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Inside the Market RBC co-manager of $127-billion is bullish on U.S. stocks (less so on bonds and the TSX)

Portfolio manager Sarah Riopelle has some advice for investors worried about the ups and downs of the market: diversify and forget it – or, at the very least, look away.

“My mantra is diversification,” says Ms. Riopelle, vice-president and senior portfolio manager at RBC Global Asset Management. “I fundamentally believe in taking a diversified approach in your investments, whether it’s asset classes, regional equity weights or different kinds of bond allocations. To achieve smooth and consistent results, the best option is diversification.”

Ms. Riopelle with her team manages $127-billion in assets across various funds. Its RBC Select Balanced Portfolio, the firm’s largest balanced fund, has returned 8.2 per cent annualized over the past five years to April 30, gross of fees. The fund currently holds about 58 per cent equities, 40 per cent bonds and 2 per cent cash. Ms. Riopelle says the mix will go up and down depending on their market outlook. The Globe and Mail recently spoke to Ms. Riopelle about her take on the markets.

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What concerns are you are hearing from investors today?

The business cycle is maturing. Investors are really worried that we are heading toward a recession. We just came through that period of volatility in the fourth quarter and recovery in the first quarter. A lot of clients have higher-than-normal cash allocations. They’re on the sidelines, looking for a better entry point. We are likely late cycle and have been here for quite some time. We know from history that we can stay in this phase for a fairly long time. We aren’t forecasting an end to this, in the next year at least. Slowing global growth and increasing protectionism and trade [disputes] are also a concern.

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

We have been cautioning investors for some time to expect lower returns from investments and more volatility as the cycle matures. Equity market valuations were attractive at the beginning of the year after the sell-off in the fourth quarter but they’ve increased so far in 2019, especially in the U.S. We now deem them to be close to fair value. We think there is still room for equities to move higher from here but that will depend on the earnings coming through. We remain overweight equities in our asset mix, but we are below our peak exposure from earlier in the cycle. We are underweight on the bond side. We think bond yields will stay close to these levels in the near term, which will lead to low and possibly negative returns for bondholders.

How has your asset allocation changed recently?

Our most recent change was in March. We lowered our bond weight by 1 per cent and put it in cash. We were closing a tactical trade we made in October, 2018: At that time, the [benchmark] U.S. 10-year Treasury bond was about 3.2 per cent. We thought that was a good time to add to our bond allocation. We added 1 per cent to bonds back then. We then took the opportunity in March to close that position when yield levels were at 2.5 per cent.

We are overweight U.S. equities, which has been a good place to be. Despite where valuations are in the U.S. market, we think that our best opportunities continue to be there, at least over the next 12 months. We are also overweight emerging market equities, which have underperformed over all, but that has been offset by the performance of our individual emerging market strategies. We have been overweight emerging markets for quite some time. Those markets are becoming more mature and are shifting more toward consumer-led economies, which generally produce higher growth. We think that economic growth in emerging markets will exceed developed market growth, so there’s an opportunity for improvement there.

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We aren’t as positive on Canada as we are on some of the other economies. There are concerns around the housing market, that we are an energy-led market [and given the forecast for oil prices] and also competitiveness. There are concerns where the Canadian dollar is relative to the U.S. dollar. There are reasons to be cautious about Canada.

Among our 55 per cent equities mix, our neutral position, which is how we build the fund, is 20 per cent U.S., 19 per cent Canada, 12 per cent international and 4 per cent emerging markets. Our current mix, based on our current outlook, is a tilt toward international and emerging markets given attractive valuations in these regions.

Any assets you wish you got into or sold too soon?

With the benefit of hindsight, we began reducing our equity weight too early in the cycle. Our peak equity weight was 61 per cent in the fall of 2016, and we have been gradually reducing it since then as the business cycle has matured. We began that process earlier than we should have, given that equity markets have reached new highs recently. While we are still overweight stocks, I would have preferred that higher weight for longer. The business cycle has lasted longer than we expected.

This interview has been edited and condensed.

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