Investment Portfolio Management for Today’s Market with RPIA’s Liam O’Sullivan

Ready to enhance your investment strategy? Tune in as Leon sits down with Liam O’Sullivan, Principal Co-Head of Client Portfolio Management at RPIA. An expert in alternative investments and risk management, Liam shares insight on managing an investment portfolio, current market paradigm shifts, the crucial role of fixed income, and the importance of differentiating between high-grade and high-yield bonds. 

If you’re interested in our Snippets podcasts or The Way Forward live webcasts, please take a moment and visit us at peo-leadership.com. Guests have included Stephen Poloz, Avi Goldfarb, Dr. Michael Roizen, Morgan Housel, and Professor Janice Stein. We’ve covered such topics as growth, uncertainty, mental health, leadership, the new world, and a host of others. 

If you’d like to learn more about our leadership community, please feel free to contact lgoren@peo-leadership.com. 

If you enjoyed today’s podcast, please subscribe and give us a review on Apple podcasts, or wherever you find your favourite podcasts.  

Transcript

Welcome to our Snippets Podcast. I'm Leon Goren, CEO and President of PEO Leadership, North America's premier peer to peer networking and leadership advisory firm. Today, I'm very excited to welcome Liam O'Sullivan, the Principal Co-Head of Client Portfolio Management at RPIA. The company was founded in 2009.

It's located in Toronto with over 100 employees. And in fact, in 2022, they were certified as a great place to work. Today, they manage more than 8 billion of assets of institutional clients and private investors. Liam joined PEO Leadership several years ago and is part of our senior leadership group, led by Leslie Ferrari.

He's been an awesome contributor to not only his group but the entire PEO Leadership community. Liam, it's great to have you with us today. 

Thank you, Leon. It's great to be here. 

All right, so everyone's going to notice your accent. So we've got to go back and learn, where's Liam from? And I also noticed you ended up at UBC and is that the entrance to come into Canada?

Yeah, good question, Leon. I get asked about my accent because I have a very Irish name, but actually I have a British accent and I grew up in southeast London, uh, with an Irish mother and had a wonderful upbringing there. And never really planned to end up in Canada, of course. I had the opportunity to study at UBC.

I got something called a Commonwealth Scholarship a number of years ago, which was, which took me, to Vancouver for a year. And then ultimately I met met my wife there. We spent some time living together in London, but 2010  we moved to Toronto and we've been here ever since. 

Yeah, you've come to the great country. Once you land here, Liam, you don't leave. Yeah, no. You also landed in Vancouver, which is hard to sort of not love the country when you land there. 

Well, it is. And Toronto as well is, you know, a wonderful place to live. And, you know, we do think about maybe one day moving back to the UK, but it's really hard to contemplate it. We just love the quality of life here. 

You've been involved in a number of jobs throughout your career here. You're over at RPIA today. Maybe just give the listeners a little bit of a description about RPIA because probably many of them don't know anything about it. 

Sure, absolutely Leon. And you mentioned in your intro that the firm was founded in 2009 and it was founded by a group of partners who had collectively run RBC's global bond trading business.

And it was set up in 2009 to give Canadian investors access to more innovative and interesting bond strategies. And so, you know, the fixed income part of the market is, you know, it's people often joke, it's kind of, you know, a boring thing and bonds are boring. And to a degree, it's true. You know, the way that most managers approach bond portfolios is pretty traditional.

And so these three individuals wanted to apply their expertise and just do a much better job for investors in terms of generating returns and protecting the downside. When Claire and I moved to Canada in 2010, the firm was, you know, about a year old. And I was fortunate enough to get introduced to a couple of the founders and was really blown away by their pedigree and by what I felt was the opportunity for the firm to really flourish.

And so for me, it's been a wonderful journey. As I say, I joined. The firm in 2010, and 13 years later, it's just been a tremendously rewarding experience being part of a growing firm that's privately owned, that works really hard to give investors and give our clients what they want. And so it's just been a wonderful journey.

It is a wonderful firm. And I got to know a few of the leaders there and it's, it's just fantastic. Money management, fixed income to our listeners. Fixed income, sometimes I think GICs, like, what are three things that people should know like direct and you're going to have mostly the listeners are going to be direct investors or families.

Right? Right. What do you think they should really understand about fixed income? So I'd make a few points. You know, the first is that bonds are not designed to do the sexy job in a portfolio. Like if you want to make money investing in, you know, equities or real estate or hedge funds is always going to be the place to get more bang for your buck.

And so, but that's the role that bonds play is to provide you with liquidity and safety. I believe all investors, no matter You know, age, risk appetite, you know, there should be a component in the portfolio that is fixed income. And that is the kind of defensive part of the portfolio. So that's the first thing.

The second thing is there's been a paradigm shift and actually, you know, we're sort of in the middle, of a paradigm shift in the markets today. We've had. 10 plus years of interest rates going lower and lower and lower. And in that period, fixed income was, was for sure less interesting. And so investors have been underweight fixed income during that period.

We're in a completely new environment now. Investors should be thinking about rebalancing their portfolios. back towards bonds and putting it simply, you know, if you invested in a bond portfolio, two or three years ago, you know, you were probably earning around 2 percent and, and the GIC rates were between one and 2%.

And that was kind of what your return expectation should be today. You can earn a 5 percent in a GIC and with a, with a high-quality investment grade bond fund, you can be looking at six, 7%. So it's a, it's a different paradigm and all investors should be thinking about rebalancing their portfolio. 

What are good grade bonds?

Like you have all these different funds. So when people refer to these bonds that they're not GIC or higher grade, what does that 

mean simply put when I talk about good quality bonds, I'm talking about investment grade corporate bonds. So these are obligations of blue chip companies in Canada, like Bell Canada, manual life.

RBC, Loblaws, that typically have, you know, two to five years to maturity. These are obligations that a company has to stand by unless they file for bankruptcy. They're very liquid. They're very easy to trade in the market. That, that's what I have in mind when I talk about high quality fixed income. Other areas of the market like preferred shares, high yield bonds, loans, there are many other areas.

But from the perspective of a private client or family looking for something good quality, resilient, that pays a good return, I think of investment grade corporate bonds. 

Timing wise, like you talked about 2019, the rates were really low. Today's a fascinating time. Yesterday, we heard that interest rates are going to be held steady, and now the U.S. is predicting 3 interest rate cuts. Maybe explain to the audience, what does that mean for a bond? Like, you're getting a coupon, but there's a bond price as well. So there's a bit of a doubling up here, possibly. I know maybe not as sexy as equities, but actually interesting, I think, in your world. 

Timing is everything in, in the financial markets, Leon, and you're absolutely right.

When you own a bond, you get, you collect a coupon, you know, and that coupon is, is sort of compensation for, for lending the money. So what we've seen is coupons have gone up a lot over the last two or three years. But in addition to that, markets move in cycles, and when interest rates are steadily rising, bond prices fall, and when interest rates start to fall, bond prices rise.

So, the environment for bonds over the last few years has been very challenging. But the flip side of that is today, as a bond investor, you, you're getting a very healthy coupon and if indeed interest rates have stabilized and, and, and start to drop next year, which to your point is, is what the market expects, then in addition to the coupon, there's extra capital gains, uh, available to clients as well from interest rates falling.

So, um, it's actually really sort of, over the last, you know, from November to, you know, mid December. During that period, the market consensus has really shifted and clients now are piling into bonds thinking, okay, over the next year, I can get a juicy coupon, I could potentially get capital gains if rates come down.

And so we've seen an overwhelming amount of interest over the last few weeks. 

A lot of these private investors, I'm sure they're using wealth advisors. What should they be taught, like, from a percentage allocation? If I'm sitting down with my advisor today, what are your institutional clients doing on their asset allocation?

Like, what should these individuals be thinking or pushing their wealth advisors to be considering right now? In the institutional world, we've seen some very interesting things, happen. Over the last year or so we've seen many of the consulting firms or wealth advisors suggesting their clients reduce their exposure to equities, reduce their exposure to private debt and private equity and put more money in, in just sort of plain bonds.

The reason for that is return expectations for bonds have gone up a lot. The economy is still. Sticking along, most investors expect a soft landing, but equity valuations and real estate valuations are still pretty elevated. So there's that big push away from equities and some of those other asset classes back into bonds.

In terms of what that means sort of in percentages, it really varies client to client. It used to be the case that a private client portfolio would be 60 percent equities, 40 percent bonds. And that 40 percent would be maybe Fixed income, GICs, cash. Over the last decade, that 60 40 became more like 70 30 or even 80 20.

And I would say sort of, you know, 15- 20 percent tends to be an Average allocation for our clients to public fixed income, I think that 15 to 20% should probably increase back up to say something like 30%. At the moment, you know, we were in a really unique paradigm from, call it 2009 to 2019. Now we're in a different environment and in a different environment.

You need a different asset mix to help hit your goals. I think that's really helpful. I mean, the idea here was today. I was hoping you talk a little bit about this because I think the knowledge base of fixed income is limited, especially, you know, among our members. 1st of all, they're operators. I don't really think about a lot of this wealth manage, but I do think we're sitting at any kind of a unique opportunity.

And the other thing I was going to ask you, and maybe listeners should be aware. You talk about high grade bonds, right? There are differences between high grade bonds and high yield, and they shouldn't necessarily mix the 2 up. They should definitely understand the difference. And I think you guys have different funds as well that it sort of allows you to have a bit more of a risk appetite versus, hey, I'm going to be a little more conservative.

Yeah, that's right, Leon. We have a range of different sort of strategies and what we aim to do when we partner with a client is to really understand their needs and objectives. And based on that, we'll make a recommendation which as to what would suit them better. Yes, within within fixed income, there's it's a it's a really.

Interesting and neat ecosystem. It's it's a sort of a geeky thing. And so it's hard to, you know, go into massive amounts of detail in a short time. And also, I don't, you know, we don't want to bore the audience. But with the right expertise, there's a lot of opportunity, a lot of interesting stuff going on in this market.

And to be frank, the reason we've been successful is we've always put the client first. We've always been. innovated and offered new products based on what we're hearing people want. For certain clients, if you know, a high yield bond may be what they want, and they're happy taking more risk and having more volatility in their portfolio.

If that's the case, then we'll speak about strategy A. If it's more about resilience and steady yield and downside protection, then we'll speak about strategy B. We'll always try to do the right thing by the client because ultimately, That's how you build a successful business. It's you put the client first, you do what's right for them all the time and then generally the rewards follow. 

Thanks for giving us a little taste of fixed income. We always read about equities, but we don't really get to know fixed income. So you sort of gave us a little bit of an educational one-on-one class on it today. So thank you so much. For sharing your insights, listen, if you're interested in our live webcasts, the way forward live and or any other sneak bits, please take a moment and visit us at PEO-leadership.com. You'll find our site has various previous recorded webcasts, which include the guests, such as Stephen Poloz, Avi Goldfarb, Dr. Michael Roizen, Morgan Housel, and Professor Janice Stein. The list goes on. And includes such topics as growth, uncertainty, mental health, leadership, the new world, and a host of others.

Thank you all for joining us today. And we want to wish you all the best for the holidays. And of course, a happy new year.