January 2019

R B C W ea l th M ana g ement

A ss et Allo ca t io n Gui d e

This publication provides guidance and direction on asset allocation from the Canadian Investment Committee, including
updated thoughts and recommendations for various asset and sub-asset classes. It can be used to help investors tilt their
own strategic asset mix in a direction that reflects the 12–18 month investment views at RBC Wealth Management. The
Guide will be updated quarterly or on an ad-hoc basis should an asset allocation view change.

Prospects that markets have transitioned into a late-cycle environ-

Underweight Neutral Overweight
Cash ment raise the risk of volatility bursts across asset classes. We would
exercise patience and retain a modest Overweight in cash, balancing
●
our desire to maintain liquidity to take advantage of potential rebalanc-
ing opportunities stemming from market dislocations with gradually
rising opportunity costs. To reduce the opportunity cost of holding
an above-benchmark weight in cash, we recommend using cash-like
vehicles, such as money market funds, which now provide a more
worthwhile yield.
We maintain a modest Underweight and think lower-quality corporate
Fixed Underweight Neutral Overweight
bonds are a good place to start the overall portfolio de-risking process
Income ● because compensation for taking those risks is currently minimal and
credit quality has weakened. This allows investors to take advantage of
higher short-term bond yields while still acknowledging that rewards
for taking both credit and interest rate risk are modest in the context of
narrow credit spreads and a flat yield curve.

We maintain a Neutral weight amid a more volatile macro backdrop.

Underweight Neutral Overweight
Equities ●
Cheaper valuations after the correction over the past few months, low
recession risk for major economies, and a reasonable outlook for cor-
porate profits suggest to us that stocks can deliver gains over the next
12 months. However, these supportive factors are offset by mounting
concerns about the prospect of a possible Federal Reserve policy error
triggering a U.S. recession, which joins China-U.S. trade as a key market
worry in 2019. A fully invested stance in equities allows participation in
potential price upside but acknowledges that prospective returns could
be lumpy and more moderate, given slowing earnings growth and limit-
ed scope for multiple expansion in the current environment.

Click here for a list of Canadian Investment Committee members.

For important and required disclosures, see page 6.
 Asset allocation
balanced profile
Current qualitative
Long-term targets recommendations
Asset class % of portfolio – = + Commentary

Global Domestic

Cash 2% 2% ●

Fixed Income 43% 43% ●

Core 32% 32% ●
Government 9% 11% ● Maintain modest Overweight. Government of Canada (GoC) bonds have
bonds rallied in response to a reduction in the number of expected interest rate
hikes in Canada as well as increased uncertainty in the global economic
outlook. We continue to believe it is timely for fixed income investors to
increase liquidity and credit quality despite GoC bonds offering lower yields
than they had for much of 2018. The value case for bonds that are heavily
discounted to par remains in place. Until we see a clearer indication that
the Canadian economy, as well as that of the U.S., may be slowing down
materially or, if their respective government bond yield curves re-steepen
from here, our focus remains on shorter-dated bonds.
Corporate - 13% 16% ● Maintain modest Underweight. The average yield differential between
investment Canadian IG corporate bonds and government bonds has moved to the widest
grade level in over two years. Despite an improved valuation case, we remain
somewhat cautious given the high levels of financial leverage outstanding
and what we expect to be a more challenging operational environment over
the coming years. Where possible, we continue to recommend issuers that
have less exposure to the highly indebted Canadian consumer.
Global bonds 10% 5% ● Maintain modest Overweight. Credit diversification is a key attraction of
CAD-hedged global bonds and as we move closer towards the end of the cycle, we think
this will improve risk-adjusted returns. We believe it is sensible for investors to
take steps to diversify credit exposure away from businesses that are exposed
to the Canadian consumer. Current hedging conditions are also appealing, in
our view, in that many global sovereigns (especially U.S. Treasuries) can be
hedged back to Canada at higher levels than the equivalent GoC yields.

Non-core 11% 11% ●

Canadian 3% 3% ● Maintain Neutral. The valuation case for preferred shares has increased
preferred substantially over the past couple of months given the relative
shares underperformance (versus other risk assets) that was experienced. This relative
underperformance transpired from a point when preferred share valuations
were not as rich as other risk assets, which enhances our constructive view. We
are cognizant that preferred shares are perpetual credit products and we are
closer towards the end of the cycle than the beginning, which is why we are not
increasing the recommended exposure. However, we are seeing opportunities
to rotate existing positions into more deeply discounted issues.

High yield 4% 4% Maintain Underweight. Despite a drastic improvement in valuation,

●
we continue to view the risk-reward profile as unattractive for HY given
compensation for credit risk remains somewhat modest and deal structures
have weakened this year. The high-yield market has underperformed
government bonds on a multi-year holding period return basis when credit
spreads are in the narrowest quartile, which is where they currently reside.
One risk facing the high-yield market resides in the investment-grade market,
where nearly half of all borrowers carry a BBB rating. This represents a
potentially significant source of high-yield supply if there are a series of
negative ratings actions in the future, in our opinion.

Emerging 4% 4% ● Maintain Neutral. EM bonds have posted positive total returns of late as lower
markets government bond yields have more than offset a further widening in credit
spreads. While EM bonds now exhibit spreads that are at their widest levels
since 2016, we refrain from adding to positions at current levels as we think
our risk budget is better spent elsewhere.
2 Asset Allocation Guide | January 2019
 Asset allocation
balanced profile
Current qualitative
Long-term targets recommendations
Asset class % of portfolio – = + Commentary

Global Domestic

Equities 55% 55% ●

Canada 20% 33% ● Maintain Neutral. Valuations remain discounted relative to the U.S., which
we believe provides appropriate compensation for domestic-specific
challenges (e.g., the impact of higher interest rates on highly-leveraged
households, constrained oil pipeline capacity, and waning economic
competitiveness). Resolution of free trade negotiations with the U.S. and
Mexico appears poised to reduce uncertainty; however, the agreed accord
must now be passed into law. Bank valuations have contracted but better
reflect expectations for slower earnings growth. Mandatory production cuts
should alleviate a glut of crude in storage, but visibility on increased pipeline
capacity remains limited.

U.S. 20% 12% ● Maintain Neutral. U.S. stocks have buckled under persistent concerns about
tightening monetary policy, signs of slowing global growth, and domestic
political discord. With most data indicating the domestic economy remains
on a solid footing, and our recession risk indicators not flashing any warning
signals, we retain a modestly constructive view towards the U.S. market.
While valuations have cheapened following the latest downdraft, we refrain
from upgrading given a higher-than-normal hurdle for positive earnings
surprises in the near term and unusually high uncertainty surrounding both
fiscal and monetary policy.

Developed 10% 6% ● Maintain Neutral. Brexit remains a worrisome overhang on European indexes,
international which comprise more than 60% of the market cap of international developed
markets. Japanese bourses offer relatively more attractive opportunities,
in our view, thanks to a combination of compelling valuations, improving
shareholder-friendly behaviours, and decent earnings growth. That said, we
believe the higher representation of cyclical sectors in these regions’ indexes
leaves their overall earnings outlook relatively more vulnerable to the global
trade and manufacturing soft patch. We maintain a bias towards high-quality
companies with global franchises and a structural growth runway.

Emerging 5% 4% ● Maintain Neutral. The current macro backdrop of lingering trade

markets protectionism, tightening financial conditions and lack of clarity on China’s
growth policy is not conducive to sustained EM share price outperformance.
Although the prospect of China intensifying its current stimulus campaign
to shore up its economy from the impact of U.S. tariffs could help to bolster
near-term sentiment, we believe EM’s earnings trends could continue to
lag developed markets. Valuations have cheapened, but we recommend
maintaining a selective approach, focusing on businesses with more resilient
growth fundamentals, such as those tied to consumers and health care.

3 Asset Allocation Guide | January 2019

Long-term strategic
allocation targets

Cash & Fixed Income

Current Very Aggressive
view conservative Conservative Balanced Growth growth
Global Domestic Global Domestic Global Domestic Global Domestic Global Domestic

Cash + 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%

Fixed Income – 78% 78% 63% 63% 43% 43% 28% 28% 0% 0%
Core + 78% 78% 52% 52% 32% 32% 17% 17% 0% 0%
Government
+ 30% 32% 19% 21% 9% 11% 4% 5% 0% 0%
bonds
IG corporate
– 38% 40% 23% 26% 13% 16% 8% 9% 0% 0%
bonds
Global bonds
+ 10% 6% 10% 5% 10% 5% 5% 3% 0% 0%
(CAD-hedged)
Non-core = 0% 0% 11% 11% 11% 11% 11% 11% 0% 0%
Canadian
= 0% 0% 3% 3% 3% 3% 3% 3% 0% 0%
preferred shares

High yield – 0% 0% 4% 4% 4% 4% 4% 4% 0% 0%

Emerging markets = 0% 0% 4% 4% 4% 4% 4% 4% 0% 0%

Equities
Current Very Aggressive
view conservative Conservative Balanced Growth growth
Global Domestic Global Domestic Global Domestic Global Domestic Global Domestic

Equities = 20% 20% 35% 35% 55% 55% 70% 70% 98% 98%

Canada = 10% 12% 15% 21% 20% 33% 24% 41% 31% 58%

United States = 5% 5% 10% 9% 20% 12% 24% 15% 31% 22%

International = 5% 3% 10% 5% 10% 6% 14% 8% 26% 11%

Emerging markets = 0% 0% 0% 0% 5% 4% 8% 6% 10% 7%

4 Asset Allocation Guide | January 2019

Interpreting the recommendations
For investors looking for more specific ways of interpreting the recommendations, we offer the table
below as a guide on how to quantify the qualitative recommendations.

"Global balanced" profile

‒ = +
UW Modest UW Neutral Modest OW OW

Interpreting qualitative asset class recommendations above:

Absolute % (of portfolio) -10% -5% 0% 5% 10%

Interpreting sub-asset class (i.e., within Equity or Fixed Income) recommendations above:
Relative % (of asset class) -40% -20% +/- 5% 20% 40%

Research resources
This document is produced by the Canadian Investment Committee within RBC Wealth Management. This group consists
of members from various investment areas at RBC Capital Markets and RBC Wealth Management, including RBC Dominion
Securities and RBC Global Asset Management. It meets monthly and is responsible for providing views on asset allocation,
fulfillment selection, portfolio construction, and management for the firm’s investment advisors. The Committee leverages the
firm’s vast resources, including asset allocation, asset class, manager, and individual security research from RBC Global Asset
Management, RBC Capital Markets, and third-party resources.
Canadian Investment Committee members:
Mark Bayko, CFA – Chair, Head of Portfolio Management, RBC Dominion Securities Inc.
Jim Allworth – Investment Strategist, RBC Dominion Securities Inc.
Sarah Bewley, CFA – Senior Analyst, Global Manager Research, RBC Dominion Securities Inc.
Siân Canavan, CFA –Manager, Multi-Asset Advisory & Portfolio Practice Management, RBC Dominion Securities Inc.
Imran Dhanani, CFA – Senior Mutual Fund Analyst, Mutual Fund Advisory, RBC Global Asset Management Inc.
Janet Engels – Head of Portfolio Advisory Group - U.S., RBC Wealth Management, RBC Capital Markets, LLC
Christopher Girdler , CFA – Portfolio Advisor, Fixed Income Strategies, RBC Dominion Securities Inc.
Erwin Go, CFA – Senior Mutual Fund Analyst, Mutual Fund Advisory, RBC Global Asset Management Inc.
Brent Hubbs, CFA – Senior Portfolio Consultant, Multi-Asset Advisory, RBC Dominion Securities Inc.
David Jean-Philippe , CFA – Senior Manager, Investment Analytics, RBC Dominion Securities Inc.
John MacIsaac, CFA – Senior Analyst, Global Manager Research, RBC Dominion Securities Inc.
Patrick McAllister, CFA – Portfolio Advisor, Canadian Equities, Portfolio Advisory Group, RBC Dominion Securities Inc.
Gopa Nair, CFA – Portfolio Advisor, U.S. Equities, Portfolio Advisory Group, RBC Dominion Securities Inc.
Mikhial Pasic, CFA – Portfolio Advisor, Fixed Income Strategies, RBC Dominion Securities Inc.
Carolyn Schroeder – Associate Portfolio Advisor, Multi-Asset Advisory & Portfolio Practice Management, RBC Dominion Securities Inc.
Michael Schuette, CFA – Senior Analyst, Managed Portfolio Strategies, RBC Wealth Management, RBC Capital Markets, LLC
Peter Scott – Portfolio Analyst, Multi-Asset Advisory, RBC Dominion Securities Inc.
Joseph Wu, CFA – Portfolio Advisor, Portfolio Advisory Group, RBC Dominion Securities Inc.
Arete Zafiriou – Associate Portfolio Advisor, Multi-Asset Advisory, RBC Dominion Securities Inc.

5 Asset Allocation Guide | January 2019

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6 Asset Allocation Guide | January 2019

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7 Asset Allocation Guide | January 2019