FidelityConnects: Retirement Trends with ClearPath® Portfolios

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Hello, and welcome to Fidelity Connects. I'm Glen Davidson.

 

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Fidelity's ClearPath target date funds are surging and the way corporate

 

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plans are evolving could be shaping your clients' portfolios right now.

 

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At the same time what's happening inside institutional retirement plans is

 

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increasingly bleeding into advisor books, and it's something advisors need to

 

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be paying attention to. Our next guest says ClearPath is uniquely positioned

 

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at the centre of that shift, bridging institutional strategies and

 

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advisor access. Joining me now to unpack what target date trends mean

 

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for your clients, how ClearPath is evolving and how the portfolios are

 

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positioned today is institutional portfolio manager, Jon Knowles.

 

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Jon, wonderful to be here with you.

 

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Yeah, great to be with you too, Glen.

 

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A reminder, if you have any questions please do send them in and I'll get them

 

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up here on the monitor.

 

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Jon, ClearPath, 21 years, I believe, this year.

 

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It's amazing. Could you talk about your role and then we'll get into ClearPath

 

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and how you work with institutional investors.

 

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Absolutely. I think a lot of people would look at my role and relate it to

 

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Ilan Kolet, similar teams, the Global Asset Allocation Group at Fidelity.

 

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We sit together in the Toronto office, similar title, but we

 

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operate in very different worlds.

 

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Just to give a brief summary of what I actually do, I'd say that most of my

 

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time is spent with two distinct groups in the institutional marketplace.

 

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The first of which is I spend a lot of times with companies around Canada

 

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of all sizes, big or small.

 

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Primarily I'm talking with their pension committees.

 

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This is a collection of individuals that are really focused on the pensions of

 

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these specific companies. They can be CEOs, CFOs, HR staffs,

 

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pension analysts, so on and so forth.

 

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I'm spending a lot of time with them.

 

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I also spend almost an equal amount of time with consultants

 

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and advisors who are helping these companies make good decisions.

 

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You can think of them almost like a Morningstar, or if the advisors have

 

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a recommended list at their organization there's a group that's focused on

 

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building that rec list. There's a buy, sell or hold rating on our ClearPath

 

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strategies as well. Those are kind of the two groups that I spend most of my

 

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time with. It's interesting getting perspective from all these different folks.

 

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It's certainly a robust due diligence process that occurs.

 

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The presentations can be lengthy but it's

 

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great perspective that we get across the entire landscape of Canada.

 

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You cover the country and you're seeing all these massive companies.

 

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We're gonna dig into that during the next 25 minutes for sure because you've

 

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garnered a lot of information that our financial advisor network is gonna find

 

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interesting, but also, you know ClearPath intimately

 

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and you'll be able to talk about where it's come from but also where

 

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it's going. Could I tell a story?

 

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I'd love to hear a story, yeah.

 

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I go way back with Fidelity. When I heard that I was going to do this with you

 

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and it was connected to ClearPath I think the hairs on my arm stood up a little

 

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bit. I have very, very fond memories of ClearPath and

 

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if I could tell the story it'll just set the scene, hopefully, a little better

 

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for what the solution is all about and what it's meant to the company.

 

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When I was a wholesaler in the mid-'90s, and then we went through

 

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the tech wreck at the end of that decade, at the beginning of the 2000s

 

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there was a real migration for advisors and their clients to go to fund-to-fund

 

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solutions. For a few years we just didn't have that solution

 

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at Fidelity, some other companies did either within their own dealers or

 

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some external companies.

 

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I was familiar with freedom funds in the United States.

 

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I was thinking how do we get asset growth back at

 

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Fidelity?

 

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Freedom funds, if I recall correctly, in around 2004

 

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were $30 billion US and they were supplied

 

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through 401k plans.

 

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They were fund-to-fund structures but they evolved.

 

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I know you know all this but I'm just thinking of all this stuff from the

 

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past. I thought, if we could take that and put

 

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it into Canada it would take the solutions that advisors were using at the time

 

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but be the future, it would be the evolution of those solutions.

 

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Lo and behold, we eventually did and called them ClearPath.

 

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I think that was around 2005.

 

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That was a huge turning point for Fidelity.

 

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It meant a lot. Advisors saw that as a migration.

 

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I saw planners and brokers alike using these solutions for different aspects

 

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of their clients' investing. The autopilot component of it made advisors'

 

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businesses much more efficient as well.

 

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A very fond memory for me.

 

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Again, my recollection was freedom funds were about $30 billion.

 

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ClearPath just started around '05.

 

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Where does all that sit today? Freedom funds, are they even still in existence

 

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in the United States?

 

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I like where you're going with this. As sort of students of the market we all

 

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love living through history. Maybe just a brief reminder of some of the stats.

 

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We've been managing target date funds out of the US through that freedom

 

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franchise since 1996, so coming up on three decades.

 

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Where that franchise sits now, it was once $30 billion, it's

 

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coming up to a trillion dollars in AUM.

 

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It's a very large, important part of our organization's

 

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DNA now. We've been able to jump on

 

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that moving train in Canada.

 

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Certainly, we have a smaller market here back home but our

 

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ClearPath franchise, which is similar but importantly different to

 

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freedom, is now sitting at around $33 billion.

 

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A lot of that is through the institutional channel but we do have financial

 

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advisors that are certainly using it and finding it valuable for all of the

 

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reasons that you articulated back in '05, '06, '07.

 

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When we think about the way the solution is structured and what freedom funds

 

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were all about, ClearPath when it came to Canada was a retail solution

 

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that now has become a big institutional solution.

 

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ClearPath's actually ...

 

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there's a bridge there for retail and institutional.

 

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What we're gonna learn from you today is a lot of what the institutional side

 

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is conveying and thinking about and also planning for.

 

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Talk about it as that bridge between institutional and retail.

 

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I think there's a lot of important shared learnings in how these solutions are

 

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good fits for both everyday investors but also through the workplace channel.

 

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I think just an important maybe caveat or an interesting fact about ClearPath

 

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is that it's the largest institutional strategy that we have at Fidelity Canada

 

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that is also available to financial advisors.

 

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We're very differentiated in the marketplace.

 

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There's a a lot of target date providers now, it's become a large business,

 

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almost all of them are singularly focused on the institutional marketplace,

 

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whereas we also own about 70% of the retail target

 

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date market as well. We have a foot in both marketplaces.

 

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We think that's important because the strategy is fundamentally great for

 

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Canadian investors regardless of the channel through which they might access

 

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that.

 

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Before we get into the trends that you're garnering from the conversations I

 

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do recall when I would hear about freedom funds as

 

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a solution within a 401k plan in the United States there was a lot

 

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of talk about the meetings that had to take place for due

 

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diligence, for companies to say, okay, we're gonna make this commitment to use

 

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this Fidelity solution. There's a lot of concerns that companies

 

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have to make sure that there's no issues that come up for any of their

 

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employees. What are your meetings like?

 

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They must put you through the wringer.

 

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Yeah. It all comes from a good place but, yes, we certainly get

 

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--

 

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True due diligence.

 

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--true due diligence, for sure. The process, there's a lot of pre-meetings and

 

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then usually there's sort of a final meeting that's typically called a finalist

 

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where us and other target date managers will present in front of the pension

 

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committee and we'll try and meet the specific needs and requirements

 

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that they're thinking about for their plan members.

 

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Ultimately, what they're trying to do with target date funds is provide a

 

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benefit for their employees.

 

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They want, as part of the total compensation package, the salary plus

 

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the benefits that you offer, and then importantly, the retirement component,

 

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that's really where ClearPath and other target date funds filter into the

 

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conversation for them. It's very important in terms of the holistic

 

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compensation package that they're offering for their employees and they want to

 

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make sure that they get it right. We have these conversations with them and

 

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really what they're thinking about is  we want to select a target date fund

 

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manager once and stay with them forever.

 

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That's what we want as a target date manager as well.

 

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We're thinking about a life cycle solution.

 

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Somebody buys it at 25, they retire and they use it until they're 95.

 

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We wanna be along that entire continuum for them and a lot of

 

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companies are also thinking along that same line of

 

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thought.

 

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If I'm not wrong, the way it would work for the employee is when they have

 

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their group plan it's option number one, target date.

 

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Option number two and so on is where you start to break things apart into

 

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tributaries, if you will, but that's at your own risk as an employee.

 

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Companies are making these target dates number one, aren't they?

 

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Yeah, and I think that's part of sort of the broader shift that we've seen from

 

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defined benefit plans to defined contribution plans.

 

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Really, the world I sit in is defined contribution plans.

 

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What has happened is that the onus on a good retirement

 

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experience has kind of been bestowed on the employee without them really having

 

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a vote or a say in that.

 

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Organizations have moved from DB to DC and, ultimately, it matters, the

 

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investment choices that you're making.

 

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What companies are doing, they still want to ensure that people are set up for

 

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successful retirement just through this DC or defined contribution

 

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environment. What that means is that target date is a great investment

 

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solution that ensures people are taken care of.

 

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We call it age appropriate asset allocation.

 

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Regardless of the age that you're at or your years to retirement you're going

 

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to have an investment portfolio that is right for you.

 

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We call it set it and forget it in that you don't have to do anything.

 

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You sign up, it's in that initial booklet that you get as an

 

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onboarding document. It's selected as the default investment option and it

 

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really becomes the driving force of that retirement experience for individuals

 

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today.

 

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The idea is reduce that concentration risk.

 

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There was a time when people would only buy their own company stock.

 

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There are some horror stories from that.

 

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Great stories too but a lot of horror stories.

 

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It's tough for someone to build their retirement nest egg and then see it

 

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disappear. That's not the case with this.

 

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It's about, as our advisors are, I'm sure, thinking, it's all about KYC, it's

 

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understanding your clients and that diversity that they need for all the money

 

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that they've worked hard to make over those years.

 

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Let's get into the trends that you're seeing and hearing through the

 

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discussions that you're having with the biggest companies in the country.

 

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The very first and foremost, and this is a little self-serving here, I sit in a

 

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wonderful place, I'm very lucky, but target date is without any question the

 

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biggest trend that is occurring in the defined contribution space.

 

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Companies en masse are migrating towards target date

 

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funds as that default investment option.

 

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There's this great deal of inertia that is happening in the marketplace.

 

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That inertia comes from really two things, one of which is what's called

 

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auto enrollment. You fill out that booklet and the default option is

 

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going to be a target date fund. You can do some other investing as well or you

 

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can complement a target date fund with other investments but primarily people

 

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are set at and forget it. They're just defaulting into a target data fund.

 

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The other thing that is occurring is re-enrollment.

 

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This is where a company says we now want to offer target date funds,

 

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or we want to offer new target date funds, and they take all of their employee

 

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assets and they map them over to that new target date solution.

 

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Even if you had do-it-yourself products before you are now

 

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invested in a target date fund which is ultimately trying to produce better

 

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alignment for employees to ensure that they're invested in the right solution.

 

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I think some people might look at that as being a risky endeavour but there is

 

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a lot of academic research and a lot that's been published by Fidelity as a

 

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record keeper and record keepers in Canada that suggest that outcomes are

 

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better in target date funds.

 

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People have better returns because they're not transacting at the wrong time.

 

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Really, it's a packaged solution that has

 

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delivered better performance year over year over year.

 

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That compounds really well.

 

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Just to give a couple of sort of stats or statistics behind this, now in Canada

 

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as of the end of last year, 86% of companies

 

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were offering a target date fund, 67% of employees

 

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were using a target date fund, and 50 cents of every dollar in a defined

 

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contribution environment were going towards target date funds.

 

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That kind of just gives you the size and scale that is now the target date

 

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industry, specifically in Canada.

 

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We got some catching up to do relative to the US where it's five trillion but

 

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you start a little slowly and then it compounds quickly.

 

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The next trend that I think is important as we talk about investor behaviour,

 

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what employees are actually doing and contributing.

 

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We typically see that savings rates are in the range of about 6% to 10%

 

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for sort of a median investor.

 

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It changes based off of your age range but that's kind of the median that we're

 

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seeing. The challenging thing, while that's good and

 

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we've seen slight improvements over the years, is that inflation is really

 

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eroding some of that nominal ...

 

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well, the nominal savings are good, the real savings are not as good as we

 

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would hope from our sort of long term retirement math.

 

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But what's good to see is that the regulators are actually trying to step in

 

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and counteract some of this to a certain extent.

 

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This is still very early days but the B.C.

 

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regulators have actually made a slight change to their pension

 

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rules. They're implementing something that's called auto escalation.

 

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What this means is that companies can now proactively increase

 

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the savings rates that are being pulled from somebody's paycheque to ensure

 

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that even in real terms those savings rates are going higher over time.

 

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B.C. is the first to roll it out, it's coming later in 2026, that's something

 

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that we think will have a cascading effect through the rest of Canada where it

 

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hasn't been a feature. In the US it's been a future and we've seen those higher

 

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savings rates so we certainly know that it works.

 

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Sorry, let me ask you about that. It's proven in the US, of all the

 

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provinces one has stepped up and said this makes sense and

 

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the others are going, well, we'll have a look.

 

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Why do you think it is that only B.C., good forward thought for

 

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them, but why is only one province on board at this point, considering it's

 

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also a proven methodology in the United States.

 

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Sadly to say that this is kind of just a function of bureaucracy.

 

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It is what it is.

 

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It's a rule that you couldn't deduct more from somebody's paycheque, that was

 

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kind of just a governing rule that was in place.

 

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You have to change the rules to enable this auto escalation feature but

 

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once one does you get fast followers so we're optimistic that this will be a

 

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trend that continues into the future.

 

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We're monitoring it closely but, importantly, it's worth noting and flagging

 

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as a trend that could take hold.

 

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The last dynamic is one that I think is really important to financial advisors

 

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and it's this degree of paternalism that we're starting to see through

 

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companies. What do I mean by paternalism?

 

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The historical model was, Glen, you retire from Fidelity,

 

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you're a liability after retirement, get out of our plan, we don't care about

 

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you. Now it's, Glen, you're retiring, oh you have a lot of

 

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savings in your investment account and you're actually among a

 

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cohort of individuals where all of the assets are.

 

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By losing those large account balances

 

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those companies lose negotiating power with some of their vendors, whether it's

 

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the investment manager or the record keeper or the benefits provider.

 

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If their ultimate goal is to provide better benefits to

 

15:42.675 --> 15:47.179

their employees, that means all employees, and keeping the retiring

 

15:47.179 --> 15:51.617

cohort assets allows for better pricing for everybody else that's

 

15:51.617 --> 15:55.321

remaining in the plan. There's a little bit more competition, I would say, that

 

15:55.321 --> 15:59.425

we're starting to see going forward where companies are vying a little bit more

 

15:59.425 --> 16:03.062

to retain those assets, where previously that certainly wasn't the case and

 

16:03.062 --> 16:07.066

they just wanted to be done with somebody once they retired.

 

16:07.066 --> 16:10.469

I know financial advisors certainly do well with people that have just retired

 

16:10.469 --> 16:13.472

and they're leaving their plans so that's a trend that's definitely worth

 

16:13.472 --> 16:15.407

monitoring.

 

16:15.407 --> 16:17.109

It's economies of scale.

 

16:17.109 --> 16:20.312

It makes sense that they're saying stay within these solutions but we want to

 

16:20.312 --> 16:21.847

make sure they keep diversified.

 

16:21.847 --> 16:24.817

All about economies of scales, for sure.

 

16:24.817 --> 16:26.618

Advisors are listening to this today and they're saying, well, he's talking

 

16:26.618 --> 16:30.823

about group plans and 401k's in the States but this

 

16:30.823 --> 16:34.393

is important information for them to understand what their client is going

 

16:34.393 --> 16:38.263

through through their employer-sponsored plan, how that could parlay into what

 

16:38.263 --> 16:41.934

they're doing individually with that advisor, and what could happen upon

 

16:41.934 --> 16:46.071

retirement in future. What are some other reasons why an advisor should really

 

16:46.071 --> 16:48.807

understand what's going on on the institutional side?

 

16:48.807 --> 16:52.978

I think that's kind of the key link here. Your clients have

 

16:52.978 --> 16:56.949

books of business with you, accounts with you, but they're also accumulating

 

16:56.949 --> 16:58.650

wealth through these other channels.

 

16:58.650 --> 17:02.254

It's important to have an understanding of some of the dynamics that are

 

17:02.254 --> 17:06.091

playing out in these other channels. For example, in a prior world where we had

 

17:06.091 --> 17:09.995

people defaulting into money market or they're extensively doing these

 

17:09.995 --> 17:13.599

do-it-yourself accounts, it's a little bit more challenging to manage as an

 

17:13.599 --> 17:16.835

advisor, what are they doing over there, what's their Canadian equity exposure,

 

17:16.835 --> 17:20.939

so on and so forth. Mapping that holistic picture, it's a little bit easier

 

17:20.939 --> 17:25.144

now, or we would hope it's a little bit easier to have a sense that in a

 

17:25.144 --> 17:29.314

professionally managed target date fund that will de-risk as their risks and

 

17:29.314 --> 17:33.285

sensitivities change. It's kind of trying to provide a little of that advisor

 

17:33.285 --> 17:37.356

model in that institutional environment which, hopefully, should lead to

 

17:37.356 --> 17:41.427

better wealth accumulation. But increasingly we're seeing this as a vehicle

 

17:41.427 --> 17:45.297

for that wealth accumulation for people to have better retirements so it's an

 

17:45.297 --> 17:47.699

important trend to be aware of.

 

17:47.699 --> 17:51.703

Well, and as an employee feels good about their

 

17:51.703 --> 17:54.907

retirement solution and they understand that it's a target date solution, and

 

17:54.907 --> 17:59.311

hopefully a Fidelity one, they're probably telling their friends and relatives.

 

17:59.311 --> 18:03.649

That may then parlay into what the advisor is able to support them with

 

18:03.649 --> 18:05.384

financially.

 

18:05.384 --> 18:08.554

Kind of an interesting sidebar is that when we're sitting in front of some of

 

18:08.554 --> 18:12.257

these pension committees they do recognize that in many instances people retire

 

18:12.257 --> 18:16.295

and go to a financial advisor and get that sort of more hand-holding

 

18:16.295 --> 18:18.530

decumulation experience.

 

18:18.530 --> 18:21.633

One of the things that they appreciate is that ClearPath not only available

 

18:21.633 --> 18:25.737

through institutional channels but then they could also have that same offering

 

18:25.737 --> 18:30.075

available to them so you continue that continuum of lifecycle investing,

 

18:30.075 --> 18:33.712

both in institutional and then into the retail channel as well.

 

18:33.712 --> 18:36.148

Let's talk about the mechanics of ClearPath.

 

18:36.148 --> 18:39.985

There's a lot of moving parts. My recollection is, because I haven't had to

 

18:39.985 --> 18:43.922

talk about them for quite a while, although fondly remembered, is that they

 

18:43.922 --> 18:48.093

are target date. The asset mix when you're younger is more aggressive

 

18:48.093 --> 18:51.864

than it is as you approach retirement and go through retirement.

 

18:51.864 --> 18:54.700

And they evolve daily, I believe.

 

18:54.700 --> 18:58.103

Is it that frequent? Could you just remind our viewers because there may be a

 

18:58.103 --> 19:00.339

couple of viewers that are saying, you know what, I don't remember what

 

19:00.339 --> 19:02.407

ClearPath's structure is all about.

 

19:02.407 --> 19:04.209

Could you talk about that?

 

19:04.209 --> 19:05.444

Your memory is good.

 

19:05.444 --> 19:07.746

I appreciate hearing that, by the way.

 

19:07.746 --> 19:10.315

We'll test you again next year, see if it's still the same.

 

19:10.315 --> 19:14.319

There's two main components to our target date funds that we like to kind of

 

19:14.319 --> 19:17.656

parse out and talk about separately. The first of which, kind of what you were

 

19:17.656 --> 19:21.426

alluding to, is the strategic mix This is essentially we start with a blank

 

19:21.426 --> 19:25.097

sheet of paper and we want to build the investment portfolio that is good for

 

19:25.097 --> 19:29.368

the long term. We're thinking over multiple decades, effectively aligned

 

19:29.368 --> 19:32.104

with that long term retirement horizon that individuals have.

 

19:32.104 --> 19:36.074

We're building the benchmark focused on things like equity

 

19:36.074 --> 19:39.711

and bond mix but then also more detailed diversification.

 

19:39.711 --> 19:42.948

How much do we actually want within each of those components and what type of

 

19:42.948 --> 19:47.186

investments? To your point, we start with more equity for younger individuals

 

19:47.186 --> 19:49.955

where our objective is really to try and grow wealth.

 

19:49.955 --> 19:53.192

Because they've got a lot of human capital and time on their side they can

 

19:53.192 --> 19:55.861

sustain slightly higher volatility in those portfolios.

 

19:55.861 --> 19:59.865

As we get closer to retirement we shift our goal a little bit and focus more on

 

19:59.865 --> 20:03.902

risk-adjusted returns, more balance between stocks and bonds,

 

20:03.902 --> 20:07.606

and being much more diversified among that bond sleeve as well.

 

20:07.606 --> 20:11.376

We continue to de-risk well into retirement where we focus more on capital

 

20:11.376 --> 20:15.314

preservation. Capital preservation in real terms, if you're retired

 

20:15.314 --> 20:18.951

and you're spending out of your portfolio inflation has a lot of influence on

 

20:18.951 --> 20:22.254

you because your liabilities are going up so the portfolio has to have some

 

20:22.254 --> 20:26.358

resiliency to it. That's kind of the core or the anchor of the portfolio in the

 

20:26.358 --> 20:31.230

strategic mix. We also have active asset allocation and active management.

 

20:31.230 --> 20:34.633

Active asset allocation would be deviations from that mix, overweights and

 

20:34.633 --> 20:38.570

underweights to Canadian equities, US equities commodities, all that fun stuff

 

20:38.570 --> 20:42.574

and then also selecting the underlying portfolio managers that we

 

20:42.574 --> 20:46.411

believe can outperform in their respective markets but doing so in a balanced

 

20:46.411 --> 20:50.015

and complementary way. We don't want to just have exposure to growth managers

 

20:50.015 --> 20:54.019

or just value managers. We want to have good, fulsome exposure that can

 

20:54.019 --> 20:57.489

operate well over a full market cycle.

 

20:57.489 --> 20:59.524

You talked about that asset mix, how it changes.

 

20:59.524 --> 21:02.094

It's more aggressive when someone's younger. It's more conservative when

 

21:02.094 --> 21:06.031

they're older. When this all came out in 2005,

 

21:06.031 --> 21:10.068

2006, my recollection is it was equities

 

21:10.068 --> 21:11.970

and bonds.

 

21:11.970 --> 21:16.275

Is it still that clear cut or is the fixed income component more

 

21:16.275 --> 21:19.111

diversified now into other asset classes?

 

21:19.111 --> 21:22.814

As Jurrien would talk about that 40 is now split into 20 and 20 because there's

 

21:22.814 --> 21:27.419

other areas to go. Is ClearPath evolving or is it stuck in the old ways?

 

21:27.419 --> 21:30.355

Fortunately, it's not stuck in the old ways.

 

21:30.355 --> 21:34.459

That's one of the beautiful things about target date funds is that every single

 

21:34.459 --> 21:38.230

day that we come in we're trying to research and evolve the solutions into the

 

21:38.230 --> 21:42.167

future. Hopefully, investors or people that are interested in

 

21:42.167 --> 21:45.270

ClearPath will really understand that you're not necessarily buying the

 

21:45.270 --> 21:49.207

solution as it stands today. You're buying how the solution is bound to evolve

 

21:49.207 --> 21:53.945

into the future. Really, when we talk with some of these institutions

 

21:53.945 --> 21:57.916

they're testing us not on the portfolio today but what is the research that's

 

21:57.916 --> 22:01.953

leading us to the specific portfolio composition today so they can get a

 

22:01.953 --> 22:05.424

sense of if things change in the future how will we respond to that.

 

22:05.424 --> 22:09.561

There's two primary dimensions of research that influence change.

 

22:09.561 --> 22:12.698

The first is what we see in Canadian investors themselves.

 

22:12.698 --> 22:16.902

What are we thinking about retirement expectations, how is retirement evolving?

 

22:16.902 --> 22:20.872

Government benefits support programs, QPP, CPP, OAS, how does that

 

22:20.872 --> 22:22.841

factor in for retirement income?

 

22:22.841 --> 22:27.045

Then thinking very detailed on the capital market side of things as well.

 

22:27.045 --> 22:31.016

More recently we made some strategic enhancements, modifications

 

22:31.016 --> 22:34.286

to the benchmark. We announced this at the end of last year but we've sort of

 

22:34.286 --> 22:39.157

been trading it over a couple of months here in 2026.

 

22:39.157 --> 22:42.227

There's two primary things that we're trying to achieve by this.

 

22:42.227 --> 22:46.264

The first of which is we wanna better insulate the longevity risk for

 

22:46.264 --> 22:50.168

our investors. For younger individuals and those further in retirement we're

 

22:50.168 --> 22:54.206

increasing the equity exposure a little bit, for younger folks 92% up to 96%,

 

22:54.206 --> 22:58.210

for older individuals  it's 21 up to 27.

 

22:58.210 --> 23:00.979

Then we're trying to refine the inflation resiliency.

 

23:00.979 --> 23:04.916

I think we've been leaders in the target date space in Canada in trying to

 

23:04.916 --> 23:07.853

infuse that inflation resiliency in our portfolios.

 

23:07.853 --> 23:12.357

We first did it back in 2018 where we added Canadian real return bonds, in

 

23:12.357 --> 23:16.428

2022 we came back with global inflation-protected bonds, and this year

 

23:16.428 --> 23:20.065

we're slightly modifying the duration profile to reduce interest rate

 

23:20.065 --> 23:24.002

sensitivity. Also, we've added, sort of in partnership with

 

23:24.002 --> 23:27.839

David Wolf and David Tulk, actually, this interesting commodity futures vehicle

 

23:27.839 --> 23:31.810

that we've recently launched that gives us even more inflation resiliency

 

23:31.810 --> 23:35.847

in the portfolio. We're adding it where it's most impactful to folks,

 

23:35.847 --> 23:39.284

again, individuals who are older and really seeing those liabilities go up

 

23:39.284 --> 23:43.155

without that offsetting human capital that can also rise with inflation.

 

23:43.155 --> 23:47.058

When you in your role sit down with a corporation in their HR department and

 

23:47.058 --> 23:51.029

it's the first meeting you must be just waiting for that question about,

 

23:51.029 --> 23:55.167

well, Jon, how are you as a firm protecting against

 

23:55.167 --> 23:59.671

evolution of products and solutions and also diversifying

 

23:59.671 --> 24:03.608

away from what were core assets in the past that we need to think about in

 

24:03.608 --> 24:06.344

the future? You just wait for that question, and you've got a great answer for

 

24:06.344 --> 24:10.849

it. Is that something that comes up quite readily from these

 

24:10.849 --> 24:12.717

institutions that you're seeing?

 

24:12.717 --> 24:16.521

Absolutely. It's kind of that age-old question of if you have a product you're

 

24:16.521 --> 24:20.826

always worried about disruption. We're constantly disrupting ourselves

 

24:20.826 --> 24:23.728

and that constant evolution ensures that people are always kind of on the

 

24:23.728 --> 24:26.665

frontier of what we're thinking about in investing.

 

24:26.665 --> 24:30.602

It's important to do this in the context of our investment process.

 

24:30.602 --> 24:34.873

We're changing the strategic mix which has a 10, 20, 40-year

 

24:34.873 --> 24:37.008

investment horizon, very long.

 

24:37.008 --> 24:40.412

The things that influence this change occur slowly.

 

24:40.412 --> 24:43.014

We're not changing the benchmark every single year.

 

24:43.014 --> 24:46.952

We just don't have the research that supports or gives us the evidence

 

24:46.952 --> 24:49.955

that says that this is actually gonna improve outcomes.

 

24:49.955 --> 24:52.757

We make changes maybe every three to five years.

 

24:52.757 --> 24:55.861

That's our typical cadence. Spend a lot of time researching.

 

24:55.861 --> 24:57.529

The portfolio has been around for two decades.

 

24:57.529 --> 25:00.599

We've been managing target date for three decades, as I mentioned.

 

25:00.599 --> 25:04.636

It's a high hurdle rate for us to make change in the portfolio because

 

25:04.636 --> 25:08.473

it really has to either improve the return potential or improve the risk

 

25:08.473 --> 25:12.611

profile. Hopefully, it does both so we can improve the risk-adjusted

 

25:12.611 --> 25:13.979

return of the portfolios.

 

25:13.979 --> 25:17.749

We just have a few minutes left, I'd be remiss if we didn't talk about where

 

25:17.749 --> 25:21.887

are the portfolios biased towards today given the chaos

 

25:21.887 --> 25:25.924

of information, which is minute by minute, and the chaos

 

25:25.924 --> 25:29.928

of geopolitics, the chaos just of market moves, futures and so

 

25:29.928 --> 25:33.965

on. I don't imagine ClearPath is making volatile

 

25:33.965 --> 25:37.802

changes but there's got to be subtle adjustments that do allow for biases

 

25:37.802 --> 25:39.538

today. Could you talk about that?

 

25:39.538 --> 25:42.240

Moving from the strategic process that we were talking about to the active

 

25:42.240 --> 25:46.578

process, we're by no means day traders but we do have that

 

25:46.578 --> 25:51.049

flexibility to take in the information that we see based off of valuations

 

25:51.049 --> 25:52.984

or some of the news flow.

 

25:52.984 --> 25:56.821

Just a sidebar, sometimes the best thing to do is just turn off your phone.

 

25:56.821 --> 26:00.926

Where we're positioned today is a reflection of our belief that we're

 

26:00.926 --> 26:05.830

kind of seeing both accelerations in growth, which is good, and accelerations

 

26:05.830 --> 26:08.300

in inflation which is more challenging.

 

26:08.300 --> 26:12.370

From a portfolio active positioning perspective we're overweight equities

 

26:12.370 --> 26:14.839

with preference for non-US equities.

 

26:14.839 --> 26:18.243

We're overweight Canada, EAFE and emerging markets.

 

26:18.243 --> 26:21.880

We're underweight fixed income because interest rates are challenged in this

 

26:21.880 --> 26:24.749

good growth and inflationary environment.

 

26:24.749 --> 26:27.986

We've talked a lot as a global asset allocation team about that positive

 

26:27.986 --> 26:32.190

correlation that currently exists between fixed income and equities,

 

26:32.190 --> 26:35.160

that's more challenging for multi-asset portfolios.

 

26:35.160 --> 26:38.330

Importantly, we've been overweight commodities which is a really good

 

26:38.330 --> 26:40.732

diversifier in this current environment.

 

26:40.732 --> 26:44.169

I think there's compelling reasons to own commodities just outright but then

 

26:44.169 --> 26:46.605

they also give you that good layer of diversification.

 

26:46.605 --> 26:50.008

That's a speed dating tour of our current positioning.

 

26:50.008 --> 26:53.745

A reminder to everybody, it's not that you are taking an active bet on

 

26:53.745 --> 26:57.782

commodities directly, you're actually looking at portfolio managers that have a

 

26:57.782 --> 27:04.055

bias towards commodities as the rounding out of that solution.

 

27:04.055 --> 27:06.391

A bit of both, actually. As I was alluding to with David and David, we launched

 

27:06.391 --> 27:10.328

a new vehicle which actually gives us exposure to the actual commodities

 

27:10.328 --> 27:13.398

themselves but we've done it in a creative way.

 

27:13.398 --> 27:15.767

This is a little bit geeky so bear with me for a moment.

 

27:15.767 --> 27:19.938

The term structure, you can invest in different types of

 

27:19.938 --> 27:23.975

commodity futures. The spot contract is the first one that moves the

 

27:23.975 --> 27:28.013

most but what we're doing is investing a little bit further out the curve

 

27:28.013 --> 27:32.050

which gives us slightly better return and risk profiles  but

 

27:32.050 --> 27:36.021

still assuming that same inflation resilient commodity exposure that we

 

27:36.021 --> 27:40.358

want. We're getting a basket of commodities, energies, materials,

 

27:40.358 --> 27:43.628

agriculture, which gives us good exposure to some of the things that are

 

27:43.628 --> 27:46.998

ultimately inflationary in nature but we're doing it in a slightly more

 

27:46.998 --> 27:51.036

creative way which gives a better risk-adjusted return profile than if we were

 

27:51.036 --> 27:53.605

just owning that spot contract that can be very volatile.

 

27:53.605 --> 27:56.708

I had no idea but that's why I ask questions and you answer them.

 

27:56.708 --> 28:00.478

This is really refreshing to hear that back in 2005 somebody that bought into

 

28:00.478 --> 28:05.350

ClearPath which had a very traditional asset mix can rest assured,

 

28:05.350 --> 28:09.287

or anybody that buys today, that it is evolving with the

 

28:09.287 --> 28:12.991

solutions that are available at Fidelity and in the market and in world, and

 

28:12.991 --> 28:16.294

it's gonna take them to a great spot for retirement and beyond.

 

28:16.294 --> 28:20.298

Could you just maybe close us out talking about is ClearPath the

 

28:20.298 --> 28:23.768

only solution that an investor should have or where does it complement their

 

28:23.768 --> 28:25.003

current mix?

 

28:25.003 --> 28:26.938

I think it depends on the ultimate investor.

 

28:26.938 --> 28:29.841

I think there's certainly individuals that can use it as a good core to their

 

28:29.841 --> 28:33.845

portfolio and then can complement with more Mark Schmehl exposure

 

28:33.845 --> 28:37.449

or some additional exposure if they have specific themes that they want to lean

 

28:37.449 --> 28:41.219

into. I think where it's really become so important in the institutional world

 

28:41.219 --> 28:44.589

is this recognition that there's low engagement.

 

28:44.589 --> 28:48.660

People don't want to be making these investment decisions but companies want to

 

28:48.660 --> 28:52.731

offer a very well diversified solution that is taken care of by these large

 

28:52.731 --> 28:57.102

global organizations that are well resourced and researched.

 

28:57.102 --> 29:00.238

It kind of can play in both of those worlds but I'd say it's more dominated

 

29:00.238 --> 29:04.042

towards those that just do it for me, set it and forget it, and it will evolve

 

29:04.042 --> 29:05.410

over time, as you say.

 

29:05.410 --> 29:08.213

Really interesting talking to you today and interesting to hear what the

 

29:08.213 --> 29:12.050

largest firms in Canada are saying about target date solutions, and then I hope

 

29:12.050 --> 29:16.087

for our audience seeing where there's a parallel to what the advisor is using

 

29:16.087 --> 29:19.758

and doing and expecting to hear from their clients as well as their clients

 

29:19.758 --> 29:22.560

learn more about the solutions that they're invested in.

 

29:22.560 --> 29:24.462

Jon Knowles, thanks so much for talking to me today.

 

29:24.462 --> 29:25.530

Thanks for having me.

 

29:25.530 --> 29:29.467

Thanks for watching or listening to the Fidelity Connects

 

29:29.467 --> 29:33.605

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We'll end today's show with a short disclaimer.

 

30:03.134 --> 30:06.971

The views and opinions expressed on this podcast are those of the participants,

 

30:06.971 --> 30:10.909

and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

30:10.909 --> 30:14.913

its affiliates. This podcast is for informational purposes only, and should not

 

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be construed as investment, tax, or legal advice.

 

30:17.448 --> 30:19.751

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30:19.751 --> 30:24.088

Or an endorsement, recommendation, or sponsorship of any entity or securities

 

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Their values change frequently, and past performance may not be repeated.

 

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Fees, expenses, and commissions are all associated with fund investments.

 

30:36.301 --> 30:38.603

Thanks again. We'll see you next time.