Retired TD Wealth chief portfolio strategist Robert Gorman says investors shouldn’t expect a repeat of recent years’ strong performance and prepare for further monetary tightening.Fred Lum/The Globe and Mail
As a young man, Bob Gorman wanted to follow in the footsteps of his older brother and become a surgeon. But while studying biology at university, Mr. Gorman realized he had "no interest in dissecting people for a living." He then got an MBA and landed a job at Toronto-Dominion Bank, where one of his contributions was founding TD Private Investment Counsel – now Canada's largest money manager for private clients. Mr. Gorman also served for many years as the chief portfolio strategist at TD Wealth. He retired in 2015, after 37 years with TD Bank.
You were involved for years in asset allocation decisions at the professional level. How are you invested now?
In retirement, my portfolio still has two buckets. In the first one is a discretionary portfolio at TD Private Investment Counsel, where my overall mix is roughly 90-per-cent equities and 10-per-cent fixed-income.
As for the second bucket, I was an officer of TD for many years and, when given the opportunity, I exercised long-term options on TD shares and held onto them.
The portfolio in the first bucket seems to have a very high equity weight.
Yes – it reflects three factors: First, I have a higher tolerance for volatility than most due to my experience in portfolio management. Second, the shares I hold are principally large-cap, dividend-growth stocks that combine growing tax-advantaged income with lower-than-average volatility. Third, about 35-per-cent of my non-registered equity position is in private equity managed by Northleaf Capital, formerly TD Capital. The private equity provides solid upside while smoothing variability in publicly traded stocks.
What do you see as the role of fixed-income investments in investors' portfolios today?
Historically, bonds have generated steady income while acting as a stabilizing influence on portfolios and dampening volatility to tolerable levels for most investors. Today, bonds produce little income and in my view, very limited prospects for capital gains, so aside from reducing equity market risk, they have few positive attributes. However, they do act as a source of liquidity should opportunities arise, so I like to maintain some non-equity positions in my portfolio.
What's your take on rebalancing?
Broadly speaking, there are two approaches to asset allocation. The first and most common is to employ strategic, or long-term, weights to each major asset class and rebalance to those target weights periodically. The second approach, which is used at TD Private Investment Counsel, assigns tactical ranges to each major asset class, for example 40- to 60-per-cent for equity – within which shifts are made based on perceived value. I employ the latter approach, so my current, 90-per-cent equity weight could drop to 80 per cent or rise to almost 100 per cent.
What were your worst and best investments?
My worst investment was Canadian Natural Resources stock, which I sold to take a large tax loss in the oil bust of the eighties, only to see it recover dramatically thereafter. As for my best investment, I've had many fortunate selections but none better than TD stock due to a decades-long holding period. Both of my worst and best investments illustrate the virtue of patience.
How do your two buckets finance your retirement?
In my first bucket, dividends, interest and capital gains are all re-invested, so there are no withdrawals from that account. In my second bucket, I take my TD dividends into income. They complement my pension income, which I consider a fixed-income substitute.
You have some strong views on the passive versus active investing debate. What are they?
Investing in ETFs that mirror the S&P 500 or other capitalization-weighted indices directs most of that cash into a relative handful of ultralarge-cap stocks such as Apple, Microsoft and Alphabet. This pushes up their share prices, further increases their capitalization and means that an even higher proportion of ETF flows will be directed into these large growth stocks. As a result, these ETFs sharply outperform value stocks and most active managers who own them. This is exacerbated by the fact these ETFs hold no cash, whereas active managers typically do to have cash available for purchases and meet liquidity requirements. This is a strategy that works in a bull market but is highly vulnerable in the event of a market pullback. Most investors are not fully aware of this and in my view would be well advised to currently focus on dividend growth stocks that offer better value, income and more downside protection.
You had a long run as a strategist making market forecasts and providing investors with direction. What key thoughts would you share with our readers as you look ahead?
We were more positive than most on the equity markets coming out of the credit crisis, based on very accommodative monetary policy in combination with decent valuations, modest economic growth and solid corporate earnings.
Going forward, we are in the early stages of monetary tightening, which removes one of the tailwinds for stocks and there seems little room for multiple expansion. Therefore, investors should condition their expectations and not expect a repeat of recent years' strong performance.
This interview has been edited and condensed.