'Misunderstood' China gets to heart of Forstrong philosophy

'Misunderstood' China gets to heart of Forstrong philosophy

If the ETF industry brainstormed its ideal poster boy, there’s a good chance he would look and talk something like Tyler Mordy.

The president and CIO of Forstrong Global talked effusively to WP about the vehicle’s ability to create “robust, diversified and modern” portfolios, and drilled down on his company’s macro investment calling card.

He explained why Canadians are overexposed to Canada and underexposed to China, highlighted the importance of behavioural psychology and outlined how 2008 and the commodity bust six years later altered the ETF landscape.

He also discussed why the subadvisory-only firm doesn’t fear a bear market and how its partnership with RBC – the first bank platform it secured – is reaping dividends.

But it’s not all business. Mordy also delved into wine, fatherhood, Fatboy Slim concerts, his native BC and Forstrong’s most popular giveaway – its branded socks (rapturously received, apparently). He’s engaging company but if the broad range of topics sound like a man jumping ad hoc from one subject to the other, think again. Forstrong is a fast-emerging global investment firm to be reckoned with and Mordy has a growing reputation as a thought leader in the field.

China and headline risk quickly get to the heart of his philosophy and he explained that as a macro investor, he is always looking for where the consensus has it wrong. Mordy said it’s about identifying these inflection points, or as his office call it, macro misinformation.

He said: “Right now, we think we are at a critical inflection point in the sense that this America first, trade war rhetoric that has surfaced over the last seven or eight months has indiscriminately sold off a lot of global assets, primarily led by China and the emerging markets.

“We would look at that as a macro investor and say, was it driven by changes in sentiment and behavioural psychology or was it driven by changes in the underlying fundamentals? You look at the data and we conclude that there has been no fundamental change in the secular growth stories of a lot of these emerging markets, primarily in Asia. It’s more about looking at these opportunities as a chance to exploit that.”

Warming to the “macro misinformation” theme, Mordy declared China the most misunderstood country in the world and overlooked by the majority of Canadian investors. He said the perception that the Chinese economy is mismanaged and riddled with corruption is a result of looking at the superpower from the outside rather than, as a macro investor, trying to understand it from the inside.

He said: “Ever since I started managing money I’ve heard that China’s economy is supposed to crash but the beauty of being a global macro investor is you are always trying to understand the country’s dynamics from within the country.”

Mordy expects China’s GDP to drop to 3% in the next five years but believes this is more about the economy deliberately being slowed down as the government re-orientates away from cheap exports, and the build-up of infrastructure to move up the value chain and focus on the return on, and efficiency of, capital.

He said: “The average investor portfolio in Canada has 0% in China. [But] their bond market has been the best performing bond market in the world the past 10 years. If you look at the most well-resourced and well-staffed fund in Canada, the CPP [Canada Pension Plan], they aim to take their China exposure to 20% in their portfolio by 2025. If that’s an indication of where the smart money is going, you should follow that money.”

Mordy, who has been at Forstrong for almost 16 years, foresaw the ETFs’ “colonization” of the world’s asset classes and threw his energy behind the vehicle. The financial crisis was a validation for the innovation, he said, after people realized that many money managers utilizing ETFs to build global portfolios were doing better than industry averages.

He added that the commodities downturn in 2014 then opened people’s eyes to the fact they were too heavily invested in Canada and, in particular, its energy assets.

But rather than tread all over the benefits of active management in North America, Forstrong is more interested in helping investors round out their portfolio to make it more robust in light of concerns like end of the cycle and rising rates. He believes what’s worked in the past, will definitely not work in the future.

“Use income as an example,” Mordy said. “If you look at the traditional 60-40 balanced portfolio, that 40% has always been populated by Canadian bonds in the balanced construct.

“Moses didn’t come down from the mountain to say, ‘thou shalt use Canadian bonds for the income exposure’. We look at things more from a risk factor perspective. Using the interest rate example, if folks are trying to increase their income and their portfolios and meet their retirement needs, if we can do better than Canadian bonds, then where does that lead us to? The short answer is that we must look outside Canada’s borders for different yield opportunities.”

He added: “We provide diversification to traditionally balanced or domestically-biased portfolios with the ultimate result of producing a more complete portfolio that can weather large drawdowns like the financial crisis or in 2011 with the EU’s sovereign debt crisis or in 2014-15 with the commodity bust. Rounding out those portfolios really insulated folks against the large losses that many other investors experienced.”

Forstrong believes it is equipped to scale and ready for what Mordy calls the shift to ETF Act II. Act I was about investors embracing the vehicle, now it’s about how they are managed and the investment process. And he believes the present “compelling” situation should be whetting the appetites of all global asset managers.

“In the United States, there are grand expectations for the economy. We have the incredibly high expectations for corporate profits in the US, we have US stocks arguably priced for protection and we have a very expensive currency, the US dollar. On top of that, we have the Federal Reserve, which is leading the world of central banks in a monetary path of higher rates.

“You compare that with the rest of the word and we have extremely low expectations for corporate profits. Nobody really has any faith in emerging markets right now or even in Europe or Japan. We have cheap currencies, reasonably cheap stock markets, and central banks that are much further behind the rate-hiking cycle. They’re still accommodative.

“China is also going down the path of both monetary and fiscal reflation so it’s investment 101 – where would you rather invest? In the place with high expectations and valuations or vice versa?”

 

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