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.
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INGRID MACINTOSH: This year, we have seen so much change. We're moving from pandemic to endemic. We've seen a change in how we typically think about inflation. And we've seen the cost of living going up. And now we have a change in our investment management leadership at TD Asset Management. But this one, this is a change we're really excited about.
Hello, and welcome to this week's edition of TDAM Talks. As always, I'm your host, Ingrid Macintosh, here at TD Asset Management. And today I have the pleasure of having two great guests, David Sykes, the new Chief Investment Officer here at TD Asset Management, and Justin Flowerday, the new Managing Director and Head of Public Equities at TD Asset Management. Gentlemen, welcome.
DAVID SYKES: Hi, Ingrid. Nice to see you.
JUSTIN FLOWERDAY: Thank you for having us on, Ingrid.
INGRID MACINTOSH: It's going to be a great conversation. So, this is an interesting time of change for both our guests. David, you're taking over the role of Chief Investment Officer, a role that has been held by Rob Vanderhooft for the last number of years, while Justin, you are taking over the spot as the Lead of the Public Equity Team. So, I'm really looking forward to having a conversation about your career journeys. But before that, I want to talk about the markets and what's happening in the world because we've got the war in Ukraine, we've got COVID still raging in some parts of the world.
And there's clearly an impact on the economy and commodities, on the growth outlook, and inflation. I just want to land us there first. So, David, I'm going to turn to you. What's your take on this state of affairs, as they say?
DAVID SYKES: Yeah, Ingrid, the world is always a busy, rapidly changing place, but I don't think ever more than now. If I think back about how we got here with COVID in Jan, Feb, March of 2020, the nosedive we saw in equity markets, a huge rebound thanks to fiscal stimulus and quantitative easing. Things were looking pretty good. And then, lo and behold, we had that Powell pivot in November last year really talking about the fact that, yeah, maybe we're a little bit behind on fighting inflation.
Interest rates have gone up dramatically across the curve. The fed is now gone. The Bank of Canada has gone, lots of other central banks around the world. And I think you're in this normalization phase where we need to get interest rates up.
And as most people know, if equities really are the present value of discounted future cash flows, rising interest rates means a rise in discount rate, probably lower equity values. But I don't want to get too carried away with that because the economy is still growing, definitely slowing. And then we have to throw in this horrible war in Ukraine.
And before I say anything, I just want to say my thoughts go out to everybody who's affected by that. It's just a horrible tragedy. But I do think that's going to definitely take growth in Europe down. There's clearly implications for China and growth there and North America as well. And I think as we look forward, you put all of that together, it probably means a slowing economy.
There's definitely questions around whether or not this is a recession. And I think that's going to mean probably lower equity returns. But it doesn't mean negative returns. And it doesn't mean that you still can't expect good return of capital in the form of buybacks and dividend growth as we go through the rest of the year.
INGRID MACINTOSH: And certainly, we know that investing a long proposition. But of course, we do get ourselves caught in the moments in the shorter-term view and trying to navigate through that. I know we'll talk a little bit more about that when we look back over both of your careers.
Justin, the invasion of the Ukraine has really spurred this strong pullback in equities. What are your thoughts now on valuations and fundamentals at the current levels?
JUSTIN FLOWERDAY: So maybe I'll start with fundamentals, Ingrid. And fundamentals are fine. We just came through earnings season. We're starting to see a little trend down in terms of revisions for the year, not dramatic, but starting to see some negative revisions. But companies are still growing earnings.
And if I look out at 2022, I'm still expecting 6% to 8% EPS growth for the S&P 500. So not as great as the last couple of years, but still pretty darn good. Where things start to get a little bit tricky is when you start looking below the level of the market and start to see some of the trends that are taking place in the sectors and industries and across companies. And a lot of it has to do in relation to what David was talking about in terms of higher rates, which is being spurred by inflation, and companies are going to have to start to learn how to deal with higher input costs. And I can't overstate the importance of this concept.
And a lot of our work goes into analyzing business models and the characteristics of industries and sectors. And the output of this analysis is often in relation to the pricing power that companies have. And I will say that going forward over the next one, two, three quarters, the companies that have the greatest pricing power will be the outperformers in the market. I think we're beyond the point of the tide lifting all ships and the market just moving in one direction. And I really do think that the companies that have pricing power are going to be able to grow their earnings and expand their margins. And the market will reward that.
In terms of valuation the S&P 500 on a forward basis is trading around 18 and 1/2 earnings, 18- and 1/2-times earnings. I think from a historical standpoint, looking at where we are in terms of inflation and interest rates and earnings growth and economic growth, I think it's reasonable. I think I mentioned this in the last time we chatted, but I don't think we see a ton of multiple expansion going forward. I think gains in the market are going to be driven by earnings growth. And I think they're going to be driven by capital returns, and less so by multiple expansion.
INGRID MACINTOSH: Thank you for that. And certainly, you're stepping into the role as head of equities coming from a head of research team. I think our listeners can really see how our research discipline takes us A, across themes that apply across multiple sectors. But also, what I'm hearing from you is the importance of active management security selection will certainly be front and center.
I want to pivot a little bit away from the Ukraine conversation and talk about another inflection point, or rather a point of change, if you will. And that is this moving from the pandemic to more of an endemic area. David, what do you think about that? What are some of the key things we should be thinking about as we go through this transition to the new normal, if you will?
DAVID SYKES: I think your characterization is spot on, which is, it's a transition. I don't think this is all over. I think thank goodness we've got great medical science, we've got vaccines, we have therapeutics, we have a better understanding of the virus and how it spreads. But I don't think that means it's over. I think we all want to get back to, quote unquote, "normal life" as soon as possible. But it's going to take some time. And there are going to be flareups. There's a possibility of new variants. Let's hope not. But even without new variants, there's definitely going to be times in the year, particularly in the northern hemisphere, when we get into the fall and winter next year, what happens. And I think this is going to be with us for a while. Clearly that's going to have an impact on growth and on earnings growth and valuations.
But it certainly is much, much better than it was two years ago where we really didn't have any of the tools in the toolkit that we have now. I think we're in a much better place. But we are going to transition. It's not over, in my humble opinion.
INGRID MACINTOSH: Not linear. And I think that this is where we separate the way we think about the pandemic being over. We're taking our masks off in North America where we have high vaccination rates. But realistically, it continues across the world and in the developing world. And it will have ongoing impacts, both to other parts of the world, but also the investing and the economy landscape. So, Justin, what are your thoughts on that?
JUSTIN FLOWERDAY: So, I read something recently that we were getting back to pre-pandemic levels in terms of hotel occupancy and in terms of travel and in terms of a bunch of different metrics, going to restaurants and all that stuff. I just think it's going to be volatile. And I think I'll just echo what David said, which is we're not out of this. One thing we have proven is that we cannot predict the future when it comes to variants and inflection points in this pandemic/endemic.
I think BA.2, the Omicron variant, is now 35% of new cases in the US. And I think we're just going to continue to see ebbs and flows of variants. And it's something we're going to have to live with.
INGRID MACINTOSH: And from your lips, as you say, I think we're all going to just have to learn to live with it. Let's pivot a little bit and talk about some of these exciting changes. So, first of all, David, you are moving from your position. You've been at TDAM for 23 years now, by my math, a little bit longer than I've been here.
And you are now moving into the Chief investment Officer role. Can you tell me a little bit about what that change looks like? And then Justin, I'm going to ask you the same questions because, again, you are stepping into the head of public equity roles that David is moving on from. Over to you, David?
DAVID SYKES: Yeah. So, Ingrid, for me, I guess in some ways, everything changes, and in some ways, nothing changes. What I mean by that is I'll certainly be taking on more responsibility, a much bigger team. Now I have to think about not just equities but fixed income and asset allocation and alternatives and the risks we take as a business. And I'm looking forward to all that.
But in a sense, nothing's going to change because I've spent 23 years absolutely focused on investment returns and investment excellence for clients. And that is job one. And so I'll be taking that view now towards the entirety of our assets here. And I would also say too, the transition is occurring.
Rob Vanderhooft's been in the spot for three years. He has stepped down. This was announced in the fall. But this wasn't something that we hadn't talked about. Succession planning, continuity in our business is really, really important. And we talk about this constantly.
And so, there was an announcement in the fall. But that wasn't the first I had heard about it. There are many, many conversations that have happened months, quarters, years ago. And I want to thank Rob and Bruce. It's been a really good transition.
And I think it's going to be lots of work for me. I plan on being very, very busy. But I think it's also opened up lots of opportunities, not just for Justin, but for lots of other people who will now get expanded responsibilities who really deserve it, who have worked really, really hard over the years.
INGRID MACINTOSH: I think you captured something there because you started your comments by talking about the different asset classes. And people might visualize an org chart that has people in boxes. But as head of equities and the roles you've had over the years, you've never just been thinking about that one spot on the capital continuum of a company. You've always been aware of all those pieces. It's more thinking about it in a different holistic way.
DAVID SYKES: Yeah. I mean, for me, Ingrid, it's a giant Venn diagram. And they all overlap. And they all intersect. And they're all really important. And just because I've run an equity group and equity funds for years, doesn't mean that I only focus on the equity market. Fixed income markets, currency markets, derivative markets, what's happening in the investing world is all really important in terms of your inputs.
INGRID MACINTOSH: Yeah. Justin, I'll put it to you. Our listeners may not know you as well as they might have known Mr. Sykes. Can you tell our listeners a little bit about your background and the journey that's taking you to where you are today, how different things might be, but actually, maybe, how much they're not that different from what you were doing the day before the transition?
JUSTIN FLOWERDAY: Yeah. So absolutely, Ingrid. I guess I'll go back a bunch of years. Joined the bank in 1999. Joined the equity group about 20 years ago. I started my career in equities covering technology.
So, I think you've had Vitali Mossounov on this show a couple of times. Think about me as the less impressive Vitali, and maybe with the less crazy hair as Vitali. I spent probably the next 7, 8 years covering different sectors and industries, including industrials, and telcos, energy, financials.
I spent the next five years managing portfolios, US portfolios, North American portfolios, Canadian portfolios. And then an opportunity came along that I thought was really, really cool. And it was to manage a global equity research platform and kind of build a global equity research platform. And we have been in that phase for the last seven-ish years. And it's been an incredible experience.
We've got a terrific team. And it's been amazing to watch the people in the group grow as investors and see the processes that have been built that have really contributed to the investment excellence that the team has generated for clients. And I'll just say, I'm really, really excited about this new role. But one thing I've kind of told myself, and I'm taking a version of the Hippocratic oath, which is this team is operating at an incredibly high level, the portfolio managers, the research analysts. And at the very, very beginning of this, it's do no harm.
We have Ben Gossack and Damian Fernandes stepping into some bigger roles, taking lead, management responsibilities for some of David's funds. They're incredibly capable individuals. They're going to do a great job. Vitali Mossounov and Monica Young are going to become co-head of equity research. Incredibly capable individuals.
The last thing I'll point out is that it's really about the process. And we have a truly differentiated and robust process when it comes to stock selection, when it comes to portfolio construction. And so, none of that is going to change along with this transition.
INGRID MACINTOSH: Just a couple of things I really take from both of your remarks, first of all, the fact that you both have been here since 1999. So clearly, you've been plotting this for quite some time to take over the team. But more importantly, when you make the comparison, we talk about some of the great talent that is also rising into broader expanded mandates as a result of this. Sometimes change feels like change, but actually, I would argue that this type of planful, strategic change is to ensure that we are creating this space and the runway for all of the great talent so that they do stay in the organization. And we do build that culture and that process that we follow over time. I'm going to turn the question a little bit now on you, Justin. And clearly with the same tenure, you and David might have similar answers to this. But what is the one event when you look back over the last 23 years that pops out as being one of the most important in your career to date?
JUSTIN FLOWERDAY: So for me, hands down, it's the GFC of 2008. And it's not one particular day or one particular month. But it was just a series of events that really, I think, allowed me to adopt an important part of my philosophy, which is trying to understand all of the human biases and the cognitive biases that go into our decision making. And I spent a bunch of years researching this very, very deeply. And it's allowed me, I think, to become a better investor.
And I think we've put in place some really good checks and balances in our team to make sure that we're always aware of our biases. When I think about what we do really, really well is we make really good logical decisions based on evidence. And I think part of that, for me, was understanding all of the different biases that went into everybody's decisions back in 2008 and how they either destroyed value or created value, and how we could learn from it.
INGRID MACINTOSH: Fascinating. As you said GFC, I was like, great financial crisis, and I remember the Monday morning that we all stood in the investment meeting as our CIO at the time said, they let Lehman fail. The things you didn't believe you could see were happening. And we stood there, saying, how do we pivot now?
David, same question to you. Looking back over all those years, what are the events that pop out as the most important in your career today?
DAVID SYKES: Yeah. And I think there isn't one for me. There are probably three or four. But the things that were most important for me was the .com boom, but more the bust. Also, the financial crisis. It wasn't just Lehman. It was Bear Stearns as well and some others.
And COVID, those were incredibly volatile, difficult times. We take our jobs incredibly serious. And I think sometimes we forget what a privilege it is to manage this amount of money. But it's also a serious responsibility. And equity markets don't react well to those three events that I named. And they were down a lot.
And I think the big lesson I had was the feeling I literally had in the pit of my stomach because things felt so, so bad. And what you learn over time and experience is to follow the process. And for me, one of the biggest tells in my career is when I feel that in the pit of my stomach, and I'm really, really, really concerned, that's usually the bottom. And in those three events, it was. Many, many sleepless nights. But if you stick to the process, you stick to what you're trying to achieve, you get through it. And the world goes on. And investment returns continue to compound. And I think, for me, that's the biggest lesson that I've learned over the last 25 years.
INGRID MACINTOSH: And those opportunities, when managed properly, and being able to trust a well-trained gut, are the ones that actually really help us set that value for our shareholders. Last question for each of you. What do you think about your team's future? What do you envision? Same? More of the same? Justin, over to you first.
JUSTIN FLOWERDAY: So, I'm going to reiterate my dedication to the Hippocratic oath. There's very little I'm planning on doing differently in the very early days. I think there's some small changes in processes that can help some of the ways we do things. I think there's some things we can do from a technology standpoint that are going to improve efficiencies. But really, this, for me, is about allowing really great people to continue to do a really great job and providing a platform for growth and allowing them to continue to grow in people's careers and grow assets for the business.
Investment performance is number one. And that'll continue to be number one. And I'm stepping into some big shoes. And I'm really looking forward to the challenge.
INGRID MACINTOSH: David, from your big shoes, as Justin is improving the processes on the team that you're handing over, what do you see for the future for your teams? New change? Development? Evolve?
DAVID SYKES: Yeah. So for my side of things, I think our number one competitive advantages are people. And I don't say that lightly. When we hire folks here, we want them to stay with us, not for two years, but for 20 years and for 30 years. And I think we've proven that that model works.
But in order for it to work, you have to attract really great people. You have to reward them. You have to develop them. You have to give them opportunities to grow and stretch.
And I think that's something that I want to continue across all of the teams. We've got 220-plus investment professionals who are dedicated. And I think we just do more of the same, which is let's make sure everyone is excited, they grow, they see opportunities, and they're committed to that investment excellence that I think it really is the foundation of our firm.
INGRID MACINTOSH: Wonderful. Gentlemen, thank you so much. That's a great place for us to wrap up. Thank you for joining me today. This has absolutely been a pleasure. And I'm looking forward to our collective next chapter.
JUSTIN FLOWERDAY: Thanks, Ingrid.
DAVID SYKES: Thanks, Ingrid.
INGRID MACINTOSH: OK. And for our listeners, as a great follow-up to the focus of this podcast, you can read our latest TDAM View's blog on the TDAM insights page. And in this edition, we're profiling Dave Sykes and discussing his journey to the CIO role, how he's going to continue to have this mark on public equities, and his love for all things Toronto Maple Leafs, I say tongue in cheek. Also make sure that you're getting the latest expertise and updates from TD Asset Management.
You can follow us on Twitter, @TDAM_Canada, and on LinkedIn at TD Asset Management. Everyone have a great day. And stay safe.
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