FOCUS 2026: Looking ahead: What matters most for the second half

Glen Davidson: Scottsdale, this is great.

Andrew Marchese: Great to be here.

Glen Davidson: You often at these events walk back and forth and do it TED Talk style. Once in a while we do this so you're not going to get your steps in today. We've got 45 minutes to go through a lot of areas of the marketplace, psychology and so on. If you have any questions do send them through the app and I'll get them up here on the monitor. The intro said that you're calm and well process driven. We should talk about that because this market is very volatile. You've had experience with Fidelity starting as an analyst in 1998 and that was a tumultuous time that led into as well. Could you give everybody some perspective on what we're seeing with volatility relative to all the geopolitical tension as well.

Andrew Marchese: With respect to the geopolitical tension, I think what the market's really doing has everything to do with pricing risk and not really focusing on reality. The risk it's pricing is perceived risk, not actual risk. That's why if you're looking at your screen every day and looking at the returns in the market and Monday's down and Tuesday's up and Wednesday's down and Thursday's up more, because there is a litany of investors out there who are very short term thinking, their mandates are very short term oriented, they're using instruments that most of us don't use on a day in and day out basis, it becomes a glorified casino where people think they're adding value but they're not actually adding value. That's a game you don't want to play, you don't need to play.

For us, it makes for interesting headlines. You probably have a joke or two in the morning about what someone said in Twitter and whatnot but the reality is you don't spend a lot of your time dwelling on it and you go to either price discovery or what future earnings and cash flow and CapEx is gonna look like and you just focus your efforts there. The rest of it is just noise, and there is a ton of noise. Our job to remain calm and remain focused and goal oriented is to distinguish between noise and signal. Focus on signal and eliminate the noise.

Glen Davidson: The noise in '98 when you started as an analyst and what you experienced with the tech wreck was a lot less relatively to the frequency that we're seeing probably today. How do you digest that and how do you convey that to the team that you're responsible for?

Andrew Marchese: I think to be a good investor, and what I try to impart on our team is that you need to be a student of history. While history doesn't often repeat itself exactly it often rhymes. You use analogies from the past, you gather as much data as you can to find similarities and it helps chart a map or a course of what you think the future is going to look like regardless of what asset class you're speaking of, equities, fixed income, commodities, so on and so forth, real estate. That allows you to remain calm and focused and not listen to a bunch of pundits who you know aren't really speaking from an area of either a), expertise, or b), actually having done diligence.

Glen Davidson: Makes sense. Earlier you talked about a casino mentality. I just want to pick up on that. There seems to be a real gamification of investing today versus, again, back to when you started into the industry. Can you expand on that? It does seem like there's a lot of volatility from people really betting on outcomes.

Andrew Marchese: There's two, I think, primary issues, and there's actually more than two, but the two primary issues is one, the financial system is just fraught with liquidity. Any time you pump a system full of a lot of money and it's sloshing around in the system you allow the participants in that system to have the potential to behave in a somewhat illogical fashion. That's one, you need the liquidity backdrop. Two, over the course of my career, and actually before that, going back into the '80s, you've had a lot of financial engineering so you can represent or express an idea financially, whether you want to talk about derivatives or packages or baskets or CTAs or what have you, you can express that idea through an instrument.

There are a lot of people making decisions about single securities on a day in and day out basis in a far different fashion than they used to. With financial engineering, with ample liquidity you actually have built the backdrop for a very robust Monte Carlo simulation. Your point about gamification, you're always expressing ideas. You think an idea you have and let's put it to work and that idea may last an hour and you're on to the next idea and so forth. That's not what we do, that's not with good investors do, but the system allows you to do it. Good investors will see through all that noise.

The other thing that's going on, third, is technology. If you go back to the '80s 90+% of investors were making a decision based on a fundamental outcome that they thought about the security in question. It was people competing with people. You sold me a stock, I bought it, you sold it. You made a decision that differed from my decision but that was basically the landscape. You migrate into the '90s and systematic investing became involved. Quantitative models, so on and so forth. It went from humans versus humans to humans versus kind of mathematical models. That kind of evolved over the '90s. Then the models got more sophisticated as we got into the 2000s and they became run by machines. Now it's humans against machines. Actually, humans making decisions for the same reason or methodology they made decisions in the '80s s probably less than 25% of the marketplace today. The next logical question is, well, someday it'll be machine against machine with the advent of AI and whatnot, that's a whole bigger, different kettle of fish.

Glen Davidson: Look forward to talking to that down the road. Let's get into your four pillars of the economy, earnings, interest rates, liquidity, and valuation. We'll start with earnings. Earnings kicked off last week, thoughts so far?

Andrew Marchese: Earnings look great. With all this noise and consternation one thing that may be getting lost in this entire discussion about the world we're living in, the corporate profit backdrop is outstanding. We came into the year on the S&P 500 where Wall Street forecasts were for about 12% earnings growth, that went up to about 16% at the end of February and now, based on the numbers that are coming in, and it's cap-weighted  so you've got to take it with a bit of a grain of salt, we're going to get up to about 21, 22% very quickly. Now, if you look into 2027 I think Wall Street forecasted for about 14% earnings growth. That is a really powerful corporate profit backdrop. The good news about that is not only are the numbers going up but the market in the short term has really been a one factor market and it all has everything to do with oil. The gyrations that we're seeing day to day is not really about ... in some respects people are talking about inflation and so on and so forth but it's really, what I think is going on, is that the equity risk premium is kind of getting blown out in the market on fears of oil going north of 100 and so and so forth.

If oil stays around these levels I think we can endure it from a consumer demand perspective and from an industrial manufacturing profit perspective. The good news about the earnings going up so much, if earnings need to get revised negatively in the second half of the year at least we've built in a good cushion, so to speak. I think as long as oil and the corresponding petrochemical products, namely diesel and gasoline and anything that Dow Chemical produces, resins, plastics, et cetera, et cetera, doesn't stay above 120 I think the consumer behaviour is basically we moan and groan about it and we complain about higher prices at the pump but we actually don't change our behaviour.

Glen Davidson: We're sensitive to it when it happens because the media comes at us as well and it's topical and then we get desensitized to it because we still have to fill up the car.

Andrew Marchese: Right. But what we learned from the last natural resources bull market in the noughts was it wasn't until oil got north of 120 that you actually saw consumer behaviour change. That seemed to be the strike price, so to speak, where it actually did manifest itself and change consumer behaviour and industrial profit margin contraction. For every bad there's a good. The good side is we're actually less energy intensive, particularly here in North America, than we were even 20 years ago. That's a good thing. Maybe we can endure a little higher price, maybe it's 125, just speculation on my part. Europe and Asia in particular are still very energy sensitive. We have to kind of take that into account from our global allocation perspective too. North America, as a general commentary, can probably endure higher oil prices than Europe and, certainly, Asia.

Glen Davidson: If you're an airline you're involved in the futures market to find the right price for, well, futures prices for oil, can you comment on the rolling off of futures contracts that will be that shock to these companies as far as the price increase?

Andrew Marchese: You mean to the extent that we're in backwardation currently and you think the long end of the curve, basically, the oil futures curve has to rise? Is that kind of what you're saying? 

Glen Davidson: I think with the hedging that these companies did they locked in lower prices, obviously, but now there's going to be that shock. You mentioned Europe and now we're hearing about European flights being cancelled, delayed and so on and prices being increased tremendously as we go into the summer and that's because of those futures contracts rolling off, I would think.

Andrew Marchese: In part but it's also a supply scarcity constraint which is different than the the bull market of the noughts was which was a demand-driven bull market. This is a little different because it's a scarcity issue. If you just can't get product you can't get product so that has a bigger ramification for airlines, in particular, but there might be some things in the industrial supply chain as well.

Glen Davidson: Ant that could be said for fertilizer being stuck in the Persian Gulf as well.

Andrew Marchese: Same thing, exactly. The people who are worried about food prices going up in the back half of the year, it's all related to fertilizer.

Glen Davidson: My understanding is a lot of companies are making quarterly guidance but they're not making full year guidance right now because they really just don't know where things are going. How, as a portfolio management team, do you deal with that?

Andrew Marchese: It's kind of our job to do that anyway. To the extent that you've seen...

Glen Davidson: It's your own models, in other words.

Andrew Marchese: Right. At Fidelity we do our own proprietary financial modelling. To the extent that a company's guidance sets the bogey, that earnings growth I talked about earlier or that forecasted earnings growth, it's helpful, it's advantageous but at the end of the day what we get paid to do is really come to a better number than consensus. If there isn't a number provided by the company there's still a consensus out there so it really doesn't change our job that much.

Glen Davidson: Let's talk about the second pillar, interest rates.

Andrew Marchese: Pursuant to my comment about this is a binary market and a one factor market and it all relates to the price of oil, I think that's what you're really seeing in the Treasury markets with yields backing up. There is some forecasting saying that, well, maybe inflation will pick up in the back half of the year and therefore the long end of the curve is backing up a little bit. For those of you who heard me speak in January prior to the war, as part of my thesis it was looking quite likely like the US would kind of get their way at some point this year and kind of strong arm the Federal Reserve into cutting rates. Now, if you look at it with the advent of the war  there's probably a greater likelihood you'll have to raise rates. That part of the thesis has changed. At best I think we're kind of no action right now with the caveat that if the war can't resolve itself cleanly there runs the risk for every day or week that goes by the likelihood of interest rates kind of going up in the back half of the year rise.

Now, even if all parties kind of resolve the tenor I think we've kind of embarked in a place of the world where I think there is an embedded war premium that will stick around in the price of oil for a while. Instead of oil going back to the high 60s or low 70s you're gonna have to have some price premium in there that maybe keeps it, again, speculation on my part, somewhere between 85 and maybe 95. That's the premium that we deal with for a situation that isn't completely resolved and some uncertainty by all political parties and how they manage this on a multi-year basis.

Glen Davidson: The third pillar is liquidity.

Andrew Marchese: Ample. Way too much of it. As I said earlier, if you think about the amount of dollars that have come into the system since the global financial crisis and then went up fourfold during the pandemic we haven't taken much, if any, out of the system. It's like anything else, certain instruments are priced in nominal terms so if you have more dollars to play with and you're going to buy an apple or you're gonna buy a jet plane or whatever, you just think in nominal terms and you have more dollars at your disposal and it drives up the nominal price of a lot of things. It also pushes you out on the risk curve because the only way you got those dollars was by suppressing interest rates. Does you no good to stay in cash so you take on more risk. Liquidity is very high and will ... I've been talking about it for years, will probably stay high. It's sustainable. It's kind of like the new normal we're kind of dealing with.

Glen Davidson: You're seeing that through the trading operation, I'm sure, as far as how frequent fills are happening. It's such great flow of capital.

Andrew Marchese: Interesting, I think liquidity is abundant to make bigger picture decisions on. The interesting thing when it comes to trading, trading of equities, in particular, because of the financial engineering that I talked about earlier and single securities are being purchased for a variety of reasons, some of which you don't know until ex post, until after the fact, the liquidity of some instruments like ETFs is extremely high but they act like a sponge on the underlying securities. The liquidity on the underlying securities isn't nearly as high as the ETF itself. What happens is you get huge volatility on a day-to-day in single securities.

You see like a grocery store which is a very low-volatility business. Maybe Wall Street forecasts were for 3% same store sales growth, company came in at 2.2%, not a big deal, and the stock's off 7%. You're like, well, who would be making that kind of decision to mark down a security 7% when it actually beat earnings, but maybe same store sells were indicative of problems in the future, for an 80 basis point miss on same store sales? The problem is the liquidity doesn't exist in the underlying instrument to the extent that it exists in the entire market. That's why you can't get sucked into the noise on a day in and day out basis.

Glen Davidson: There's a disconnect between the fundamentals and the price movement and you've got to filter through that. It's like a synthetic price.

Andrew Marchese: Oh, yeah. We sit there daily ... we're investors for the long term but nobody likes to lose even on a given day. You own a stock in your portfolio and you're like, oh, the quarter was pretty good. The stock gets marked down 10% and you are cursing at your screen because something somewhere out in the universe is causing this price aberration. You have one of two actions to take. One, you ignore it and go along your merry way, or two, you take advantage of the price dislocation and go, I'm stepping in. Those are the decisions you have to kind of make.

Glen Davidson: How are you viewing Canada now as an investment opportunity?

Andrew Marchese: I feel far more optimistic on our country than I have for probably my adult life, which is good. If anybody has heard me talk I've talked about brain drain, I've talked about lack of investment, I talked about the taxes are too high, business incentives aren't high enough. I think maybe what happened last year with respect to tariffs, an ongoing kind of isolationist philosophy by the United States, has kicked our country into high gear and saying we need to take care of ourselves. I think it's more than rhetoric. I don't think it's just noise being uttered by a Prime Minister in his cabinet. I think it's real. It's a multi-year thing where you have to put the pedal to the floor and keep going, and you can't let up on this. Somebody asked me internally, what do you make of all this? I'm like, the reason I had a problem with it for 30,40 years, if you ran a business and you had a customer that was 75% of your business you'd say great, they're healthy, they're great, but are we really tapping into everybody else out there?

Two, what if they get fickle one day? If you were looking at Canada as an equity as an investor, you would go you got all your eggs in one basket here so you would discount the P/E/ multiple as a result. If anything happens with that one customer you're in a lot of trouble. That kind of happened last year in April, February, April. I'm optimistic on our country because I think we finally got the right mindset to do something about it. That's a good thing on a multi-year basis. There's going to be speed bumps along the way, that needs to happen, but I'm more optimistic than I think I've ever been.

Glen Davidson: Mark Carney said recently that that was a strength in the past about dealing with the US the way Canada has but now it's a weakness. To your point, there's a need to broaden out of that, where are the best areas do you think that Canada can branch out to?

Andrew Marchese: The obvious one is to tap into more of our natural resources and what we have into the ground. I think we have Hugo Lavallée speaking later on today, he's going to go into the whole hard asset theme that he has in his portfolios. He and I talked a lot about it in Q3 and Q4 of last year and really kind of went through that. I think that we have to exploit more. The second thing we have to address is the brain drain and make entrepreneurial ventures in this country from a taxation perspective and an incentivization perspective more lucrative for people who are willing to take on risk. That's the next step. That's a bigger policy change that needs to happen. The low-hanging fruit is on the natural resources side.

Glen Davidson: Which countries do you think Canada can best work with?

Andrew Marchese: All of them. There's not an excuse to say we can't do this with so-and-so, we can't do this with someone. All of them.

Glen Davidson: Quick question about productivity in Canada. I'm sure there's a few people watching that could identify with this. Whenever I drive on the 401 or anywhere around the GTA, try and drive, it's all trucks. It's amazing how many trucks there are. I feel like we're just trying to share the road with trucking. Is that a sign of increasing productivity? When I think over the years it's really ramped up or is it just inefficiency with transportation.

Andrew Marchese: I think it is no different than any kind of typical economic cycle where you see transports ramp up in the early stages of the cycle from economic activity. I wouldn't necessarily ascribe it to anything related to productivity and whatnot. I think it's just more coincidental that if you're seeing more trucks on the 401 economic activity is good. That's all I would take away from it.

Glen Davidson: That's a positive to [inaudible]. It doesn't feel that way when you're driving, though. Let's talk about AI. You talked a little while ago about robots taking over everything but let's talk about your views on AI.

Andrew Marchese: I think I might be no different than anybody else online or in the crowd in the sense that we're kind of drinking from a fire hose on this to kind of really understand what the capabilities are. Our natural extension, our minds go to science fiction and kind of say, well, we'll be able to do all these things one day and society somewhere in 2041 looks like the movie WALL-E and all roads lead to universal basic income and all that kind of stuff. I don't think it's that simple. There are days where having used tools and whatnot you're amazed at some of the things that can be done, and equally as disappointed in some of the errors that are made. Long story short, you're not ready for prime time, you aren't even close, but to suggest that this is a multi-year kind of CapEx cycle that will continue and continue is probably an accurate one.

I think the real ... as ever, when society takes a huge quantum leap forward in terms of technology to me the more fascinating thing is what industries and ways of life you currently can't see that emerge. We kind of know a lot of times what is going to go away and where maybe you don't want your children to pursue from a career perspective. Those tend to be a little bit more transparent. The internet got rid of the department store, full stop, that's what it did. So many other businesses and industries ... I could remember in 2002 and 2003 when this stuff was kind of emerging, we didn't have really a clue what the new things were gonna be. Ten years later they kind of revealed themselves. I think over the next 10 years  that's going to be the interesting thing, how new industries emerge from this and change the way we work and live, not just the garden variety discussions about hyperscalers and the whole idea of AI and Nvidia and whatnot. It will go from that to something, I think, bigger.

Glen Davidson: It's kind of like if we were sitting here in '98 when you started and said, do you think this internet thing is going to be big? There was a lot of water that had to go into the bridge. There's a lot that has to be digested and people are wondering if it's going to be like a knee-jerk, or they should they make a knee-jerk reaction to things today, but there's lots still to happen.

Andrew Marchese: Oh, there's a ton to happen. Things invariably, when you're talking about technological innovation of this quantum, something will go horribly wrong, too, meaning how we grow as a society from it. That may have social implications, government policy implications. There will be things that we didn't bank on that we're going to have to confront. Some of those may have investment implications, some may not in just how we live in a society.

Glen Davidson: Let's talk about it relative to employment. It's kind of ironic that a number of tech companies have had job losses recently because of AI. A lot of people are saying, am I going to lose a job because of this? Comments around that.

Andrew Marchese: I think there are some things that are probably ripe to go away, if not entirely. If you had 100 people in a room doing a function you'll only need 10 to 20 doing that function in the future because of the productivity assistance as it relates to AI. You'll have other folks who say, and subscribe to the theory, AI won't replace you. Where the advent is of new employment is going to be people who can use AI in a fashion to drive productivity and gains. It will probably be a combination thereof. I'm interested in certain industries in particular, like the face of healthcare changing where you go more from the AI and the technology doing a lot of the diagnostics and whatnot but the explosion goes on to the servicing of people, helping people, nursing, the actual act of human-to-human interaction that you need. Part of that is age waves and part of that is it will be more necessary than it ever has in the past. The landscape of employment in certain industries, healthcare being one of them, will move from kind of ... maybe it eats into the diagnostic knowledge-based stuff a little bit but you get an explosion more on the service side of it all. That has big investment implications as well.

Glen Davidson: From a portfolio management standpoint, I was talking to Dave Way a few weeks ago and he was talking about how he utilizes AI not to make decisions but to assist in making decisions. Is that a valid point? I hope so because he reports to you. Also, how do you work with the investment management team and AI?

Andrew Marchese: It's an extremely valid point. In fact, I sit right beside Dave. We have an open concept seating arrangement in cubicles and I sit beside him. If we have a question, 20 years ago we would either do the work ourself, which would take time, it could take anywhere from a half hour to two hours to get the answer to the question, or we'd walk down the hall to the analyst who might have it a little bit more readily available and cut it down in half, let's say, cut that time down in half. Dave and I were looking at some of the railroads and we had some hypotheses running through our heads. He just typed the query in. If it took three seconds it took two seconds too long. It was incredible. The layer of detail we got an answer on was really astonishing.

It then cited all the sources so you were very confident and had high conviction that the source was valid. You saw the trend and you got an answer to your question. In some cases, as ever, the intellectual value was in the question, not in the answer. What happened with AI is it just made the answer really quick and comprehensive. Again, productivity. But if we asked it a bad question the answer wouldn't be helpful. Again it took Dave's years of experience, knowledge of the situation, how the business model works, to actually ask the right question. Then the corresponding information helps make an investment decision.

Glen Davidson: And citing the sources is how you judge validity of that information.

Andrew Marchese: It helps. It's helped. It took us through transcripts of past calls with the company. It was like, I think they said this way back and sure enough, came up.

Glen Davidson: An analyst today can go through more information in a faster period of time and be even more efficient.

Andrew Marchese: Yes.

Glen Davidson: When you think back to when you were an analyst that would have been a pretty amazing tool. What do you think that would've done for you?

Andrew Marchese: Well, not only me, but everybody. It changes the timing where you can arbitrage information. You've shrunk your edge from a timing, from a price transmission in the stock. Again, that goes back to the fact that the single day volatility of single securities, that volatility is in the hundredth percentile relative to history. Not only are decisions being made for different reasons the information on which they're being made, whether you agree with it or not in principle, the answers are happening quicker. By definition, or as a result, the activity to put that information into action happens near instantaneously, particularly if those products are being run by machines.

Glen Davidson: Very interesting. Just staying on the portfolio management side can you talk about the benefits of being able to long and short the market? Obviously, the firm has a number of options today.

Andrew Marchese: From our fundamental research perspective at Fidelity, internally we ascribe ratings to securities, everything from strong buy through strong sell. What we in our Canadian team realized, we keep a very comprehensive database of the rigour and the efficacy of all our ratings, the accuracy rate and the implied value added, we are generally good stock pickers. We know what stocks to own and we know what stocks to avoid. What was very compelling from our backward-looking kind of research into the efficacy of our ratings is that, yes, we're good on the buys but we're really good on what stocks to avoid. The natural question comes from that in that is there some way to monetize the intellectual capital of knowing what stocks to avoid, which is shorting a security. Now, shorting the security and ignoring a security, not owning it, are slightly different arguments but if you can do it in a risk-controlled fashion you should be able to add value from the short side of the book as well. It kind of spawned some of our liquid alternative products of which we have, I think, about five now run out of Toronto.

Glen Davidson: And then you've also got a shorting operation in the UK that assists with that. Am I correct?

Andrew Marchese: We have analysts but all the shorting we do is ... on the analyst side but all the shorting we do is done from the PMs in Toronto and Montreal and utilizing our desk and our prime broker partners in Toronto.

Glen Davidson: There's a number of people here in the room, and I'm sure watching, who remember going to Boston back in the '90s, and we'd go up to the Magellan boardroom and see the trading operation. That was it. There was a pit that was for Canada. You've built that in Toronto. Can you talk about what that means to the operation?

Andrew Marchese: In 2018 we started a trading desk in Toronto  which sits amongst our research team, portfolio managers, investment risk and so on. It's captained by a gentleman by the name of Eddie Smith who's great, who actually used to trade our Canadian securities when we were trading on the Boston desk. Eddie moved up to Toronto. He's outstanding, has built himself an outstanding team of people. We trade all the Americas for Fidelity International. On a daily basis you're looking at somewhere plus or minus about 45% of all trades conducted by FIL run through our Toronto desk. It's a big operation.

Glen Davidson: When you talk about trading it makes me think of capitalizations. What are you thinking today about small, mid- and large-cap stocks?

Andrew Marchese: From a purely trading perspective?

Glen Davidson: No, from an opportunity standpoint.

Andrew Marchese: The opportunities, given that it's been a top-heavy market, it's been a very top-heavy market, you would like to think that the opportunities for arbitrage really exist in the small and mid-cap space. Historically, that's where the greatest inefficiencies lie in the marketplace so it behooves us as a research team and a portfolio management team to really kind of hunt those single securities in the small and mid-cap vein. We think you can add a lot of value there when you get them right. That hasn't changed over time. The frustrating thing, I think, if you're running an all cap portfolio against a broadly diversified benchmark, the S&P 500 or the MSCI ACWI, it's been very top-heavy and it's been, largely speaking, last decade those largest companies had the best earnings growth and they were buying back stock. Their multiple also expanded.

Well, you're starting to get to a point where the only way they're really gonna get a lot higher is if the multiples continue to expand. I'm not to say that can't happen because we've seen plenty of instances over history where they continue to expand when you think they won't but it makes it harder if some of your mid-cap and small-cap names in the short term get left behind because all the capital tends to be dragged into the large-cap space.

Glen Davidson: Earlier you talked about resiliency in Canada, in particular. Can we talk about the consumer? It really comes down to the economics of that consumer, doesn't it, that creates the K-shaped economy. Do you want to talk about that?

Andrew Marchese: As it pertains only to Canada or North America?

Glen Davidson: No, I think we should look at North America in particular.

Andrew Marchese: It's a little fascinating. If you think about Canada right now, if you would the clock back to kind of February of last year and you would say, okay, we got tariffs going into effect with our largest trading partner and it looks like housing in the GTA is coming off the boil really fast and hard, you put those two things together and you think, boy, your consumer is going to be in a lot of trouble. It's actually held up a lot better than even I would have guessed going back, say, 14, 15 months ago. I kind of look at data in aggregate and I don't like to get too fine with where it's coming from, as long as it's coming from somewhere, to me, if you add up at a very high level all the economic data I think we're fine. I actually think we are really fine.

I think where we are not fine in the future if, as I said earlier, if oil prices start verging on 120 and it persists for longer that's when it starts taking a toll on things, on people. People start changing their patterns of behaviour from a consumption perspective. There are people in the GTA who have negative equity in their homes. Without a doubt that is true, that's a fact. You can only kick the can down the road so long. Right now, as we're kind of sitting here, and even if you rewound the clock six months ago, things look okay, I'm not horribly worried. But the fly in the ointment now is the war broke out and it kind of changed a few things from an inflation perspective. We can still get back on better footing, I just don't want to see it go on for too long.

Glen Davidson: Because of the war breaking out, as you said, that can change some things, it's really watching that threshold for things like oil and the elasticity of some of those consumers.

Andrew Marchese: When we talk to our companies it's just like trying to see the canary in the coal mine. Are you seeing guys seeing anything on the margin that is different and maybe indicative of a change in trend? The quicker you can pick up that ... again, the canary in the coal mine the better you're off probably from an investment perspective.

Glen Davidson: You mentioned real estate, what do you think where real estate sits and young people who say I can't wait till prices go back to the level where my parents bought a house.

Andrew Marchese: That ain't happening. But 20% correction in the GTA for a lot of things and condos even more, that's a good thing. I'm probably the worst person to talk about with real estate because I never understood the fascination with it because over the long term, very, very long term up until probably 20 years ago, the last 20 years we lived through, the return on real estate is 5 1/2%. That's the return on real estate. I can do better than 5 1/2% in a whole lot of different asset classes. I always looked at it as you were buying a home or some place to dwell, it's because you've got to live there, you want to live there. It wasn't ever done for the reasons that we've seen over the last 20 years, which is flipping and speculation and so on and so forth. It's not the be all and end all. I would say to young people  get a studio apartment, save your money, invest it in things that yield far more than 5 1/2% and you'll be happy one day.

Glen Davidson: When we think of all about all those options that you can invest in and make more than 5% that makes me think of the 60/40 mix. I know you believe in diversity, where do you think that 40 goes in particular?

Andrew Marchese: I agree with Jurrien Timmer in it's a 60/20/20 split and the 20 comes from fixed income because you do have to be mindful of a tail around inflation for two reasons. One, the liquidity and the amount of cash kicking around the system that I mentioned earlier, number two, the hard asset thesis that goes back to not just the supply constraint right now that we're dealing with in oil because of the war but also if countries are changing their trading partners and one major economy is becoming more isolationist that has big ramifications on the price of resources in the ground. If you put those two things together there is a certain tail risk with inflation secularly moving higher.

Now, the contrary of that, somebody like Mark Schhmehl or a growth investor would say, yeah, but we could make it all back in AI productivity gains. That may or may not be true, absolutely. I think in building a diversified portfolio you need to kind of acknowledge there is a non-zero risk that that inflationary tail kicks up. You combat that by taking 20% of the fixed income portfolio and putting it in things that are more diversified and you trade less. We talked a lot today about single security volatility and liquidity and more decisions, more financial engineering, more, more, more, more, more. I read this quote early in my career and it always stayed with me, it was a quote by Eugene Fama, famous professor. Money is kind of like soap, the more you handle it the more you lose of it.

It's so true. Make less decisions, make better decisions. Know what your roadmap looks like over a multi-year basis, and I don't mean two years, I mean 10, 15, 20, and then you can trim things accordingly on the margins. It's a well diversified portfolio that is going to give you a low volatility, best-in-class return. That's what you really want. You want the best-in-class return without the sleepless nights. I just think given the world we live in and what has transpired over the last 10 to 15 years the traditional 60/40 is probably looking a little bit more like 60/20/20 as Jurrien has talked about.

Glen Davidson: Consensus view. That's good. Lots of different options for the particular 20 that you mentioned as well. A question's just come in related to energy, actually. It says Canada has the potential to benefit from the recent events in relation to energy when it comes to exploiting natural resources. Do you foresee legislation around emissions being relaxed?

Andrew Marchese: It's a good question. I'm not close enough to people in office who would make such policy or talk about changes in policy. I think it might be warranted. I think there is a lot of science that has come out as it relates to the greenhouse effect and CO2 emissions that show that maybe we have, what's the word, kind of over exaggerated the impact of emissions in general, which is not to suggest for a second that's not important, it is, it's very much important. We may have been using bad math to talk about that. The people who are closest to it, both scientists and policymakers, if that were to come to fruition that's probably a good thing for Canada economically.

Glen Davidson: Are there other areas that we haven't discussed that you'd like to bring up with the audience today?

Andrew Marchese: No, I think we touched on a lot of good things. We talked about diversification which I think is really, really important and is gonna get more important going forward. I think, again, the urge to do more because we have the means to do it, I think you gotta kind of actually step away from that and pick your products accordingly that suffice you and your clients on a multi-year basis. I think that's really key. Just the general knowledge about, I think, one of the things we try to help all our clients with, all our advisors with, is being able to foresee questions that you're going to be asked by your clients and so if we can arm you with answers, kind of ex ante before they actually occur that's a good thing. I just think there's a ton of noise in the world, nobody has a really good means of gauging the probability of what the outcomes are going to be by various political bodies and nations and whatnot. I would venture to say it's actually not that important right now. Try to pick your financial instruments with the long term view centred around the health of businesses as opposed to what the rhetoric in the news can do around a risk premium. That always goes away.

You brought up the chart room. When I started at Fidelity in Boston I was on the 32nd floor of 1 Federal Street. On the 33rd floor was Jurrien Timmer's chart room, which is an awesome room. When I wanted to stretch my legs I would walk up the stairs and I'd just go through the charts in detail. You could actually flip through them. It was a great library. One thing became very apparent to me, the world is always a terrible place, and probably a lot less terrible now than it was centuries ago, but we know more now. We're plugged in every day and we get news by the second. The world's always a terrible, dangerous place. If you focused on the fears of it you probably didn't make as much money as you could have. There was huge opportunity costs to focusing on fear.

I would just simply say focus your attention on what really matters and what you can control. The rest of it will take care of itself on a multi-year basis. That's what I'm trying to tell our analysts every day. Let's forget about that, we don't have any control over it. If you have a fear of flying look at the steward or stewardesses. You can't control the pilot. The pilot's probably got it in good shape so just sit there, enjoy the ride. That's kind of what I would take away from all of this.

Glen Davidson: I like how you discussed earlier as well on top of that just the disconnect between where prices are and what's really the basis of fundamentals for those companies. We need to digest that. We need to not dwell on that and be so concerned on a daily basis.

Andrew Marchese: If you're looking for the market to tell you the truth on a daily basis you're looking in the wrong place.

Glen Davidson: Karishma calls up next and I want to ask you about quantitative research because she's part of a massive group out of Boston. You have quantitative research that you derive in Toronto as well. Can you talk about how that's an asset to you?

Andrew Marchese: Yeah, it's a small but extremely good team in Toronto. We do have what we call quantimental portfolios where we take fundamental information that really govern the stock selection process but the portfolio construction is done more on an optimized quantitative way. We also look for inputs that are fundamental in nature, revenue growth, earnings growth, various valuation metrics, maybe some sentiment and technical measures, and we put those through a quantitative filter which tends to rank order securities from best to worst on a litany of factors and models. It kind of does everything a human would do but far more efficiently and quicker. It helps add conviction.

You hear a story on a single security and you're like, well, that sounds really good. Our quantitative models will compare and contrast it to, let's say, other investment decisions either in that sector or across the broader market. You see where it ranks relative to those things and say, well, now I have even more conviction because the model probably likes it even more than I do. That should be taken as a real strong signal, I should own more of that security. Generally speaking, our quantitative models are alpha generative.

Glen Davidson: Very good. That's a great asset to what you and the whole team do. I love the way you talked about being in pods as well. It's group think. It's access to everybody. There's no silos at Fidelity.

Andrew Marchese: No silos. I'm a big believer there's a huge value to experience. One of the things I try to impart on our younger analysts is talk to people. The greatest lessons I've ever had in my career had nothing to do with actually covering a security and being at my desk and looking at the screen and doing a financial model. It was all about talking about securities or just the market in general by the coffee maker, or you run into somebody in the hallway, like a Will Danoff when we were in Boston, or a Joel Tillinghast, I could rhyme off dozens and dozens of very well respected PMs over the course of my career. That's where you learn the most things, being open, being collaborative and being collegial. The other thing is just from a compensation perspective, we have team scores. We want everybody to do well. It behooves you to talk to your peers and not hoard information or behave in a way that is very selfish. Everything is oriented and structured in a way that collectively we're making the best decisions for our clients.

Glen Davidson: Very good. As the intro said earlier on, you're cool, calm, and collected. Thanks for those insights. Andrew Marchese, everybody.