FOCUS 2026: Allocation priorities: Building resilient portfolios

Ilan Kolet: [00:00:01] Fantastic. Let me be one of the first people to welcome everyone in the room to lovely and warm Scottsdale. I almost said Scottsdale, Ontario. Scottsdale, Arizona. Thank you everyone for coming. We have a tremendous amount of questions to get to on a wide range of subjects with my colleagues and friends but let's start with some of the top-level questions that we are getting. Global trade war, regime change in Venezuela, Iran war, oil over $100, they sent Katy Perry to space and brought her back, a lot of volatile headlines. DW, how should we be thinking about this at a 10,000 foot level?

David Wolf: [00:00:50] That Katy Perry quip, wasn't that like a thousand social media cycles ago?

Ilan Kolet: [00:00:55] Many, many swipes ago.

David Wolf: [00:00:57] I don't know what the current one is, it probably has to do with frogs.

Ilan Kolet [00:01:00] Possibly.

David Wolf: [00:01:01] Anyway, good morning everyone both here in the room and online. It's a scary world. The headlines are fast and furious. When we step back, though, I think there are really only two things that matter most to markets that we're spending much of our time thinking about, working with our research department to understand the investment consequences .The two are AI and the Iran war. Where do you want to start?

Ilan Kolet: [00:01:30] Let's start with Iran, which really sounds like a misspelling of my own name but anyway, let's with Iran. Again, it feels like it's just a much more volatile type of regime. Globalization feels like it's done a U-turn. Fed policy seems much more haphazard, or I should say policymaking in general feels much more haphazard. How should we be thinking about the Iran shock? How are you thinking about it?

David Tulk: [00:02:01] I think when we look at this shock and we lump it into the wider basket of geopolitical uncertainty, first thing I want to try to articulate, really, is just chasing the headlines and trying to time the market with this type of TACO tweet-driven universe is virtually impossible. We spend a lot of time listening to experts within Fidelity, the world around. There's an emergent class of retired US army generals and admirals who offer their services to try to provide the understanding. The conclusion really is there is no clear answer as to how these events will proceed from here. What we want to do is we want to take a bit of a step back and just try to understand the deeper fundamentals. I think that's always good advice to investors everywhere.

[00:02:50] When we think a little bit about what's going on in Iran, we look at what's happened in Venezuela and look at the trade war, I think that's emblematic of a really important theme with regards to the United States. What we have seen, again, is the United States retreating from its unipolar role. It basically is the centre of the global economy, the centre of  financial markets, we're transitioning to something that I think people haven't really figured out yet but describing it at a minimum as a multi-polar world where there's different groups that are fighting for agency and influence. That's the type of economic market backdrop that makes us be very sensitive to changing correlations, changing relationships between different types of asset classes which, ultimately, underpins one of the big views that we have.

[00:03:43] I think as the US retreats we want to be very sensitive as a foreign investor, namely Canadians, in worrying about the direction of the US dollar. There's a lot to unpack here. This is a theme that we've spoken about a lot. I think the US pulling back from the rest of the world leaves that risk to the currency where we want to be underweight US dollars and be very sensitive to understanding how that influences a lot of the other themes that we want to invest around.

Ilan Kolet: [00:04:10] That's interesting. When you talk about that multi-polar world, as a dad to two teenage daughters that feels like my house at times, that multi-polar world. DW, how do we invest in this? One of the questions we used to get all the time, is the 60/40 dead? This is sort of how I think about this multi-polar word in the context of the 60/40 that all of us have come to know and love and rely on. How should we be thinking that 60/40? How can we build into those portfolios resilience and diversification in this world that definitely feels more volatile?

David Wolf: [00:04:49] As DT mentioned there are sort of currency consequences and other consequences but I think that the biggest thing for us as asset allocators is a more chopped up world is a world that's going to be more prone to inflationary shocks. You think for 30 years the world got more integrated, it got more efficient, it got less costly. That's something that will tend to put downward pressure on inflation. Corresponding to that 60/40 works pretty well in that world because stocks and bonds are negatively correlated so when you do have drawdowns when you get a growth scare bonds tend to do relatively well. Now all of that is going in reverse. DT mentioned the correlation. What that means is bonds are likely no longer going to be hedging your stocks. We saw that in 2022 with the inflationary shock, we seem to be seeing it again.

[00:05:43] That means for us as asset allocators we want to think about diversification differently, more creatively and one of the places that leads us to is commodities. Commodities are something that we've been buying into for some time, our gold position, in particular, which has helped us a lot over the past year, year and a half or so. A way to think about it is inflation is obviously not good for fixed income and it tends to be not good for fixed income at the same time as it's not good for equities, so you need to own something else and the something else you want to be a real hard asset and, ideally, you want it to be something that is actually part of what's inflating. Again, that's led us to commodities.

Ilan Kolet: [00:06:30] It's interesting because I think for so long we just took for granted the efficiency of the 60/40 portfolio construct. I think one of the edges that we have is, you know, of course we're picking every underlying manager, we're picking what we lean into and what we lean out of, but also from an out of benchmark position we can also choose the asset classes that we're choosing to add there as well. On the inflation side, I can't help but nerd out on inflation for just a little bit. That's probably not a surprise. I think everyone understands why inflation is damaging for a society. It's just a very punitive tax on the folks that can afford it the least, when food inflates, when transportation inflates and housing inflates. I think for us as investors, for you as investors and advisors, we really should be thinking about things through the context of what it does to that correlation, eroding that inverse correlation between stocks and bonds, which is something we've written on at length. We'll have a QR code at the end of this presentation to our latest discussion around that. We want commodities in the portfolios, we've discussed that. How can we get exposure, we've discussed that as well. One of the natural questions is if we want commodities exposure, DT, can we get that regionally? Hint, hint.

David Tulk: [00:07:57] Hint, hint. Yes, this is the most innovative, exciting thing to try to bring to everyone's attention. It follows a long period of an evolving theme for us. We are now for the first time in more than a decade overweight Canadian equities and overweight the Canadian dollar. The motivation for that is, again, partly driven by the notion of the world becoming more fragmented and that rush for resources that does drive the commodity story. Canada, as we know, does have that very deep pool both within the economy but also within the TSX of a commodity lean. Just going back to geopolitics, I think you can imagine a scenario that at some point the conflict in Iran goes away but you would be also prudent to think that there's probably a lingering geopolitical risk premium priced into oil and the world will look for more sources of reliable resource industries.

[00:09:00] Canada scores very highly, I think, on that list. You can imagine that investors overseas, even within Canada are going to now have that renewed incentive to invest within that industry. That's a theme that we really want to reflect in our positioning. The notion of that commodity piece, and there's a lot more that we'll unpack along those lines, but that gives us the motivation after a long period of being very concerned about Canada to now display some latent optimism where in quarters past we had trimmed the underweight and now we're comfortable expressing an outright overweight.

Ilan Kolet: [00:09:34]  DW, I just want to dig into this a little bit. Take us back, I don't know, 2013. You start at Fidelity, one of the very initial and first decisions you make when these funds receive their tactical flexibility or those capabilities is leaning away from Canada, leaning into the US. Take us back to the thinking around then and how we, again, both from a currency perspective and an asset allocation perspective, and then take us to the motivation that DT sort of brought us to today in terms of the beta or the sensitivity to commodities. I'll also mention get your questions in, we're happy to take any questions. We get them on screen. I've asked the folks that screen the questions to not screen any questions so be as creative as you'd like. DW, take us back, 2013, you start at Fidelity, that initial asset allocation decision and how it sort of evolved and what it's meant for the funds as well.

David Wolf: [00:10:34] Sorry, you think I can remember 13 years ago?

Ilan Kolet: [00:10:38] It's getting harder and harder.

David Wolf: [00:10:42] At that point the Canadian dollar was at parity which was relatively overvalued in our view. I think more importantly the Canadian economy at that point, and I think it became clearer over the years, that it was kind of on a road to nowhere.

Ilan Kolet: [00:10:59] Don't sugarcoat it.

David Wolf: [00:11:04] We were driving growth by basically borrowing a bunch of money, building houses and selling them to each other, which is fundamentally unproductive. That carried growth through the 2010s and up until relatively recently. It's just not the kind of thing ... you're basically eating yourself as an economy because housing is not a productive asset and you're borrowing a lot from the future in terms of the debt that consumers in particular were taking on. All of that came together to have the view that we want to be underweight Canadian assets, underweight Canadian dollars. We had that in place with the currency, for example, all the way down from parity to 70 cents. It was a great trade for our clients, for our funds because what it meant was our foreign holdings tended to appreciate underlyingly in those foreign currencies.

[00:12:00] Things have changed, and we'll unpack that a little bit, but just to say even with the domestic economy still struggling, and that's something that we should talk about a little, as DT alluded to the market is not the economy. If you just look at materials and energy sectors in the major markets, Canada's almost 40%, EAFE is 11, EM is 10, US is 6. So if commodities are working Canada's going to work pretty much regardless of what's happening domestically.

Ilan Kolet: [00:12:30] No, that's a really good ... this is a very, very critical point, I think, for everyone in this room to hear and understand and listen to ... the market is not necessarily the economy. With 40% of the Canadian market being resource sector, energy extractors, that is that sensitivity to commodities and that goes a long way in explaining the overweight. I am going to push back and I'm going to do it on stage which gives me a little bit of cover. That's because in the client conversations that I've had with many of you in the room coast to coast, I mean, there's a lot of familiar faces in the crowd, there is a lot of skepticism, and I think well-placed skepticism, around the optimism that we have in Canada. It feels very Canadian to feel skeptical of Canada. I'll tell you why that skepticism exists and again, I think it's well-founded.

[00:13:25] We have an unemployment rate of near 7%. We have an unemployment rate for 20 to 24-year-olds that's 10%. We haven't had much growth, much productivity. Food prices are up 30%. Wages haven't kept up. My back kind of hurts. Anyway, there's a lot of these issues that when I'm speaking to advisors coast to coast you can sort of read the room that they're throwing a flag. I understand the beta and the sensitivity to the commodity sector but how should we be thinking about the economy? It doesn't feel great.

David Tulk: [00:14:05] I think you made the point that the economy is not the market and that's certainly true. There's also the notion that the market can move well in advance of developments in the economy as well. We want to try to take that forward-looking perspective when it comes to investing the funds. Just a comment on the economy. I take all your points, my back is also feeling a little sore as well, the notion that things don't feel particularly great now but growth happens on the margin. A big part of our outlook is that things don't have to feel great today but we just have to get the sense that things are improving so that tomorrow will feel a little bit less bad than it does today. When we think a little about some of the fundamental headwinds that Canada has faced, DW outlined a lot of the housing story, that, again, is pretty daunting from where we sit today. As a rate of change we are starting to see an improvement.

[00:14:59] You can look at the cycle of mortgage renewals from those that were originated in the dark days of the pandemic at exceptionally low rates, those are starting to come due. Yes, households are facing higher borrowing costs but from this point forward that becomes a smaller headwind. We're also noting that there's been a lot of supply issues that have really stopped a lot of the construction in housing. That is something that we'll weigh on the short term but you can imagine a scenario a few years down the road where you end up with a dearth of supply where construction now has to really catch up. That can be a very positive tailwind into economic growth. That fundamental story on housing is starting to get incrementally better from where we go from here.

[00:15:45] The second big issue as it relates to Canada's struggles is really just a fundamental lack of productivity. We have spent a lot of time over the years talking about this, we've been thinking about it, but there is a sense, at least from a regulatory perspective, when we look at government policy we are starting to get maybe a government that recognizes some of these challenges. Again, you can't fix productivity overnight but as a marginal rate of change where you're getting policies that are more favourably inclined or better received by industry that can also, again, just motivate a little bit more in the way of spending, a little bit more in a way of investment to try to remedy some of these longstanding challenges.

[00:16:26] I'll just mention quickly the trade dynamic. We are in the midst of renegotiating the CUSMA agreement. It's going to inevitably be very messy, a lot of tweet-driven headlines but I think at some point if we get to a world where at least there's a little bit more certainty as to how the rules of the game will exist that can allow companies to feel, again, a little bit more comfortable on the margin to invest and to spend and then also look further afield. Again, you're seeing a marginal diversification of trade into other regions. Yes, you can't fully detach yourself from the United States but with the idea that growth can happen on the margin that agreement with other countries starting to divert trade a little bit can be very beneficial.

Ilan Kolet: [00:17:09] DW, are we seeing global institutional investors sort of change sentiment? How powerful could that be?

David Wolf: [00:17:17] Sentiment is actually really important here. You mentioned the skepticism. Frankly, as an investor we love to see that skepticism. It's a key pillar of our process that, generally speaking, when things feel great and look great and everyone is there you actually want to be very careful when folks are skeptical of a story of an investment. I quite understand why possibly everyone in this room, and certainly a lot of Canadians, are skeptical that things are going to get better because they haven't for a long time. The best trades are, as DT alluded to, when things are bad but going to get less bad and no one is there.

[00:18:01] A couple of insights that I'll offer. One, we manage the Canadian multi-asset funds. We're part of the broader group in Boston that manages our North American multi-asset funds. It's a pool of capital of close to $2 trillion dollars. That's mostly US, obviously. Our US colleagues I can tell you are almost never interested in Canada. They're starting to get interested in canada. The other thing I'll mention is there's a skepticism not only with respect to the economy but with respect to policy. We had 10 years, the Trudeau government that seemed, shall we say, not inclined to do the kinds of things that are going to really drive productivity, drive investment, resource extraction seemed to be a particular sore spot. The current Prime Minister gets it. How successful he'll be, we'll see.

[00:19:01] As you know, I worked for him when he was governor of the Bank of Canada and he really understands what's needed to drive investment and I think we've seen that manifested. Even recently a global summit on Canadian investment, we had Shell buying our resources. Shell tends to be one of the kind of wilder companies in things, they pulled out of Canada twice, they're coming back in. How successful we will all be in terms of getting resource investment up in Canada the way it ought to be, we'll see. The possibility, the path to better exists. Again, when sentiment is negative and the path to better exists when it didn't in the past is actually a great setup as far as getting into a market.

Ilan Kolet: [00:19:50] Absolutely. I think buying back Canada last year and now being overweight Canada, I mean, it's funny, in January I did a dinner in Vancouver, many folks in this room might have been there, we had about 140, 150 people in the room. I sort of did an informal poll of what was the best performing asset class in 2025 out of Canada, the US, Europe and EM. And almost nobody in the room knew or guessed that Canada was the best performing asset class in Canadian dollar terms, with Canada doing 30% last year. Again, it feels very Canadian to not believe how well Canada did and I think maybe that is changing.

[00:20:30] My other thought is that line, things moving from very bad to less bad, that can be quite powerful. As asset allocators we have to be thinking about where things are heading not where things are right now. Things moving very bad from bad to less bad, that's a great line but it also explains why none of us are in sales, I think. What does all of this mean for how we are positioned around the Canadian dollar in our portfolios and how that's evolved over, call it, the last sort of 18 months?

David Tulk: [00:21:01] I think when it comes to the Canadian dollar, I mentioned we're overweight now and that's, again, reflecting some of the nascent optimism that we've outlined when it comes Canada. As I mentioned also off the top, it's a greater reflection of the concern we have around the US dollar. If you think of the currency pair, Canadian dollar versus the US dollar, there's a very clear desire on the part of the US administration to try to weaken the US dollar. I think that's, again, very much driven by, at least superficially, the desire to bring some manufacturing activity back into the United States. That's a very open question as to whether that will be successful but it does, again, try to underscore the desire to weaken the currency.

[00:21:46] I think more fundamentally, and this is something we've seen a great deal with the United States in recent years, is that their debt and deficit profile from the government perspective is exceptionally unstable. That's something I think the administration understands. When we do a study of how countries have historically been able to get out from these debt burdens, one of the ways is ultimately to punish foreign investors. That's us in Canada. Again, a weaker currency is the vehicle in which way that the US government can get out partly from its debt burdens. Again, from where we sit it's tied into the view on the US dollar that can be very supportive for the Canadian dollar.

Ilan Kolet: [00:22:29] DW, I want to dig into the Canadian dollar just a little bit before we move on. That's a pretty big positioning change for us in the portfolios. As we had discussed on Canadian assets we had been underweight the Canadian dollar for a very long time and we are now, as one of you mentioned, I think, at the start, outright overweight the Canadian dollar. To put this in perspective for folks in the room, in the first five and a half months of last year ... we're managing about $100 billion in multi-asset class fund of funds for Canadian investors ... in the first 5 months of the last year $47 billion of funds, futures and ETFs were traded. There's a lot that happens underneath the hood in the funds, switching out of Insights into Insights Currency Neutral, take us through the actual positioning of where we were at the start of last year and where we are today, and maybe touch on stiffing your creditors.

David Wolf: [00:23:22] At the beginning of last year we would have been about 20% overweight US dollars. We reduced that to basically zero in fairly short order. Now, as you mentioned, we're overweight. I mean, the view, and this applies to the US dollar, it also applies to US Treasury market which we sold out of last year entirely in terms of direct holdings in the funds, what we identified pretty quickly is this new administration seemed to be intent on eroding all of the deep fundamental advantages of the United States which made it not only the largest but the most solid, so to speak, market in the world financially. Those are things like the rule of law, property rights, strong institutions, stable governance. As it's evolved it's become increasingly clear, as DT alluded to, that foreign investors were likely to be punished.

[00:24:27] Think about if you wanted to screw your creditors as a country what do you do? Well, you borrow tons of money on top of already borrowing tons of money which stokes inflation and gives you the incentive to inflate out of it. You put pressure on your central bank to actually pay very little interest on that and cut rates. Then you antagonize your allies who provide a lot of the funding for those deficits. In that context if the US is intent on stiffing its creditors and punishing those that lend it money, we don't want to to lend them money. That's been a big piece of not only the currency movement but the movement that we've made in fixed income markets away from the US. A lot that has come back to Canada but a lot of it as well in global fixed income markets including in emerging markets.

Ilan Kolet: [00:25:25] I actually head to D.C. tomorrow with meetings with the Council for Economic Advisers at the White House on Wednesday so I'll have an update on what I would call the administration's view.

David Wolf: [00:25:37] Yeah, don't use the screwing your creditor...

Ilan Kolet: [00:25:40] I will avoid using the term screwing your creditors, probably. Let's touch on gold. One of the motivations for why we own gold has to be dollar debasement. Last year gold performed exceptionally well. It took the shine away from many other asset classes. See what I did there?

David Wolf: [00:25:58] Yeah.

Ilan Kolet: [00:26:02] Let's quickly touch on gold and then I want to pivot to another topic.

David Tulk: [00:26:07] Gold, obviously, had an exceptionally strong performance last year. Obviously, it's a nice asset to have and we had held it for a very long time as an out-of-benchmark allocation. The challenge, though, with gold is that it tends to be very fickle in its correlation. There was a long period of time where it was most closely correlated with real interest rates and that was a pretty sensible driver, then we hit 2022 and that correlation broke down in spectacular fashion, what's replaced it is an evolution of different views in terms of central bank purchasing gold dollar debasement, other investors looking for a hedge against fiat currencies more generally. That just underscores, I think, that volatility that's inherent in gold on its own.

[00:26:58] I think when we look at it as part of a wider portfolio it does serve that purpose ... I think you talked about certainly off the top in terms of diversifying your equity risk and having something that's uncorrelated to your standard risk driver within a balanced fund. We still want to have that as an important allocation. It's part of thinking about the evolving nature of a 60/40 fund to have gold as part of that wider commodity basket to make sure that we are getting the right type of uncorrelated exposure to the equity risk that will drive the majority of the returns through time.

Ilan Kolet: [00:27:33] DW, we've talked a lot about some scary things, we talked about inflation, why we want to own commodities in Canada, sort of take us through the risks as well as how we are currently positioned right now, and then I do want to pivot to a different topic.

David Wolf: [00:27:49] Let me be very brief with the risk. We've talked a lot about the sort of scary Iran stuff, we want to get to the thing that equity markets seem to actually care about, which is AI and not so much Iran, which is sort of interesting in and of itself. The risks around commodities in Canada, a commodity bust would be bad but a big commodity boom that gets oil to  $150 a barrel, that kills the global economy, is not great either. There are CUSMA risks in terms of that renegotiation. I think, as I mentioned, the really interesting aspect is that you have this chopping up of the world, you have all of these scary headlines and equity markets really don't care. I think that has to do with the fact that the almost unique focus in equities has been AI and what these hyperscalers are doing with trillions of dollars of capital investment.

[00:28:49] The way that we think about it, you can paint all kinds of different pictures with respect to AI's impact on the economy and on society. The AI maximalists will say this is going to be revolutionary, it's going to be ushering in a golden age of productivity, of economic growth. On the other side there is a paper floating around about AI is going to take everyone's job, crash the economy and we're all going to end up in camps with universal basic income. There are questions about is all of this CapEx actually going to earn a return and ultimately maybe not and maybe not so good for those companies, or maybe it actually does earn return but just not for the companies that are doing it the winners may be very different from the winners. The perspective that we've taken is all of this is imponderable. We don't know, I don't think anyone can know with high conviction what AI will ultimately do to the economy and to society.

Ilan Kolet: [00:29:54] People are afraid to say I don't know.

David Wolf: [00:29:57] I admit we want to act on things that we know or we think we know.

Ilan Kolet: [00:30:03] What's our guidance then?

David Wolf: [00:30:06] Just to finish the thought, we want to act on what we think we know. This is AI or anything else. We want to protect ourselves from the things that we can't know. That's one of the stories behind the diversification and the commodities, et cetera, is not knowing. With respect to AI and what we do think we do know, DT, I don't know if you want to follow on on that.

Ilan Kolet: [00:30:32] I'd be curious on your follow on and also if you can kind of give us a little bit of a tour around positioning. We do have a positioning slide if we can pop that up as well. Maybe what we know and what we don't know from an analyst perspective and then how we're positioned.

David Tulk: [00:30:44] How about I just run through AI and you can touch on positioning? On AI, I mean, again, it's something where we want to be very humble in what we know. I think this is where we leverage Fidelity more generally and spend a lot of time talking to our building block managers, talk to the analysts that support them, they're really the best position to understand the evolving technology. Sure, I can use ChatGPT to find the best coffee in Scottsdale and otherwise plan renewal of car insurance and things like that but that's only just really scratching the surface of this technology. That's where we want to understand what the analysts think.

[00:31:22] One of the things that I think underpin the market and underpin our relatively optimistic view more generally is that from an earnings perspective our analysts are still ahead of the street. That has proven to be a reliable guidance of future returns. Looking at that relationship and challenging their views and speaking to them quite frequently give us the confidence that we still want that part of the portfolio to be tied into that theme. We talked a lot about the concern we have with the United States but digging into the nuance of that AI theme represented in the different managers that we use as building blocks they're the ones that can bring these ideas into the portfolio and we want to make sure that they have the resources available to them to do that.

Ilan Kolet: [00:32:05] Before we touch on positioning, it's so powerful, it's so unbelievably powerful that bottom-up building block that we use in how we manage the portfolios. Again, I think to the meetings that we had last week where we sit around a table with our underlying managers with $400 worth of Domino's Pizza and just think about every topic and every sub-sector that we can, which goes a long way in explaining how we're positioned here. I'd like one of you to kind of take us at a high level through some of the main points from this positioning slide. What we're looking at here is the positioning in the Global Balanced portfolio. It's a 60/40 portfolio. I'll let these guys describe it but this is where we're leaning in and where we are leaning out, which we've covered a lot of. We'll touch on this and then we'll move on from it.

David Wolf: [00:33:01] Maybe I'll make a couple of points. One, we've talked about moving overweight Canada. You can see that all the way on the left and all the away on the right in terms of our equity and currency positioning. We're still okay being overweight equities, to David's point, so long as the people that we work with that know the companies best say they're going to be making a lot more money than before and a lot more money than the street thinks, the market is not going down. That may change and then we will pivot but the market's not going down so we still want to be there. We want to be in equities, we're shying away from bonds, and we have both commodities and gold and the alternatives.

[00:33:44] Just to the earlier point with respect to gold, you can see there that position's actually come down. We are tactical with it so when gold moonshot in January, February we sold a fair bit. We've actually been buying some back more recently. Let me mention the other reason why we're still comfortable being overweight equities. It's kind of one of the few places where the AI theme and the Iran war theme come together. That's the Fed. You can imagine if the Fed were wanting to react to higher inflation by jacking up rates, tightening financial conditions, the equity market is going to pivot from being really enthusiastic about AI to worrying about the fact that rates have doubled. I don't think that's going to happen. The Fed is, frankly, more likely to cut rates still than hike rates, in my view, because that's what, at least I think, Kevin Warsh is being put there to do. He's going to come up with some sort of justification.

[00:34:51] Look, monetary policy, I was at the Bank of Canada for a number of years, it's always a judgement call. You can always justify almost anything. Whether it's the deflationary impact of AI, whether it's the fact that the job market is not as good as it could be, whether it's we want to shrink the balance sheet so we're selling long bonds so we have to cut rates to offset that tightening. I am strongly of the view that rates are going to be flat to lower at the short end of the US curve and that takes away a potential risk factor for equities. As you can see there we're not over our skis, we're keeping it fairly limited but we're still happy to be overweight equities and making sure we have capital with basically everyone you're going to see here today, Patrice and Darren coming up next, with others who are going to be on the stage, with folks who aren't here like Mark Schmehl who has done great as everyone knows, and give them the opportunity to engage the market and pick the winners which is something that will help all of our shareholders.

Ilan Kolet: [00:35:56] Really good point. I always feel like we talk about a lot of scary things on stage but we are actually optimistic. We're leaning in right now and not over our skis, as you mentioned. DW, one of the things that you mentioned that again I get a lot of questions on, DT, I wouldn't mind picking your brain on this, is political interference with monetary policy. Is this an overblown risk? I mean, between the three of us there's about 20 years combined experience at the Bank of Canada. DT and I actually started at the bank together. The current governor, Tiff Macklem, hired us to the bank, I don't know, 25 years ago. I got to know DW when he joined the Bank of Canada as an advisor. How risky and how slippery of a slope is political interference with the Federal Reserve? Is this an issue that we should be concerned about in Canada or is this really a US issue?

David Tulk: [00:36:53] It seems there's a lot of pressure on the Fed, certainly, from the government to try to lower rates. I think we understand a lot of the motivation behind there. Tolerating a higher level of inflation more generally in your economy is another great way to get out from your debt burden if you are an overlevered government. I think that's the strong motivation. Kevin Warsh out of the full spectrum of candidates might not have been the most political choice so maybe the risk around Fed independence is a little less than if it was someone that was an obvious political appointee but we have to also remind ourselves this is a very transactional US government right now so it stands to reason that there will be some pressure. DW outlined some of the things that the Fed could lean on to motivate a rate cut within the US. I think that's an interesting development and it stands, I think, really in stark contrast to Canada.

[00:37:51] I think Canada is a much more credible independent central bank than the Fed today. There's also the notion of the type of shocks that the Bank of Canada will respond to in contrast to the Fed. If you think of a commodity price boom or a rally and that geopolitical risk premium being priced into commodities, that's a positive terms of trade shock for Canada. That is actually more supportive to GDP in aggregate. If you're the Bank of Canada you look at that type of environment and you're actually inclined on the margin to be more focused on maybe raising interest rates to respond to stronger economic activity. That to me is a very interesting dynamic where on one hand you have the Bank of Canada potentially raising rates at some point, most likely much later in the year, and the Federal Reserve may be moving in the opposite direction. That widening in the interest rate differential can also be very supportive for the Canadian dollar. That's another tactical checkmark that you can look at to motivate that overweight we have into the Canadian dollar. That is part of the story that I think hinges on central banks.

Ilan Kolet: [00:39:02] I think it's interesting for us. For us we are thinking about the path of monetary policy, the direction of rates not just from sort of a BNN punditry type of perspective. This has real implications in terms of how we are positioned in the portfolio. DW, to put a finer point on it, the direction of rate in Canada, we believe, is likely higher. Am I correct to say that? Are we correct to that here? Yes. It's a little bit more uncertain in the US although with Kevin Warsh coming in we believe the direction is likely lower.

David Wolf: [00:39:35] As David said, rates higher in Canada, rates lower in the US, improving interest rate differential for the Canadian dollar will tend to be Canadian dollar up. The other element, you know, we've talked a fair bit about the currency that I think is important here is, you know, we don't think in terms of forecasts. I've been doing this almost 30 years and I know it's essentially a fool's errand to try to forecast a level for the currency and a timing for the currency. We think more in probabilities and asymmetries and what we really like when there's relatively little downside and there's a lot of upside. I think that's true of the currency at this stage. We're right now 73 cents-ish. This is not an environment with a weaker US dollar and higher commodity prices that we're going to go anywhere near the all-time lows which were 62 cents-ish.

[00:40:29] It is an environment that in the limit could look like what we had in the mid-2000s when the Canadian dollar got up to parity. There's an asymmetry there which is could it go down some? Yeah, but probably not that much. Could it go up some? We think so and actually maybe a lot. It's one of the reasons why we're willing to have this overweight because that asymmetry, the downside versus the upside, even if we can't forecast the exact level and trend, is pretty favourable.

Ilan Kolet: [00:41:00] People forget, too, if we had oil at $100 10, 15 years ago when the link between the Canadian dollar and oil prices was a strong link we'd probably be sitting in the high 90s or par right now. We only have a few minutes left. DW, let me pass it to you for a few closing thoughts. Again, I just want to thank everyone. The QR code that you're seeing on screen is our latest paper. Please read it and criticize it and send your comments to your wholesaler. DW.

David Wolf: [00:41:26] Don't criticize it too much.

Ilan Kolet: [00:41:28] No, no, not too much.

David Wolf: [00:41:31] Just to close, I want to zoom back very big picture about the things that we've been talking about. As I mentioned at the outset and as we've talked about in the session there are two big themes, AI and the Iran war. As I've mentioned they kind of come together from an investment point of view in the Fed and monetary policy. We think that the Fed is not going to react to higher inflation, is going to remain relatively supportive. The other place that they come together in a very big picture view is both AI and the Iran war and the broader geopolitical parsing up and higher inflation that comes with it are good for capital and bad for people. If you think about AI may take your job and everything is more expensive and you have more income, that's really bad for people, which is unfortunate because we're people.

Ilan Kolet: [00:42:30] Still.

David Wolf: [00:42:30] Still. What that means is in the way that we think about it, and this is relevant not only for the way that we think about the world as investors, and that hopefully you do too, but also your clients and the population as a whole, which is to say that if the way the world is going is good for capital and bad for labour then you're best off owning a piece of that capital. If you don't own a piece of that capital in the very, very big picture trends the way the world is evolving you're going to be more vulnerable. Maybe that's a slight ad for if you want a bigger piece of capital do it with us

Ilan Kolet: [00:43:11] Absolutely.

David Wolf: [00:43:12] More generally it's sort of a way of zooming out and seeing the big picture here. The world is different. We've talked about the world being different. We've talked about having to be different in terms of asset allocation. Even the way we think about our lives and how we want to allocate ourselves in terms of labour and capital, I think it's worth reflecting on that as well.

Ilan Kolet: [00:43:34] Absolutely. When I'm on the road I often say think of the breadth of the conversation we've had just on stage here, think of the places that we've gone to in the conversation, the portfolios that we're managing are offering elegant solutions to really complex problems. That's kind of how I think about that. Thank you, everyone, for joining. I look forward to seeing a lot of you over the next couple of days. Patrice is up next so stay tuned and thanks again.