TDAM Talks Breadth of Experience: Listener’s Choice

ANNOUNCER: Hello and welcome to Breadth of Experience, a TDAM Talks podcast. On today's episode, we have a special treat.

Jason McIntyre, head of retail distribution at TD Asset Management, will be joined by David Sykes, TD Asset Management's chief investment officer on an episode aptly titled Listeners Choice Where we shake things Up by putting a spotlight on you are valued listener. We've collected an array of thought provoking topics and questions directly from our audience, covering everything from market trends to investment strategies and beyond.

So whether you're a seasoned investor or someone just starting out, this episode is for you.

Now let's dive in.

JASON: Hello, David.

DAVID: Hey, Jason. How are you?

JASON: I'm fantastic. How are you doing?

DAVID: Well, thanks.

JASON: Good. And I really appreciate you taking the time to join us again today. It's been about a year, I think, since we kicked off this podcast with you and we're going to do it again.

DAVID: Super. Sounds good.

JASON: So usually we think about what the topics are and we have a specific topic that we want to talk about and your team and you and the investment professionals we have at TDAM, a number one priority is delivering investment returns for clients, you know, and managing risk and volatility and whatnot. But another really important aspect is the marketing aspect.

JASON: As we talk about it and going out, talking to advisors, talking to clients and talking about markets and through that and by the way, your team does an amazing job at doing that as you will do as well.

DAVID: Thank you very much.

JASON: Through the course of that, we recognize that there's a lot of value in just clients and advisors and our sales team asking questions and getting answers to timely topics that are important to investors as we speak. So we actually thought if you're good with it, that we would kind of go into the mailbag and pick out four or five, you know, really important topical things that are on the on the on the lips of all of the investors and the advisors today and just just go around and ask you some questions about markets and about various things and get your thoughts.

DAVID: Okay, sounds good.

JASON: Great. Number one, it's been a wild ride when you think about fixed income, Right. And you and I have been in this business for a fair number of years. And I can remember starting my career when interest rates were, believe it or not, higher than they are today. But we went a long time through my career where they didn't get back to that level until what we've seen recently, the rate of change in in interest rates and, you know, the impact that it's had on fixed income, it really has been an interesting call it 24 months.

JASON: I'd love to start because we get this question top of mind all the time. Talk to us about interest rates in Canada, maybe in the U.S., where we've been and what the expectations are going forward.

DAVID: Yeah. And so, look, I think it's very clear that if you are involved in capital markets, you know, foundational, is what is the price of money? And so when we talk about interest rates, that's really what we're talking about. And that's such a foundational point for corporations, for investors, for asset management. Look, I think the big picture is that interest rates have come up a lot in a relatively short period of time, fastest rate hike in cycle we've seen in 40 years.

DAVID: The good news is that corresponding to that, you've seen a very, very dramatic drop in inflation. Back in June of 2022, not that long ago, headline CPI in Canada was 8.1% and headline CPI United States was 9.2%. If you look at both countries today, you know, fast forward, we're now down with a three handle. You know, it's a little bit above three, whether it's headline core, trim, core PC, whatever you're looking at.

DAVID: But we're in that mid threes to high to range. And so that's a lot of wood has been chopped, if I can phrase it that way. But look, we're not there yet and I think at the beginning of 2024 markets had expected that the Fed would cut rates seven times. And I think they had the Bank of Canada penciled in for four or five cuts.

JASON: I think the big surprise of 24 has really been two things. One, it's been this strength of equity markets, but really that strength is because of number two, which is economic strength. Job numbers have been pretty darn solid across the board. You've seen economic activity not really respond to higher rates the way we would have thought. And so I think where we sit today, we do expect both the Bank of Canada and the Fed to cut, but it's going to be back half loaded and it's not going to be nearly by as much as markets would have thought at the beginning of the year.

So to put some specificity to that, we think Bank of Canada goes in June and they probably go two or three times this year in the Fed, probably go something like June and maybe they go two or three times. If we had to guess, we'd say the Bank of Canada would be a little bit more aggressive just given how high rates have come up.

But, you know, that's our best expectation. And so the front end of the curve will come down. But, you know, long rates a ten year and Canada's now 340 bps ten year in the U.S. is something like 415 bps. They've come down quite a ways from the end of the year. And we've saw that rally in the end of 2023.

I think it's fair to say we expect rates to come lower and I think the overall returns should be better in 2024.

So if I think about what that means, because one of the questions that we often get is around real estate and depending on the market, we're in, it's obviously very important to both, you know, advisors that we talked to, but also their clients. What's that going to mean for the real estate market? Residential real estate market in Canada?

DAVID: And what are the expectations there?

JASON: Yeah, So on residential real estate, I think it's very obvious to most observers that, you know, Canadians have a lot of debt, particularly mortgage debt. And I think there was a massive fear coming into 24 and 25 and 26 that a lot of the refinancing that had to take place, you know, Canadians generally financing a five year fixed and that as those mortgages had to be renewed, you'd see massive jumps in those mortgage payments and that would cause real problems for the consumer.

DAVID: And, you know, real pain. I think it's fair to say that households have adjusted better than expected. I think households have cut back in certain areas, but they are adjusting to those higher rates in those five year resets. And I think in job economy, you're getting a job market, as I mentioned earlier, has been much stronger than we thought.

Still suspect there's going to be some weakness in the second half of 2024 and 2025. But I think the main note here is that, you know, consumers can adjust you. You do have to deal with a higher mortgage payment, but you are able to cut back in certain other areas. You know, maybe you don't take that vacation, you dine out a little bit less.

And I think we haven't given the consumer enough credit for the flexibility they can show around that renewed higher mortgage payment. And I think the other the other proof point is, as you look at the five core banks, they all reported in the last couple of weeks, and yes, loan losses are going up, provision for credit losses, yields are headed higher.

But we're nothing like what we saw during the financial crisis. There's definitely some weakness, but from everything that's coming out on the on the conference calls and the guidance, those pictures are expected to be very well controlled. And, you know, I think all in all, that's that's boding better for the financials and that's boding better for the consumer in Canada.

JASON: Great. So like most Canadians, if I looked at my personal investment portfolio, I'm pretty sure I'm biased to Canada and I've got an overweight in Canadian equities. When I looked recently in the last couple of days, I think the TSX has done about nine and a half percent over the past 12 months. But when I compare that to... take your choice ... the Nasdaq's a runaway, but but you look at the Dow, you look at the S&P, we're talking about sort of, you know, low to high 20% returns and a lot of these other markets.

So that nine and a half doesn't feel as good. But because we're biased and because we're in Canada and, you know, there's a lot of interest, obviously, in Canadian equities. What are your thoughts on the Canadian equity market? And is now a time I should be looking at adding, subtracting, staying neutral?

DAVID: Yeah. So look, I think if you have a fair assessment looking backward, I think it's very fair to say a number of economists in Canada now pointed out something. There's been a 20 year trend in this country, which is the productivity rate here has not kept up with productivity increases. The United States, all kinds of different theories as to why.

You know, in my mind, we're not putting enough capital back into reinvestment, technology, innovation in this country. But that's just my take on it. But I think just looking back, what you said is factually correct. You know, U.S. markets have outperformed Canadian markets. And I think a lot of people have sort of said, well, you know, Canada just doesn't have that productivity.

Why would we invest here? And I think there's a couple of important points to make here, which is, look, no one can predict the future and all of these things may or may not happen and line up perfectly. But if you look at the consumer market, it definitely is a couple of things going for it. Number one, just based on your question, expectations are really low.

You know, anyone in investing knows if you can just beat those expectations, if anything goes right in Canada, there's not a lot of love for the U.S. market at the moment. The other point is that the market is cheap. You know, people have talked a lot about valuations of Nasdaq of the the Magnificent Seven or now the Magnificent Four stocks and how traditional valuations are very expensive because you look at Canada, the TSX is traded at 14 times forward and a 3.2% dividend yield, which I think historically is very, very attractive.

You compare that to United States trading well north of 20X Price/Earnings and the dividend yield about 1.3X. There's definitely a valuation case to be made here. As I mentioned earlier, you know, the Bank of Canada, inflation has been a little bit stickier than we would have thought, but it is our full expectation that rates do come down somewhat in the second half of the year.

And if you've got rate cuts on the way, I think that's going to be a catalyst for the Canadian market. Definitely going to help out our financials and our insurance companies. And the other thing is, you know, as I talked about in the residential space, that tail risk this, you know, big, big fear in the market about this bolus of mortgages that have to get renewed at higher rates in the next 1 to 3 years.

That's fading a bit. It's looking like consumers are a little bit more resilient. Banks and insurance companies are able to absorb some of those pressures. So if any, you know, 1 to 3 of those things line up the right way, I think there's a significant case to be made for Canada. And remember, anytime you go outside of Canada, you're taking currency risk.

You might take taxation risk. There's lots of other risks you take. So all you always want to look for the best risk adjusted return opportunity, you know, anywhere in the globe. But I wouldn't give up on Canada. I think there are lots of reasons to be optimistic looking forward.

JASON: And more than just a contrarian play, there's actually some fundamentals behind what you.

DAVID: Said. There are real companies with real competitive advantages, industries that are going to be here for a long, long time. So if I think about, you know, the key rails of think about getting banks, I think about telcos, there are some really great companies here that have been under loved by the market. And I think, you know, it's very clear we haven't done as well as United States, but I wouldn't want to throw the baby out with the bathwater and not have any Canadian exposure.

JASON: And it might be time to take a second look at Canada. All right.

So pivoting a bit. AI, AI, AI - We hear it all over the place. We read about, you know, how it's impacting businesses and what the future is from an investment perspective. How are you and your team thinking about AI as an opportunity for investment? And also, I'd like you to maybe start there and then move to how you as running a large asset management business.

What are some of the things that you see AI impacting the way that you and your team actually do business on a day to day basis?

DAVID: Yeah. So as you noted, I mean, everyone talks about air. It's in every conversation, every dinner party, you know, every work conversation about markets, air, air. I, I think the first thing to say is that we are really, really early. I mean, we are in the it's in its infancy. This is very early days. And I guess the analogy I would use is try and think back to pre-Internet. If you can think back that far and think about what life looked like before the Internet and after the Internet and then, you know, it didn't just happen overnight. It took years and decades to sort of unleash the full power of that innovation. And I think we're at the same spot with, I mean, the big enabler here has really been around computing power combined with GPUs.

JASON: If you think about GPUs plus the cloud that's really allowed us to to explore and develop the full power of AI. Now, having said all of that, just so we're clear, A.I. to me really is about taking massive, massive amounts of data and extracting meaningful insights and then executing on some tasks with a great deal of precision. And so if you think about that massive data, you think about extracted insights and you think about the precision of executing a process that goes through every single industry that we talk about.

DAVID: And, you know, that can literally be revolutionary for manufacturing. If I think about a warehouse and how a warehouse functions in different processes, if I think about agriculture and some of the AI innovations, they're just they're mind boggling and we're just getting going. If you think about health care and drug discovery and molecules, you think about banking and regular processes and functions.

And really to me, last year, 2023 was all about A.I. enablers. It was who is making, you know, the GPUs, who is sort of allowing this revolution to happen. But we're now shifting from that enablement phase, if you can call it that, to adopter is what companies are now adopting AI and using it the full potential. Again, we're just getting started.

But as I think about AI, think about all of the processes that become much more efficient. And if there's one thing that companies want to do relentlessly, year after year after year, it's getting more and more efficient to drive their margins even higher. And I think that's really the beauty and the and this the special aspect of AI, it's going to make a lot of companies very, very efficient, which should allow margins to rise and it should allow Labor to be reallocated into even more revenue generating possibilities.

So to me, this is real. It's really important. We're just getting started. And if I think about our business in the way we use it, we definitely use it in our analysis. We have large language models. We scour conference calls looking for trends. We do some things with web scraping, all kinds of different applications. But it's about, again, for us finding companies that are not just enabling AI to happen, but really truly adopting it in their operations.

And they span all the way through primarily in health care and banking at the moment. But this is not going to be limited to any one particular sector. AI is real and you're going to see the innovations come in the next five, ten, 15 years. So I think you're going to surprise all of us.

JASON: Fantastic and fascinating is going to be fascinating to see how this plays out over the next, you know, three, five, ten years for sure. Let's let's pivot a bit to U.S. elections. I mean, we hear a lot about this. There's a much anticipated election coming up in in November. Without getting into any political bias, which I know you won't do.

How do you think the markets might react to this?

DAVID: So a couple of interesting points on this. I think, you know, over the next eight months, we're going to talk a lot about this. I think it's now official that President Biden will run for the Dems and then President Trump will run for the Republicans. But what I would caution people is to think about not just necessarily who occupies the Oval Office, but think about the composition of Congress.

DAVID: I think we often forget as Canadians, if you have majority government in Ottawa or in any province, see, you can have quite a bit of legislative success. It's not just the presidential race that will matter here. You know, the election that not going to happen. It's always the first Tuesday in November and a year divisible by four. That's in the Constitution.

So it's going to be November 5th this year. It's not just Biden versus Trump. You've got 435 seats in the House that are all up for reelection. And you also have 35 seats in the Senate for up for reelection. Don't forget, today, as we sit here, the Dems hold a very, very small majority in the Senate, and the House has a similar small majority.

So the Republicans have a similar small majority in the House. The composition of those races is going to be vitally important. And if we're going to focus on the U.S. election and we'll probably all be transfixed with Biden and Trump and the debates and the tweets and all the things that are going to happen in the next six months, I think the really important thing is to focus on policy.

JASON: You know what happens if it's a Trump win? What happens to taxation? What happens to regulation? No question. Trump is a very business friendly candidate. I think also, if it was a Trump, when you're going to have to think about geopolitics, you're going have to think about the role of America in the world. You're going to have to think about potential tariffs against China and others.

DAVID: And so there is a lot of moving parts, and I wouldn't want to predict that a bit. But what I would say is let's focus less on the the hyperbole of the candidates and more on the composition of Congress and the Oval Office. And then look at what are each of the candidates saying about legislative enactments that they want to make.

And that's going to impact capital markets to a much, much bigger degree than any of the hyperbole. I'd also just remind people that generally speaking, in election years, equities have risen and, you know, you're probably going to want to have central banks out of the cutting or hiking cycle as we get towards November. The last point I will say is that there's not just elections in the U.S. this year.

There's elections all over the world. And so lots of stuff happening. But I think, again, it all comes down to how do capital markets interpret legislative actions, whether they're favorable for companies and for profits and for growth or not. And I think that's the big thing to focus on.

JASON: Great, terrific insights, as always, Dave, and really appreciate this. I just want to say, as we wrap things up, I'd like to actually give you an opportunity to maybe talk a little bit about about your team and the things that you guys do. You know, we're the largest institutional asset manager in Canada, being TDAM, the third largest mutual fund manager in the country, the sixth largest ETF provider in the country.

And your team is managing all of these assets. We have recently been awarded and honored with 18 Fundgrade A-plus awards across 18 mutual funds and ETFs and managed portfolio solutions that you and your team provide. So just an enormous first of all, congratulations for the A wins wins and the success that we've had as an investment portfolio management team.

But just the size and the scale of your team, I think it's it's incredible the amount of clients that we represent, the types of money that we're managing and the different asset classes and capabilities that we have. So I'd love to finish with just maybe a word from you on the team, the structure, the size and the capabilities.

DAVID: Yes, you're right. It's a it's a big show up on the investment team. We have just over 360 people. You know, we we cover all of the traditional asset classes, one would expect. So of it's we have fixed income, we have equity, we have our asset allocation team. In addition to that, we have our alternatives team. And an alternative for us really centers around real estate infrastructure, commercial mortgages and private debt.

You know, we also though, inside of our fixed income teams, we also do something called Asset Liability management. We have LDI strategies, we now do commodities. We do an entire host of things on behalf of clients. You know, assets under management now are roughly 430 billion and I would say what's integral to all of that is really the the process and philosophy that drives everything at the end of the day.

Each of those different groups has different objectives, you know, whether it's a high yield fund or a core fund or a core plus fund, or whether it's a growth fund or a value fund, whether it's a conservative portfolio or an aggressive portfolio. But at the end of the day, what really underlies all of this is research. It's really, really about teams coming in every day committed to a process that they've selected, they believe in, they back tested, they know that works and being very, very methodical and repeating that process day in and day out doesn't always work, doesn't always lead performance.

But we do think if you stick to that philosophy, if you stick to that process, you don't change in the middle of the investment horizon. We we believe that that produces great results. And so it's a real testament to the team, I'd say doesn't have much to do with me, but I think every single member of that team contributes.

And the one other last thing you would say that's really quite nice about it. We do have a team approach. A lot of shops I think have in certain silos and pods that sort of work to work amongst themselves. We have a morning meeting every single day. We have monthly meetings with the entire investment team and it allows a lot of cross-pollination people to move between groups.

And it's fascinating, you know, somebody who's running a dividend growth fund may have a lot in common with someone who's trying to understand where rates are going and what the next move for the Fed is. And so that cross-pollination, I think, adds to good results as well. So a real testament. But there's a lot of money and there's a lot of people and there's a lot of discipline and dedication to what we do.

JASON: And based on the awards, a lot of success. So congratulations. Thanks again, Dave, for taking the time to chat with me today and I look forward to doing it again soon.

DAVID: Thanks, Jason. Great to see you.