WHEN SCREENING STOCKS FOR ESG IS ‘A SLIPPERY SLOPE’
Manager of Canada’s biggest fund dishes on outlook, diversity and sustainable investing
If you are a Canadian reading this, there is a good chance Sarah Riopelle is looking after your money or the money of someone you know. Riopelle, 46, oversees about US$107 billion as senior portfolio manager at RBC Global Asset Management. More than one million Canadians are invested in funds she’s responsible for at the asset-management arm of Royal Bank of Canada, North America’s fifth-largest lender by assets. There she manages multiple funds under the RBC Select banner, including the RBC Select Balanced Portfolio — the biggest investment fund in Canada, with about US$30 billion in assets.
The fund’s 13.9-per-cent return in 2019 beat 82 per cent of its peers.
Born on a Canadian Air Force base in Newfoundland and Labrador, Riopelle had the typical life of a military kid, moving from place to place, including a stint in Germany. Her family eventually settled in Ottawa. It was there Riopelle first got hooked on numbers, working as a teenage accountant at her high school’s store. Later, she graduated from the University of Ottawa with a bachelor’s degree in commerce, majoring in finance and international management before her career in banking took off. In an interview with Bloomberg’s Doug Alexander at the end of January, Riopelle talked about her outlook for 2020, how active management can outshine passive strategies, and what she’d tell today’s students who want to follow her career path.
Q How are you feeling about the markets for 2020?
A Given the strong performance that we’ve seen in markets over the last couple years, especially in 2019, we’re cautioning people to lower their total return expectations. We’re not going to get a repeat this year of the returns that we saw in 2019.
Q What’s your outlook for stocks, and which region provides the best opportunities?
A We’re sort of looking at mid-single-digit returns for the next 12 months. We have a preference in the asset mix for international over North America, because we think that there’s better return potential and better valuations in Europe and Asia than in North America, so that’s kind of where we’re tilted. We’re a little bit overweight in emerging-market equities as well.
Q Generally, how are your funds performing against benchmarks, and what’s behind the performance?
A They’re doing quite well. We’re overweight equities, underweight bonds. I don’t want to put a number on it, but most of our strategies are ahead of their benchmarks and ahead of the median of their peer groups as well. The main driver would be the equity overweight, because our equity holdings are above the benchmark. Equities have performed well, and I think we carry a little bit more equities relative to our peer group as well.
Q In a world where passive management seems to be taking over, what’s the case for active management, and how do managers justify the higher fees?
A Active and passive both have a place in an investment portfolio, and we as a firm want to make sure we have all vehicles available for investors, which is why we did the alliance with Blackrock about a year ago. (RBC’S asset management division and Blackrock’s Canadian asset manager combined their Canadian exchange-traded funds under a new name, RBC ishares. The alliance is now the largest player in the Canadian ETF market.)
I’m of the view that the decision on investing in passive is probably based on two key things.
One is the availability of alpha in the particular asset class that you’re looking at. So if you’re looking at large-cap U.S. equities, as an example, generating alpha in that asset class is becoming more and more difficult with the number of people and investors who are in that space. So that possibly would be a place where you would consider a passive allocation. But if you’re investing in emerging-market small-cap equities, if you want to go to the total other end of the spectrum, there’s a lot of alpha available there to harvest for active managers, so it probably makes more sense to go active there.
And then the other side would be the market regime that we’re in. In a macro market, when all stocks are moving up based on interest rates with the Fed, maybe it doesn’t pay to be in active solutions. But if you’re in a stockpickers’ market where companies are being rewarded for fundamentals and you can generate alpha on an individual basis, then maybe active management makes more sense there.
When we look at performance of our multiasset portfolios, we are generating alpha on a net-offees basis. We are still adding value for our clients, and we think that we can continue to do that.
It’s getting harder and harder, so we’re doubling down on our efforts to make sure that we have all the right tools, the expertise, the people, access to data, and looking for new ways that we can keep our edge relative to the competition.
Q What’s your view on sustainable investing? Do you see the attention being given to environmental, social, and governance issues gaining more traction, or is it just the flavour of the month?
A Climate is a particular focus for people now. They seem to realize that global warming is a thing. I think that doesn’t go away. It’s going to continue to gain traction and be topical for people, and I think we’re very well-positioned in that way: We incorporate ESG into the investment process, and we really think about active stewardship. With all of the companies our portfolio managers invest in, they meet with management teams and boards and talk to them about ESG factors and what our concerns are and help them to work through some of those issues.
Q Within those efforts, are you prepared to drop a stock from a fund if it doesn’t meet certain ESG criteria — and what would that criteria be?
A That’s an ongoing discussion. Ultimately, our clients hire us to manage our assets relative to a market or an index. We have to be very careful about screening out sectors and stocks based on some of these criteria because our clients didn’t ask us to do that. If our clients wanted us to do that, they could invest in one of the responsible investment or Vision suite of funds that we have.
That said, we do have a few “no-go zones”: Landmines is one of them, a couple things related to ammunition and guns, but that’s sort of all that we’ve done. I realize that tobacco can be an issue for some people and thermal coal. But it’s a slippery slope if you get to the point of starting to screen that stuff out. Because where do you draw the line, and where do you stop?
Q The asset management industry has a reputation for being male-dominated. What tangible changes, if any, do you think we would see across the industry if there were more women managing funds?
A I’m going to tilt that question a little bit to diversity in general. I realize that the biggest piece of the diversity conversation is gender, but we fundamentally believe in diversity of thought and building diverse teams, whether it be gender, whether it be educational background, ethnicity, any of those things. We think bringing together teams of diverse people is going to lead to better results and better decision-making. I’m on multiple, different diversity committees, and part of the conversation (among committee members) is: We need to make sure that we’re bringing in people from all different types of educational backgrounds to make sure we don’t get group-think on teams.
It has certainly been slow moving, but I would say our analysts are a much more diverse group now than they were 10 years ago, and those are our future portfolio managers. Over time, we’re really positive about the prospects of moving that (gender) number forward toward parity, but it takes time and you have to be patient — unfortunately, and I’m not a patient person.
Q Who were some of your champions who helped you along the way?
A Our chief investment officer, who is my boss (Dan Chornous). I’ve been at RBC for the last 22 years, and he has been my boss for 22 years. He has really been both my mentor and my sponsor, in terms of just making sure that my career is pushing forward. He has certainly been instrumental.
People ask me what the challenges have been being female in this industry as I’ve come up through my career, and they’re disappointed when I tell them I haven’t actually experienced a whole lot in the way of challenges . ... I think it’s because I had a strong mentor and sponsor who was very supportive of me, and I also work for an organization that is very focused on diversity.
Q If you were speaking today to a business school graduate who was interested in following a career path such as yours, what advice or warnings would you give them?
A Find a mentor or a sponsor, or several of them — people you need to bounce ideas off of. They often ask me, “If you look back on your career, what is the one thing you would change?” And mine is networking. I am not a very social person. I’m terrible at small talk. I would prefer to sit at my desk and work away at spreadsheets and stuff, and so early in my career I avoided all networking opportunities because I just wasn’t comfortable with them. When I fast-forward to now, I look back and realize my network is not as big as it could be if I had really focused and made an effort and gotten outside of my comfort zone and forced myself to go to cocktail receptions or whatever to meet people.
I advise young people now that networking is really important. Don’t think you’re going to see a job posting on a website and you’re going to apply to it and it’s going to get into some HR system and you’re going to miraculously be picked out of a pile of 300 different résumés. You need to use your network to make those opportunities happen.
And the last one is, be open to all different types of opportunities. I started out as a secretary for a corporate finance team. I went from there to be an associate for two gold analysts — certainly not what I planned on doing. And then I ended up in quantitative research and then macro strategy and then Canadian equity portfolio management and then this job that I’m in. What I’m saying is, I didn’t have this concrete plan as to what I was going to do with my finance degree. I just let it happen.
Climate is a particular focus for people now. ... I think we’re ... well-positioned in that way: We incorporate ESG into the investment process.
Q Outside of your work life, what do you do for fun?
A I don’t have fun! (Laughs) I work quite a bit. I have teenagers at home. I have two halves of my job: Managing the balanced solutions, but also I help our chief investment officer manage the global investment team. We have 23 teams in seven cities, and that means I spend a lot of time travelling to the different offices. In my spare time — and it sounds kinda corny — I spend most of it with the family, because I have limited time with them . ... But my kids are getting older, so I’m going to have to develop a hobby at some point.