Looking at the big picture

After 17 years in the investment business, including a stint on Wall Street, Zyblock had become familiar with almost 1,500 money managers throughout North America, and was always impressed by Dynamic. He respects the freedom enjoyed by the disparate group of individual fund portfolio managers to pursue investment ideas without having to keep step with any market indices, as well as their ability to achieve market-beating results.

Dynamic, after being an independent firm for many years, is now part of the Scotiabank empire, although Zyblock describes the bank’s approach as “hands off” and “collaborative.” One of the attributes Zyblock brings to the table is his decade of working within a bank culture in his previous role as chief investment strategist at RBC Capital Markets, the investment-banking arm of Royal Bank of Canada (RBC).

“The talent at Dynamic attracted me,” Zyblock says. “My 17 years of experience have helped me understand why some business models work better than others and to figure out the dos and don’ts. What you don’t do is seek a consensus opinion or middling opinion when it comes to stock-picking.”

Zyblock says that more than a third of so-called “active” portfolio managers are actually closet indexers who collect higher fees than they deserve. However, he says, Dynamic funds show a low correlation to market benchmarks, as well as superior long-term performance.

Zyblock is stepping into the shoes formerly filled by Rohit Sehgal. In Sehgal’s new position as vice president and portfolio manager at GCIC, he will focus more closely on the management of the Dynamic products that employ alternative strategies such as hedging and leveraging. As of Sept. 1, Sehgal, a 40-year veteran of the financial services industry, also relinquished his role in the management of a handful of funds, including Dynamic Power Canadian Growth Fund, Dynamic Power Balanced Fund, Dynamic Emerging Markets Fund and Dynamic Financial Services Fund.

Says Rudy Luukko, editor of investment funds and personal finance at Morningstar Canada in Toronto: “The [Dynamic] team has to be mindful of the fact that in addition to the Dynamic fund family they have managed for many years, as a result of the acquisition by Scotiabank, they are also managers of other bank-sponsored funds. The bank-branch customer tends to be risk-averse. There is also a trend toward a more conservative mindset as a whole, given the damage caused by the bear markets of 2000 and 2008. Several of Sehgal’s mandates had a history of high volatility, and the hiring of Zyblock seems to be a signal that more attention is being paid to the risk-management side.”

Zyblock is working with a portfolio-management team responsible for about $100 billion in assets under management. The Dynamic team has been amalgamated with the Scotia Asset Management team, including mutual funds and other pools of capital under the Dynamic and Scotiabank banners. Zyblock’s role includes identifying big-picture themes to help to provide a framework for investment ideas.

“The individual managers are independent and directly responsible for their own funds,” Zyblock says. “But I may shed some light on why the tectonic plates are shifting one way or another.”

He is also the voice of the team in communicating to the advisor channel and increasing brand awareness through public and media appearances. Zyblock writes investment commentary, including a weekly research piece on developments in fixed-income and equities markets. The influential themes he cites includes the transition in China from an economy driven by government-financed infrastructure spending into a consumer-led economy, which signals a levelling off in demand for resources such as energy and metals.

“Commodities are struggling,” Zyblock says, “which means the resources-heavy Canadian market is struggling – and that won’t end anytime soon. We are moving away from resources-based and emerging markets. Developed markets and the U.S. will be themes for some time. Investors need a sideline on asset classes and geographies, and need to pursue global opportunities.”

Zyblock sees promise in some of the western European countries that have been suffering economically, such as Italy and Spain, in his belief that they are close to hitting bottom: “These are cheap equities markets, and the European growth profile is looking less bad.”

He says the aggressive monetary and fiscal stimulus now being employed in Japan may also present opportunities. Due to Japan’s aging population, the country is “in danger of going extinct.” But, he adds, the government is doing some things to right the ship, such as loosening immigration policies and encouraging women to enter the labour force.

“As long as efforts are being made, there will be some successes,” he says. “We are also looking in areas that could benefit from a weakening yen.”

Zyblock believes the “vicious sell-off” in fixed-income markets early this past summer was overdone, recently adding some exposure on the fixed-income side. He is not expecting a significant rise in interest rates.

“We are at the end of a 30-year bond bull market,” he says, “but we are not seeing a bear market. We’re seeing a cycling market rather than a trending market.”

Zyblock expects that aging baby boomers will continue to drive demand for income-producing investments such as dividend-paying stocks, but he prefers to invest in companies that offer the ability to increase their dividends rather than just a healthy current yield: “Dividend increases are a signal of prospective fundamental health for the company. Dividends are real skin in the game.”

More than ever, he says, clients are looking for stability of returns after being scarred by two “monster bear markets” since 2000 and the collapse of the U.S. housing market.

“Clients don’t want to lose money,” he says. “Their mindset shifted dramatically in the past 10 years, compared with the 90s, when no one talked about risk. It’s not about how much money you can make, but about how much money per unit of risk.”

Zyblock has a master’s degree in economics from Queen’s University. But if his father, an accountant, hadn’t objected, Zyblock would have concentrated on philosophy instead.

Zyblock became interested in the financial markets while in university, when he witnessed the dramatic stock market crash of 1987 and the subsequent recovery. The shocked reactions of his university professors to the plunge and sensational newspaper headlines drew Zyblock’s attention and aroused his curiosity. After graduating from university in 1991 and pursuing two years of postgraduate work, he wanted to enter the field of financial markets and investing; but jobs were scarce, and he ended up as a senior research economist with the Department of Finance Canada in Ottawa.

Still fascinated by the stock market, three years later Zyblock moved to Montreal-based research firm BCA Research Inc., where he rose to head the global equities-sector strategy team. His next move was to New York-based investment bank Brown Brothers Harriman & Co., where he stayed for four years and became head of the U.S. and global equities teams.

In 2003, Zyblock was hired by RBC, which was building up its U.S. capital markets business and was impressed by Zyblock’s long list of U.S. contacts. He stayed at RBC until his recent move to GCIC.

Although Zyblock did not pursue a career in philosophy, he is a keen observer of human nature: “As humans, we swing between emotional extremes of fear and greed. The primitive part of our brain that makes us run from the sabre-toothed tiger to save our lives also makes us do crazy things in the stock market. Stock market behaviours are repetitive and go in cycles. The key is understanding what’s a glitch and what’s a real change in direction.”

© 2013 Investment Executive. All rights reserved.