RBC Financial Group
RBC Home | Search | Site Map | Contact Us | Legal Terms | Français  
Other RBC Sites:
Banking Investments Capital Markets
» Corporate Profile
» Corporate Governance
» History
» Investor Relations
Media Newsroom
 News Releases
 Editorial Edge
 RBC Executive Profiles
 Speeches
  Diversity
 RBC Facts
 RBC Purchasing Managers’ Index
 RBC Canadian Consumer Outlook Index
 RBC U.S. Consumer Outlook Index
 Special Reports
 Multimedia
 Events Calendar
» RBC Social Media
» Economics
» Publications
» Community & Sustainability
» Careers
» Diversity
» Become a Supplier
» Become an Employee
» Make a Complaint

Speeches

 

Forging ahead: Investing and business strategies
for a global capital market

Printer-friendly format

George Lewis
Chairman & CEO
RBC Funds Inc. and
RBC Global Investment Management Inc.
Mississauga Board of Trade
Tuesday, May 28, 2002

Thank you and good afternoon.

Thank you very much for your introduction and kind words. This is not an easy time to be making financial decisions, either for your business, or for your own personal investments. The fact is, these are uncertain times. Many variables could affect global economic performance over the near to mid term. There are even more divergent opinions as to how these variables will affect you as an investor and as a business person.

We are all searching for that one "truth" that will serve as a guidepost for our businesses and investment portfolios. Unfortunately, our experience is likely to be similar to the quest of the philosophy student for the perfect political and economic system. Instead, he finds himself confronted by the Bovinian Theory of Economics and Political Philosophies explained in simple "Two Cow" terms:

Socialism : You have two cows. The government takes one and gives it to your neighbour.
Communism: You have two cows. The government takes them both and provides you with milk.
Fascism: You have two cows. The government takes them both and sells you the milk.
Bureaucracy: You have two cows. The government takes them both, shoots one, milks the other, pays you for the milk, and then pours it down the drain.
Corporatism: You have two cows. You sell one and force the other to produce the milk of four cows and then act surprised when it drops dead.
Capitalism: You have two cows. You sell one and buy a bull. Clearly the preferred alternative.

I would like to share three things with you today -
First, to provide RBC Investments perspective on the capital markets and long term investing in these challenging times. Second, to review how RBC Funds Inc. and its primary investment manager, RBC Global Investment Management, are charting a new course as businesses facing large global competitors; we believe there are parallels in the challenges faced by many Canadian-based businesses. Finally, to share with you some thoughts on the importance of a "new culture of responsibility" in a post-September 11th, post-Enron environment.

Let me begin by providing you with the current capital market outlook of the RBC Investments Strategy Committee. First, what is RBC Investments and second, what is its Strategy Committee? RBC Investments is the division of the RBC Financial Group focused on meeting the investment needs of individual clients - through our financial planning teams in RBC Banking branches, our self-directed and full-service brokerage businesses, and our discretionary investment counselling, private banking and trust services for high net worth individuals.

The mandate of the RBC Investments Strategy Committee is to provide a quarterly strategic review of the capital markets and recommended asset mix for use by all RBC Investments businesses in serving their clients. It is comprised of investment management professionals from around the globe - North America, Europe and Asia. It is supported by an in-house research team that is focused exclusively on the needs of investors. It is Chaired by Mark Arthur, the President & Chief Investment Officer, of RBC Global Investment Management, the investment manager of the Royal Mutual Funds family and the RBC Advisor Series Funds family. In short, it is truly global in scope and capability.

While dire economic news may make headlines, the fact is the fundamentals of our economy remain sound, and we estimate a moderate economic recovery in 2002. The North American economy is being revived through unprecedented interest rate relief and stronger fiscal stimulus. We are seeing evidence of this rate relief in the economies of both North America and Europe.

While the Fed's desire to ensure an economic recovery in the U.S., combined with the lack of obvious inflationary pressures, may temper interest rate increases, we don't expect returns on short or long-term government bonds to exceed their coupon rate.

Turning from the economy and bond markets to our view of the equity markets, it is important to recognize that equity markets don't wait for the actual economic recovery before rising. In 1990/1991, the market bottomed six months before positive GDP growth and a full 18 months before the peak in unemployment rates.

During the first few weeks or months of emergence from a long bear market, low interest rates and excess financial liquidity can make it possible for stocks to rally. This is what happened in the last quarter of 2001 following the September 11 tragedy and subsequent short-term dive in global share prices.

For such a bounce to have staying power, investors will need to stick through the current climate of disappointing reported earnings and rising corporate layoffs. Once investors begin to see a plausible and probable resumption of earnings growth and regain confidence in the accounting behind those earnings (which we believe will occur), we will see more lasting improvement.

To sum up, this is an environment where we would recommend a modest overweight for equities vs. fixed-income securities. However, the larger message is that we don't believe that all sectors of the equity markets will perform equally well over the next twelve months, or even the next decade. Rather than a broad market advance across all sectors - financial services, consumer stocks, technology, communications and media, natural resources, health sciences, and infrastructure-related stocks - we expect significant returns will depend on careful sector and stock selection.

With this backdrop, there is no substitute for a financial plan that includes a balanced asset mix and diversification within these asset classes. While asset mix should depend on your investment objectives and risk profile, the RBC Investments Strategy Committee currently recommends an equity weighting of 60% for long term balanced and growth oriented investors. A diversified portfolio, with stock exposure at this modestly over-weight position will give your portfolio greater staying power.

With respect to diversification within the equity component of your portfolio, in a market with reduced visibility of earnings and elevated risks, one of the best strategies to manage those risks is by looking at the sector make-up of your holdings.

Traditionally, investors have diversified their portfolios along geographic lines, complementing their Canadian holdings with some US equities and perhaps European, Asian or Latin American holdings. While it is extremely important to use your allowed foreign content of 30% within your RRSP,
at RBC Investments and RBC Global Investment Management, we focus on a sector approach, and recommend apportioning your portfolio into industry groups, thereby achieving geographic diversification indirectly.

Why have we adopted this approach? Well, in terms of conducting basic research and portfolio management this approach reflects the increasingly "borderless" markets when it comes to major businesses. Swings in various industries occur globally rather than within the confines of a specific region. Furthermore, as long as one has a defined investment process, which we do at RBC Global Investment Management company conducting global equity management by sector, rather than geography, can concentrate most of its research and investment management resources in a few locations. As such, while RBC Global Investment Management has personnel in six international centres, the vast majority of our 200 investment research, portfoio mangement and other investment management employees are concentrated in Canada

The most important reason for adopting the global sector approach is simply this; the benefits of geographic diversification for investors have gone down over the last five years, while the benefits of sector diversification have gone up.

Numerous academic studies of the performance of equity markets around the globe, certainly in developed markets, have shown that the correlation among geographic markets has risen - U.S., Canadian, European, Asian markets have moved more in tandem in recent years. This means there is less diversification benefit from having exposure to each of these geographic markets.

On the other hand, these same studies have shown that there is less correlation of stock market performance across different industry sectors - financial services companies perform differently from health sciences companies, which perform differently from technology companies within one market and across geographic markets. This means that there are more diversification benefits from having exposure to each sector in a global investment portfolio.

While academic studies support this, we don't have to strain to recall a real-world example of this in terms of the performance of equity markets for most of 2000 and 2001. Investors who believed they enjoyed diversification by holding Canadian equity funds, U.S. equity funds, European equity funds and, yes, even Asian equity funds had a rude awakening when all declined significantly. The underlying reason in most cases was an exposure to technology stocks of 30-40% in each fund.

A better means of cushioning the blow would have been to balance an investment in these funds with, for example the Royal Global Health Sciences Fund (up 10% in 2001). For investors desiring simplicity, another alternative is a global equity fund with exposure to all industry sectors, such as our Global Titans Fund. In the spirit of Canadian-based fair play, I should note that a few of our large foreign competitors also offer these kinds of funds.

In terms of allocating investments among various sectors under current market conditions, there are conflicting short term arguments in favour of various sectors. The RBC Investments Strategy Committee has recommended a consistent underweighting of Technology and Telecom for the last six months, with an overweight recommendation in Consumer and Industrial Sectors. One sector within the Consumer area which we believe will be particulary attractive over the long term for demographic, technological and other reasons is Health Sciences.

However, rather than attempt to predict which sector will outperform in the next twelve months, I would like to re-inforce the basic message of the RBC Investments Strategy Committee to you as individual investors -
#1 maintain an asset mix that fits with your investment objectives and has a sufficiently large equity exposure (60%) to enable you to meet your long term goals; and,
#2 ensure that the equity portion of your portfolio is diversified across industry sectors on a global basis.

I will now turn to a review of how RBC Funds Inc. and RBC Global Investment Management are evolving our business model to address these trends and our competition. We must begin at the foundation - by focusing on the investment process we use to select stocks for each of our sector funds and our diversified Global Titans fund.

Why must we begin here? Because simply selecting the sector versus geographic approach to portfolio construction is not sufficient from a business or investment management perspective. Other global asset management companies, such as Merrill Lynch and Deutsche Asset Management have announced their intention to follow this approach, presumably after having noticed the launch of RBC Global Investment Management's sector approach and related Royal Mutual Funds in January 2001. So what makes our approach unique?

First, in order to make our in-depth research process effective and efficient, we screen the over 1500 companies in the MSCI global stock market index for ten years of results along several criteria : profitability, leverage, sales growth, return on invested capital, predictability of results, and valuation, using a metric which corrects for accounting differences among different jurisdictions. Once the companies have passed this proprietary screening process, roughly 500 remain, which results in 50-75 stocks for each of our sector research analysts to examine.

The second part of our process involves conducting in-depth research, including a traditional competitive analysis of industry structure, competitors, suppliers, regulatory environment, as well as a review of the company's operations, management team and approach to governance. In this respect, we are particularly interested in a company's adoption of a "North American" model in terms of being committed to creating shareholder value and otherwise recognizing the rights of shareholders as owners of the company.

Our universe of stocks is then ranked based on this analysis and RBC Global Investment Management's portfolio managers use this analysis in making the actual investments in the sector funds in the Royal Mutual Funds and RBC Advisor Fund families.

It is clear that the effect of borderless markets is having a major impact on the decisions facing Canadian companies, including our own. Global competitors, industry rationalization and tight capital markets face virtually every business.

In an uncertain world, it is tempting to retrench and hold one's position. But in our business, RBC Funds Inc.and RBC Global Investment Management, we are taking the opposite tack. We are forging ahead and facing up to our foreign competitors by taking what has made us successful and offering it more broadly.

Our line of 54 Royal Mutual Funds is extremely popular among Canadians, but prior to 2001, they were distributed almost entirely through the RBC Royal Bank branch network.

Through this channel, we grew to be the second largest mutual fund company in Canada, ahead of companies such as CI Funds, AGF, Fidelity and AIM/Trimark. In January of 2001, by expanding our product line to include more global funds, including the sector funds I mentioned earlier, we ensured that there would be no investment product reason for a branch-based client to change his or her relationship.

However, as a mutual fund and investment management company, we no longer wanted there to be any barriers for Canadian investors to hold our funds based on where or from whom they received their financial advice. For example, more than 50% of the assets held in mutual funds in Canada are held by clients of full-service brokers, such as the Private Client Division of RBC Investments, as well as independent financial planners. To remain a top-five mutual fund company in Canada over the long run, we had to address these channels, which we had previously left to be served by these other fund companies. We began this process in 2001 and as a result, increased our assets under management outside the RBC Royal Bank network by $1.8 billion. That is a 50% increase over last year.

RBC Funds Inc. and RBC Global Investment Management will continue to grow in this way, expanding into different distribution channels, including beyond Canada's borders. We will allow our products and underlying investment management to reach more investors through their financial advisors, whether they are based in RBC Royal Bank branches or not.

Other businesses may have gone through a similar high-growth phase in the 1990s. A narrow group of customers or a single channel of distribution typically fuel the growth of many businesses during this phase, during which the appropriate strategy is to maximize business with your traditional partners. However, with the global economy slowing and the growth rates of some industries along with it, it may be appropriate for these businesses to look not just at what they are offering, but at the way they are offering their services and products. The expansion of channels and flexibility of delivery will be the keys to remaining strong in the face of increased global competition and market uncertainty.

In reflecting on the messages I've shared with you today concerning setting investment and business strategies in this uncertain environment, I hope you'll agree on their basic logic. But logic rests on basic assumptions and premises about our world and our economy.

These assumptions and premises were tested in a very clear way by the external attacks of September 11th. In my view, President Bush expressed not only the American view, but the view of the civilized world when he detailed these basic premises in his 2002 State of the Union Address. He referred to them as the "non-negotiable demands of human dignity" : " the rule of law; limits on the power of the state; respect for women; private property; free speech; equal justice; and religious tolerance."

If we pause and reflect on those "non-negotiable demands for human dignity", we will realize that wherever they have been met, in either the Western or Eastern hemisphere, the cause of humanity has advanced.

So where does the greatest threat to these guarantees of human dignity exist today? I do not wish to diminish the personal tragedies of September 11th, the ongoing risk of global terrorist groups, or the threat from governments that respect none of these demands for human dignity. Nor do I wish to equate in any way, the immorality of those who committed the acts of human destruction on September 11th, with those who committed the acts of document destruction in the Enron situation at around the same time. However, over the long term, the more serious threat to these guarantees of human dignity is from abuses by those who benefit from them, rather than attacks by those who don't believe in them.

For how can we defend the "rule of law", if some of our organizations seek ways to skirt, if not break it?How can the "power of the state be limited" if some individuals and organizations use the freedom of these limits to deceive others?How can there be "respect for women" if there is an insufficient number of women's voices at senior levels of our organizations? Or if these voices go unheeded?

How long will "free speech" be defended in all forums, when in the forum of financial reporting, there is both a lack of clarity in the speech and a lack of diligence in its analysis?

All businesses, charities, regulators, governments and individuals will have to come to grips with these issues to create what President Bush referred to as a "new culture of responsibility", which is the best guarantor of these "non-negotiable demands for human dignity".

As a large, diversified financial services company, RBC Financial Group has been fortunate in that the very nature of our industry, combined with the need to ensure that our diverse businesses share common elements of culture, required us to focus on these issues well before these recent events. Over the last several months, we have articulated a common set of five RBC Values which our President & CEO, Gord Nixon, outlined at a recent analyst presentation :

#1 "Excellent service to clients and each other".
#2 "Working together to succeed".
#3 "Personal responsibility for high performance".
#4 "Diversity for growth and innovation".

I want to spend a few minutes on this particular value. There will be three areas of focus with respect to Diversity, driven by an RBC Financial Group Diversity Leadership Council, chaired by Gord Nixon and with senior executive champions for our various businesses, such as myself for RBC Investments. These three areas are:

1. Selecting senior management from a more diverse talent pool, with a particular focus on women and minorities.
2. Increasing our representation of persons with disabilities at all levels of our organization, and
3. Leadership and education on diversity across the enterprise.

#5 Our fifth and final core value is self-evident : "Trust through integrity in everything we do."

These RBC Values are more than words on a page. These values will be incorporated into business unit plans and personal performance plans, ensuring that we "walk the walk" as well as "talk the talk".

I would hasten to add that this is not a new focus, nor are these necessarily new values, for the RBC Financial Group, but our recent growth and acquisitions have spurred us to more strongly emphasize these common values. Nor is the focus on values and integrity new for most companies. In fact, it is extremely important to remember that recent aberrations, such as the Enron situation, are aberrations and not the norm.

I know a speech concerning the importance of human dignity and values was more than we advertised. However, an assessment of these factors is necessary to provide a complete review of the capital markets at this time. After all, the markets are subject to the full range of human emotion, including fear, greed, worry, pride or exuberance (whether rational or irrational).

On that note, I leave you with the assurance that this protracted period of market downturn will pass, as others have before, but we must do our part:

  • Diversify your portfolios from a personal and business perspective.
  • Diversify your personal investment portfolios by sector. Broaden the channels of distribution for your core business competency.
  • Make the defense of the non-negotiables of human dignity part of that core competency.

On behalf of my colleagues at the RBC Financial Group, thank you very much for the opportunity to share these thoughts with you today.

 

Take Action
  Contact a member of the Media Relations Team


In the news
  RBC PMITM signals solid output growth in February (14.03.03)
  RBC seeks emerging painters to enter 16th annual RBC Canadian Painting Competition (14.02.21)
  Royal Bank of Canada announces results of conversion privileges of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series
AJ & AL (14.02.14)
  More »


Related Links
  Quarterly Information
  RBC at a Glance
  RBC Letter
  About RBC


  Special Reports
 
  RBC Canadian Manufacturing Purchasing Managers'Index
 
10/06/2006 10:05:17