FOCUS 2026: Building better portfolios from the inside out

Glen Davidson: Hello, everyone. Good to see you all and out there in TV land. Great to be here with you both again. We talked back in Toronto at the beginning of the year. I know there's lots of updates and new things to talk about. It should be very, very interesting. We're talking about ETFs, we're talking about alternative strategies. As I said in Toronto back at the beginning of the year, glad that we're doing this with you together because of the topical nature of ETFs and alts. I can't walk anywhere without seeing an ETF ad on a wall or seeing something on TV. Also, from an alt standpoint, Brendan, a real gateway for investors into an institutional space as well through so many other means, which is really exciting. Why don't we start with you, Étienne. Where are you seeing the ETF world right now? It's been quite an exciting start to the year as we sit here in May. Give us your thoughts on where we're at.

Étienne Joncas-Bouchard: It's been an outstanding year. It's been an outstanding couple of years, to be quite honest. Even when we were here last time in October, not exactly in this location but we were in Scottsdale and we chatted about the acceleration in the adoption rate of ETFs as a vehicle but also the more and more options available to advisors with regards to ... for example, even today, anything that I'm gonna be talking about, that Brendan's gonna be talking about, they're available as ETFs. These are strategies that are available as ETFs as funds. We're now in the realm where we're talking about product and not about the vehicle itself. Nonetheless, the ETF industry has been booming. Last year was a record year with $165 billion in net new assets. I was trying to do the math because we don't have the end of April numbers, but I was doing the math week by week for the last couple of weeks. We're at around $77 billion in Canada so far year-to-date. We're almost halfway where we were into a record year last year.

Very happy to say, and very thankful for everybody in this room, Fidelity's having a record year as well. We're at around 10% of those total of 77 billion. Really outstanding so far.  It's just been lots of [audio cuts out] of interest, as much on the equity side, like international has been a theme for the last 18 months, it continues. We heard from Patrice earlier, obviously, from a portfolio management standpoint they're seeing opportunities. We're seeing advisors, investors allocate more to that to that area. There are some multi-asset and a few others as well but it's just been a really interesting 12 to 18 months.

Glen Davidson: We'll unpack a bit more of that in a few minutes. Thanks, Étienne. Brendan, what are you seeing as far as trends so far this year on the alt space?

Brendan Sims: I would say there's been a lot of shifting behind the scenes and I would say that there's a few driving forces to that. I think growth has continued to be prolific in a sense that long/short equity as well as multi-strategy have compounded at over 50% in the past 12 months as at Q1 of this year to Q1 of last. Growth is rampant. Keep in mind that in the alternative landscape we're talking about much smaller numbers, take a zero off per se on total AUM relative to ETFs broadly. ETFs be it the vehicle, alternatives be it the asset class, right? Just like that of an institutional style investing I don't think that retail investors are necessarily going to get to that 50% non-stock or bond long-only like that of a institutional mandate, and I think that's crucial to point that out. I do think that what is important is that we have a new tool that goes beyond just stock or bond available to everybody at their choice.

I don't think that alternatives are for every single investor, and I'm the alt guy. What I would say is that for those that are using any degree of fixed income or bonds in their portfolio the chances are that you're doing so to reduce the overall risk to a traditional 100% equity portfolio. I think what we've seen is massive evolution in the long/short equity strategies, the multi-strategies which we're going to get into and touch on later, as far as innovating and bringing out new product. These are still new in the grand scheme of things and Fidelity and other asset solution providers are innovating as far what we're bringing forward.

Glen Davidson: It's good that you mentioned about these may not be for everybody. Obviously, that's up to our advisor partners and those watching online as well on what's right for the client. The client may ask, though, and that's why it's so important that we're having the two of you talk about these two asset classes today. Now, Étienne, I'll turn to you, the year started very, very strong and now we're into some some pretty high volatility including today, things are all over the place. What are you focused on as far as your research right now from an ETF standpoint?

Étienne Joncas-Bouchard: There's so many things. This year's been super interesting. The start of the year it seems like we were turning a page a little bit. If we look starting October last year, from our perspective, and for those maybe a bit less familiar with our lineup, we don't have any purely passive mandates here at Fidelity. We're not an index shop. We're not trying to give you the seventh S&P 500 ETF in Canada at a basis point less. We're trying to find ways to add value. Our objective is the same as any other portfolio manager that you're going to hear from today. Obviously, in this broad lineup that we have of more than 50 different products we're trying to find the areas that should be working for the current environment. We do that in a number of different ways.

Like I was mentioning, October and November, we started to see signs of a bit of a change in leadership. In '23, '24, '25 for the most part, it was a very narrow market, it was heavily led by some of the hyper-, well, now you call them hyperscalers, we used to call them the Mag-7, we used to them the mega-cap US tech stocks. You had that driving US markets. Then you had, obviously, the AI theme come into play and the kind of trickle down effects from there. That was working really well but then you had somewhat of a risk-off here and you started to see broadening away into more the cyclical sectors and a bit of what Darren was talking about. Commodities came back into play so value started to work a lot again. We talked a lot about hedging some of the risk in your exposure to what had worked the last three years so you saw markets broaden.

Just one stat that I thought I'd bring up with the group, for the last three  years you had about 32% of the Russell 1000 outperforming the index. If you're a stock picker, if you're an active manager, if you weren't in that 30% it was very challenging to outperform your broad benchmark. At the end of March it was about 58%, much more kind of healthy breadth to the market. Then April happens and then it seems like we're right back to the last three years. If I look at like our momentum strategies, for example, which I think are a great tool, by the way, for anybody in the room looking to get exposure to a factor or a style or a theme that's kind of challenging to do as an individual stock picker. Momentum's back in line with what it was doing and really driving the performance, even in our All-in-One ETF portfolios. Those are some of the examples of stuff that we've been looking at.

I'll just quickly kind of wrap that up. International has been, and I mentioned it in terms of flows, there's very rarely a meeting that I've done over the past 18 months where we haven't ... when I'm meeting with advisors, that is, that we haven't chatted about international. What are the options that you have in your portfolio? What are you currently using? Are you using passive? Are you using an active manager that maybe does have a very strong style bias? What are the other options out there? I think in our lineup our All International Equity ETF, which is a combination of multiple factors, solves a lot of the issues that we've found, which is the MSCI EAFE index is not a very efficient index. It's not comparing apples to apples with the S&P 500. The S&P 500, you have inclusion criteria. You have to be profitable over the last 12 months. You have to be profitable over last quarter. There's a lot more constraints on liquidity and market cap.

Whereas the MSCI EAFE, if you're liquid enough you're in. There's no bias. What that means is the average profit margin is much lower. The leverage is much higher. The inherent quality of that index is lower. We're able to solve for a lot of those with a factor approach where we're screening for fundamentals whether it's low vol, quality, momentum, value. We're looking at fundamental characteristics of businesses that have shown over time to add value. Hence, we get a very, very consistent outperformance with our factor products in international markets.

Glen Davidson: That's a great overview. Thank you for that. Why don't we talk from an alt standpoint since we're talking year-to-date in a lot of the news. Let's talk about private credit. There's been a lot about companies, not Fidelity, there's been a lot about private credit companies gating redemptions. Is underwriting changing? What's happening with quality and what's your assessment, Brendan?

Brendan Sims: My assessment broadly is that there are less liquid assets that we can invest and I think there's some great opportunities there. That's not going to change. Right now there's a lot of negativity into headlines. What do media outlets do? They get clicks, they get clicks and follows. Right now they are looking for that and they're doing so by putting the headlines out there that make the most sense for that to carry out. Are there some cracks in the foundation? Sure, maybe. Are there always cracks in any foundation? Yeah, probably. Where is this going to go? The answer is nobody knows.

Private credit came about coming out of the GFC in a sense that banks that had traditionally catered and serviced that mid-market higher risk clientele were sort of, for lack of a better word not able to do so on the backside of GFC due to regulation, due to the extent that they could lend out capital. There was the birth of the 2+ trillion private credit landscape that we know and see today over the past 10, 15 years. I think that a lot of that growth did come about in the software space. I think that any time a space balloons and grows by $2 trillion in a handful of years there's gonna be good growth and less good growth. I think that what we're seeing is some of the problems are occurring in that less good growth area.

When you think about lending, you can lend to asset-lite businesses based on their ability to generate future cash flow, or you can lend to asset-heavy businesses and collateralize that with their balance sheet. If you think of software, a lot of that space is being lent to based on cash flow. If that cash flow becomes encumbered or threatened in any way like it is by large language models and sort of the prevalence of AI there is concern. We saw that being priced into stocks from October to ... I mean, yeah, we've come back a little bit through April in some of the software space but we saw a lot of negativity being priced in in public markets. Private markets take longer to digest that. Have we seen a number of private equity portfolio holdings be handed over to sort of creditors? Yeah, we've seen some news headlines recently. I would say private credit is not  separated and insulated from private equity and this and that. They're all kind of connected. Where rates are really matters when you're sort of using leverage to buy companies.

I think there's a lot going on in the world that, keep your eyes peeled, but again, this is a $2 trillion space. Broadly, if we look at publicly traded equities and bonds those numbers are much, much bigger. You could see a fund that is targeting long term like a high-single digit, low-double digit return. There were some reports come out that said some of these leading private asset labels and private credit, maybe they had 15 to 20%. The Wall Street Journal came out and said, oh, we think that you have more like 20 to 30. What's going on? Which is it? And if it's 30 is that bad? If you were to wipe the sheet on half of those 30 and/or just take away the coupons that you're paying, which is probably something commensurate with LIBOR plus 4 to 5, yeah, you're probably going to take what is like a 9% return profile and bring it down to a 3 1/2 or 4 in the next three years annualized. Is that Armageddon that a 9% return profile becomes 3 1/2? I'd say no. It's not ideal but that's sort of how I observe private credit and sort of what's going on right now.

The funny part is that it's a lot of these loans that were extended to the hyperscalers to allow them to buildout and have that CapEx spend for the compute that has funnelled and fueled these language models and AI service providers that has then jeopardized the valuation. It's gonna come full circle between private equity and private credit side. If you look at some of the biggest labels out there, we're not gonna name any names, they have businesses on both sides of the equity street and the credit street that are sort of in a circular way creating this vicious issue, if you would.

Glen Davidson: So you don't think it's gonna create a systemic issue, the dominoes are gonna fall, it's too small a component of the market.

Brendan Sims: That's a really hard question to answer. I don't have a yes or no. I think that by and large what caused in some private credit mandates to have anywhere between 30% and 45% of NAV, or unitholders, run for the door  that's been fear-mongering. That's not fundamentals. That's fear-mongering and that's people sort of just trying to get out and get to the off-ramp and get to the exit before others. If you think about private credit, and we'll just maybe toss this over to private real estate, for example, because that space in and of itself is hitting its own headlines. In the Canadian landscape we've had a number of counterparts throwing up gates, gating capital, not providing liquidity to investors for a number of quarters, if not calendar years. We first saw it in 2022 and we're seeing it more frequently today. Why is this happening?

It's because the underlying assets are not as liquid as what people are trying to get so gates come up. I think gating of capital is, in fact, a really good thing because it's preserving and protecting for all their unitholders to ensure that you don't flash sell buildings or sort of parcel off loans at 60, 70 cents on the dollar. That's not in anyone's best interest, really. You do need to see this through. If you think about private credit there is a natural rolling to a diversified portfolio of loans, whereas if you own 15 buildings these things don't like sell 10% of them. You need to transact so private real estate would be far less liquid than private credit which does have an organic underlying churn to it. If your yields are 9 to 12%, well, it's only a matter of quarters before you can service a 10% queue of redemptions in a sense that you can kind of organically get through that with your yield just over the course of a year. Private real estate would be far less liquid. I think liquidity is a big concern right now across a number of different industries. Rates were high, they're less high but you typically don't feel those effects till later.

Glen Davidson: Something for us all to keep our eye on. Étienne, Investment Executive had an article on Friday, I believe it was, and it had something to do with the fact that the industry is creating lots of new shiny objects and it seemed to be, from their perspective, more about quantity versus quality. I don't suspect that's the case with what you've been creating. I look at All-in-Ones which you mentioned a few minutes ago, five years for the growth and balanced options. They've been doing extremely well. They weren't about just throwing some spaghetti at the wall, were they?

Étienne Joncas-Bouchard: No, that was a long process, obviously. We embarked on this journey back in 2018. We didn't take the time today, obviously, to kind of go through the history of how we got here but this is the sum, this is the end game ... well, not the end game, we're always launching stuff, but the main objective when we started launching ETFs was to have enough building blocks to create these fully diversified solutions where we incorporate different strategies that have different return and risk profiles that work very well together, give you diversified exposure to global markets including fixed income, equities, crypto, global diversification, you've got Canada, US, international, different styles to the factors, they've become the flagship of our lineup. These are portfolios that have been used by various different types of advisors in various different type of ways.

To give a bit of an explanation of how we think and how the thought process of these portfolios ... how we thought of them when we constructed them, we want a strategically managed portfolio where we're not actively asset allocating. Basically, very different than what we heard from our Global Asset Allocation team this morning, but to say we want these core portfolios that will work throughout any given investment cycle. So far I think we definitely can say mission accomplished. In terms of the way that I think about them versus other competitors or peers that exist in this space ... I think it's the best way for me to explain kind of the functioning of the portfolios is ... they're not passively managed, and passive management, all it means is that you're replicating an index based on one criteria, on market cap, whereas here we're looking for these fundamental characteristics to somewhat create a filter or a sift.

There's more than 30,000 tradable securities in the world, how can we get the top 10% in a very simple way? How do we get there without necessarily having boots on the ground and meeting management and doing all these different things. What defines a better investment versus a worse investment? I'm gonna give it a try. I know we were mentioning, I said I've got a metaphor I'm going to try to use today. Sometimes we try to tell stories, it helps to understand some of these processes.

Glen Davidson: We're the first to hear this. This is [crosstalk].

Étienne Joncas-Bouchard: You're the first to hear this so hopefully it lands. It's a true story. I fell into a black hole on my Instagram. When you're in flight you've got nothing else to do. It was like how AI was being adopted in manufacturing. It was literally a video of a machine that was filtering through a conveyor belt of tomatoes. You have all these tomatoes flying through this conveyor belt and it was just knocking off all these green tomatoes and just kicking them off the conveyor belt. To me, I was like, it's obviously ... you've always got your work hat on and I was thinking this is exactly what we're trying to do with our All-in-Ones or with our factor strategies. Can I tell which one of these tomatoes is the most ripe and the juiciest and tastes the best? No, but it's fairly easy for us to identify the ones that aren't ripe and the ones that aren't good.

Basically, what we are doing is starting from this 30,000, the 25,000 investment universe, and if I look at FBAL, our All-In-One Balanced ETF, we're down to 2,500, 2,000 holdings. Inherently what we're doing for you at 39 basis points is removing a lot of these names that we don't see having a defined investment thesis. It's not about picking the best, it's about helping remove a lot the dead weight. I think we've managed to do that, obviously, given the performance that we've seen so far.

Glen Davidson: I think that was a good metaphor. You had a eureka moment on the flight and that was pretty good. When I look at this chart, the chart that's up on the wall, there's six different portfolio solutions. That's very thorough. Some would say that Bitcoin was a huge contributor, or had been depending on the time of yea, that's not really the case. There's lots of contributing factors. Do you want to talk about that?

Étienne Joncas-Bouchard: Absolutely. Depending on which one of the portfolios that we look at, maybe even taking a step back on the logic of including crypto in the portfolios, and Bitcoin more specifically because obviously there's a bunch of other crypto options out there. I mean, we have an Ethereum ETF, other companies will have a Solana ETF among others, and probably Brendan would be in a better position to talk about this, but the idea was to say what is Bitcoin to us? This is a tradable asset. We're not going to say it's an alternative to gold. We're not gonna say it's an inflation hedge. We don't really know. What we do know and what we can look at is the way that it behaves. You look at past performance and how it worked in different cycles, different environments and say, if we pair this to a fully diversified portfolio is it gonna help us, or is it going to help all our unit holders? What we found is by gradually adding from .5% all the way to 3% in the All-in-One Equity we were actually improving the risk-adjusted returns of the portfolio, the Sharpe ratio. Not just the returns, the risk-adjusted returns. There was a clear diversification effect.

Like any good thing if you have too much maybe not so good. You have to respect the volatility and understand that during the larger drawdown periods you have to manage the key risks, those key drawdown risks, which is basically if you look at what we're targeting for alpha in these portfolios, which is around for the equity side 1 1/2 to 2%, if we have a 2% sleeve in Bitcoin and it drops 50% we're still making you a net positive outsized return versus our peers. That's kind of like the whole thinking process. Obviously, it's been a good contributor since inception. Tougher year in 2022, tougher year of it last year, but overall it has contributed about 22% of our alpha versus peers, a fifth of our alpha.

Glen Davidson: What you're saying when we look at these pie charts is it didn't come at the expense of something else. You have the capacity, the team has the capacity to add on more asset classes as they're deemed worthy for these solutions.

Étienne Joncas-Bouchard: Absolutely. Last year we added two new fixed income mandates. The rationale is always we're not trying to ... if we're adding something it's not because we think it's short term benefits. This is what are the long term benefit of adding this new mandate or new solution to this already well diversified portfolio. Any addition we make is in order to enhance the diversification. In that case for fixed income it was looking at solutions that were more US-focused, had maybe a bit more of a credit tilt, if you will, with absolute income. Obviously, that was just long-term thinking. We have the flexibility to add and remove strategies over time.

Glen Davidson: Brendan, you also have strategies. Why don't you take us through Multi-Alt Equity and then we'll talk about the soon to be Multi-Alt Balanced.

Brendan Sims: Sounds great. Multi-Alt Equity has been around for about six and a half months now. The fund has garnered over $100 million in AUM in short order. Really, what we've done is we've combined five of our underlying alternative products in a methodical strategic neutral mix that really breaks down and distils to rhyme with 70% directional exposure to markets and 30% diversifying exposure. There are no fixed income. There are no bonds held in this product but yet on a historical look-back basis we've been able to see the standard deviation of a solution of this nature with five underlying components land in the world of, say, a five to six standard deviation, for example, on the volatility front. That's very attractive in a sense where if you looked at fixed income world and again, just quoting today we're almost 4.5 on the US 10-year. That was not, and is not, a comfortable ride from the 3.9 that we came into this year to getting up there. Once again volatility is present. Market's up, market's down, volatility stays, comes, goes.

Bonds have not held up their end of the deal. I think that multi-alternative strategies that can provide lower correlation, greater diversification and lesser volatility to long-only equity investing are highly attractive right now. My strongest take on a go-forward basis is that the multi-strategy space, or the fund-to-fund space within liquid alternatives, will be the fastest growing. It grew at over 50% over the last year. Take our lineup, for example. When I came onto this team we were three liquid alternatives, a market neutral and two long/shorts. We had just around a billion dollars in AUM. Today we sit at over 5 billion in AUM. In a few weeks' time we're gonna be coming forth with a multi-alt balance product. Think of it as an extension of our multi-alt equity that we just discussed. That was 70/30 directional diversifying. This will be about a third, a third, a third directional diversification in long/short credit or fixed income, if you would.

We're now at a point where we're going to have 10 liquid alternatives and one private asset mandate. We've come a long way. We're over 5 billion, as I said, and I think that as I look ahead I look forward to doubling that AUM and being a more meaningful partner in our client's alternative sleeve of their portfolios and their business. This is at a time when ... if I look around and I read headline news there have been alternative solution providers, liquid and/or private, that have already transacted, packed up shop and sold, or are in the process of doing so and have just made public news releases to suggest that they're looking for liquidity. Fidelity is here, we're looking to grow. We are highly competitive on the price standpoint within liquid alternatives. We do not have any performance fees across our liquid alternatives which I think is huge. We can, time pending, touch on that, really important on a go-forward basis. But very much so with multi-all balance we're really excited to add that lesser risk spectrum to what's already out there, garnering assets on the multi-alt equity side. Stay tuned, look forward to a note from your wholesaling teams in the next few weeks. That underlying long short/credit mandate, we'll get some information on that that allows us to kind of have that balanced approach to a multi-alt strategy.

Glen Davidson: Thank you. I want to pick up on the cost point that you mentioned. Let's look at that relative to CRM3.

Brendan Sims: CRM3, it's alive and well. It is being tracked since January 1st. We're all gonna get a beautiful statement that breaks down costs in dollar terms. I just wanna emphasize that net returns matter. Costs and fees are one of many lenses through which you would look through to assess product best fit and/or validity. But I'll go back. Net returns matter. We are an active management shop. We have years and years and great track records on the research front of delivering and driving alpha from our underlying portfolios. I think that while cost is one thing it's one of many. I want to be clear with that. It's gained a little bit of importance because of the amount of light that's going to be shed on it. With that said, I spent a lot of time sort of canvassing the broader liquid alt landscape and I would say for those solutions that have performance fees it's going to be crucial to ensure that the setup or the structure of that performance fee is neutrally aligned and appropriate.

I'll maybe highlight a few of the things that I look at. Hurdle rate is important. For products out there that have no hurdle rate, or no high water mark, meaning essentially you could administer performance fees twice if markets pull back and then go up, that's a big red flag for me. No hurdle rate means essentially that you can get a cash-like rate of return and kind of get a performance fee associated with that. Hurdle rates most often come up around the 2% mark, for those that are familiar with the alternative landscape. I ask myself the question, where do equities compound at, where have interest rates been, where has the overnight lending rate been? All of these numbers have been north of two so why are hurdles at two? I'm just asking the question, just throwing it out there. I think that if we look to a number of products on a top-down basis that have some aggressively high fee structures, they have it because this setup of this performance fee is probably not so neutrally aligned and maybe pointing more in favour of the asset manager than that of the investor.

I think there's economies of scale with Fidelity and the ability to have all of our research already being conducted and taking place. We came to the alternative space about six years ago. We plugged right into that think tank that is Fidelity and we're able to be very competitive with no performance fee. I equate it to CRM3, it's not only MER that matters, your management fee plus admin plus HST, we're looking now to a TER. Those TERs can add in a big way. If I'm an advisor tomorrow my job is to avoid 6, 7, 8, 10% FER products. Million dollar holding in something that costs 7%. In the eyes of the average investor, I don't know how they account for their dollars, that's an SUV out of the driveway every single calendar year on a 7% product. I do think that on a go-forward basis it's gonna be crucial to navigate that way and make sure that you pay top dollar for top utility but not a cent more.

Glen Davidson: Did you say SUV?

Brendan Sims: Yeah, SUV, like a car.

Glen Davidson: SUVs, tomatoes, good analogies today.

Brendan Sims: Let's keep the cars in the investors' driveways.

Glen Davidson: Just a couple of minutes left. Étienne, final thoughts for the audience.

Étienne Joncas-Bouchard: The ETF industry has become more and more opaque. Even when I started back in 2018 it was pretty black and white. It was like funds are active, ETFs are passive. It's not so much the case anymore, definitely not the case anymore. We've great resources here internally. We've got great resources with your wholesalers. Your wholesalers have access to myself, to Brendan, to Mark, who's here as well, who's on our ETF strategist team, to Nick, who is here, who's on our alt strategist as well. We're going to be around but anytime in the future that you want more insights on anything that you have in the ETF or alternative space we're here to help you, we're here to guide you for anything. It's been great being here.

Glen Davidson: Excellent. You can access Étienne through his podcast and maybe a soon to be podcast for Brendan. Brendan, final thoughts for the audience.

Brendan Sims: We'll see. I'm just really excited about where our lineup's at. I think we're at a really competitive spot in a landscape that, like I said, is definitely shifting and churning. I really look forward to what we can do in a growing alternative landscape. I think that it is truly the third tool to a resilient portfolio for anyone's portfolio is less than high risk with ultra long term time horizon. It's a tool that we can use alongside any form of fixed income. To take a page out of Jurrien Timmer's book, he often sort of takes that traditional 60/40 and breaks it to a 60/20/20. While I love that breakdown we can also sort of bend it and whatnot, 60/30/10, it works. I think that some allocation that's a non-zero number to alternatives is prudent for a medium or low-medium risk investor for sure. We're very early innings and there's a long runway for the products that we can innovate on and sort of the number of different investor accounts that can gain access to long/short liquid solutions and private asset mandates, for that matter.

Glen Davidson: Thank you very much. Before we go to break I just want to say thank you to Étienne and Brendan for a good chat today. Thank you.