The best investors are the ones who...

Ashleay: Welcome to the In Your Interest podcast. My name is Ashley and as usual, I'm joined by my colleague and chief strategist Sébastien McMahon. This week we welcome Pablo Carrera, Regional Sales Director, to talk about strategies for choosing the best Fund. So hello Pablo, thanks for sharing the mic with us this week.

Pablo: Hello, Ashley. Hello Sébastien, glad to be back. Thank you very much for having me.

Sébastien: Hello, Pablo. It's always a delight to have you with us. And this week, I mean, I was listening to your question, Ashley. It's a question we hear all the time, butI know you well enough, Pablo, I'm pretty sure that this is not the right question that you would wish people to ask you:  “what's the best fund?”

Pablo: And yet that question comes up so often. I think it's partly because it would be so much easier to be able to say “this is the best fund” and it would make everybody's life so much easier to be able to evaluate a fund independently and say: “this one's good, this one's bad.” And unfortunately, it doesn't work that way. Honestly, when we look at investors that have success over time – and I'm kind of giving away the answer – but some of the key ingredients to that success is patience, staying invested, not panicking –obviously, markets go up and down, making sure that if you can, you invest on a regular basis, you stay diversified and just let time do its thing. Time will take care of generating gains and generating added value. The trick is: “Can you be patient enough for time to deliver?”

Sébastien: Yeah. And in what you mentioned here, you didn’t even mention “fund”.

Pablo: That's right..

Sébastien: Fund wasn't there.

Pablo: Choosing the right fund is not one of the ingredients to success. In fact, if anything, it can lead you down the opposite path where you end up making choices based on perhaps short term returns, and you end up a little bit like your favorite dog chasing its tail.

Sébastien: Yeah.

Pablo: And that's really not a long-term investment strategy.

Sébastien: And it's always a risk, because when you think about investors that have the most financial success, you tend to guess or think that, well, they must always be invested in the highest performing fund out there or the biggest gaining stock of the year. But in fact, it's not the case. And that's when the mistakes come in. So you log in on Morningstar to see how your funds are doing, and you realize that “Yeah, I have a few good funds in my portfolio. But these funds over there, the last year, they are 5% ahead of my fund. So let's switch to those.” And then you start chasing returns. And these are when the mistakes happen, because it doesn't mean that because they had a stronger return over the last year that they fit your profile, or that they're giving you exactly what you want, or that they will continue to outperform for a while. And same thing with your stock portfolio: It's easy just to open your app and say: “well, yeah, I bought a few stocks that had some good gains this year. But look at this sector here. I see a few 100% gainers over the last few months. So let's switch my portfolio over there.” And, you know, maybe you buy the top and then after that the price starts falling. So discipline, having a plan, following the plan is always the key to success.

Pablo: Absolutely. And in fact, you bring up such a great point because the approach to trading securities or trading stocks is so different from the approach of investing medium to long term through funds. I mean, you realize that you're essentially trusting a professional management firm to manage the money for you. You are no longer trading your own funds. It doesn't work when you think about how the system is set up. Honestly, if you're going to do trading, then perhaps funds are not the right product to be trading on a short-term basis. Stick to stocks, stick to securities. But then obviously you understand the risk level is completely different and you need to have the competencies and the knowledge and the tools and the time to be able to dedicate to that. Most people simply don't. So trust your advisor, trust your managers to be able to manage the money for you and let time do what time will naturally do on its own.

Ashleay: Sébastien, how do you measure fund quality?

Sébastien: Sure. So I'm part of the asset allocation team at iA, so we manage all of the diversified funds or managed mandates. This is all in our team. And of course, there are funds of funds mostly. So we have to make those decisions. You know, we have our views. We have our views on the economy, on the markets. We have investment policies. And then we need to decide: “all right, so how do we allocate this money.” And when we choose a fund, we have of course sophisticated tools where we can look at how consistent all of these managers have been through time at adding value on top of their mandates. So if, for example, we have a portfolio manager who invests in US stocks. So how consistent has the outperformance been through time. So we're looking for consistencies. We're looking for managers that stick to their mandate. You know, if you sell a fund as a growth fund and you realize that growth is underperforming value for a while, well, you want the manager to stay true to the style and add value within his style. You don't want people to just to be running after fads. So it's all about the consistency and how they do it over time. So, in this conversation, I'm not mentioning the return over the last year, two years, three years. It’s how consistent are the fund managers. So basically, like you said, Pablo, we invest in portfolio managers, and we just give them time to do their thing so that can benefit our clients. Very simple.

Ashleay: And what's the role of the advisor versus the investment team?

Pablo: So this is an interesting question because if you're not in the industry, if you're not like we are, you know, looking at it from the inside, it's hard to differentiate those two roles. But it's so important because people will have this idea that “my advisor is managing my money.”

Ashleay: Right.

Pablo: And we mix up the fact that the advisor is in charge of the client, managing the relationship with the client, and the advisor will take the money and trust professional fund managers to make the actual investment decisions. It's very important to differentiate the role of the fund manager and the role of the advisor. And sometimes that line gets blurry because we will say to clients: “I will take care of you.” And that's a blanket statement. So the client says: “Well, fine, I trust you. Here's my money. And you said you were going to take care of me. Therefore, I expect that you will generate the returns, that you'll make the investment decisions, that you'll actually invest the money.”

Ashleay: Right.

Pablo: …when in fact that's not the case. We turn around as advisors and we say we trust these managers to do it for you. We've chosen these managers for very specific reasons, but my role as an advisor is to make sure that I understand what are your needs, what are your objectives, what are your priorities, and that's what guides my fund selection. It's not based on me trading the money, it's based on me understanding what are your needs.

Ashleay: Right. And then transferring that to the right team. Sébastien, I would like to take this opportunity to ask you your opinion on which funds to keep an eye on. Do you have any current recommendations?

Sébastien: Sure. So rather than going with a specific fund, I'm thinking maybe here of going maybe with category. You need active management in your funds. I mean, Pablo, we've been working together for ten years, we've been discussing active management through the years, but I think it's going to be even more important in the years to come. We're seeing some divergence between central banks. We're seeing volatility. We're still in the post-Covid era. So you want your managers to be active. And here maybe I could put the spotlight on the fixed income side, which is not something that we discuss as often. But you know, interest rates have been rising for the last few years, we know that fixed income returns have been negative or close to zero…

Pablo: Challenging.

Sébastien: …challenging for a good while. But there's a lot of value to be cut in this market still, because you need bonds in your portfolio: just for the diversification benefits, you need them. Corporate credit gives you very good returns. We're talking about 6 to 8% return all in for corporate bonds in the US. So you want a manager that will position you correctly in the right sectors, with the good mix of corporates versus sovereigns. The duration call is very important. So you want to have a good manager that will take your money, give you the right exposure to fixed income for all of the benefits that it gives you, but you want them to be very active in the world that is constantly changing. So I would say active management in fixed income, this is what you need.

Ashleay: Well, once again a great exchange! Thank you Pablo, and thank you, Sébastien for informing us on the best strategies for choosing the best fund. I will stay with rabbit ears! And don't hesitate to drop us a line if you have any questions, and we'll see you all next week!

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