Som SeifDella Rollins/The Globe and Mail
Som Seif, chief executive of Purpose Investments and a pioneer of the ETF industry in Canada, joined The Globe and Mail for a Facebook Live Q&A this week. The following are edited excerpts. Click here for the full video interview.
What impact do you see CRM2 (new regulations that went into effect this month that requires investment firms to provide personalized accountings of investment returns and fees) having on the ETF industry over the next year?
I think it's going to have an impact on the industry … I think that there's a large number of people that understand these things already, they know that they're paying fees. But there are a large number of people that don't. For those people, I think that it's going to be a bit of a wake up call. I think it's going to drive people to think about: 'How do we keep costs lower?' Because fees are one thing you can control. But I don't think that advisers are going to get squeezed and all the rest. I actually think it's the exact opposite. I think the people who are going to get squeezed are more the people like myself, manufacturers. And that's why we really believe in keeping costs low on the mutual fund or the ETF side is really critical. The adviser actually is the most important part of the equation. In fact, I think the adviser is the one who does the most here to help investors not just build portfolios, but to help clients with their long-term goals, and I think advisers are going to win coming out of this CRM language. They're going to build their practices much more pragmatically and focus on how to help clients and the value-add that goes along with that, and they're going to get paid for that, and clients have to understand they have to pay for that value-add.
Should I be buying Royal Bank of Canada shares?
I've been a Royal Bank investor for many, many years. I started my career at Royal Bank, actually. … It's done very well for me. But I also find that Canadians fall in love with banks and it's because their performance during the last 20 years has been phenomenal. Stock performance has been great, the business has been improving. But we also have to recognize that the banks are fundamentally shifting … going into a period where their businesses are becoming much more impacted by changes of margin structure. In my view the banks are going to become more like utilities.
And so, what a utility looks like, is a low-growth business, a high-dividend paying company. I don't know how you want to position Royal Bank. If you're looking for Royal Bank to give you the sort of … investment returns that you saw through the 90s and 2000s, I don't think that's likely going to happen. It doesn't mean Royal Bank is a bad company. I own it in my portfolio and I think it's a good core, but I don't think you should expect more than five to eight per cent annualized returns out of it, which for most people is very, very good.
Bond markets are in uncharted territory these days, given that so much government debt worldwide is featuring negative yields. What do you make of the current state of credit markets?
I think bonds are the most overvalued assets in the marketplace. I think that the bond market right now is very challenging. I think it's actually probably the most overvalued part of the marketplace. And so for most investors I actually think you should be very careful to play bonds. You have to be much more thoughtful about the amount of duration risks, the interest rate risk you're taking, the amount of interest rate spread you get. I think a lot of people have been venturing into more risky areas like corporate bonds and high-yield bonds and preferred shares. And that is a tricky slippery slope as well because those assets act much more like equities – meaning that when the markets fall off, they actually correlate very highly with them, and they fall off quite dramatically. So they don't act like bonds, and I just don't think that's a very good trade-off as well.
How can investors get a reasonable amount of income in this environment without taking on too much risk ?
If you are in a decumulation phase, meaning you're at the stage where you're looking at retirement, you're looking to make money off your portfolio. This is the trickiest part for any individual investor right now. I think one of the important things that you have to do is think of different ways. You can't have 40 or 50 per cent of your portfolio in fixed income because you're just not going to get enough return off that monthly income. You're going to probably have more equity exposure, alternative exposure, things like that. I think there's really wonderful opportunities in high-quality dividend companies, high-quality assets that provide really nice income, but I think it's really challenging. Or the other is to put more money at work and effectively earn less on that money, but that's a safer way to do it.