90580 (10/2018)

InsightsRBC MANAGED PORTFOLIOS

Active management in global marketsThe goal of passive, or ‘index’, investing is to generate the same return as the market in which you’ve invested. The market return is commonly referred to as beta and the goal of active investment managers is to deliver a return in excess of beta, which is known as alpha. Over the past several decades, the opportunity for alpha has been shrinking, particularly in large-cap U.S. equities.

Seeking alpha (α)The U.S. equity market is the largest, broadest, and most analyzed investment marketplace in the world. As technological advancements increase the speed of information flow, and the number of investment professionals scrutinizing that information grows, it is getting harder and harder to find, and profit from, attractive investment opportunities.

As shown in the chart below, the performance difference between top ranked and lower ranked U.S. large-cap equity mutual funds has been declining over time – a clear indication that it is becoming more difficult for active managers to generate alpha in this asset class. While generating alpha has become increasingly difficult within U.S. large-cap equities, a combination of sound execution strategies in that market and a focus on more alpha-rich global investment opportunities can still help active managers generate excess returns.

In this issue1 Active management in global markets

2 What happened in world markets last quarter

3 RBC Future Launch

Investment insightsTo help you stay informed, RBC Global Asset Management regularly provides insights and forecasts on the global economy and capital markets, along with in-depth analysis of how certain investment trends may impact your portfolio.

To learn more, please visit rbcgam.com/insights

FALL 2018

Performance difference between top ranked and lower ranked U.S. large-cap equity mutual funds†

1967

15.8%

10.8%

7.3%6.2%

2.9% 3.5%

1977 1987 1997 2007 2017

Going globalA combination of price imbalances and limited analyst coverage in some markets outside of the U.S. has created new alpha-rich opportunities. More than a decade ago, RBC Global Asset Management (RBC GAM) recognized the disruption that the global wealth management industry faced amidst a diminishing alpha environment in North America. Taking action, we began expanding our asset management capabilities around the world, in select asset classes and by seeking creative analysts and portfolio managers who possess a high level of skill and expertise in the markets they cover.

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Cont. from page 1

Staying activeIn response to an increasingly efficient U.S. market, we continue to expand our capabilities outside of North America and enable our portfolio managers to drive better investor outcomes. When referring to the virtues of investing globally, the fact that not all markets move in the same direction, to the same degree, and at the same time is often mentioned. Yet, the opportunity for excess returns varies as well. You can be confident that your investment in RBC Managed Portfolios takes this additional layer of insight into consideration when deciding where – and why – to invest globally.

How RBC GAM is building expertise with an eye on alpha

By regionWe are investing heavily in our equity capabilities in regions that are attractive from an alpha-generation perspective.

§§ Building our London-based European, global and emerging market equity teams

§§ Expanding our Asian equity teams in Japan and Hong Kong

By asset classOur growing, diversified fixed-income expertise now spans well beyond Canada and the U.S.

§§ Emerging markets government and corporate bonds

§§ European bonds

§§ Global and emerging markets currencies

§§ Global sovereign bonds

§§ Global convertible bonds

New investing strategiesWe are integrating new tools and strategies in pursuit of a competitive edge and to help deliver sustainable, long-term outperformance.

§§ Quantitative research

§§ Portfolio engineering

§§ Socially responsible investing

† Data prior to 1998 was approximated based on Michael J. Mauboussin’s Alpha and the Paradox of Skill (Credit-Suisse, July 15, 2013). Spread calculated as 3-year rolling performance difference between 1st and 3rd quartile breakpoint of the global U.S. equity universe, 1998-present. Source: Michael J. Mauboussin: Alpha and the Paradox of Skill, Morningstar, RBC GAM

Portfolio Manager viewpoint Sarah Riopelle, CFA , Vice President & Senior Portfolio Manager, Investment Solutions

Led by the U.S., global economic growth is running at an above-average pace but many other major economies are decelerating. Protectionism, China’s economic slowdown and the aging business cycle are potential risks to our base-case view of solid, albeit moderating, economic growth. If the economy navigates these challenges and continues to expand as we expect, tightening central-bank policy will likely lead to higher bond yields, which will act as a headwind to bond returns. We remain underweight fixed income but

to a lesser degree than in the past since bonds should provide a cushion in a balanced portfolio in an economic downturn. Stocks offer more attractive upside given the strength in corporate profits, and we remain overweight equities as a result. However, above-average valuations in U.S. equities and the maturing business cycle has us holding a smaller exposure to stocks than at earlier points in this bull market.

RBC MANAGED PORTFOLIOS | FALL 2018 | 3

What happened in world markets last quarter

Fixed incomeGlobal fixed-income markets outside of North America declined, mostly as a result of a strong U.S. dollar. European bonds declined somewhat on concerns of slowing Eurozone growth. North American bond yields fluctuated within a narrow range, providing small total returns in local-currency terms. The Bank of Canada increased its policy interest rate to 1.5% in July and said it’s monitoring trade developments. The U.S. Federal Reserve raised its benchmark rate by 25 basis points in September.

Going forward, we expect the overall pace of interest-rate increases in Canada to lag the U.S. This quarter, the FTSE Canada Universe Bond Index declined 1.0%, and the FTSE World Government Bond Index (CAD hedged) decreased 0.7%.

Canadian equities The Canadian equity market hit an all-time high in mid-July, but has since retreated

on uncertainty about the impact of the Trump administration’s focus on global trade, in general, and NAFTA, in particular. We expect uncertainty to weigh on Canadian equities until the dust settles on the newly announced USMCA. The earnings outlook has improved over 2018, driven largely by the Energy and Financials sectors. However, stabilization in commodity prices and stability in the housing market may be necessary before we can expect S&P/TSX valuations to rise sustainably. The S&P/TSX Composite Index fell 0.6% during the quarter.

U.S. equitiesU.S. equity markets have recorded impressive gains since the beginning of the

year, driven primarily by solid company fundamentals and lower corporate tax rates. Earnings are soaring and continue to exceed analysts’ expectations. Small-cap U.S. stocks continued to outperform large-cap and mid-cap stocks, but the gap narrowed. The U.S. economy is poised to continue to grow; unemployment is near a 50-year low, wage growth is improving and inflation is within the target range. The S&P 500 Index rose 5.8% this quarter.

International equitiesMost international equity markets have been declining steadily since their January 2018 peaks.

Emerging market equities have fallen substantially in 2018 due to a stronger U.S. dollar, slower Chinese growth, and severe economic problems in Turkey, Argentina and Venezuela. European equities also declined on concerns about European growth, U.S. protectionism and uncertainty around Brexit as the deadline for an agreement with the EU fast approaches. Asia-Pacific equity markets declined on fears of an escalating trade war between China and the U.S., rising U.S. interest-rates and reduced fund flows into emerging markets. The MSCI EAFE Index finished down 0.3% and the MSCI Emerging Markets Index declined 2.7% in the quarter.

All returns are in C$ except where indicated. Canadian, U.S., MSCI EAFE and MSCI Emerging Markets index returns are total returns.

1-800-463-3863 | funds.investments@rbc.com | rbcgam.com | @rbcgamnews | RBC Global Asset Management

All opinions contained in this document constitute our judgment as of September 30, 2018, are subject to change without notice and are provided in good faith but without legal responsibility. The RBC Managed Portfolios program is managed by RBC Global Asset Management Inc. (RBC GAM) and distributed through Royal Mutual Funds Inc. (RMFI). Investors pay a monthly fee to RMFI based on the net asset value of the investor’s account. A portion of the monthly fee is paid to RBC GAM. No management fees are charged by RBC GAM to the RBC Private Pools or RBC Funds in respect of units used in the program and no sales charges or trailing commissions are payable by investors in connection with any purchases, sales, redemptions or fund switches in the program. Underlying funds and pools pay a fixed administration fee plus applicable taxes to RBC GAM for operating expenses, as outlined in the fees and expenses section of the RBC Funds and RBC Private Pools prospectus. Please read the account agreement and supporting documents and the prospectus of the participating RBC Private Pools and RBC Funds before investing in the RBC Managed Portfolios program. RBC Managed Portfolios, RBC Private Pools and RBC Funds are not guaranteed, their values change frequently and past performance may not be repeated. RMFI, RBC GAM and Royal Bank of Canada are separate corporate entities which are affiliated. RMFI is licensed as a financial services firm in the province of Quebec.

® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2018

4 | RBC MANAGED PORTFOLIOS | FALL 2018

We thank you for your ongoing trust in continuing to hold RBC Managed Portfolios as part of your investment plan. If you have any questions or comments, please contact us or your advisor.

RBC Future Launch – empowering Canadian youth for the jobs of tomorrowAs a firm, RBC is committed to helping youth unlock their potential and start building their careers. In 2017, RBC chose to start our own youth program – RBC Future Launch. This initiative is focused on helping youth gain work experience, grow their network and obtain new skills. It’s driving us to change the way we do things as we launch RBC youth employment and thought leaderships programs. We’re also collaborating with governments, educators, youth-serving organizations, and companies large and small to foster change that makes a real difference.

Helping youth get work experience

Young people need more opportunities to apply their skills

in the real world. More than 80% of educators feel youth

are prepared for work, yet only 34% of employers and 44%

of youth agree.1and partnerships to co-create

meaningful, long-term solutions.

of investment RBC’s largest

ever commitment

to a social issue.

Helping youth grow their network

There are few things as important as your network. In fact,

85% of all jobs are filled via networking2, yet many young

people feel they lack or are unable to develop professional

relationships.

Helping youth gain new skills

The nature of work is changing, and so are the skills

required to win. 33% of core skill-sets for most jobs will

be different in 20203 and over 40% of the labour force will

have skills that are at risk of automation in 10-20 years.4

RBC Future Launch is focusing on three critical gaps Future Launch is our commitment

Sources: 1. McKinsey, April 2015, 2. The Adler Group, February 2016, 3. World Economic Forum, March 2016, 4. Brookfield Institute, June 2016

10

$500M

For more information visit www.rbc.com/futurelaunch.

years of hard work