Transcript
ANNOUNCER:
TD Asset Management welcomes you to this week's podcast. As a reminder, this podcast cannot be distributed without the prior written consent of TD Asset Management.
INGRID MACINTOSH:
Hello and welcome to the final episode of TDAM Talks for 2022. I am your host, Ingrid Macintosh here at TD Asset Management and I am so pleased to welcome our guest for this session, Damian Fernandes.
Damian hasn't been on this podcast at least for about two years. This is going to be a great conversation. Damian is Managing Director of Public Equities here at TD Asset Management and collectively he directly or co-manages over $30 billion in our combined global and U.S. dividend strategies.
Damian, welcome.
DAMIAN FERNANDES:
Thanks, Ingrid. Long-time listener in this whole COVID backdrop, first-time participant and you know, from working and seeing us in real life in the office and it feels great to be back in 3D.
INGRID MACINTOSH:
For our listeners, we're actually sitting in the same room for the first time in, I can't remember how long, so. So today we're going to talk about 2022 in the markets.
I can't believe we're already looking back at a whole year, and I think about all the podcasts I've started reporting...down 10%, we’re down 22%... We're down, but we're still you know, we've come through quite a year.
So why don't we start where we always start, Damian? Let's talk about 2022 in the markets. What do you think brought us to where we are and maybe what surprised you about this year?
DAMIAN FERNANDES:
Yeah, I think a few things, right, that got us to where we were and we were thinking about these things going into last year. It's just that the unintended surprises this year were really threefold. First of all, it was pretty apparent last year that growth was going to slow, not because of, you know, any great insight.
DAMIAN FERNANDES:
Just because of growth is at a breakneck speed and it's operating in full thrust like that, you have to have a moderation. What normally happens, though, with that moderation is that inflation slows. This time around, what was really surprising was inflation remained persistent, forcing the Fe's hand. The Fed being the Federal Reserve and global central banks to actually raise rates at the fastest pace in over two decades.
DAMIAN FERNANDES:
Let's think about that for a second. Right. The cost of your mortgage is going up. The cost of companies' borrowings are going up. That all weighs on earnings. And then, of course, we had the Black Swan or Gray Swan of geopolitical conflict, the war in Russia that, you know, put a spike in commodity prices, further exacerbating inflationary pressure.
DAMIAN FERNANDES:
All of those, you know, led to significant increases from these rate hikes from central banks. And of course, the result is what you've been seeing every month. You know, just 10% declines, 20% declines. When is it going to stop?
INGRID MACINTOSH:
I think that's a really great place to start too because, as asset managers who wake up every day collectively thinking about how do we make our clients and customers lives better in the long run, we have a bunch of tools. Asset allocators are trying to look at these big pictures. You're focused day in, day out on equity markets.
You don't have a choice about whether you're going to be in them or whether you're not going to be in them. You need to be in them, but it's how you navigate them. So when you sort of look at this past year, in the last few years combined or compared to the 20-odd years that you've been in the industry, what's been unique about this environment?
We've been going through the pandemic, the environment we're in because it is extraordinary.
DAMIAN FERNANDES:
Yeah, I think what is unique versus this experience, given prior experiences, is the speed information is impounded into the marketplace. Let me be more clear about this. Slowdowns, rising inflationary concerns of central banks, you know, aggressively raising rates. These aren't new. But what is new? This time around, the last five years is the, you know, the I'd almost call it the negative influence of social media where, look, we've always had geopolitical conflicts.
We've always been at risk of wars, we've always had slowdowns in economic activity. But right now, those moments are being exacerbated by anyone really with a Twitter account and a few thousand followers. I tell my clients this all the time, and by clients, I mean, you know, if we're out to both our advisors, our planners, their clients.
Imagine for a second, you know, if it was 20 years ago, the information you receive, you consume normally comes on the nightly news. It's validated, the reporters have done multiple checks and you have a credible source. Right now, something if we have something, a piece of information, it's not even validated. Some person with a Twitter account can put their own spin on it.
And by the way, the social media companies, I think people actually forget this... They exist to make money. Right? They're profit making enterprises. You don't generate more likes. You don't generate more, more input. If you if you show, like, the most moderate behavior, you generate by showing the most polarizing views, and I think people forget this. Right?
So the information people consume on social media is by definition the most extreme views that are rehashed and reposted and amplified. And then our clients, your clients, my clients are sitting there like, oh, my God, the world is such a scary place. No, it isn't any scarier than it used to be. It just seems a lot scarier now because the information medium is, I don't want to say corrupted, but it's almost misguided.
INGRID MACINTOSH:
It's like institutionalized hyperbole. Yeah, like it really is. And then we see the same thing and you know, we're not going to go down this rabbit hole. But when we look at our political leaders, particularly south of the border, literally the entire news engines have become polarized. And you get this like, there is no middle ground. There is just hyperbole.
DAMIAN FERNANDES:
It's a constant news cycle where the most extreme views are amplified. And that is a problem for our clients because it doesn't lead to the right decision tools, right? We're in the we're in the game, like you said at the start, Ingrid, you said we're in the game of building wealth for our clients, it's to help discharge the liabilities. That takes time and compounding.
But if everyone's panicking at every, you know, at every near-miss because it's being amplified by social media, our clients are fearful and sometimes that leads to bad decision-making.
INGRID MACINTOSH:
I think that is, you know, in the moment of fear that the instinct that anybody would have, it would be to run. Yeah, I think you know, what running looks like in the investment world would be maybe exiting my investments, putting my money into GICs, something that is safe. And oh, by the way, relative to where we've been for the last two years, looks pretty great.
I mean, 4% versus a 1%. This is great. But the reality is with inflation over 6%, still the negative real rate of return and a huge opportunity cost likely if that's if that is the motivation for people to go to that place. So I think you're right. You're actually giving me a different perspective on it. I was thinking about the hyperbole and how it makes your decision-making tougher, but the bigger issues that might scare people out of being on their investment journey longer term because they do get that panic.
Now I want to pivot our conversation a little bit and talk about your investment process. And I know one thing we always talk about here at TDAM is our quality bias. So, what does quality mean to you? And can you talk a little bit more about your investment process for the mandates that you run?
Sure. And I think this would be for our fundamental team broadly, not just the U.S. and global products, the Canadian products, too. And I find it interesting, because Ingrid, you interview a lot of managers, portfolio managers, and they'll all say we're quality investors. I think people use that as an intellectual blanket.
For me, quality is... think about this: in your own purchase decisions, in your own life.
DAMIAN FERNANDES:
When you think about quality products you buy or services, you want durability. You want, you don't want things to break down. You want uniqueness. You want actually brand power. That's very similar to what we look for in companies when we talk about quality. When we mean durability, we mean durability of cashflows, right? The value of any business is how much cash it's generating.
We want those cash flows to be protected. We want limited competition. We want industry-leading products and services. And ideally we'd like the best time to buy these businesses is what we've had this year, right? When companies are being thrown out, you know, the baby and the bathwater, when quality companies are being dislodged to the same degree as, you know, the companies that we might consider not as high quality.
These are ideal times for an active manager to actually, you know, look through, you know, separate the wheat from the chaff. Right. And actually find these quality companies who have these business models that are really unique, that are growing cash flows at an accelerating rate. I mean, the marketplace has just because it's so volatile and so enamored about, you know, the near term has kind of forgotten about it.
INGRID MACINTOSH:
And that's where you and your teams really play a role in terms of finding those gems for us and being able to add to portfolios. Let's go back to that conversation we were having a little bit because I want to go a little bit deeper on this, this hiding from the markets phenomenon, this GIC phenomenon. Let's, you know, I think one of the underpinnings to that we look at take a the outlook is the outlook for rates.
I know it's an underpinning to what you do looking at the equity portfolios, but can you talk a little bit about the outlook for rates and what you would say to folks that maybe are taking those very conservative positions in GICs?
DAMIAN FERNANDES:
I think if you're looking to invest in GICs, if you absolutely need a guaranteed sum of money in one or a two-year horizon, GIC investing with no risk of loss. Sure. Right. Yeah, you've got a place. But if you are looking into GICs as an alternative to conventional investments where you can compound growth, where in a broader asset allocation format, for example, in any portfolio and Michael Craig, our colleague, who manages the asset allocation team, will tell you that having 30, 40% in cash probably sacrifices returns for the rest of your portfolio.
What I mean by that is that if our goal is to generate returns to fund future liabilities, being overly conservative, just to completely eliminate risk isn't the way to do it. Ideally, you have a longer-term time horizon where you should be willing to accept some risk, hopefully investing in quality managers that can grow portfolios over time. I find it interesting, right?
And GICs will just... we can talk right now, GICs from TD Bank. Ingrid, you and I both work for TD Bank. You can get a GIC right now for one year for 4%. But you're locked in, right? You're locked in at 4%. I would say we work for TD Bank. I can go buy TD Bank stock, earn a 4% dividend yield.
That dividend yield is growing. I'm getting a raise of high single digits every year. That to me is we have to characterize safety, security.
INGRID MACINTOSH:
Absolutely. And I think that's a really great way to crystallize it, because when people are hiding from the markets, they're actually really decreasing the likelihood that they're going to have a great success in the future in terms of being able to meet their personal liabilities, whatever those would look like.
DAMIAN FERNANDES:
So exactly. And I'll say one final thing on this, right? It's the point about investing is you actually have to tolerate some degree of uncertainty, but you're generally compensated for that over the longer term. Right now, we started this conversation about all the things that have gone wrong, that have led to volatile markets. But generally those things are temporary.
What I mean by that is there would be, imagine a very optimistic day. This is not my outlook. I'm just saying that right now geopolitical conflict with Russia-Ukraine war, that could have a finite date. We could have a ceasefire of sorts. What happens to markets then?
And what happens alternatively, if we do have that scenario play out, what if you're locked in GICs? You cannot pull that money out to now participate in an environment that's a little, that's more benign.
INGRID MACINTOSH:
And we could we could keep going because, you know, I'm passionate about this all day long and making sure that our clients are sort of prepared for the long term. Let's talk about a personal passion of yours, and that's in the realm of sustainability, though, as an active manager, obviously we have rules of engagement. We have different types of mandates.
But what does ESG mean to you?
DAMIAN FERNANDES:
Yeah, ESG has become one of these terms that it's almost like amorphous. It means something to every different person. Let me tell you what I think ESG means for TD Asset Management. It speaks to our values, right? ESG, the definition of being Environmental, Social, Governance. TD Asset Management...
We have a separate team that, an ESG team, that oversees that works with our Chief Investment Officer to see how ESG processes are being implemented across all our strategies. What I mean by that is that it's how we identify ourselves. It's the things we value, for example: Governance. The G part of ESG. That that captures proxy voting. So we vote proxies along our value system. For example, we have we have defined roles in our proxy voting where we require a certain number of board members to be female.
That's not, that's because we actually believe that will lead to better investment outcomes. If your board is just populated with one sex, it's probably leading to narrow decision making. Exactly! And so for things, what I mean by ESG, it's just in our engagements with companies, we want to ensure that the risks are being monitored, not just the risks on the financial statement, the risks, you know, for the company's environmental footprint, the risks for the company's social behavior, the risk for the company's governance, how the board and the CEO is being compensated, fundamental inputs.
Right. This is basically... I'm hoping in five years from now, ESG will just be called active management. We won't have this – because ESG by definition is just enhanced due diligence. It's what we were doing before. Now, just the consultants, found a nice, cool word to call it. And like everyone, it's raising people's eyebrows.
INGRID MACINTOSH:
And I think I mean, there are mandates out there like impact investing that are avoiding something or eliminating something. But we are talking day in, day out. What are the values from the ESG perspective that we bring to our investment decision making process as fiduciaries? And that's I think that's really what we’re talking about.
DAMIAN FERNANDES:
And that's when people talk about ESG, I think what's important is that they look at the companies that the asset manager and what they want to represent and our value system is represented in our ESG behavior, whether it's engagement with companies, whether it's through proxy voting, whether it's in the you know, in the different boards.
We sign up for.
INGRID MACINTOSH:
And I think it's an important narrative to have as an asset manager because it's increasingly important to our clientele. For instance, we know that the share of wallet is increasingly moving into the hands of women, and women are twice as likely to invest aligned with their value system. And similarly, I think about my children in their twenties and thirties, they will make their decisions down the road, not in an impact investing way necessarily, but they want to make sure that when they put their investment dollars that they're aligned.
I know that you and I have talked before on a podcast about some of your favorite podcasts. There's one called Conversations with Tyler. And you and I talked about this before. He's got this great section of his podcast called Overrated, Underrated. So they usually do a speed run but I’m going to try it your way. The Overrated Underrated if I can. So let me throw a few things at you here...
Inflation fear.
DAMIAN FERNANDES:
Overrated.
Inflation likely to moderate next year. Goods inflation is already coming off pretty significantly. Service inflation, you're seeing some softening in the labor market.
Overrated for how it's being perceived. It's likely to slow.
INGRID MACINTOSH:
China and the lockdowns.
DAMIAN FERNANDES:
Oh, I almost want to say pass. Oh, I think it's underrated. I think it's... let me be more clear about this. I think it's underrated because China is at that point where developed markets, I mean, Canada, the U.S., Europe, whereas if you remember last year in November, a year ago last year in November, when we first started, when we had the spread of Omicron, despite highly vaccinated populations, we saw a rise in cases.
And at some point, policymakers were like, okay, there's nothing we can do, right? They stopped counting cases like literally like last December. Yeah. They're just like, yeah, exactly. Cry uncle. That's it. I think China is slowly wake up this realization that a zero-Covid policy is no longer possible given the vaccine, the evasiveness of Omicron and the spread they're seeing.
And look, it's going to be tumultuous, right? Because they've tried to separate it from the rest of the world by saying, you know, we've adopted a zero and we're great at this. We are going to see a significant rise in cases, but we're all going to end up at the same point, you know, like a population that has that's vaccinated, but has also had some degree of prior infection.
INGRID MACINTOSH:
And we’re starting to see it already, and by the time this is released, I think we'll be a few weeks post. But we're starting to see now the government starting to moderate some of its tone on this. Like it's one of the largest economies in the world. But yeah.
DAMIAN FERNANDES:
It's one of the largest economies with high population density in urban areas and a highly transmissible variant, which has proven to be vaccine evasive, by the way, I'm not ever trying to discount the magnitude of COVID. I'm just, you said overrated underrated. I think China's zero-covid policy is I don't know, underrated because it's probably going to fail.
INGRID MACINTOSH:
And again, this might all be over by the time we get this out. But how about the World Cup?
DAMIAN FERNANDES:
Sure. The World Cup. Yeah, we talked about overrated under. So I love I grew up playing soccer. I grew up playing football for those who are not in North America or soccer for North America. So I think it's underrated. I think it's one of the few times every four years you have countries that come together in unity and in one of the most competitive sports that shows skill, effort, teamwork.
I absolutely think it's underrated. I love it. It's going to be a phenomenal World Cup.
INGRID MACINTOSH:
And it's going to – and it rises above all of the geopolitical.
DAMIAN FERNANDES:
Oh completely.
INGRID MACINTOSH:
Final words, your outlook for 2023: optimistic? Neutral? On balance?
DAMIAN FERNANDES:
You know, you hear those terms like cautiously optimistic or uncertain. You know I think... better than this year. Let's put it this way: We've had... the events that got us into this year, over a much higher and persistent inflation, requiring global central banks to tighten aggressively. All of those things will be rear view.
DAMIAN FERNANDES:
Yes, we are. You know, we might go into a slowdown, maybe even a mild recession. But the factors that got us here will also be the ones that got us out. So that leaves me unabashedly optimistic about, you know, versus what we've just had over the last 12 months.
INGRID MACINTOSH:
It's the best we can do. And then the markets. You don’t get a choice, but you get to pick where we go and how we manage our assets. Thank you so much for joining me today.
DAMIAN FERNANDES:
Always a pleasure, Ingrid. It was great. It was great having this conversation. It's great to do it in person. For those listening.
INGRID MACINTOSH:
And for those who are interested in learning more about TDAM’s approach to sustainability, you can find our recently published Annual TDAM Sustainable Investing Report on the TD Asset Management site, along with more of our latest thought leadership and commentary in that section. Also, to receive the latest expertise and updates from TD Asset Management, you can find us on LinkedIn at TD Asset Management.
Thanks everybody for joining us today. We will be back in January with our year ahead focus featuring our Chief Investment Officer, David Sykes. Take care, everyone, and stay safe.
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