How Wealthsimple’s chief investment officer is preparing investors for a sudden turn in the markets

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Dave Nugent may oversee investments at a cutting-edge Canadian robo-adviser, but his investment strategy, by his own admission, is downright "boring." Mr. Nugent, the chief investment officer at Wealthsimple, sees a big part of his job as promoting a steady investment approach and tempering investors' expectations in good times and bad.

Wealthsimple manages more than $1-billion in exchange-traded fund assets and, in 2017, its growth portfolio (about 90-per-cent equities, 10-per-cent bonds) returned 12.8 per cent, while the conservative portfolio (35-per-cent equities, 65-per-cent bonds) increased by 3 per cent. These compare with a return of 6 per cent in 2017 for the S&P/TSX composite index, excluding the dividend yield.

The Globe and Mail spoke with Mr. Nugent recently about Wealthsimple's market strategy amid the recent market frenzy, and how it's preparing for the next major market downturn – something the robo-adviser has yet to experience since its launch in September, 2014.

Describe your investment strategy at Wealthsimple.

Our strategy comes down to managing client expectations and behaviours. When you're invested in a broad-based passive approach, when the markets go down, there's no saving us – we're going to be down with the broad market. There can be decisions made around the type of ETF methodology we use … but the lion's share of what we are trying to do is make investing approachable. At the end of the day, it's our belief that, given the fact that most of our clients are mostly young professionals, that if they stay the course and focus on things they can control around savings habits and planning ahead, they're going to get through those hard times … . Our investment strategy is to help clients make better choices when it comes to investing, through passive investing.

What concerns and questions are you hearing from investors today?

There are two major ones: The first is: 'When is the market going to crash?' And, the second is: 'My friend has made more money than me.' Those are two polarizing questions and concerns. The reality of where we are in the market is that we've seen reasonably strong performance coming out of the [last] recession. We've seen strong performance in parts of the market: The U.S. equity market has been a powerhouse coming out of the downturn. Obviously, if you've been exposed to a very overweight technology portfolio, marijuana portfolio or, given the fact that we have a young client base, cryptocurrency, you can see vastly different performance relative to a boring, broadly diversified ETF portfolio. It's not uncommon to hear of a young person who has made a triple-digit return because their portfolio is made up of crypto and marijuana [stocks]. That's always one to help investors put into context: How much risk are they taking with their money? [Our take] is that it's okay to invest in cryptocurrency as part of a broadly diversified strategy. It's a speculative asset class at this point in time. That's one people are having a hard time putting into perspective around why some investors are doing better than them.

What's your take on where the markets are heading in the short term?

For us, because we're passive, we still have the same strategic allocation as we did last year and the year before that. On fixed income, we're shorter duration, in light of the fact that interest rates have gone up a little bit and, chances are, they will continue to move up over time. It's not really relevant for where we think markets are going to go in 2018. We've had a good run and there are political events that could change the outcome of the market. We continue to encourage clients to set up monthly contributions and to be disciplined around adding to their portfolio as long as they have time horizon on their side. For the retired clients who need to live off of their portfolio, I tell them there's nothing wrong with locking in some gains and ensuring you have the capital available. Depending on the type of client, there's somewhat of a different message.

Do you see a correction on the horizon?

There will be a correction at some point. It's healthy for corrections to take place. It takes a lot of the excess and exuberance investors naturally have when you see markets go up in a straight line. Will it happen tomorrow, six months or a year from now? How deep will it be? Who knows?

Wealthsimple hasn't been through a prolonged market downturn yet. What's your plan for the portfolios when that happens?

We've seen some minor blips since we launched. For us, constant communication with clients is important to put context around what's happening. [With the portfolios] we have set up automated rebalancing and automated tax-loss harvesting [selling a security that has gone down in value to offset taxes]. In the event of a downturn, obviously, if you're diversified, your bond exposure should hold up reasonably well and your equity exposure is probably going to get hit. We have thresholds set up on all of our asset classes where we would be triggering rebalances. We would most likely be buying more equities because the percentages would have changed: Equities would be worth less and bonds would be worth more. Tax-loss harvesting is widely used by traditional advisers, typically at the end of the year. Ours is on a threshold basis in an automated way… . We are going to optimize for the things that we can control. We are not going to be making tactical decisions on overweighting bonds or moving to cash or anything like that.

What investments have you been buying and selling lately?

We are pretty boring. We made a small change in December on our short-term bond ETF. We added some maple bonds – Canadian-dollar-denominated bonds held by foreign institutions – for diversification. That's the only change we've made recently. We had a BMO Short Corporate Bond Index ETF and we switched to the iShares Core Canadian Short Term Corporate + Maple Bond Index ETF. It's a small change that adds a small, extra layer of diversification. The fees are also slightly lower.

Is there an investment you wish you bought?

Any of the sector ETFs that have really gone up. The marijuana sector is obviously one that has been a home run for investors. That's not really our strategy. We're not playing any specific sector. Hindsight is always 20-20. You can be a very wealthy person with hindsight.

This interview has been edited and condensed.