VELA Podcasts

In this quarter’s Polestar Podcast by VELA Wealth, Kevin Parton and Keith Allan unpack the highs, lows, and surprises of Q3, setting the stage for what to expect in Q4. From interest rate cuts that could spark a holiday spending spree to the skyrocketing appeal of gold amid inflation worries, they dive into trends that matter. Also, they discuss TD Bank’s $3 billion fine in the U.S. for money laundering—how will this impact one of Canada’s largest banks?

Keith also shares valuable insights on modern portfolio strategies, moving beyond traditional approaches to include non-traditional assets that offer a fresh edge in today’s unpredictable market. This episode is full of timely insights for those looking to stay ahead in the investing world. Don’t miss it!

 

 

Kevin Parton and Keith Allan cover the latest in financial markets with some compelling highlights:

• Q3 Market Trends: How did the typically quiet summer months shape up, and what might that mean for Q4?
• Interest Rate Shifts: With new cuts in Canada and the U.S., they discuss the potential impact on holiday spending and the broader economy.
• TD Bank’s Record Fine: A major headline in finance—how will this affect TD’s reputation and future growth?
• Gold’s Unusual Surge: Gold’s standout performance this year prompts a closer look at its role in portfolios.

 

About the Guest – Keith Allan

Keith Allan is a Portfolio Manager with Harness Investment Management. Harness has engaged in a strategic partnership with VELA Wealth and provides discretionary portfolio management for many of VELA’s clients. With more than 15 years of buy-side investment management experience, Keith brings a wealth of knowledge and experience to provide insight and guidance to clients regarding their investment portfolios. At Harness, Keith is responsible for developing and maintaining investment portfolios for VELA clients. To learn more, please visit Harness Investment Management team page.

 

About the Host – Kevin Parton

Kevin Parton, CFP professional, specializes in personal and business financial planning, tax reduction, and estate planning. Kevin is diligently concentrating on client education as a powerful strategy for building financial certainty. As no financial situation is the same, Kevin and his team monitor clients’ plans and implement personalized strategies to reduce their personal and corporate taxes, and protect their income, assets, and loved ones against the financial consequences of a serious illness, injury or death, ensuring clients maintain financial certainty and peace of mind. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

 

Disclaimer

The information provided in the podcast transcript is designed for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

 

The Podcast Transcript:

Kevin Parton:

Hello, I’m Kevin Parton, Partner and Senior Advisor at VELA Wealth, and this is the Polestar Podcast. I’m here with Keith Allen, Portfolio Manager with Harness Investment Management and Portfolio Manager at VELA Wealth. Hello and welcome back, Keith.

 

Keith Allan:

Hi, Kevin. Thanks for having me.

 

Kevin Parton:

Well, we like to connect every quarter to discuss what happened in the markets and look at some forecasts for the upcoming quarter, and anything exciting that has happened over the last three months. So let’s start there. When we last talked, we were talking about what was going to happen, what we predicted might happen, if you will in Q3. Some of that revolved around Q3, historically the sleepy quarter; people like to take the summer off, go on vacation. That’s not just specific to people who like to spend money and are not necessarily shopping, but hedge fund managers who would otherwise increase the volume of trades are maybe also not at their desks. Now that we’ve gone through Q3, how did that pan out? What happened in the last three months that aligned with that or maybe didn’t?

 

Keith Allan:

I think for the most part, the summer months kind of followed suit and we saw pretty much a steady to flat market throughout the summer coming out of the summer into the beginning part of fall sort of end of August into September. We did see some strength in the market. I mean we saw the TSX reached an all-time high. This was early last week and there was some momentum coming out of the summer months into September back to school, back to work. But as we’ve kind of approached October and head into October, you could definitely say that we’re starting to lose some momentum in the market and that’s not uncommon, but certainly, as I’ve said in the past, typically the Q4 months are traditionally quite strong. So we’ll see what happens. To your point, Q3 sort of hummed along the summer months, with not a lot going on and this year was much of the same.

 

Kevin Parton:

Well, there’s a few things that happened that I want to bring up and get your take on that happened over Q3 that were interesting. I just want to get your take on them and then we’ll take a look at some forecast for Q4 and some of the things that have happened recently that might influence that. One of the things that I want to cover is interest rate cuts. I was just listening to our last conversation and Canada had been the first country to cut rates, and US hadn’t followed suit well since then. Now the US has cut rates. So, what does that look like as it relates to the market in sort of immediate sense and how do you see this sort of new trend of rate cutting impacting the market?

 

Keith Allan:

Well, last week we saw that the Bank of Canada also cut interest rates by 50 basis points. So, we went from, I believe 4.25 the overnight rate to 3.75. So, they are kind of following suit there and that wasn’t unexpected. I think the consensus amongst most people was that there was going to be a rate cut and it was probably going to be larger. Their typical cut rate is a 25 basis point rate, so 50 basis points was somewhat expected and in fact I heard a lot of people talking about maybe a 75-basis point rate cut, which didn’t come to fruition. That being said, I do have a fair amount of confidence that the next time we will see an additional rate cut and possibly an additional 50 basis point cut. I think there’s more to come on that. What it means is that we have seen the market lose a little bit of momentum; unemployment numbers are creeping up, they’re the lack of GDP growth and just overall growth itself in the economy. Canada has slowed down a little bit and I think a lot of that is the impetus for the Big Canada to cut rates now and look to be cutting rates moving forward into 2025.  I think when we do see a cutting interest rate, the idea is that it will stimulate the economy, provide initiative for consumers to spend and borrow, and try and stimulate that growth within the consumer sector. As I’ve said many times on here, Q4 traditionally has that spending momentum, if you will, when you factor in all the upcoming holidays, the Black Friday, the Cyber Monday and Amazon Prime days, the Boxing Day in December; so, people traditionally like to spend during these fall months. So, we’ll see lower interest rates, lower borrowing costs, more access to liquidity, and more access to money and that should sort of help in that respect.

 

Kevin Parton:

Move things along, which is the idea and so I think it’s like I said, it’s it can spur business growth, which is exciting. It can also increase spending as people are spending money on debt and one of the other things that I would think happened and it’s come up in conversation is as well as interest rates go down, yields in sort of the fixed income or cash space go down and to where a lot of money was parked, getting a decent return, that return decreases that money is looking for somewhere to go now. Something worth mentioning is gold as an asset is coming close to 40% this year and there’s lots of conversation around it. People always hold some amount of gold in their portfolio for a haven. But historically, it’s kind of barely kept up with inflation. And this year it’s kind of on a tear. How much of that do you think has to do with the current economic environment versus how much of it has to do with geopolitical uncertainty? So, you think that with interest rates coming down, that gold stops being appealing? Is there a correlation between gold safety and people feeling stressed in the market and the economy?

 

Keith Allan:

Yeah, it’s actually a really good question, Kevin. I was at an investment management conference last week, and they talked a lot about alternative assets, nontraditional assets, and how to structure portfolios in today’s environment. The last session of the day was on commodities, alternative assets, crypto, real assets, and infrastructure, and the fellow that was speaking put an interesting quote up on the big screen from Warren Buffett, who you know is probably the most sophisticated, best value investor of our generation and has obviously done quite well, but notoriously is not being very bullish on gold. The quote says, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” We spend all this time taking it out of the ground, melting it down, putting it in the safety deposit boxes, paying these people to guard it for their lives, and it serves no functional utility in society, right? We have this fascination with it, and he can’t understand it. And he’s right. If somebody who didn’t know anything about human beings or planet Earth or how we function in the economy was watching us do this, they’d be like, “What is the big appeal?” So, he’s right in the sense that it has no functional utility. If you were to go to buy a car tomorrow or some furniture, you’re not going to take a bunch of stack of bricks of gold and pay for it. So, what is our fascination with it? I think the biggest thing is that it is a store of value, it is a natural hedge against inflation because gold holds its value and it has shown that throughout time now. To Warren Buffett’s point, and I’ve said this before, it does not provide any cash flow, it is a non-yielding asset class. So, you hear people that are super, super bullish on gold like you got to own gold, you got to own silver – that’s great, but it’s not providing you any meaningful cash flow, all it’s doing is holding its value. So, at some point in time, presumably, you’re going to trade it in for something else. You’re not just going to hold it until the day you die. It’s going to hold its value, and you’re going to exchange it for presumably cash at some point to buy things. So, do I think that there’s a place for it in everybody’s portfolio? Yes, I do think there’s a place for it because it is a diversifier. It’s a hedge against inflation. It holds its value. Am I super bullish on it like everybody else? No, because, again, it doesn’t provide that needed ongoing cash flow that most people need in their portfolio. To your point, Kevin, yes, it’s done incredibly well this year. You could say the same about other alternative assets. In 2020 Crypto did incredibly well, is there a place for it in your portfolio? I’ve gone on record saying that I’m not a huge crypto guy, I still I’m not necessarily a believer in it and I think there are a lot of holes in its functionality, but yes, if you’d like to have it in the portfolio, sure, as a diversifier. Same thing with the gold. I think the biggest reason why it’s done so well is because people are afraid of inflation, and traditionally gold has been a hedge against inflation. So, people drive the price up because more people are buying into it, because they think it’s going to hold its value. So, if all of a sudden there is a recession, I’ve got this gold that’s held its value and now I can get what it’s worth. We’ll see.

 

Kevin Parton:

It will be interesting to see if gold is this sort of thing that stays at this value or do the majority of the people who have invested in gold which is then driven up the value of the commodity, do not see inflation is coming down, interest rates are coming down and need to capitalize on the growth and then the market gets flooded. With gold, and now all of a sudden the value of gold comes back down, it will be interesting to see, and like you said, when there isn’t an underlying value to it, it’s not producing dividends. There isn’t a business you live and die by the price of gold. If you own gold today and then own gold in a year and it’s worth half as much, well, it didn’t matter that it was the highest it’s ever been today. You still hold it and it’s not pumping out dividends. So, it’s interesting how it fits in and again, given that it’s spiked this year, but has been a lagging sort of asset historically. I just want to mention it now because we’ll see in the next few quarters go on, if there does seem to be a correlation between the people’s propensity to buy gold and a high-interest rate environment, a poor economy, and if that changes, people then start to pivot, and we see gold maybe come down in value while other market segments spike.

 

Keith Allan:

Yee, and don’t forget, we’re talking about gold as an asset class now. You can own gold through instruments such as ETFs and gold stocks of gold-producing companies, and there are all types of assets, or you can hold and own physical gold which a lot of people do. There is a tangible aspect for people that do hold physical gold, you can see it, you can touch it, you can hold it, you can feel it. You have it. And that goes a long way with people, and that’s a whole other podcast we can talk about behavioral finance and the feeling of actually being able to touch and hold something, whereas like with the traditional stock. Back in the 1920s, you would have a stock certificate that you would put away in your safety deposit box, but everything’s electronic now. So, there’s no tangible aspect of it. You can hold 100 shares of Apple, but you don’t hold it. You don’t see it, you don’t touch it, it’s on a computer screen. So, for some people, that tangible aspect of holding gold is real. It is part of the fascination with it. I think a lot of people like that aspect of it.

 

Kevin Parton:

I get that. I have comments from people all the time.

 

Keith Allan:

Same as real estate – you can hold it; you can touch it. I see the house I live in. I own this piece of land; I can see it.

 

Kevin Parton:

I was just going to mention that. They understand people need to live in homes and it’s a lack of understanding of what ownership in a company means. What is a share? Well, that’s where people get spooked. The market could go to 0. That’s only said by someone who doesn’t understand what makes up the market. So, it’s a lack of understanding.

Something interesting happened in the last quarter that I wanted to talk to you about, which is the TD Bank. TD Bank got fined for a big money laundering scandal and they were fined $3 billion, which to my knowledge, is the largest fine in history of any. What happened? What do you expect to happen going forward and in the aftereffects of that, where does TD sit in the landscape of trustworthiness and reliability for Canadians?

 

Keith Allan:

Yes, pretty big news. I think it was about 2 weeks ago. That came out in the United States. It’s important that we get our facts straight. So, it was the US arm of TD Bank and over the last several years, TD has made a conscious effort to expand their business operations in the United States, particularly in the Southern United States. They were found guilty of money laundering effectively like funding some pretty shady individuals, cartels, drug trade, and things of that nature and we don’t need to go into the specifics of what, but the reality is that there was a pretty high-level cover-up and it was a kind of a no in secret amongst the regulators and the big industry that had been on this for a while. So, here they are with the largest fine. I think was over $3 billion along with some pretty heavy sanctions against it moving forward. Again, this was in the United States, not here in Canada. So, it’s important we differentiate between the two.

So, reputationally, TD Bank is taking a hit now. I’ll go on record as saying, I still have my mortgage with TD, and my wife and I bank there. I’m not about to pack up and move to another bank because as banks operate, they’re people overseeing different divisions and while the bank itself is one name brand, there is a separation of the arms and how this kind of came down the pipeline and where it was affected. So, it’s important to keep that in mind now, but it did cost the CEO of TD his job. Effectively, he stepped down or was asked to leave, or whether he knew about it or not, it happened on his watch. So,  the safeguards weren’t in effect. It happened on his watch and someone had to take the fall and he did.

We had a portfolio managers meeting last week and we actually have decided to add it to our portfolios at these price levels for a number of reasons, but most notably because although reputationally it has taken a hit, we still feel that fundamentally it is a very sound business. This happened and it doesn’t look great, but TD has been open in Canada for decades and is still sort of a staple in the Canadian financial industry, and a place where people entrust their money, their savings, their mortgages, their loans, and their business accounts. We don’t feel that’s going to change moving forward. I do feel and we as a portfolio management team feel that this is going to perhaps stall their growth in the United States with these sanctions coming down and some of the measures that the US regulators have thrown at them in terms of their ability to expand and grow in the United States, that’s obviously going to affect their balance sheet moving forward. But still, at these prices, we feel it’s attractive. As far as you know, things that are important to investors are their dividend. Based on our research, we feel like this isn’t going to impact, they increase their dividend year over year, and we feel that’s going to be the same going forward. Is it going to increase as much next?  Maybe. Maybe not. But that shouldn’t be impacted and it’s at a pricing level that we feel is very, very attractive from a ratio analysis and just looking at the fundamental aspects of the company.

So, well, let’s call a spade a spade; it’s not a good look for TD regarding what happened. It sounds like they’ve taken the necessary steps toward addressing the people involved, who have obviously been punished, and they have implemented the necessary measures to prevent this from happening again. I think it’s important, again, to differentiate between what happened down in the United States and TD’s operations here in Canada, as they are two separate entities, although they all fall under the TD brand

 

Kevin Parton:

Totally. Well, I wanted to bring it up as I had a number of conversations last year when Silicon Valley Bank went under as well as a couple of other private banks. People were viewing a bank going under as like an entire banking industry recession. There were very big differences between segmented banks and US banks and Canadian banks and what would happen over there in regulation. So, seeing TD, what does this mean?

 

Kevin Parton:

So, how does the U.S. branch differ from the Canadian branch? What does that mean? Was this just an internal issue that didn’t go well and is now tarnishing the brand, without really changing how the bank operates? It’s not the first time, after all. You need to look these things up—it’s par for the course in this industry. It wasn’t that long ago that we were talking about the Panama Papers with RBC, the largest bank in Canada. You have to google to remember exactly what that was. You don’t want to see it, but it happens.

I think what’s important, like you said, is what is the bank doing now to kind of fix that. Are they removing the people who are involved? Are they putting systems and processes in place and are they looking out the front window? Seeing how can we continue to grow and rebuild that brand going forward, and seems at least in the early days.

 

Kevin Parton:

They are two more things that I wanted to get to before we are able to wrap this up today. In the next couple of weeks, we’ve got an election coming up. By we, I mean, we as humanity. It’s happening in the States. What have elections meant for markets in short term? Is there sort of a forecast on what happens to the market over the next couple of quarters if it goes Democrat versus what happens if it goes Republican?

 

Keith Allan:

Well, we saw the last time that Donald Trump ran for and won in November 2016. The short-term effects of a Republican win were positive for capital markets, right? It’s no secret that Trump is a capitalist. He is very pro-business and pro-U.S. business. So, this means lower corporate tax rates and more profits in the pockets of big companies, which should lead to higher earnings and, hopefully, higher payouts. Not always, but higher earnings typically result in more money invested back into the business, which, in turn, should lead to an increased stock price. As anyone knows, the price of a stock is the discounted future value of any cash flows, and if those cash flows are forecasted to be larger moving forward, that will ultimately increase the current stock price. So, in the short term, that’s what it could mean.

Now, in the medium to long term, there are a lot more unknowns. Again, it’s no secret that he has a very protectionist view of the U.S. economy. Tariffs, such as “pro-U.S.” and “buy U.S.,” along with keeping everything sort of closed and in-house, do not lend themselves nicely to overall growth in terms of the U.S. and what it means globally. Many companies in the U.S. rely on global trade and attracting global customers. So, if trade slows down suddenly due to protectionist views and tariffs, that may be detrimental to the growth of the economy in the long term.

As for the overall global economy, typically, as I said, in the short term, if we see a Republican win the election, we can expect some stimulus in the capital markets and potentially an extended bull rally. Democrats are sort of the reverse. Right now, I think the Democratic view has been a little more right-leaning than traditionally, in terms of some of their economic views. But, like I said, if you’re just looking at it as blue versus red, Democrat versus Republican, traditionally, a Republican government has led to more growth in capital markets in the short term than a Democratic win. So, we shall see.

 

Kevin Parton:

Well, it will be exciting to see, nonetheless. The things that continue to come up as we have these conversations—and as I’ve looked at the markets for 15 years—are that the forecasts are great, but a lot of it is really unpredictable. Timing seems to be something that no one can get consistently right. So, there are two things I want to finish off with. One is portfolio management strategy. When you’re looking at the markets as a whole and having conversations with your team, what has happened over the last quarter that impacted how you might be designing a portfolio, and what are some of the things that you’ve changed? This way, people who are listening can understand what is happening within a portfolio. Then I want to move to asset allocation because I think those are two distinctly separate things. One is what’s in the portfolio, and the other is what percentage of your assets are in different types of portfolios. So, we’ll start with portfolio management: what’s happened in the last quarter that you and your team are looking at, and how does this change how you design a portfolio?

 

Keith Allan:

That’s a really good question. As part of the seminar conference that I attended last week, we were discussing ways to be nimble and pivot in terms of how we build out portfolios for our clients. As I’ve said in previous podcasts, the typical 60/40 or 70/30 portfolio is kind of antiquated, right? We don’t look at investing in clients the way we did 2-3 decades ago. You can’t really achieve true alpha in a portfolio nowadays by doing that. So, what can we do? How can we be elastic? How can we be flexible? How can we build our portfolios by mitigating our risk, staying within our risk tolerances, and ensuring we’re not taking undue risk in a client’s portfolio to achieve that alpha, while also diversifying enough to fulfill our responsibilities as portfolio managers? We are not going to act as if, “Hey, I don’t care what this client’s risk appetite is.” You can’t build a portfolio that way, right?

So, what are we doing? We’re looking at other ways to build value and diversify. Whether it’s nontraditional fixed-income solutions—we talked a lot last week about using corporate debt from other countries, such as global debt from South America, Europe, or emerging markets—to find alternatives beyond traditional U.S. corporate bonds. Can we find value in debt from other countries where we may not have previously looked? There may be uncovered value.

We discussed a little bit about gold; can we use commodities, real assets, gold, energy, infrastructure, or farmland to build out portfolios in a non-traditional asset class that would hedge against volatility in equity markets by utilizing private assets? Private equity, private debt, and private real estate carry some risk every time you invest in them, but they also act as a hedge against traditional equity markets and can uncover meaningful value for clients in private assets if they’re willing to accept the parameters that come with it, where your capital is tied up for several years and there’s not a lot of yield there necessarily, but there’s potential for capital growth. It hedges against traditional asset classes, so it’s uncorrelated.

Then there’s the use of derivatives, right? Put-call options. Are you able to write puts and calls and collect the premium on them, and hedge against them if you’re in or out of the money, depending on whether you’re long or short the option? These are ways where you have to become, I wouldn’t necessarily want to say creative, but you need to think outside the box to try to add value from an asset allocation standpoint and diversify what we’re doing for clients, rather than just saying 60% equity, 40% corporate and government bonds, and then washing your hands of it and being done. No, that’s not going to work.

 

Kevin Parton:

Totally. Well, it’s good to hear because I think it’s really helpful that there are multiple parts to building a portfolio if one is to have one or is working with someone to do that. What makes up the equity component? What makes up the fixed income component? What makes up alternatives and cash, and how is that being managed on an ongoing basis to not only be advantageous now but to change with the times in a meaningful way that happens over time?

The other aspect is asset allocation. So, you, as the person who’s investing, need to know how much of your money should be in that equity component versus that fixed income, and that has everything to do with your time frame and your goals—what’s important to you and your appetite for risk. You don’t want to be in a position where you’re so concerned about what’s happening with interest rates—wondering, does that mean I need to get out or stay in? We built this model for you based on your time frame. So, if you have short-term goals, you have enough in short-term reserves. If you’re a long-term growth investor, you’re in the markets, and prices will go up and down.

Even more importantly, I think the significant reason that market returns, portfolio returns, and real investor returns are often so far apart on average is that people behave in ways that contradict the outcomes they want. So, you can have a great portfolio and the right asset allocation. If you don’t have the ability to stay focused on the ‘why’—the end game—and you’re not working with a partner who can help you talk you off the ledge or invest when the opportunities are there, those are kind of the three major ingredients to a recipe for success within the markets. So many people don’t get all three of them right and are left in a worse situation, with a sour taste in their mouths.

I like to end this conversation by focusing on the fact that portfolio construction is really, really important. That’s what you and your team are doing. Asset allocation is also key. Talking and figuring out where your money should be, and then having meetings regularly: Why am I invested? Why does this portfolio make up part of my overall assets? How does it make sense? Why should I stay invested? Why should I invest more? And then coming back to it on a regular basis.

So, I’ll end on that note. Thank you again, Keith, for taking the time. I love going over what happened in the last quarter, and with each quarter having more interesting developments, I’m really looking forward to talking to you in the new year.

 

Keith Allan:

Of course. Thanks for having me, Kevin.

 

Kevin Parton:

Cheers.