S. It was never a problem until more recently. And over the last couple of years, there were massive headwinds against “Low Vol” strategies starting in 2020 because of the increased concentration in not only the index but the rallies that we saw.
Julien: So in 2020, you had like all the tech companies that rallied because people were working from home and you had like a massive surge in interest for cloud computing as well, even though it's not entire it's not really related to COVID itself. But there was a coincidental phenomenon where companies were moving to the.
Vitali: Cloud as time for physical services, more time for digital services and a push for enterprises to accelerate their cloud transition.
Julien: Yes. And then there was a Chat GPT moment like three years and a half ago, as you mentioned. So that was another shift towards A.I. and you had another bunch of companies like NVIDIA - NVIDIA profited during COVID because of the Bitcoin. Now it was A.I. that kept on going. So these were always the same names that were winning in different circumstance, slightly different circumstances, but equally concentrated rallies, which is really tough for any portfolio that's built on an absolute basis.
Julien: So when you have vastly different sector allocations and when you have vastly different single stock weights as well, and it becomes difficult. Now they war periods like 2022. Total reversal, massive win for low vol like we in fact in contrast with even bonds, we did much better the other periods where last year was actually pretty good in terms of upside capture.
Julien: Because of this, the fact that outside the US there was some degree of the concentration. But now even in the U.S..
Vitali: Environment.
Julien: You see the same phenomenon. Exactly. So really good. I am crossing my fingers for this business because it's it's a good business that people forgot about because of the conditions of the market. So I think we're going to go back to this at some point. But so far. So we had this year, I would say.
Vitali: Julien, it was a pleasure. Thank you for a wonderful conversation and your rich insights.
Julien: Thank you. It was a pleasure as well.
Vitali: And to our audience, thank you very much for tuning in for episode number two of Portfolio Manager views. We invite you to tune in again for more great conversations with investment professionals and portfolio managers from TD Asset Management.
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