FOCUS 2025: Asset allocation update: a global perspective – David Wolf, David Tulk and Ilan Kolet.

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Hi folks, it's great to see everyone here.

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That was darn slick. That was the first time we had all seen that.

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Wow, very, very impressive so thank you to, well, someone out there

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that put that together.

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It's really great to welcome everyone to Palm Beach.

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We have a lot of stuff to cover.

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I'm going to be your moderator today and we're going to jump right into it.

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So DW, we just had a really interesting discussion from Steve,

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wide ranging discussion.

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The questions I'm going to be asking today are the questions that I'm getting

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on the road from all the advisors here.

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The very top of that list is, the U.S.

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has really ripped on the AI trade, is it sustainable?

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That is the right question to ask.

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First of all, good morning, everyone, and let me say an early good morning

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to folks on the West Coast joining us online.

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Central question, right?

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Equities have been ripping largely driven by the U.S., which is kind of always

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the case given that the U.S. is the largest market, and the U.S.

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has been ripping primarily because of the top end of the market, which is AI.

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The question is, can that continue, is that sustainable?

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The way that we try to answer that as asset allocators who are looking at

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basically every asset class around the world is we're running our process

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and you need to be anchored in a disciplined process, asset allocation,

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equities, fixed income, whatever it is, because especially when you have

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something that's new and shiny like AI,

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if you don't have a process, if you don't have an anchor, you're basically just

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telling yourself stories. There's good ones and bad ones, what have you.

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As those of you who have known us for a long

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time our process has four pillars, macro,

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bottom-up, valuation and sentiment.

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When it comes to the U.S. Market, and AI in particular,

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they're kind of mixed, I would say.

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The macro is okay, it's not great, it's not terrible, we'll

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unpack that later in the session.

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Valuation is extended. Steve was talking about some of his companies

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being only slightly more expensive than the market but the market itself is

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expensive, there's no question.

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Sentiment, people have gotten relatively bulled up, which is usually a

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contrarian indicator for us, folks over their skis

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basically positioned for further rally.

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You tend to want to lean against that. None of those are particularly

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constructive but one that is very constructive right now is what we

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call our bottom-up pillar.

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This is when we're getting intelligence from our hundreds of

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underlying portfolio managers, analysts, what have you.

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We think it's a real source of informational edge for us.

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We keep asking them, is this earnings growth

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sustainable? As Steve said, stocks follow earnings, is this earnings growth

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through the top end of the market sustainable?

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They keep coming back to us and saying, yes, not only is it sustainable

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but the market actually may be somewhat conservative about what it's

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saying with respect to these companies' earning power.

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In that context when the people who know these companies best, because

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they've been working on them and working with them for years, we're

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one of the world's largest shareholders in basically all of these companies,

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when they say earnings are going to be better than people think

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we have to be there. \.

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What are we doing in that contest as asset allocators?

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The first thing that we're doing is making sure

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that we are on top of those analysts all the time.

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If they start to tell us, well, people are kind of getting ahead of themselves,

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their names may not come through, once stocks don't follow earnings, or if they

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do follow them down, we're going to get out, not entirely, but we're going to

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get out of it.

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Second thing that we're doing is we're making sure that we have our money with

people who are going to be able to navigate

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this market well. We don't want to own the whole thing.

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We want to be with folks like Mark Schmehl, Will Danoff, we just spoke to

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Steve, who are able to pick the winners out of all of this.

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One of the things we do in the funds is we manage our overall equity

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exposure by shorting out elements of the U.S.

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market and others that we don't like as much.

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We control our overall risk exposure.

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The third thing that we're doing is remaining diversified, which is something

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we always preach, as everyone knows, which is to say

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that selling out of the U.S.

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market six months ago on Liberation Day was a bad idea, and

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being all in on the U.S. market now is a bad idea.

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We want to stay diversified, we want to cast a wide net for returns because

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the one thing that we know for sure is that we

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don't know anything for sure.

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We want to make sure that we have all our bases covered.

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That's a really good place for us to start. Sometimes people don't realize

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being underweight the U.S. doesn't mean we have sold all the U.S.,

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as you rightly point out.

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For me, and for all of us, I think, as economists, it's been really interesting

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to factor in that bottom-up intelligence.

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It's critical and oftentimes a good

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stress test kind of where we're at.

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DT, I'm going to turn to you.

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That said, I think we probably all have concerns around

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the U.S.

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I've got to be careful knowing where we are and maybe they're listening, I

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don't know. Again, talk to us about the concerns

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around the U.S., and I'm glad that you have to answer this instead of me.

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I definitely appreciate you setting me up for this one.

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In a word, the U.S., I think, is complicated.

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I think there are aspects of the U.S.

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that we definitely want to participate in. We talked about AI and the

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transformational nature of that technology.

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I think one thing we really want to be very careful and trying to understand is

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that transition from the generators of AI to the users of AI.

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Steve talked about this and lots of other portfolio managers are trying to

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source the holy grail of how that technology moves through

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the market and how that impacts margins.

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As DW mentioned, we want to make sure we have those allocations to the managers

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that are best able to watch those themes and invest accordingly.

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Then you move on to the economy more generally.

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I's sort of an okay-ish economic outlook.

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We have a group of researchers in Boston who run very elaborate

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recession probability models that focus on the U.S.

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and other economies around the world. You go through all of those analytics,

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even with the absence of official data because

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of the government shutdown we can leverage some of our proprietary data sources

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to make up that gap, the conclusion there is

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that the recession probability in the U.S.

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is still fairly modest and you're getting a little bit in the way

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of Federal Reserve easing, rightly or wrongly, we can certainly debate that.

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That's at least a step in the positive direction.

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You're going to get a lot more fiscal stimulus with the one Beautiful Big

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Bill coming into effect early next year.

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That's part of a reasonable story for the U.S.

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You can look at the labour market, it's slow to some extent.

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The best way I think that we can characterize it is sort of a low hire but low

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fire market. It had been very tight previously, it's sort of coming into

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a notion of equilibrium but again, it is all consistent with an economy that's

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reasonably well entrenched.

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Then you get to the more complicated part, and we'll all have very strong

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opinions on this in particular.

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It's really just what we're seeing from the administration in terms of the

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policy backdrop.

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This, from my perspective, is really relevant as a foreign investor

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coming into the U.S. because all of the policies announcements that we have

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seen I think one way or another are really just trying to change

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the relationship that the United States has with its trading partners,

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with other countries, with other economies, but also changing the relationship

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the U.S. has with the global financial system.

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We can point to challenges to Fed credibility.

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We can point to challenges to the provision of economic data.

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We can talk about trade policy.

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We can talk about financial flows policy.

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All of this is really just trying to isolate the U.S.

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economy and that has some really strong implications.

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The implication that we're most sensitive to is the depreciation in the

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US dollar.

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We can tell lots of good stories about the local currency of the U.S.

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and what's happening within the U.S. but as a Canadian investor, being aware of

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that weakening in the U.S.

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dollar is really something that we want to take on board.

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I think it's a very deliberate part on the part of the administration to try to

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weaken the U.S. dollar. Part of it is, at least nominally, to

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bring back manufacturing and revive that part of the U.S.

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It's really debatable whether that will be effective.

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A more, I think, insidious motivation is really just to

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get out from under their debt bubble.

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We've seen a lot of federal debt within the United States and they also have a

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lot of foreign bondholders.

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One way you can punish those investors is just to pay that back in depreciated

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dollars.

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One or another, I think the direction of the U.S.

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dollar is lower. One of the ways that we want to tilt our

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portfolios to manage that is to where we can take currency

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neutral versions of our U.S.

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exposures but also really tilt the portfolio out of U.S.

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dollars into other currencies.

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This was something we did in tremendous size over the course of the year.

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I think in our Global Balanced managed portfolio we started the year with a 20%

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overweight to U.S. dollars and within the first couple of months of the years

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we basically took that to zero and are now underweight.

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For us that's a huge movement of funds that really reflects the evolution

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of what we're seeing on the currency.

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I'm going to jump around a little bit. I really want to dig into this

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politicalization of the Federal Reserve.

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I want us to be extremely clear for the people in the room.

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I view this as a very, very serious risk.

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We all spent those 20 years of combined experience working at central banks

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between us. DW, how are you thinking about this?

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Is this an overblown risk? And what I would say there is I think people are

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forgiving of a lot of things when the line is going up.

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How do you think about this?

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I think this is, at least from a

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macro point of view, the number one thing to be worried about.

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The Fed, to some degree, is the financial

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bulwark, in a sense, against less responsible,

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we'll call it that, U.S.

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fiscal policy and such.

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I think the biggest question, again, macro question that folks

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have to answer with respect to the U.S.

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financial markets is, is the administration going

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to succeed in taking control of

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the Federal Reserve, and everything that comes with that in terms of saying,

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okay, you're going to make rates much lower because that helps us finance...

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That's a remarkable sentence, right, to everyone in this room.

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The likelihood, at least in my personal judgement, is

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that probably happens, at least explicitly or implicitly over the next,

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call it a year, 18 months, what have you.

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I wish that wasn't the case but structurally, it's difficult.

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I'll get into the weeds just a little bit with respect to the Fed.

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You hear on the news replacing Jay Powell, et cetera, it's

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actually very difficult structurally to turn over the Fed.

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Fed governors have 14-year terms which are

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particularly designed to stay away from the political cycle and give that

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entrenchment. They turn over very slowly and even

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the ones in Washington that are part of the Board of Governors, most

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of the federal open markets committee, or at least about half of it, is the

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regional reserve bank presidents that have nothing to do with Washington DC.

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Turning that over is very hard. You can replace the chairman, and his term is

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up next May, but even that, that's not the end of Jay Powell's governor term.

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He'll still be on the board. He just won't be the chairman anymore.

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However, we have seen that this administration has

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not necessarily, I'm not even

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sure how to put this, I'll leave that unsaid and just say,

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legally and structurally speaking it's very difficult to do but functionally,

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and maybe that's where the rubber meets the road, I think there is

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a move towards a greater politicization of

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the Federal Reserve. We should all worry about that in terms of, to put it in

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the context of some of what DT was talking

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about, if you really wanted to trash a currency what you do is you take over

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the central bank, you cut rates to zero, you treat

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creditors very poorly and that makes them sell your

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currency.

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Right, exactly. One of the things we talked about in the office is this concept

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of observational equivalence.

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They haven't told us they have a weak dollar policy but it sure is

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observationally equivalent to a weak dollar policy.

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Actually, you had an interesting experience recently,

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earlier this week with respect to that politicization of the Fed.

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Exactly, exactly. I'm like, wait a minute, I'm the moderator. I was

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at a conference, I actually flew here from Philadelphia directly, where I was

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at the National Association for Business Economics annual meeting that

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I helped to organize.

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The best way to describe it is sort of a collection of nerds.

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I'm on the board of the nerds. On Tuesday I actually

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had a chance to have lunch with Chair Powell.

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Again, the discussion with him was

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incredibly interesting but even more interesting was the final

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panel of that conference was three ex-Fed regional

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presidents.

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Gloves came off. They made it abundantly clear just how

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dangerous kind of the political capture, which is the term they used,

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of the Federal Reserve is. I think that's an important thing for us to stress

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here. I'll sometimes say, when I'm meeting with clients I'll say, everyone

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is entitled to their own opinion but your opinion might be wrong.

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On this, it's unquestionably dangerous.

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Did Jay have any security around him?

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Oh, that's right. Jay Powell had, I would say, four times the

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amount of security he had than last year.

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These were huge human beings.

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Their necks were that big.

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I just keep thinking 5,000 people are watching. We

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have other things to get to. We're going to circle back on rates in a little

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bit but let's talk about Canada. For a very, very

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long time, predating me, really, on the team we had this underweight

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to Canadian equities which was absolutely the right decision.

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That's evolved quite a bit.

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DT talked about the evolution of the Canadian dollar, which we're going to

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circle back to, but DW, talk to us about where we are now

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in terms of Canada and where we think we might be heading.

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Yeah, absolutely.

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First of all, we can put our Canada positioning and our

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covering of the underweight partly in the context of what we talked about in

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the US. Everything is relative if you're an asset allocator.

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If the U.S. looks less attractive, particularly on a currency basis,

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everything else looks more attractive, including Canada.

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I think there are reasons to be buying into Canada.

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What we did just very functionally was when I came to

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Fidelity in 2013 and the way that things were headed in Canada we

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sold a lot of Canadian dollars.

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Recently, as DT mentioned, we bought them back.

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The trade we basically did for investors over a decade was we

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sold Canadian dollars at par to the U.S.

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and bought them back at 70 cents.

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That's been a very good trade for our investors.

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We bought the back again partly because the U.S. side doesn't look as good but

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I am getting ...

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and it may shock a lot of folks in the audience that have known us for some

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time, increasingly bullish on Canada.

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That seems strange to say given that things are pretty terrible now.

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We know that. GDP is contracting, the labour market's flat on its back,

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the housing market is very weak.

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That is a function of things that have happened years ago.

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I think there's been a lot of economic and financial

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mismanagement. Policy has not been favourable to the economy to earnings

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growth, to overall growth, what have you.

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There is now a view towards that getting better.

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That has to do partly with the change

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of leadership in Ottawa. As you know, as many folks know, I

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worked for the Prime Minister when he was Governor of the Bank of Canada for a

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number of years. He's up against it, there are a lot of challenges

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but he gets more than anybody else in the country the

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productivity challenges and the fact that we've been going backwards

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in terms of needed investment in a lot of ways.

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He's going to try to do better.

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We'll see if he can but there's a path, at least, to it getting better.

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In Canada I used to call it productivity growth but it hasn't grown so

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I just call it productivity now.

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It's kind of depressing. DT, I want to get your comments on this, have

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all of those long term structural issues that we have

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and those concerns that we've had in Canada, have those disappeared?

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How are you thinking about things?

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They definitely haven't disappeared.

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I think to channel my inner Mark Schmehl, one of his

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famous lines is, when something is bad but getting less bad

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is a great time to invest. It doesn't have to be objectively good.

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It just seems like we're beginning to turn a corner in this respect.

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We talked a bit about productivity and I think you're getting some positive

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signs, at least the words coming out of Ottawa, we'll see, the

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budget in November where some of those words will be accompanied by numbers so

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we'll be better able to gauge that.

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Some of the other longstanding themes when we talk about housing and the

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challenges facing the consumer, we are still that pig working our

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way through the python in terms of large mortgage resets compared

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to 2021 post-pandemic lows in interest

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rates, we are slowly getting through that.

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Again, to really extend the baseball analogy, we're

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not in early innings. We're getting towards the end of the game there.

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That is a sign of at least providing a little bit of maybe not a

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tailwind but less of a headwind.

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I think that's something that is very encouraging.

[00:19:20.392]

Also, on top of that, when you're thinking about trade policy

[00:19:24.563]

... again, we are renegotiating CUSMA or USMCA,

[00:19:28.534]

however you want to order the countries in that trade agreement, I think we're

[00:19:32.971]

maybe a little bit closer to being out of the woods there with respect to not

[00:19:36.909]

facing the same kind of uncertainty that we had back around Liberation Day.

[00:19:40.612]

That was truly terrifying. You effectively shut down the border and that more

[00:19:44.383]

or less caused that GDP report that was exceptionally ugly.

[00:19:48.387]

Not to say we're entirely free and clear from any of this but there is

[00:19:52.524]

this movement that's taking place. I think it's not just us looking at it,

[00:19:56.962]

there's definitely a sense that others around the world are

[00:20:01.133]

seeing some of these changes and starting to view Canada in a more

[00:20:05.170]

favourable light as well. I think, DW, you were recently in New York and I

[00:20:08.840]

think you had an interesting anecdote as to how the world's viewing Canada

[00:20:12.377]

compared to the past.

[00:20:14.513]

I was in New York City last week at a conference.

[00:20:17.649]

This is a conference that brings together U.S.

[00:20:21.019]

investors and Canadian issuers.

[00:20:23.689]

That's companies but also the provinces were there

[00:20:27.859]

and some of our pension fund counterparts, et cetera.

[00:20:30.429]

It was better attended than anything I've

[00:20:34.766]

seen, and I've been going to this conference for many, many years.

[00:20:39.338]

The room of U. S. investors was fuller than it has been in the past.

[00:20:43.542]

The list of Canadian issuers who wanted to get in front of those U.S.

[00:20:46.245]

investors, knowing that higher demand was there, was also more significant.

[00:20:50.749]

Canada, again, there's a push-pull.

[00:20:53.685]

There's the pull of Canada has a path to being better

[00:20:57.889]

in a way that hasn't been true for a decade but there's also the push

[00:21:02.261]

which is the U.S. has a path to being worse, which hasn't been true in a while

[00:21:06.365]

so it's coming together.

[00:21:08.667]

And weren't you also bumped off the agenda because they didn't want the

[00:21:11.270]

economic backdrop. They really wanted to hear from the people issuing

[00:21:14.273]

[crosstalk].

[00:21:14.306]

Yeah, thanks for mentioning that.

[00:21:18.977]

It's interesting. Continuing with the baseball analogy, you really want to

[00:21:22.547]

skate to where the puck is going.

[00:21:23.448]

He's not into sports.

[00:21:26.585]

No, they're the sports guys.

[00:21:28.186]

Hello, investors. We'll be back to the show in just a moment.

[00:21:31.390]

I wanted to share that here at Fidelity, we value your opinion.

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And don't forget to listen to Fidelity Connects, the Upside, and French

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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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else you get your podcasts. Now back to today's show.

[00:21:59.251]

A couple of other topics I want to get to.

[00:22:02.988]

Everyone in this room has clients that are incredibly sensitive to rates.

[00:22:07.359]

DW, take us through how you're thinking about the rate dynamics, not just

[00:22:12.030]

the Bank of Canada overnight rate or the Fed rate but also kind of further out

[00:22:14.900]

the curve. Then DT warning, I'm going to ask you what this means for fixed

[00:22:18.603]

income.

[00:22:21.039]

I'll talk about rates and maybe spare you all, I'll talk

[00:22:24.976]

a little bit about the longer end of the curve and fixed income more generally.

[00:22:30.315]

It's complicated in the sense ...

[00:22:33.418]

usually when you're thinking about the Fed or the Bank of Canada

[00:22:38.090]

and you're crafting a fixed income strategy on top of that you say, okay, what

[00:22:42.094]

is growth going to look like, what is inflation going to look like, what does

[00:22:45.731]

that make the appropriate level of interest rates, which is what the Fed and

[00:22:49.101]

the bank are establishing, and then how does that cascade

[00:22:53.205]

out the curve, what is the shape of the curve, what does that mean for

[00:22:57.409]

spreads? Then you construct a fixed income strategy based

[00:23:01.546]

on that. That's all still true and we can talk about that but

[00:23:05.450]

at this point, as we've kind of alluded to,

[00:23:10.055]

there's an overlay that you have to do that with.

[00:23:11.890]

It has nothing to do with economics which is, what is the probability that

[00:23:16.161]

the administration effectively takes over the Fed, how much are

[00:23:20.132]

they going to drive rates down, how much is the longer end of the curve

[00:23:23.902]

going to be unhappy about the inflationary consequences, and at what

[00:23:27.973]

point does the Treasury have the Fed just start buying those long term bonds

[00:23:32.210]

to control the yield curve?

[00:23:33.945]

That has huge consequences for fixed income and that's a completely different

[00:23:39.251]

... a year ago you would have said, well, you don't have to think about any of

[00:23:41.920]

that but now you have to think about all of that.

[00:23:45.323]

What we're doing in that context is

[00:23:49.261]

we're being very careful with our fixed income allocations.

[00:23:52.831]

One thing we're not doing is buying U.S.

[00:23:54.733]

Treasuries. If you invest in U.S.

[00:23:57.035]

Treasuries you are a creditor of the U.S.

[00:23:59.704]

government. If what the U.S.

[00:24:01.573]

government is doing is not creditor friendly by

[00:24:06.011]

moving towards currency debasement we don't want to lend them money.

[00:24:09.247]

There are plenty of fixed income opportunities, and we have underlying

[00:24:12.584]

managers, Mike Plage will be up here later today or tomorrow who will

[00:24:16.655]

talk about what he's doing specifically in that fixed income fund, but

[00:24:21.526]

as asset allocators our direct holdings of U.S.

[00:24:25.163]

Treasuries have gone to zero.

[00:24:28.366]

Wow. It's just remarkable to me how different our conversation is today versus

[00:24:31.603]

a year ago.

[00:24:34.272]

DT, as asset allocators we can't be, I mean, we've talked a lot about

[00:24:38.610]

a lot of scary things but as asset alligators, we can't be defensive

[00:24:41.746]

everywhere. Let's talk about some opportunities.

[00:24:44.282]

Where are you guys finding opportunities, what are we leaning into and how are

[00:24:48.253]

you thinking about some of those asset classes?

[00:24:49.888]

I'll make a quick comment first on the equity side then maybe a little bit on

[00:24:52.691]

the bond side of the portfolio.

[00:24:54.659]

On equities, that underweight to the U.S.

[00:24:57.896]

is very nuanced and largely being an underweight to small-cap.

[00:25:02.934]

That helps to fund an overweight we have into Europe and

[00:25:06.972]

international markets as well as into emerging markets.

[00:25:11.009]

It's not that we expect heroic growth out of Europe by any

[00:25:15.180]

stretch but there is a compelling valuation argument.

[00:25:18.483]

There's also a potential catalyst in terms of the galvanization

[00:25:22.487]

that we've seen with respect to regions in Europe maybe playing

[00:25:26.691]

nicer than they have previously.

[00:25:28.360]

You've got a certain amount of commitment for a lot of fiscal spending and that

[00:25:32.364]

will start to propagate hopefully through other countries as well.

[00:25:36.601]

There is some sense that this is a moment where a lot of countries in Europe

[00:25:40.705]

have recognized challenges and are now trying to at least bring that

[00:25:44.843]

into more direct spending.

[00:25:47.579]

To that point, one of the thesis that we want to really test, one element of

[00:25:50.715]

that thesis, is just seeing how much is spreading.

[00:25:53.151]

I'm actually heading to Europe in early November, one of these five days,

[00:25:57.222]

five countries type experiences so I am already looking forward to the jet lag,

[00:26:00.992]

but, ultimately, just getting a sense from people on the ground

[00:26:04.996]

... I mean, we've heard these announcements but what's the actual follow

[00:26:07.332]

through? That's part of the overweight we have with respect to Europe.

[00:26:11.002]

The same is true to a certain degree of emerging markets as well.

[00:26:15.240]

Quickly on the bond side of the portfolio, being underweight or

[00:26:19.411]

short duration allows us to be more overweight credit and

[00:26:23.582]

plus sectors. We work with our underlying managers.

[00:26:26.051]

We like the attributes of emerging market debt, particularly

[00:26:30.288]

in local currency terms.

[00:26:32.090]

It's a nice yield pickup and it correlates nicely with Canadian dollars and it

[00:26:35.827]

gets us out of U.S. dollars.

[00:26:37.929]

As well, just working with those managers to just try to enhance the yield side

[00:26:41.132]

of the portfolio while we're a little more cautious when it comes to

[00:26:45.070]

investment grade bonds.

[00:26:46.605]

It really speaks to the two ways to win. Gold has also been an important

[00:26:50.442]

position for us so I've got to ask about that.

[00:26:52.877]

I get questions about gold now in every single meeting I've been doing.

[00:26:56.514]

I don't have to answer it today so over to you.

[00:27:00.352]

Thanks.

[00:27:02.787]

We have owned a lot of gold in

[00:27:07.158]

our balanced funds for quite some time, thinking of it as a diversifier

[00:27:11.596]

and as something of a hedge against exactly the kind of

[00:27:15.600]

environment that's emerging now. I believe in the

[00:27:19.971]

funds that we're responsible for as a whole, we own about 9

[00:27:24.142]

1/2 tons.

[00:27:25.944]

Actually, if you come by the office we have it in the corner piled up.

[00:27:29.314]

I'm kidding, we don't do that.

[00:27:32.050]

We take our exposure through the ETF.

[00:27:34.486]

It's in my teeth, actually.

[00:27:36.421]

You do have a large smile.

[00:27:41.059]

Obviously, gold has been ripping.

[00:27:43.028]

The reason that gold has been ripping is exactly what we've talked about in

[00:27:46.965]

terms of fears of U.S.

[00:27:49.401]

dollar debasement.

[00:27:51.670]

If you're not in U.S. dollars you have to be in something else.

[00:27:54.205]

You can buy euros, you can buy yen but there are some issues that way.

[00:27:58.843]

Gold for thousands of years has been the store of value.

[00:28:01.846]

Supply is at least relatively fixed in

[00:28:05.850]

the short term. It doesn't take too many individuals and too many of these big

[00:28:09.888]

central banks to say, you know what, I don't want 80% of my foreign

[00:28:13.825]

reserves in U.S. dollars, I want 75 or 70 or 60 or whatever

[00:28:18.063]

it is to really move the gold price.

[00:28:20.732]

That's something that can have an awful lot of momentum.

[00:28:26.304]

We've seen that. We haven't sold our gold holdings, it's still a great

[00:28:29.874]

diversifier, it has been contributing to performance in the fund and we're

[00:28:34.979]

still there.

[00:28:35.947]

I think another reason, and this goes back to one of your favourite topics,

[00:28:39.484]

Ilon, I still think there's some residual risk to higher inflation.

[00:28:43.488]

I was hoping you were going to talk about it.

[00:28:45.223]

Maybe I preempted one of your questions.

[00:28:47.959]

I think with the tariff risks that are still ...

[00:28:50.862]

I think they flare up periodically in the eye of the market but the economic

[00:28:54.966]

impact I still think is coming.

[00:28:57.168]

If you kind of pour over details of producer price

[00:29:01.272]

reports or consumer prices there is some sense that

[00:29:05.243]

I think we're not out of the woods yet there as well.

[00:29:08.113]

The tolerance of higher inflation, especially if you get more political

[00:29:12.217]

pressure on the Fed, I think is entirely consistent with another way

[00:29:16.154]

that the U.S. can punish its creditors.

[00:29:17.922]

By, basically, tolerating and accepting a higher level of inflation

[00:29:22.193]

what you're paying back those creditors are depreciated dollars in real terms.

[00:29:27.265]

Just as a risk that exists out there that I think the market has more or less

[00:29:30.368]

moved on from we still want to provide that protection, especially in the

[00:29:34.305]

context of a balanced fund.

[00:29:37.275]

That's exactly right. There's kind of an interesting way

[00:29:41.379]

that a lot of these themes come together with respect

[00:29:45.717]

to the U.S. government's holdings of gold.

[00:29:49.821]

As I said, our funds own about 10 tons worth.

[00:29:52.857]

The U.S. government owns about 3,000 tons worth

[00:29:56.961]

of gold. It's in Fort Knox, it's at the Federal Reserve, Bank of New York, et

[00:30:00.799]

cetera.

[00:30:03.301]

Does anybody know actually in this room at what

[00:30:07.372]

price the U.S. government has its gold marked?

[00:30:10.775]

Anyone? Yell it out if you know.

[00:30:14.746]

$42 an ounce.

[00:30:17.515]

That's a buy.

[00:30:20.285]

It is marked at 42 because that's the price that it was in 1973 when

[00:30:24.522]

the U.S. dollar got off of Bretton Woods and it's never been revalued

[00:30:29.294]

since. It is not impossible that the Treasury could

[00:30:33.331]

say, okay, we're going to mark that to market.

[00:30:36.301]

Obviously, going from $42 to $4,000 an ounce,

[00:30:40.772]

and you can do the math times 3,000 tons, that's about a trillion dollars.

[00:30:44.709]

Just with a stroke of the pen could say, oh, we have a trillion dollars more

[00:30:49.113]

liquidity and we can go spend stuff and we don't have to borrow and et cetera.

[00:30:53.017]

To your point, that's obviously hugely inflationary and that's frankly

[00:30:57.021]

more of a monetary policy thing than a fiscal, but that's all blurring.

[00:31:00.692]

You worry about these things happening and global

[00:31:04.929]

investors including ourselves worry about these things happening.

[00:31:07.532]

That's why you want to buy things that are not vulnerable

[00:31:11.569]

to these kinds of policies that may lead to debasement.

[00:31:16.407]

Absolutely. That's a hell of a pen to have with one stroke.

[00:31:19.410]

We're going to move to a separate chunk of this discussion

[00:31:23.948]

and kind of do a rapid fire round.

[00:31:25.917]

Now, for many of you in the audience who've spoken to me or any of us you know

[00:31:29.888]

we're not overly rapid fire so we'll be as rapid as possible.

[00:31:33.892]

If you're interested in a lot of these topics we've talked about, we just put

[00:31:36.561]

out a paper a couple of weeks ago, our Q4 thought leadership paper covers all

[00:31:40.131]

of this. Please read it and steal from it.

[00:31:42.667]

Let's get into a little bit more of the casual questions.

[00:31:46.571]

Oh, there's the paper and the QR code.

[00:31:49.807]

I want to ask about influences.

[00:31:52.343]

I think this is a really, really interesting question.

[00:31:55.013]

We haven't told each other the answers to this so this is fresh for me as well.

[00:31:58.516]

DW, talk to me about some of the people who have influenced you.

[00:32:03.588]

I'm happy to do that. It's not going to be rapid fire because there are a few

[00:32:07.558]

people who are...

[00:32:08.326]

We're never rapid fire.

[00:32:09.327]

I'm never rapid fire, everybody knows that.

[00:32:11.596]

Self-awareness is important. Let me speak about a

[00:32:15.667]

couple of folks who have really influenced me a lot.

[00:32:19.037]

The first going way back is my grandfather with respect to what we

[00:32:23.141]

do. He's a really interesting guy.

[00:32:26.611]

He fled Germany in the 1930s, ended up in New York City,

[00:32:31.082]

worked a lot of odd jobs, tea factory, that sort of thing.

[00:32:34.619]

Ended up opening up a small butcher shop in Queens, New York.

[00:32:38.723]

Really smart guy,

[00:32:42.860]

very little education, and was fascinated by the stock market.

[00:32:45.396]

And opened up an account at what was then a

[00:32:49.434]

small brokerage called Merrill Lynch in New York City and

[00:32:53.738]

would put, say, five bucks and put it in there and watch all the stocks and

[00:32:57.976]

everything. My grandmother thought he was crazy because from that generation,

[00:33:01.846]

if you save money you put it in the mattress or maybe you trust the

[00:33:05.850]

bank. You certainly don't buy a stock, et cetera, but my grandfather loved

[00:33:09.854]

it. He loved it his whole life. I used to go visit him when he was much older.

[00:33:13.791]

He passed away a few years ago. Even into his 90s I'd go visit him

[00:33:18.062]

at the retirement home, he would have CNBC on.

[00:33:21.566]

I kind of got the bug earlier on.

[00:33:24.469]

The other person I'd mentioned who was really quite an influence on

[00:33:28.639]

what I do and how I do it is Mark Carney.

[00:33:32.243]

I've heard of him.

[00:33:34.579]

I've known Mark almost 25 years.

[00:33:37.849]

He brought me to the Bank of Canada when he became governor in 2008.

[00:33:41.219]

I worked for him as his advisor until he left for the Bank of England

[00:33:45.323]

in 2013.

[00:33:49.427]

He was an influence on me in a kind of different way than you might think.

[00:33:53.931]

It was nothing about economics or policy or financial markets.

[00:33:58.736]

He actually had a big impact on me with respect to work ethic.

[00:34:03.207]

Let me talk about it. Can I talk about that?

[00:34:07.945]

Yeah, of course. This is the second part of the rapid fire.

[00:34:13.284]

Or the eighth?

[00:34:15.486]

I was early in my career and in school, pretty smart

[00:34:19.424]

guy and kind of leaned a little bit too much on that and wasn't always

[00:34:23.394]

the most industrious person.

[00:34:25.296]

I got to the bank, I'm working with Mark and what I saw

[00:34:29.233]

in him was not only very clearly the smartest guy at the

[00:34:33.237]

bank but also the hardest working guy at the bank.

[00:34:38.276]

Tell a little story about that.

[00:34:40.445]

We used to go and represent Canada at all these international meetings,

[00:34:44.482]

BIS, IMF, OECD, G20, all of this kind of thing.

[00:34:48.853]

Before these meetings, a couple days before, we would have a briefing from the

[00:34:52.757]

staff who were basically, all right, you're going to be negotiating with other

[00:34:56.127]

countries on these 20 topics and here's our guidance.

[00:35:00.665]

We would get these briefing books to read beforehand. These things were

[00:35:03.334]

hundreds of pages, sometimes more than one binder.

[00:35:07.572]

We go to the briefing, and I remember this one actually quite clearly, we were

[00:35:11.342]

going to the BIS, so Basel, talked about banking regulation,

[00:35:15.379]

and we're sitting around and the staff is briefing us

[00:35:20.384]

and Mark says, oh, but your suggestion on

[00:35:24.789]

which policy to support in this contradicts what I

[00:35:29.026]

read on page 267 of the briefing book which says that

[00:35:33.364]

we should be supporting this other policy.

[00:35:35.867]

I'm sitting there thinking, you got to page 267?

[00:35:38.369]

Maybe I did but I was half

[00:35:42.507]

asleep when I did it.

[00:35:45.109]

Here's the governor who has, obviously, just the largest set of

[00:35:48.079]

responsibilities you can imagine and he's not only reading

[00:35:52.150]

through all the briefing books and not relying on the staff but he's going toe

[00:35:55.186]

to toe with the poor staff whose whole life may be this little

[00:35:59.857]

piece of policy and the governor is like, well, explain.

[00:36:04.362]

It really impressed me that someone who is that capable and that smart was

[00:36:08.766]

also the hardest working guy around.

[00:36:12.069]

It kind of shamed me to say, you know what, I can do better, and I've tried

[00:36:16.040]

to do better.

[00:36:18.042]

DT, that's certainly my experience working at the bank.

[00:36:22.046]

I was the guy sweating it out, preparing the 300 page binder as

[00:36:26.384]

was DT. DT, talk to me about some of your influences, or how you think about

[00:36:30.288]

that.

[00:36:31.055]

I think it's really important to have people that you can rely on

[00:36:35.193]

as mentors in your career.

[00:36:37.195]

When I started at Fidelity I was an economist,

[00:36:41.465]

a strategist by training but I'd never really managed money before.

[00:36:45.002]

I did take stock of a lot of other people who had had similar career

[00:36:49.040]

trajectory and it never really ended well because the graveyard of economists

[00:36:53.244]

turned money managers is very large because you can get the macro right,

[00:36:57.315]

which is really hard, but doesn't mean you get the trade right or the

[00:37:00.952]

investment right. Having a chance to really work with our former

[00:37:04.922]

CIO, Geoff Stein, a lot of the senior portfolio managers, just allowed

[00:37:08.960]

me to become a little bit more ingrained in the money management process.

[00:37:12.930]

It was a nice slow gradual adjustment that has led me to

[00:37:16.867]

where I am today.

[00:37:17.635]

The deeper point, I think, and this is something I think is really important,

[00:37:20.838]

is to find mentors.

[00:37:22.940]

If you're more junior in this career find someone who's more senior, who's

[00:37:27.078]

had the experience, to just walk you through their learnings.

[00:37:30.248]

For those people that have had more tenure this is your chance to give back.

[00:37:33.951]

It's really, I think, important to try to provide those opportunities for the

[00:37:37.521]

next generation. I think that's the really important part that's helped my

[00:37:40.591]

career. I think it's helped all of us along the way and it's something that I

[00:37:43.327]

think a lot of people can channel as well.

[00:37:45.229]

Absolutely. For me, you

[00:37:49.333]

need those selfless mentors and managers early on

[00:37:53.371]

that really help you. I've had that

[00:37:57.408]

in every job I've had, Bank of Canada, Bloomberg, Fidelity.

[00:38:00.811]

When I think about mentors I kind of think about my dad and my

[00:38:04.882]

father-in-law. My dad immigrated to Canada in 1971.

[00:38:08.786]

Again, immigrant school of parenting, he used to me shoot

[00:38:12.957]

for the stars and be happy when you hit the tree.

[00:38:15.526]

That was one of his lines.

[00:38:17.728]

He told me the only way I'm going to pass high school is in a cab.

[00:38:19.997]

He was

[00:38:23.934]

full of these good lines. My father-in-law who's 83, I

[00:38:30.174]

can repeat none of his lines on stage because the head of HR is right over

[00:38:33.377]

there, but he has helped me through every

[00:38:37.581]

salary negotiation, every review, every move from Ottawa

[00:38:42.820]

to Boston to Toronto.

[00:38:46.023]

It's been kind of incredible.

[00:38:49.260]

Last question I want to ask is what your average day looks

[00:38:53.297]

like, or what does the day look like? DW, I'm going to start with you.

[00:38:56.801]

Go.

[00:38:57.568]

I'll be quick about this one.

[00:39:00.037]

Our day starts with what we call attribution.

[00:39:04.208]

So wake up in the morning early, big cup of black coffee, open the computer,

[00:39:08.479]

and we get a 65 page report

[00:39:12.917]

... the full report is hundreds of pages, it's a 65 summary

[00:39:16.921]

... in gory detail of our performance and every decision

[00:39:20.958]

that every one of our managers made and their contribution to performance,

[00:39:24.662]

absolute and relative.

[00:39:27.365]

I do that, one, because it's our scorecard and we're here to win.

[00:39:31.268]

We want to win, we want to beat benchmark, we want to beat peers, we want to

[00:39:34.538]

beat the market. That's what our job is on behalf of clients.

[00:39:37.141]

Also, it's a great test of

[00:39:41.245]

risk. We have all these risk models that tell us we're exposed to this, that

[00:39:44.648]

and the other thing but they're models.

[00:39:47.351]

You all have heard me talk about model suspicion.

[00:39:50.988]

There's nothing to replace live performance and behaviour to say, okay,

[00:39:55.326]

what are we really exposed to?

[00:39:58.162]

It's usually a clue to say, well, maybe you have a little too much of this or a

[00:40:01.899]

little too little of that, and we'll make adjustments.

[00:40:04.502]

It's a great way to go forward in the day to start there.

[00:40:08.072]

DT.

[00:40:09.306]

I do what he does. One of the other things we do, as you heard from Steve we

[00:40:13.511]

have just tremendous resources available for us and it's just absorbing

[00:40:17.715]

information. The lion's share of my day is just literally pulling in together

[00:40:21.485]

all the insights. I know Neil Constable will be up next talking a bit about how

[00:40:25.790]

AI is helping us. That's basically the totality of our days is

[00:40:29.894]

absorbing information to make good decisions.

[00:40:32.897]

We're almost out of time but for me, day before yesterday I flew here

[00:40:36.967]

from Philadelphia. It was my 76th flight of the year.

[00:40:39.904]

My day normally starts either in a hotel or going to Pearson.

[00:40:44.241]

I've met a lot of you in the room. If I haven't met you at this point it's kind

[00:40:47.278]

of odd.

[00:40:49.613]

A fun fact, a couple of weeks ago I was in Ajax, Ontario.

[00:40:54.251]

I mean, I don't mean to brag.

[00:40:58.255]

I mentioned this was my 68th flight of the year or whatever it

[00:41:02.326]

was, I was at 70 at that point, and an advisor asked, oh my God, that's

[00:41:06.363]

a lot of travel. Are you married? My answer was, we'll see,

[00:41:10.301]

I was when I left this morning.

[00:41:13.003]

It's been a great treat for all of us talking to all of you.

[00:41:16.707]

Thank you again for the support.

[00:41:18.642]

We have a 10 minute break after which Neil Constable and Ramona are up.

[00:41:22.680]

Thank you again for your time.

[00:41:25.015]

Thanks for watching or listening to the Fidelity Connects

[00:41:28.953]

podcast. Now if you haven't done so already, please subscribe to Fidelity

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Connects on your podcast platform of choice.

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And if you like what you're hearing, please leave a review or a five-star

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Visit fidelity.ca/howtobuy for more information.

[00:41:49.773]

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We'll end today's show with a short disclaimer.

[00:42:02.620]

The views and opinions expressed on this podcast are those of the participants,

[00:42:06.457]

and do not necessarily reflect those of Fidelity Investments Canada ULC or

[00:42:10.394]

its affiliates. This podcast is for informational purposes only, and should not

[00:42:14.398]

be construed as investment, tax, or legal advice.

[00:42:16.934]

It is not an offer to sell or buy.

[00:42:19.236]

Or an endorsement, recommendation, or sponsorship of any entity or securities

[00:42:23.574]

cited. Read a fund's prospectus before investing, funds are not guaranteed.

[00:42:28.379]

Their values change frequently, and past performance may not be repeated.

[00:42:31.949]

Fees, expenses, and commissions are all associated with fund investments.

[00:42:35.786]

Thanks again. We'll see you next time.