PARTICIPANTS
Mark Brisley
Managing Director and Head of Dynamic Funds
Myles Zyblock
Chief Investment Strategist
Jason Gibbs
Vice President and Senior Portfolio Manager
Mark Brisley: You're listening to On The Money with Dynamic Funds, the podcast series that delivers access, insights, and perspective from some of the industry's most respected active managers and thought leaders. From market commentaries and economic analysis to personal finance, investing and beyond, On the Money covers it all because when it comes to your money, we're on it.
Welcome to this special edition of On The Money. I'm your host Mark Brisley. Joining me on this call are two of our investment management professionals here at Dynamic Funds. First, our Chief Investment Strategist, Myles Zyblock. Myles has over 25 years of investment industry experience where he has guided and advised on asset allocation for a diverse set of institutional and retail advisors across North America, Europe, and Asia. Myles holds an MA in economics and is a CFA charter holder.
I'm also joined by Vice President and Senior Portfolio Manager, Jason Gibbs. Jason has over 20 years of investment management experience and is the co-head of our equity income investment team here at Dynamic. Jason is a CPA, CA, and CFA charterholder. The intent of today's podcast is to provide an overview of major headline issues in the financial sector and their impact on investing, inflation, interest rates, and financial stability.
In addition, we will discuss our perspectives on maintaining perspective in complex times like these and the importance of professional advice, professional money management, and staying on track with your longer-term financial goals. I'm going to start with a question to Myles. If you could bring investors listening in today up to date with what has happened, specifically with the U.S. regional bank scenario, and then ultimately what we've seen evolve more globally with issues like Credit Suisse.
Myles Zyblock: Hello, Mark. Thank you. It's a pleasure to be with you today. As you mentioned, we have had three U.S. regional bank failures, Silvergate, Signature, and Silicon Valley Bank. The fear is that there could be more. Regional bank's deposits have been growing as a share of liabilities for over a decade. It's estimated that over 40% of the deposits are uninsured and therefore highly runnable. The opportunity cost of holding deposits at the smaller U.S. banks has risen, especially given that deposit rates are still near 0% while money market rates are now 400 basis points or 4% points higher than those deposit rates.
There's a risk that the downward pressure on the deposit base will persist, and this could create some additional pressure on the regional banks over coming weeks or months. The regional bank stock index in the U.S. has declined by 33% in March so far over concerns that these banking industry issues might not be over. Then the sense of financial industry unease was recently magnified by the troubles that you pointed to there, the troubles for Credit Suisse.
This bank was classified as one of 30 global systemically important banks. The 30 banks on the list are deemed by the regulatory authorities to be of such importance that failure could generate conditions for a wider financial or economic problem. As you know, there was a forced merger between Credit Suisse and UBS recently. Under the guidance of the regulators, this merger, I think, will go a good way to reducing some of the immediate risk in the financial system.
Mark: Myles, based on these events, does this change the way you view the stability of here at home with our Canadian banks? How do they differ from what we're seeing happening in the U.S. and European sectors?
Myles: I wouldn't go so far as to say that there is no risk in the Canadian banking system, but the Canadian banking industry is on a solid foundation. Our banks are well-capitalized. They have diversified business models and funding sources, and they have to meet strict liquidity standards set out by the federal regulators. Canadian banking industry is well recognized for its prudent risk management practices, stringent government oversight, and very sensible regulation. Banking crisis, at least historically speaking, have often been rooted as crisis of confidence.
Recent surveys by both the Bank of Canada and the International Monetary Fund not only acknowledge the strong capitalization levels of Canadian banks but show a high degree of confidence from market participants in our country's financial system. Let me just put what we're seeing into perspective, especially when it comes to the Canadian situation. There have been no bank failures in Canada during the Great Depression, World War 2, the 1970s energy crises, the dot-com collapse, or the great financial crisis. If memory serves me correctly, there've only been two bank failures in the past 100 years. Those both occurred in the mid-1980s and they were quite specific situations to the two banks that were involved. Again, Canada has a very strong foundation. Its banking industries on a very solid foundation.
Mark: Jason, there have been so many headlines surrounding these events. What advice would you give investors who may be nervous about their investments and a lot of that just having to do with listening to the information being communicated mostly through the media and that media overload?
Jason Gibbs: Great question Mark. One, I always say, it's perfectly natural to feel stress at times like these especially when we're bombarded as you said, with negative news on a fairly constant basis when things go wrong, but if you have any chance of being a successful investor, you need to recognize that our first impulse at times like these, because we're all humans is to flee and feel stress. That's the first impulse to find safety. What I would call and what others have called level one thinking.
Now, the problem is, especially when it comes to investing that is often always in the long run, the exact wrong thing to do. Markets cannot be timed. Look, we live in a world and life is something that is not a straight line of just happiness every day, and if things do go wrong. You cannot flee to safety every time something goes wrong as an investor, because what's going to happen you will miss those days when the market turns. There's a lot of data out there I know Myles has it, that if an investor misses those big, big up days in the market when things turn it's really going to harm your portfolio for the long run.
The other thing I would say is that you can't let the day-to-day news cycle distract you from the prime goal of what we're all trying to do, and that's own a properly diversified portfolio of the best businesses we can find. These are businesses that offer essential services, have moats, pricing power, and most importantly, they're going to be around in 5, 10, 15 years when everyone has forgotten what happened in March of 2023.
I remember my colleague Steven Hall mentioned this on a podcast with Tom Dicker in our equity income group recently. Warren Buffett in his recent letter to investors gave the example of buying Coca-Cola in 1994, when I think we were going through another interest rate hiking cycle. He bought 400 million shares, or he had 400 million shares of Coca-Cola, spent $1.3 billion to get that investment. He had $75 million of dividends coming in on that investment. As he said in his letter, you fast forward to 2022 and he's done nothing I think on that investment, and the dividend is $704 million on a $1.3 billion position. It's simply an example of something that Warren Buffett has put out there publicly.
That's just one example of the power of letting the compounding be. Just let it be in the great businesses that are out there. Don't try and time around macro events, because you're just going to get in trouble. For us Mark, we really stick to those essential businesses and diversified sectors. Keep it very diversified. Keep an eye on the balance sheet, whether it's utilities, consumer companies, financial companies, telecom, technology, on and on, and you're going to be fine. That's what we always think about.
Mark: It's such a great point, Jason. I think many investors listening to this call and the three of us together went through the 2008 financial crisis. Myles, are we about to repeat this in this particular instance?
Myles: I don't think so Mark. Back in 2007, 2008, you were dealing with a very large and global real estate problem that eventually engulfed some of the largest banks in America and in the world. Because of that crisis, regulators have forced the most important banks in particular to greatly increase their capital strength and liquidity ratios. Today, we have a situation that seems at least to this stage, largely confined to several regional banks which have very concentrated deposit relationships that are mostly above the $250,000 deposit insurance limit and some of these banks also made some very bad bets. The regional bank situation seems – it does seem to be quite specific to the U.S. where there was, perhaps some people would argue, a softer application of the capitalization rules. That enabled some of these smaller banks to run up higher risks than what has been allowed among the larger banks. Again, I don't think that this is like 2008 at all.
Mark: Given the broader market concerns. We hear about them every day and probably since we've emerged from the pandemic inflation, interest rates, and now the possibility of a recession. Jason, how are you managing as an investment professional, the risk-return trade-offs?
Jason: The first thing I'd say, Mark, is episodes like this, which again, we seem to see something happen every year that was not predicted, but episodes like this really should crystallize it for people that trying to make short-term predictions about interest rates and economies and recessions or no recession is impossible. No one was talking about regional banks two weeks ago, nobody. I didn't see it in any looking-forward forecast, we should be careful about regional banks. This is what happened similar to the beginning of 2020, no one was really talking about we should be thinking about a pandemic.
Again, as a portfolio manager and an investor, you can't get caught up in trying to time around these things and thinking about what macro might happen. You have to be very aware of it, but you can't get caught up in that and trying time it. Now, second Mark, we always focus on stepping back from the day-to-day noise and keeping it to security selection. What is this business worth? Depending on the fund, we may own 30, 40, or more securities, the best businesses that we can find.
Every day we're trying to figure out what is the business worth in our mind. What is the market today, the auction known as the market think it's worth? Does that give us an opportunity? Is the security cheap? Is it fairly valued or is it expensive? What we don't do is change our models every second day for what might be happening to interest rates or what might happen to the economy next month that would--
No one should think about businesses that way. Just as if you owned a private business, whether it was say, an apartment building or a farm or your own private business, you're not going to be changing your value every single day. We're looking forward many years and always remember that stocks over the long term are very directly correlated to earnings growth. What are the earnings going to be? Then we think about diversified portfolios trying to put together a diversified portfolio, what we like to call it stew.
One thing Mark that still confuses people a lot I know is that the market is a discounting mechanism. It's always looking forward. The thought that reading the news today and then try to trade around that, that can get you in a lot of trouble. The market will look over the valley very, very quickly when it starts to see a change happening in terms of what's happening with the current situation. Now short term I would say it probably doesn't take a big leap to say that banks will likely cut back on a certain amount of loan growth so you may see a bit of credit contraction from here. I don't think it takes a leap to make that conclusion.
Again, in the long-term, if you own the best businesses, the earnings will be there over the long term. That's what we're looking at and we certainly see some opportunities on a daily basis given what's going on in the markets today. I would note, as we've all seen, I think very quietly, interest rates as we speak today have certainly declined fairly substantially just over the past month. Even if you look at the dividend yield of the TSX, it's now above the interest rate yield on the 10-year Canada bond, which it's happened very quietly. That's what we think about, Mark.
Mark: Jason, your years of experience and I know you have a real personal interest in this subject, we're going to see good and bad behaviors or maybe that category of can't help ourselves with the influence that we get from the information that's constantly being thrown at us. What can you offer our investors that are listening to help manage the emotional side of looking at their investments and their finances and staying on track with their long-term financial plan?
Jason: That's a great point, Mark. I'd first make the point that this can make or break your success as an investor. Often, I think this is the most important thing that people should think about handling their emotions when it comes to investing. It can really make or break you. If you think about the peaks and valleys of investing and the peaks and valleys of life. When you think about stocks and markets, it is humans behind the pricing of those securities. Humans can have periods of euphoria and periods of depression. The first thing I always say is step back and recognize that is part of being human. We should be kind to ourselves in a way, that is part of being human. It's not easy, especially when it comes to investing. This is why so many fail at it because it's not easy, one when there is euphoria staying out of it.
I always go back to the best investor of all time, Warren Buffett. Part of the way he became Warren Buffett is he didn't get involved in peak periods of euphoria. He took a lot of heat for doing that at times for not getting involved. Then in periods of desperation, despondent, when there's a lot of fear, and there's been many periods like this in history you got to be very, very careful not to disrupt the compounding and your long-term plan just to feel safe.
Even though that can feel like the right thing to do at the time, you always have to go back and think as I do, look, storms come and go, either in the physical world or the emotional world. They can go on for longer than you think, but they do end. There is light at the end of the tunnel.
In my investment experience over a few decades now, there's been many, many storms, and there will be many in the future. As I look back-- Myles certainly has the data on this. If you think about a century worth of data, stocks, bonds, cash, gold, real estate, owning publicly traded businesses, stocks is the best way to go. That's where you're going to create and preserve wealth. Just saying that, it sounds easy, but the hard part is sticking with it. That's why many do fail at this. You just got to stick with it and remember that you own great businesses.
As Ned Goodman, our founder is famous for saying he never met a rich pessimist. Always remember that you have to be an optimist in life. You have to be an optimist to be a successful investor. I've never met a pessimistic investor that's done well over time. Just think of some of the best investors and inventors over time, like Steve Jobs, Bill Gates, optimistic people.
Avoid social media, I would say as much as you can, and it can be hard to do. You're going to catch a lot of negative news on media sites, social media sites because that's how they get high ratings. Try to avoid that. Don't overtrade. Overtrading does not work. Market timing doesn't work. Remember your time horizon is everything. No one knows what's going to happen over the next month or a year. If you look out 10 years, your risk declines massively. You just got to always keep that in mind and remain a little bit stoic and we'll be fine.
Mark: Jason, your comments on owning great quality businesses. This is a great segue into a question for you Myles. It's around the subject of active investing versus passive. When we're in times like this, the question is, why do you think active management in terms of portfolio construction and building out an investment program is particularly important?
Myles: An active manager has many different tools that can be used to enhance the risk-adjusted return of a portfolio. Cash levels can be adjusted, industry allocations can be altered. Those are just a couple of the important steps that an active manager can take to change the characteristics of a portfolio given shifting circumstances.
However, what is probably the most important is the manager's ability to differentiate between investments. I think Jason did a really good job of speaking to this earlier in different ways.
In periods of financial stress like we're seeing today, we often see stocks regardless of their fundamental health moving up and down together. In other words, it's called the good in quotes and the bad in quotes they get treated with the same brushstroke by investors. I think this can create some important and meaningful, mispricings or dislocations within the market that I believe a bottom-up stock picker can capitalize on. If you take a look back at history, some of the more difficult investment environments for example, that which persisted for a good portion of the 1970s offered some of the best long-term opportunity for an active manager. I think in times like this, the active manager does have some tools at their disposal to help the performance of a portfolio.
Mark: Myles and Jason, I would like to thank both of you for your comments, perspectives, and insights on this call. For further information on any of the topics discussed today, please contact your financial advisor or visit us at Dynamic.ca. We believe strongly in the concept of investing with advice and we hope you found this call informative and useful. Thank you for joining us.
You've been listening to another edition of On The Money with Dynamic Funds. For more information on Dynamic and our complete lineup of actively managed funds, contact your financial advisor or visit our website at dynamic.ca. Thanks for joining us.
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