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Jason: Hello, and welcome to TDAM Talks - Breadth of Experience, a podcast where we discuss all things TD Asset Management. Today, our focus will be on the opportunities that exist in the global equity markets. My name is Jason McIntyre. I'm Head of Distribution for TD Asset Management. It's my pleasure today to be joined by the man himself Damian Fernandes, managing director within our portfolio management group. Damian, welcome. And thanks for joining us today.
Damian: Thanks, Jason. And thanks for saying those really nice things as an intro. That's almost buttering me up for the hard questions.
Jason: We have to make sure you come back. So we have to be nice to you. Listen, I do want to focus on the opportunities in the global equity market, but let's take a step back and maybe look at the macro environment. We've had, let's call it, 3 and 1/2 years of just a wild ride as a Canadian investor-- interest rates rising at a pace we haven't seen in a very long time, equity markets all over the place, pandemic issues. Through that time, maybe just your views on how the global equity markets held up and what the opportunities have been and will be going forward.
Damian: That's a great way to start. And maybe, Jason, I'm going to say something controversial. And so if we were having this conversation in 2019 when we thought corona was a beer, right, and we didn't understand that we would all be quarantined at home and living in fear, visceral fear, because we both have families, about what that means for our loved ones, and then the success of a vaccine that mitigated the worst effects, and then the slow return-- there's so much that happened, and markets are up. Markets are up, I was looking at it this morning, markets are up, if you look at it from the end of 2019, so December 31, 2019 to today, the S&P is up 46%. The TSX is up 33%-- so decent returns and a lot of emotion. And when I say it's done what it's supposed to do, what people don't fully accept is that in the S&P's case, earnings went from 160 to 220. So earnings are up 36%. So I guess market performance is a little more than earnings, but not exaggeratedly so. And the TSX, the Canadian market, it's literally 33%. Earnings are up 33%. The market's up 33%. So my controversial take on this is that we've had a lot of emotional market economic volatility, but markets have done what's expected. They've followed the path of earnings and cash flow. In the Canadian market's case, earnings grew 33%. And the market's up 33%. And same thing with GDP growth. GDP growth is above where it was pre-pandemic.
Jason: So with the theme being controversy, let me throw something back at you then. If I look at an investor's portfolio, and especially you look at advisors that we work with on how they build their books, we see an awful lot more cash and cash equivalent type investments today in portfolios, way more than we saw back in 2019. GIC rates, I think I was sharing with you the other day, Damian, that I was out West and an advisor had shared with me that they have a one-year GIC they just renewed for a client at 6.25%. That's different. So although the markets have done what they would expect to do, our advisors' portfolio makeups looks a lot different. And today if I'm investing, why shouldn't I go into a 6% one-year GIC rather than some of these other investments that typically make up a relatively basic portfolio?
Damian: The other investments are boring stocks and bonds, right? OK, a few things. If I'm going to be controversial, I'll say something that I think is not controversial. I'll say that in this pandemic and the aftermath of this pandemic, the rise of social media has exaggerated emotion and compressed time horizons.
People are looking for the boogeyman around the corner at every single turn. Earlier this year, people were convinced we're going to recession. And I'm earning 5% or 6%-- let's use 6%, right? Or actually, 5% is an easier number. If at December 31, 2022, we're like the recession is coming. We're still in geopolitical conflict, inflation is an issue.
I'm going to sit and hide in my 5% GIC. Sure, do that. We're at the end of September right now, we're recording this podcast, so we're 3/4 of the year done. Your 5% has paid you 3.75%. That's before the highest marginal tax rate on interest income. And when I looked this morning, the TSX, which has underperformed global markets, is up 7%, right?
The US market's up, I don't know, 15%, 16%. Global market's up 15%, 16%. Japan's up 20%. I guess what's happened is that because people's fear emotion has really accelerated-- think it's social media, I think it's a whole host of things-- it's like I will take 5%. But 5% or 6% isn't going to discharge your liability base.
Inflation's falling, but inflation today, as we just reported, is north of 4%. If you're earning 5% or 6%, look, for your client that has a liability in the next one year, sure, put them in GICs. But we're in the wealth management business, and I think the key to that is growing your wealth. And I don't think you can do that in GICs. And I don't know if that's a controversial statement at 6%, but I will take global equity markets up 10% on average year to date 3/4 of the year that will take 3.5%, 3.75% on the GIC so far.
Jason: And points well taken-- very good points. I think there's a behavioral aspect to advice that advisors have to work with clients around. But you have to balance that behavioral theory with the realities of the market, like you say, and what's going to be best long term. And part of our job is to make sure that people are invested in portfolios that mirror what their risk tolerance and their investment time horizons are. So I think that's very well taken. You talked briefly about economic growth and where we are. I saw the other day that it looks like US Q3 GDP growth is coming in well above forecast, which sounds great. So given that you manage US equities and global equities, how are you thinking about that relative to the opportunities in the US? And how might that extend to the global opportunities?
Damian: Sure. So, first of all, I think this is our last hurrah for service consumption, because a lot of that GDP growth - we are Q3, GDP is actually being pulled up by service consumption. I think the sign of our times - and maybe, Jason, are you familiar with the term Barbenheimer?
Jason: The movies.
Damian: The movies, the Barbie, the Oppenheimer, or even the Beyhive, the Beyoncé fans, or Swifties, Taylor Swift.
Jason: You're a big Swiftie.
Damian: I do like Taylor Swift's older stuff. I didn't go to the concert. Maybe you took your daughter for those tickets. But either way, let's put this in perspective. And why I'm talking about this juicing up of GDP growth in Q3-- and this is in the data, this service consumption, so Barbenheimer is going to generate $1.1 billion of ticket sales outside of North America. So that's net exports. That's positive. That's additive to GDP, this hit. The average Taylor Swift fan spends $1,500 on the ticket, accommodation, and so on. Much more-- you can't even get a ticket in Toronto. We're in Toronto right now-- $1,500, it's not happening for a Taylor Swift thing. She had 14 concerts, and the average stadium was about 55,000 people. These numbers add up to the billions pretty quickly. And so I guess when I say it's the last hurrah for service, people are going to look at Q3 GDP and they say, wow, that's a really big number. And that's the last hurrah of service consumption. I think Federal Reserve rate hikes, central bank rate hikes are slowing the economy. You see that when you look at what your prime rates are, what interest rates costs, what mortgages are. And that's having the desired effect. Inflation was 9% last year. It's got a 4 handle right now. Growth is slowing. And I think that we are moving into just a more normal environment, which is generally good for markets.
Jason: Very interesting. I didn't see that one coming, but thanks for the insights. Let's get into the investment management side of what you're doing. Talk a little bit about the fundamental equity team, the work that you're doing, the size of the team. The results are speaking for themselves, and we're just seeing some terrific performance out of the team. But maybe give us a view inside the curtains, and how does the team look, and how are you feeling about things on the fundamental equity side.
Damian: This isn't hyperbole or exaggeration; I'm feeling great about it. I don't think people fully understand the gravity of my statement when I say this-- we have one of the biggest fundamental teams in this country. We have over 20 analysts now. We have a host of long-tenured portfolio managers with deep industry experience across multiple equity markets-- Canada, US, global. And we're combined in the TDAM fundamental equity team. We're a unified group. We can draw on each other's experiences. And we've built products that are four or five-star funds or generate tremendous value for clients. And I think it's a testament to the leadership. It's a testament to the people we've hired. We really haven't lost voluntarily anyone, and just the continuity.
I love coming into work. I love working with my team. But to your question, it's been 11 years I've been with TD Asset Management, and I've seen we've built, and we've developed our junior analysts to become portfolio managers. And there's deep industry research. They write thoughtful reports.
And what we're always trying to do is sift through the noise, right? Your clients receive information instantaneously through Twitter-- sorry, it's not Twitter anymore. It's X. It's X, or other social media venues-- we want to exploit this almost skepticism that people want to trade, want to act on the immediacy of information, when investing is arbitraging time horizon, right? Compounding of cash flows, thinking about quality businesses that grow. And I think that's our sweet spot. And our whole team, between one of the biggest analyst teams, and the combination of the PMs, and data scientists, we're working towards that goal.
Jason: That's wonderful. And I can attest to that having worked with you and all of the members of the team, just not only the terrific performance and the things that you're driving from that perspective, but also just the support, and the marketing, and the commentaries that you are all providing really go a long way in helping us all as we're dealing with clients. Maybe we can end on a deep dive into a couple of the mandates. You talk about the five-star Morningstar ratings and the performance. Maybe we'll start with the TD Global Equity Focused fund. Give us a couple of highlights there, and start with what does the focus part mean?
Damian: So the focus part-- so coincidentally, today is the 13th of September, right? It is, when we're recording this. Today is Global Equity Focused five-year anniversary. It's the team. It's a team effort. It's a five-star fund. It's done tremendously well.
The "focus" part is just the idea that we want to build a portfolio of the best global businesses that can compound, between 45 and 55 stocks, and then just diversify those businesses so we're not taking unintended bets. And think about the last five years. We started this conversation about talking about COVID. When this fund was launched, the Federal Reserve was initially late in 2018 thinking about ending quantitative tightening. That led to some market indigestion. So it's a very volatile period initially when it launched.
Then you had a recovery, you had Trump tax cuts juicing up earnings. Then you had COVID and lockdowns. And throughout this whole period, because of the skill of our team and how we construct portfolios and thinking about businesses that can compound, we've been able to just keep our head on straight, not take unintended bets, not swing the portfolio around-- just buy quality companies who throughout that whole five-year period have grown cash flows, and the share prices have followed. And our clients who have been invested in that have-- I'm really proud of this-- have done tremendously well, have compounded at a double-digit rate through this pretty volatile time period.
Jason: So if we look forward from today, given the economic background that you laid out before, can you share with us maybe one or two areas of interest to you and the team, whether it's geographies or sectors or whatnot, that you're interested in looking at for growth over the next period?
Damian: Yeah, for sure. So just take a step back, right. First, I said this before, the way we want to try and build portfolios and pick high-performing stocks is exploit skepticism of how much cash these companies are going to generate. Where I think there's a dislocation-- everyone wants to talk right now about AI, and to be clear, we own NVIDIA, and we have plays in this. But for me, what's more interesting is, what's the next step of how does artificial intelligence incorporate into businesses? Our business, for example, how does TD Asset Management use AI to improve its value proposition to its clients, right? And so for us, what we're looking at is thinking about business models where AI can actually improve the consumer surplus, and then these companies, they already have an existing business, they'll either reduce costs or improve revenues using.
I can give you some examples-- that's one area that we're super excited about. The other area, like you talked about regions, a region that I've been spending a lot of time in is Japan. Japan has these wonderful business models that generate prodigious amounts of cash flows and industry leadership, whether it's autos and machinery and parts.
But more importantly, because Japan was still dealing with the hangover of its big depression, almost, you have these companies with very, very underlevered balance sheets and a lot of cross holdings. Japan's going through an interesting corporate governance phase where if you're a Japanese company and you have these assets sitting on your balance sheet that aren't earning, the regulators are actually forcing you to create value, divest these assets, improve ROEs.
So I think you've got a twofer. What I mean a "twofer," you've got, obviously, these high-quality companies which a play on global growth, and you've got this added kicker of maybe corporate governance reform actually improving returns. We like those things.
Jason: That's great. And I'm assuming with the US focused fund, very similar, if not identical, practices.
Damian: Yeah. It's, in fact, the idea when you talk about focus, and we have a focus platform. We have global equity focused that's done really well. We have US equity focused-- same idea. This will actually be even more focused. It's under 35 companies in that fund - highest-quality companies with underestimated cash flow. And then we have Jeff Tiefenbach, which has just newly launched his international focused fund. So for us, I say this all the time, right, I hope we fit in one of your client's platforms, but I don't want to tell people which of our products we want to fit, right?
We're bakers. We bake high-quality cakes. Which cake do you want? I personally am not a big fan of carrot cake, but I do like a dark chocolate cake. I'm not sure about you, Jason, but--
Jason: Dark chocolate cake and Taylor Swift, what a Friday night for you and the Fernandes household. Anyways, listen, Damian, wonderful update. Thanks so much for joining us. Love to have you back soon. I think this was great, very informative, and really appreciate all the work that you and the team do. And appreciate you taking the time today.
Damian: Thanks, Jason. Always a pleasure.
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