ANNOUNCER: Welcome to TDAM Talks, a TD Asset Management podcast. Join us for insights and analysis on current themes in capital markets from our thought leaders. From market insights to investment strategies, we'll help you navigate the complex landscape of investing.
Ingrid: I'm Ingrid MacIntosh, head of global sales enablement, marketing, and digital strategy here at TD Asset Management. And I am thrilled, on this podcast, to be joined by some of the sharpest minds in the asset management industry. Why I'm really excited today is this is the first podcast that we will publish to the popular platforms and streaming directories. With this milestone, we hope to reach a much wider audience and be available where you prefer to listen to podcasts.
So of course, on this inaugural platform podcast, I am pleased to have Dave Sykes, chief investment officer of TD Asset Management and one of our most popular guests and my friend. Welcome, David.
David: Thanks very much, Ingrid. Appreciate the invite.
Ingrid: So David, we've been doing this podcast for three, almost four years. And we have had you on as a guest several times. But for those out there who aren't as familiar with TD Asset Management who might be listening to us for the first time, let's give them a bit of a rundown on who we are and what some of our capabilities are.
David: Yeah, so at a very high level, TD Asset Management is in business for our clients. And so that sounds a bit trite, but I think it's really foundational to how we think about the firm. When we think about TD Asset Management and what it is we do, we really provide solutions for clients. Some clients are interested in capital preservation. Some are looking for income. Some want growth. Some are looking for asset allocation services. Some are looking for asset liability management. And so we've got an entire suite of solutions that we like to offer to our clients. Now, our client base is really divided up into two key areas. One is on the retail side, a very large retail fund business. We have mutual funds, ETFs, strategically managed portfolios, managing money for over 2 million Canadians. So it's quite a big operation. And on the institutional side, little-known fact, but we are the largest institutional pension fund manager in the country. We have a broad range of institutional clients, from large pensions, endowments, and foundations. And just to put some numbers around this, we do manage over $420 billion of assets for our clients. And roughly speaking, on the investment team, we have 300 investment professionals who come to work every day thinking about how can they add value for our clients.
Ingrid: Can you break that up a little bit and talk about how those teams are divided, the asset classes that we cover here at TDAM? Because I do believe that we really do have one of the broadest capability sets in the country.
David: Yeah, so just focusing in on our capabilities, years ago, it was fair to say that we had equities and fixed income. But I think today, we have an incredibly broad lineup of capabilities. And so let me just walk you through that. On our fixed income team, a huge, huge amount of AUM here. And it's really the cornerstone of TD Asset Management. I think about our fixed income capabilities both on the active side and the passive side. We've also added a team known as ALM, which is Asset Liability Management, which is really helping clients try and solve for the liabilities that they know are going to come in the future and matching those off with existing assets.
Ingrid: Keep those retirements, right?
David: Exactly right. And that's run by a gentleman named Michael Augustine, who's got a great team underneath him and has done a fantastic job. On the equity side, that's run by Justin Flowerday. Justin has a large team, plus or minus $80 billion. He has, again, a core Canadian equities. We have dividend growth strategies. We have US products on offer, also global. This is very much a fundamental, bottom-up research type of equity team-- and again, both institutional and retail capabilities. The nice part is that we have made an acquisition a few years ago to provide us with another capability, which is in the alternative space. That's our TD Greystone team. And when we talk about alternatives, what we really mean are real assets-- so things, as an example, like office towers and industrial buildings, retail shopping, or multi-unit residential. So think about institutional retail real estate. We also have an infrastructure team with assets, literally, globally. We've got a commercial mortgages team. We have a private debt team. We also have global real estate. And so the addition of that capability, along with fixed income, along with equities, has been a fantastic win for us and for our clients.
Ingrid: And when you think about it, these are all terrific ingredients. Can you talk a little bit about what it means to have a wealth asset allocation committee? And I know so many investors invest on their own and are typically picking securities or funds or ETFs. But can you talk about asset allocation and what that means?
David: Yeah, and that is such an important foundational point. There are obviously different ingredients in equities and fixed income and in alternatives. But it's really about putting those all together in the appropriate ways. And so that's really-- the number-one driver of portfolio returns is going to be the asset allocation decision. That, we have an internal team run by a gentleman named Michael Craig. We do institutional and retail asset allocation. But surrounding all of that, we have a committee that meets on a monthly basis. It's known as our wealth asset allocation committee. There are 11 committee members. The committee is chaired by myself. And we debate, at a very vigorous level, asset allocation decisions. And we think about broad asset classes such as fixed income, equities, alternatives, and cash. But we also drill down into sub-categories. And we do produce a monthly perspective to let clients know our latest thoughts and how we are thinking about asset allocation.
Ingrid: And how we're pulling those together in the managed solutions, which is really, by and large, how we serve those 2 million Canadian investors.
David: Absolutely.
Ingrid: Can you talk a little bit more about innovation in some of the new things that we're bringing on?
David: So we constantly look at our lineup, both our capabilities and our product lineup, to think about, how can we make portfolios more efficient? And so from a portfolio management, construction standpoint, we're always looking at risk-reward. What capability could we add to improve risk-adjusted returns? And the one that we're quite excited about is commodities. We have a strong belief that commodities do play a role in a diversified portfolio. Various studies would suggest, that we've done internally, somewhere in a 3% to 5% mix in an overall diversified asset allocation. And the benefit of commodities is really on several fronts. One, it tends to do well in periods of inflation. Two, it tends to have a negative or very low correlation with traditional asset classes. And we really think there's going to be value by adding commodities into a broader asset allocation mix. And we think that's going to really improve client outcomes. Now Ingrid, I've been doing a lot of talking. I have a question for you. I know that you have been doing TDAM Talks. Can you tell me more about them?
Ingrid: Yeah, so I've been hosting TDAM Talks on a monthly basis for almost four years. And I think, at TD Asset Management, beyond just delivering investment excellence to our clients, we really want to help make meaning of the markets and the trends that we're seeing and provide a value-added service to either our end clients, our institutional clients, and even the advisors who work with us and support our business practices. So we want to be touching on deep dive on investment themes. But we also want to provide context around current events and capital markets, perhaps a major election. How do people think about that? Anything that might be in those headlines, we want to be trying to tackle and support our clients in making meaning. We've had amazing guests from all over TDAM. You've talked about some of the heads of your business, Michael Augustine, talking about fixed income, Justin, talking about the equity markets. Jeff Tripp, who leads our alternatives business, has been in. But we've also more recently been covering really interesting trends in the marketplace. And again, our listeners will be able to find some of these podcasts. We've done one already on the impact of artificial intelligence and what that might mean, not just for the technology sector, but how we think about it across all sectors, and what it might mean for the economy. Similarly, we just had our health care analyst on, talking about why health care is a growth segment and how to think about it. So whether you're a do-it-yourself investor, whether you're invested in ETFs or mutual funds through your bank or financial plan, or whether you're an institution, we really believe that the content and the insights that we bring forward in a medium of podcasts is accessible and relatable to an incredibly broad audience.
David: And Ingrid the thing that I really appreciate about it is, too, the content, and also the delivery. It's a really nice, easy listen. And I find it very informative.
Ingrid: And to think I've got four kids in their 20s and 30s. And I don't know that they read anymore. But I do know that when they have their headphones in and they're not listening to me, they're typically learning, consuming, educating themselves through podcasts. I'm pretty sure I'm guiding them not to use TikTok as a source of investment information. But hey, you never know when we might be out there with an influencer. So I could be convinced. But it really is how do we reach as many people in a format and a language that makes the concept of investing accessible? Because as I always say, really, having knowledge gives you confidence. Having confidence allows you to act. And I think the sooner people act and make sure that they're thinking about investing, the better they'll be in the long run.
David: Absolutely. Ingrid, which podcasts, over time, have you enjoyed the most or found the most interesting?
Ingrid: I think some of the really special ones, like the AI, or things that are disruptive and I'm learning the moment. But also, I'm the executive sponsor for the TD Wealth for Women program, which is a program supporting investor education and empowerment, investing empowerment, and confidence among women. And we've had some great episodes, including one where I featured my grown daughter to talk about some of these themes. So again, anywhere that I believe that we are going above and beyond talking about the markets and bringing something value-added to our audience really makes me feel great. I love the year ahead podcasts. They're always super popular. Because we hold you accountable, Dave, to give a view on what's going to happen going forward. And then I must say, I do go back and listen to them a year later and just see how well we got that right. And as I said, again, trending topics, things that people are curious about, if we can frame that up for them, I think that's just fantastic. So again, now, I sort of held you out a little bit here as being all-seeing and all-knowing when we called you out to the year ahead. Let's talk a little bit about 2023. I know 2022 was a brutal year for markets. 2023, what are you seeing in the financial landscape right now? Let's give them a little taste of what they can expect.
David: Yeah, so looking at 2023, a bit of a rearview mirror, I think it's a very surprising year for a lot of investors. If you had told me at the beginning of the year that short-term interest rates would go up four or five times, both by the Bank of Canada and the Federal Reserve, and if you told me the yields at the long end would go up 75 to 100 basis points, and that earnings growth, year over year, would be negative, I would have told you that had been a pretty good year for fixed income and not such a great year for equities. In fact, quite the opposite-- if you look at universe fixed income, both the United States and Canada, it's positive, but a small positive. Maybe up 1%. Maybe up 2%. The big surprise has been on equities. I think we very much underappreciated the multiple expansion that we've seen. As I mentioned, earnings actually contracted this year. But the multiple expanded significantly. And the market's really, really been driven by these five, six, seven large names, the so-called magnificent seven, and just to an extraordinary height. The S&P is up something like 17%. The Nasdaq is up 35%. I think that's been the big, big surprise. Another nice surprise has been on the alternatives. I think with the move in interest rates, concerns about people heading back to the office, would we get office towers repopulated, it's been a nice surprise on the alternative side. We've seen pretty strong returns from our commercial mortgages. We've seen good, solid, mid-single digits from our global infrastructure fund. And on the real estate side, office space has held in better than we thought. And if you combine our office, industrial, multi-unit residential, and retail portfolio, it's somewhere in the range of up 2% for the year. So that's much better than we thought. It's been a good diversifier. But again, I think the big surprise has been the move in rates, and then what's happened in the equity market in the face of a declining earnings year.
Ingrid: Well, I think what's really interesting about what you just said is-- and I think people just believe that asset managers must have a better predictive capability on what the markets are going to bring. And you use language like big surprise. And I think that really is the power of the asset allocation committee is we can't ever know what is going to happen going forward. But how we adapt, how we take that information as it's coming in, and how we manage the portfolios accordingly as the landscape changes is really at the heart of what your teams do, right?
David: Yeah, and we have made some shifts in our asset allocation recommendations as the years progress. But I think one of the other fundamental foundations at TD Asset Management is to really think about, what is the nature of a quality asset? And whether that's in alternatives, whether that's in fixed income, whether it's in equities, it's this notion that, yes, asset allocation is the number-one driver of your returns. But we're not advocating making wide swings in your asset allocation. We're talking about tweaks on the margin. And if you combine a bottom-up, fundamental view in fixed income, in equity, and in alternatives, I think that's the right recipe. And so the one thing that we're always focused on is quality, quality, quality. And even with those changes this year in markets, I think the average investor, with a good, diversified portfolio across those three areas, has done not badly.
Ingrid: So that's a great look back at 2023. Now I'm going to get to pull the crystal ball out a little bit going into 2024. But for those of you who haven't listened to a podcast before, one of the favorite closes for it is I typically give my guest a lightning round. And what that means is I throw some words at them, and they do not know what's coming before I throw them at them. So here you go, David. Now, you've been with me on this show, so you know. But you just don't know what's coming. I'm going to throw a few at you. And tell me what you see going forward into 2024. The first one is interest rates.
David: I think it's very fair to say that there's a very, very large divide on rates. There's one camp that says rates go higher. There's one camp that says rates go lower. I think it's fair to say, for TD Asset Management, we're not in the camp where, currently, people think we're going to see three, four, five cuts early next year. We don't see rates going materially higher from here, but we do think they're going to stay higher for longer. And we might see one or two or three cuts in the back half of '24.
Ingrid: Housing-- and I don't mean yours, personally. I mean housing as a theme.
David: Housing, I think, has been a fascinating one. With the increase in interest rates that we've seen this year, you've seen a complete collapse in existing home sales in the United States. A 30-year fixed mortgage is now hovering above 7.25%. That's a big, big move. And in Canada, I think it's no secret that there's a huge chunk of mortgages that are going to come up for renewal in 2024 and 2025. That just has to hit into people's discretionary income. And so on the housing front, no doom or gloom predictions, but I would say the big move in housing is going to be about renewing mortgages at higher rates, which is going to have an impact on discretionary spending.
Ingrid: You led that right into my follow-up one, shift in consumption.
David: Again, you can't imagine a 200 or 300-basis-point increase in someone's mortgage rate not impacting their ability to spend at the mall, or to go to a restaurant, or to take that vacation. And so we do think you're going to see a shift away from more consumption-based discretionary spending and back to good old-fashioned staples. I think it just has to have an impact. And we've seen really, really significant rate increases in Canada from 25 basis points to 5%. And maybe one or two more, that's got to have an impact. And I think, just to remind people, monetary policy acts with a lag. I think it's very fair to say that we're going to see those effects in '24.
Ingrid: How about AI?
David: AI-- fascinating topic. A lot of stocks this year have been moved by the promise of AI. I would say a couple of things. One, AI is real. AI is a massive productivity enhancer. But I think a lot of companies have talked about using AI on the revenue side. We're less confident that AI can be used as a tool for the revenue of a company. But we're quite confident it can be used for cost reduction in a company. But again, like all new technologies, there's a lot of hype. We think the hype is real. But it's going to take two, three, four, five years to allow this to play out so you can see it in corporate margins and help companies' bottom lines.
Ingrid: Haven't been able to trip you up yet-- geopolitics, specifically, US-China and the war in Ukraine.
David: So US-China-- I'm glad to see the tensions have come down somewhat, but they still are high. I think the biggest impact here is on supply chains and reshoring. I think that's going to be a constant theme. And I think it's fair to say that there's one military-economic-- sorry, one military superpower. But there is a big competition between two economic powers. And I don't think we're going to see that calm down. Hopefully, the rhetoric calms down. But I certainly think there's going to be an arms race, if you will, toward technology and all the things that China wants to produce internally, especially around semiconductor chips. And on the war in Ukraine, what can I say? Just a horrible situation. And the sooner that ends, the better for all of us.
Ingrid: My last one for you-- 2024 is a US election year. What can we say about the US elections in 2024?
David: Oh boy, a lot to say about elections in '24. Everything we know, it looks like, today, we're going to have a Biden versus Trump race. Maybe that changes, maybe it doesn't. But I think the one thing that is starting to percolate in markets is that, regardless of the winner, if those are the two options, a lot of fiscal restraint has not been shown. And so I think it does lead to larger budget deficits, larger debt to GDP. And it'll be another impetus to think about slightly higher rates. Congressional Budget Office has done a lot of good work looking at budget deficits, looking at debt to GDP. And it's definitely going to be additive to longer-term rates. And so I think whether it's a Trump or Biden win-- and maybe there is another candidate. But I do think a lack of fiscal discipline will have an impact on markets.
Ingrid: I am going to let you wrap it up there. This has been a great conversation. Thank you so much for joining me today, Dave, on what will, for many listeners, be their first podcast asking us through their streaming platforms. It's been a true pleasure.
David: Thank you, Ingrid, very much.
Ingrid: And for our listeners, thank you for tuning in. Make sure that you follow us on Spotify, Apple, Google, and/or Amazon podcasts, or simply on the TD Asset Management Insights page, where you'll find our entire library of past podcasts. Your feedback is incredibly important to us. So if you have any questions or comments on the content shared today or you'd like to reach us, you can get us at td.tdamtalk@td.com. Thanks, everyone, and have a great day.
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