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: It's that time of year again, RRSP season. And investors are inundated with all the great advice. Open a retirement savings plan, automate your savings, start today. These are all great pieces of advice to help you save for your retirement, but with market volatility rapidly changing interest rate landscape and talks of recession, what can we really be doing to better prepare for potentially three decades of retirement?
Joining me today is Michael Craig, Head of Asset Allocation here at TD Asset Management, to talk about the landscape we saw in 2022, what we can expect going forward and how we think about the markets today as we enter into the all-important season. Michael, welcome.
MICHAEL CRAIG: Thank you.
INGRID MACINTOSH: So we know and we've talked about this, 2022 was brutal. It was an incredibly tough year for investors. Equity markets were in bear territory, fixed income markets, where we should be able to take some cover, had the worst year on record in a very, very long time. Can we talk for a moment about what happened to sort of recap it, and then talk a little bit about the challenges we're going to be facing as we head into 2023.
MICHAEL CRAIG: Sure. Well, to summarize, in 2022 there's a lot of narratives. But the one that mattered the most was the dramatic rise in real interest rates. So we think about what the market thinks about inflation over the years to come, we think about nominal bond yields. The difference of those two is real interest rates.
And that went from a negative number to 1 and 1/2 to 2%. And this really upset bond prices, equity prices, et cetera. That being said, if we look at a broad gauge of global markets last year, equities were often anywhere, give or take, 20%. Bonds are off, give or take, 12% to 15%.
And I look across our strategies. The returns range really between negative 7 and negative 11 and 1/2. So a challenging year. But this is not 2008, this is not our 2009, this is not a knockout blow. It was certainly a setback. It really gave back some of the excess of 2021.
And as we come into this year, there's certainly lots of bearish arguments out there, but markets will bond. And equity have actually done pretty well this year. So it's one of those things where sometimes the front page of the news isn't really always what's happening in the marketplace. And I think people are worried, rightly so, about recession. But I think the asset markets are telling you a different narrative.
INGRID MACINTOSH: But the rate environment, fundamentally, how does the landscape change for people? We talk about the penalty on savers that we witnessed since 2008 right up until the start of 2022. Can you talk a little bit just first about how the world has changed for savers and investors?
MICHAEL CRAIG: So interest rates, globally, are higher. I think there's been a lot of movement into the shorter dated interest rate products. I would make a couple of comments. One, we're in very, very restrictive levels. But what I mean by that is the level of rates there are quite high as a function of inflation and economic growth.
You shouldn't assume that they're going to be there forever. And if I told you something was on sale and you could buy that one thing for one year or you could buy that sale item for the next eight or nine years, you'd probably take the latter. And that kind of logic will then-- for an income centric investor, it does get you into fixed income, because you're able to buy, not just high yields for one year but high yields for an average of nine.
And that makes a lot of sense. For a lot of people, that's 1/8 of your life if your average life expectancy is 80. So I think that's the thought process, is really locking in those higher rates for as long as you possibly can. That tends to get you into a fixed income type of strategy.
INGRID MACINTOSH: Yeah. And I really like the way you're approaching that. So I'm going to give you a follow up question on the HISAs and GICs. But effectively, if you think about GICs having a one-year term at a certain rate and effectively a bond fund having an average term of 15 years and a duration of seven years on average, you're actually guaranteeing yourself that income and potentially more for a much longer period of time.
So that is the scientific view or the mathematical view on GICs versus HISAs. But we know that there's an emotional part of investing. And that emotional part of investing has led investors, and so their advisors, to take cover in GICs to get caught up in the-- look at the rates now.
They're so much better than they have been for these years. This is a safe place to hide. What do you think about that? What do you say to investors who hold their money from the markets to protect themselves or to prohibit their long-term funds into a HISA or a GIC in the short term?
MICHAEL CRAIG: I think the biggest challenge with that is you are giving up your decision rights to make an investment decision in 12 months, 6 months' time. I was speaking with one of our portfolio managers Alex Gorewicz earlier this week. And she mentioned her view that based on outcomes of the world, she saw returns from fixed income being between 0 to double digits.
A lot of things-- you drive a truck through it, but that's the range of returns. If we were to go into a medium to severe recession, bond returns are going to be very high. Because you're going to get a collapse of interest rates, bond prices are higher. For fixed income investors, that long term return is going to be front loaded.
So you're going to see, rather than seeing an average of 5% over 10 years, you're going to see much higher returns near term, which depresses longer term returns. But you have the option then of moving into other assets at a lower price because you've had that economic shock. Within a GIC, you've basically given up that option.
And so I know there's a degree of comfort because you don't see prices moving around every day. But the worst thing is earning a return that's below inflation. Actually, if you look at long term Andex charts, cash proverbially underperforms inflation. And that's--
INGRID MACINTOSH: You're guaranteeing a negative rate of return on your money in real terms, practically?
MICHAEL CRAIG: Absolutely. So yeah. So when you go to pay that grocery bills in 10 years or tuition or buying a car or buying whatever, the money you have will not go as far after buying GICs. Short term expense of cash longer term, you really give up a lot. And it does come back to bite you in terms of the inflation picture.
INGRID MACINTOSH: You sleep at night short term; you don't sleep well long term. But the behaviors that we've seen, we do believe some of it is fear based. But some of its market timing. What's your view on market timing?
MICHAEL CRAIG: Well, look, I worked at a hedge fund. I've tried it before. I've done this, so I speak from a period of expertise. A few things here. One, the shorter your window of time, the less accurate you're going to be.
So if you're trying to a day trade versus weekly versus monthly, the farther the time you go out, the actually easier it becomes. So I don't actually stress too much about making a call in an 18-month period. Short term is noise, really. It is actually impossible. Because of the confluence of short-term players between what could drive something, could be completely random.
And I think people think-- they always look at this kind of low price. And why didn't they get it there well? And so it's really important to think about what are the states of the world. Are we set up to win in each of those states, and do we have the options to move if one particular outcome do have the ingredients to be able to move so that we're successful next year?
Well, that's what investing is all about. But again, using a GIC and saying, well, in three years when it matures, I'll buy a bond. The opportunity that we see today, are they likely to have it in three years' time? And therefore, these are the kind of conversations you're going to think about how to make a better investment.
INGRID MACINTOSH: You and your team manage well over $100 billion in asset allocation strategies, which is really thinking about different scenarios and how you use the tools available to you. So from where we're sitting today, if you paint for me an optimistic or a more neutral and a more negative scenario and what the likely outcome for capital markets is in each of those, and I know, I'm not asking you to time the market or predict it, but use the kind of logic that you and your team use when you're making the shorter or longer term decision?
MICHAEL CRAIG: I'll start from the more negative situation and then the positive events, OK? On the negative side, whenever you go through a period of sharp rate increases, it does take time to percolate it through the economy. And 2023 and into 2024 would be a period as this starts to take hold. It's one thing to see high rates.
I think people will start-- as we go longer and longer in a much restrictive environment, we'll start changing purchasing decisions. Financing a car now, a lot different than it was a year ago, for example. And that is going to weigh on consumption. I don't think there's any obvious massive imbalance.
So when you think about recession, I don't think we're talking about a 2008 recession where we've had to credit reduction. We're talking about an income based one where growth consumption is very, very tepid. And I think we all get used to these v-shaped -- 2020 was a v-shaped collapse and rally.
2008, while slower, I agree to that metric. This is going to be going to be a bit more of an out, where it's not going to be the severe drop in economic activity, but the after effect will be a bit more tepid. Because I don't think you're going to get the monetary easing you've got in the past. So near-term, I think it's going to be a grind this year.
And look, if we could get single digit returns-- I think bonds are on a risk adjusted basis, and that's where we've put our energy. A risk adjusted basis is a little bit quite attractive.
Equity in different parts. I think Europe is coming off very, very depressed levels. Asia is looking a lot better with reopening China. There is value internationally. And I think we're probably in the middle innings of a US dollar bear market.
So international looks a lot more interesting. I think the US is vulnerable here for a number of reasons. It will be the most likely economy to fall into recession. That's the near term.
Longer term-- look, our capital market assumptions would tell us that a typical-- if I use a 60/40 as a guidepost, returns should be in the upper single digits over a longer-term period. And that's above inflation, and that's not a bad outcome for clients. And so if you have a view of more than three years out, now it's not a terrible time to invest. You'll probably get better [INAUDIBLE] in this time.
INGRID MACINTOSH: Don't skip the market timing. You and your team-- because we're talking about retirement, I want to go a little bit deeper on a key strategy that you and your team have managed, the Retirement Portfolios. What can you tell us about these-- how have they evolved over time, how do they help investors save for retirement.
MICHAEL CRAIG: Yeah, the genesis of these portfolios really came out of the zero-interest rate environment. They are seen as fixed income alternatives, if you will. And the idea originally was to use, what are called, collar strategies where we use equity, and we buy puts as protection against short-term sell offs.
And it will sell calls to generate more income and create a vehicle that will give us some degree of equity upside without the risk of material equity drop. And the idea was all about managing the sequencing of return. Last year was challenging. There's no question.
Equities were tough. But we didn't get any love from fixed income. And even when I look at super conservative fixed income strategies last year-- on short term bond funds, for example, at one point last year, we're down 6%. So even the stuff that you really don't even--
INGRID MACINTOSH: Nowhere to hide.
MICHAEL CRAIG: Nowhere to hide. So it was a brutal year. And I think clients were at least so are nervous and rattled by that. Today, how we're set up, these look actually much more like bond funds today. We've increased the amount of fixed income in the material to take advantage of those higher yields.
And that's what we'll be for the time being. And there is an option that there will be a point in time where we think equity markets present enough value or we'll start adding more what we're calling protected equities back in. And so for clients-- I told you earlier that you can't market time, and I would stick to that. But with these, there is an asset allocation aspect to it where we will shift back from a really fixed income heavy bias to a more protected equity one.
And so clients can think about this as that option, if you will, in order to hopefully make returns that are in excess of fixed income. Right now, if we're totally frank, if you ask me what victory looks like, if we can just keep up with extending over the next six months, we'd be quite happy with these strategies. And then as yields do come lower, we'll look to generate returns from private equities and stuff.
INGRID MACINTOSH: So if I recap, as a strategy originally built on a very low interest rate environment to give clients fixed income exposure with the opportunity in a ensured way effectively or protected way to capture an overlay of equity market premium, the landscape has changed. The need to supplement fixed income is less than it was once. So you've changed some of the strategy within it or use different levers, and you've added new tools to strategies. Is that the way to think about it?
MICHAEL CRAIG: 100%.
INGRID MACINTOSH: Perfect. Awesome. So if we think about it, you and your team manage many, many mandates from an asset allocation perspective where you're leveraging different tools, working through the different environments and trying to ensure that we're respecting our clients' long term assets. How do you feel about your retirement plans?
MICHAEL CRAIG: Oh, good. Yeah. No, I've been adding. I mean, I'm not going to retire. My wife tells me I'm never going to retire. But let's just say, conceptually, I'm still in the point my life where I'm trying to build wealth and having kind of higher risk types of strategies.
The funny thing about this, things that look really good are long term fund strategies that I haven't touched. Dividend growth strategies, for example, that's up 70% since I started adding it years back. And it it's really hard to explain this until you can kind of feel it and see it yourself.
I wish I could go back and talk to myself when I was 22. Because the more time you had, the better. But that's where I'm at on that side. How about you?
INGRID MACINTOSH: I've got kids in their 20s, and I am all over them right now with the power of RSP and the compounding pictures. But people always say, am I too late? And I would say, you're never too early and you're never too late to be putting away money for your retirement.
And also make sure that you've got your health and all those other things working in your life as we get there. Thank you so much for joining me today, Michael. Great conversation about retirement portfolios, about asset allocation, and about the market landscape as so many investors are making these big decisions.
MICHAEL CRAIG: My pleasure. It's been great to be here.
Awesome. So for our listeners, you can find our recently published Wealth Asset Allocation Committee's perspectives on the TD Asset Management site along with more of our thought leadership. And of course, always to receive the latest sector piece and updates from TD Asset Management. You can follow us on LinkedIn. Thanks and stay safe.
Disclaimer
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank. ® The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.
Certain statements in this podcast may contain forward-looking statements ("FLS" that are predictive in nature and may include words such as "expects", "anticipates", "intends", "believes", "estimates", and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future, general, economic, political, and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors, including those factors set out above, can contribute to these digressions. You should avoid placing any reliance on FLS.
The TD Wealth Asset Allocation Committee (“WAAC”) is comprised of a diverse group of TD investment professionals. The WAAC’s mandate is to issue quarterly market outlooks which provide its concise view of the upcoming market situation for the next six to eighteen months. The WAAC’s guidance is not a guarantee of future results and actual market events may differ materially from those set out expressly or by implication in the WAAC’s quarterly market outlook. The WAAC market outlook is not a substitute for investment advice.
TD Asset Management operates through TD Asset Management Inc. in Canada and through Epoch Investment Partners, Inc. in the United States. Both are wholly-owned subsidiaries of The Toronto-Dominion Bank. In providing investment management services and advice, each entity has access to, and draws on, the personnel, resources and experience of the other.
Canada
