AGE AND MONEY
How attitudes toward saving are changing across generational lines
THE CRM2 EFFECT WWW.WEALTHPROFESSIONAL.CA ISSUE 5.02 | $12.95
Investors have gotten their new year-end statements. Now what?
BEYOND BONDS
Where top advisors are finding fixed-income returns after the bond sell-off
RIDING THE
ETF WAVE Everything advisors need to know about the hottest investment vehicle in Canada right now
00_OFC-SUBBED.indd 1
10/02/2017 6:41:17 AM
When two parties’ interests are mutually aligned, they are said to be “all in the same boat.” Ever notice our logo? Everyone says they put their clients’ interests first, but at Vanguard Canada, it’s deeper than that. Our parent, The Vanguard Group, Inc., is owned by Vanguard’s U.S. funds and ETFs. Those funds, in turn, are owned by their investors. This unique mutual structure aligns our interests with those of our investors and drives our culture, philosophy and policies throughout the world. WE’RE IN IT TOGETHER
vanguardcanada.ca Commissions, management fees, and expenses all may be associated with investments in a Vanguard ETF®. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard ETFs® are managed by Vanguard Investments Canada Inc., an indirect wholly-owned subsidiary of The Vanguard Group, Inc., and are available across Canada through registered dealers. © 2017 Vanguard Investments Canada Inc. All rights reserved.
VAN_Jan2017_WealthProfessional_Brand_8.25x10.875_CMYK_Final.indd 1 IFC-01_Contents-SUBBED.indd 2
2017-02-07 11:30 10/02/2017 7:13:43 AMAM
11:30 AM
ISSUE 5.02
CONNECT WITH US Got a story or suggestion, or just want to find out some more information?
CONTENTS
22 RIDING THE
ETF WAVE
COVER STORY
RIDING THE ETF WAVE
ETFs have seen a major surge in popularity over the last few years, along with a multitude of new products. So where do they go from here?
PEOPLE
INDUSTRY ICON TD Wealth Private Wealth Management senior vice-president Dave Kelly explains why his firm chose to enhance its offerings for high-net-worth clients
18
twitter.com/wealth_proca plus.google.com/+WealthprofessionalCa facebook.com/WealthProfessional Canada
UPFRONT 02 Editorial
The upside of a Trump presidency
04 Statistics
42 PEOPLE
PORTFOLIO MANAGER
Empire Life Investments’ Ian Hardacre shares his strategy for finding diamonds in the rough
Can the TSX top its stellar 2016 performance?
06 Head to head
Fixed-income strategies in the wake of the bond sell-off
08 News analysis
The first year-end statements under CRM2 have gone out – is the industry ready for the potential aftershocks?
10 Intelligence
This month’s big movers, shakers and new products
12 ETF update
Five trends that will define the ETF landscape in 2017
46
FEATURES
GENERATIONAL DIVIDE
Recent studies highlight a marked contrast between each generation’s approach to managing money
14 Alternative investment update
Institutional investors are driving a trend toward private debt
16 Opinion
Adding value for clients doesn’t mean increasing complexity
PEOPLE 44 Advisor profile
Simon Partington reveals how he’s been able to expand his practice in record time
55 Career path
Growing up poor in Italy gave Sam Albanese a drive to succeed
50
56 Other life
DRIVING CHANGE
WEALTHPROFESSIONAL.CA
Under the sea with scuba diver Warren Lo
FEATURES
A blueprint for transforming your practice – and making the changes stick
CHECK IT OUT ONLINE www.wealthprofessional.ca
IFC-01_Contents-SUBBED.indd 1
1
10/02/2017 7:14:07 AM
UPFRONT
EDITORIAL
Reasons for optimism
T
hey say the first 100 days is crucial for a presidency, and Donald Trump certainly hasn’t wasted any time making his mark in Washington. For many of those in the wealth management space, his decision to dump the proposed DOL fiduciary rule didn’t come as much of a surprise. The new president campaigned on cutting red tape and bureaucracy, so further regulation of the investment industry was always going to be a non-starter for his administration. It’s early days, of course, but so far the Trump era has been largely positive for the equity markets, both in the US and Canada. The TSX has continued its momentum into the new year, and the bull market looks to have some legs yet. The rally of 2016 was attributed in large part to the performance of the energy
Donald Trump may be as divisive a president as you are ever likely to find, but for your clients’ energy exposure at least, the early signs are positive sector, which bounced back strongly after the doldrums of the previous year. The new occupant of the Oval Office is a noted supporter of the oil industry, and he quickly confirmed as much when he reversed Barack Obama’s block on the Keystone XL pipeline. While drawing the ire of environmentalists, Keystone being revived is undoubtedly a boon for the Western oil patch so increasing your clients’ energy exposure appears timely. Canada is the largest foreign supplier of oil to the US, and companies here have been acquiring energy assets across the border at a steady pace. Most recent was the US$4.6 billion purchase by AtlasGas of WGL Holdings – the owner of the Washington utility that supplies natural gas to the White House. Enbridge and TransCanada’s multi-billion-dollar deals for US pipelines last year, along with Fortis’ purchase of American power-line operator ITC Holdings for close to $7 billion, point to a clear strategy by Canada’s energy companies. Those planning to move their clients further into oil or gas also have a lot more options available nowadays. Aside from futures or producer stocks, you can also purchase speciality products like the Canadian Crude Oil Index ETF. Donald Trump may be as divisive a president as you are ever likely to find, but for your clients’ energy exposure at least, the early signs are positive. The team at Wealth Professional
wealthprofessional.ca ISSUE 5.02 EDITORIAL
SALES & MARKETING
News Editor David Keelaghan
National Accounts Manager Dane Taylor
Writers Joe Rosengarten Libby Macdonald Leo Almazora
Associate Publisher Trevor Biggs
Executive Editor – Special Features Ryan Smith
Project Coordinator Jessica Duce
Copy Editor Clare Alexander
CONTRIBUTORS Markus Muhs Michelle Gibbings
ART & PRODUCTION Design Manager Daniel Williams Designer Randy Pagatpatan Production Manager Alicia Chin Advertising Coordinator Kay Valdez
General Manager, Sales John Mackenzie
CORPORATE President & CEO Tim Duce Office/Traffic Manager Marni Parker Events and Conference Manager Chris Davis Chief Information Officer Colin Chan Human Resources Manager Julia Bookallil Global COO George Walmsley Global CEO Mike Shipley
EDITORIAL INQUIRIES
david.keelaghan@kmimedia.ca
SUBSCRIPTION INQUIRIES
tel: 416 644 8740 • fax: 416 203 8940 subscriptions@kmimedia.ca
ADVERTISING INQUIRIES dane.taylor@kmimedia.ca
KMI Media 312 Adelaide Street West, Suite 800 Toronto, Ontario M5V 1R2 tel: +1 416 644 8740 www.keymedia.com Offices in Toronto, London, Sydney, Denver, Auckland, Manila, Singapore, Bengaluru
Wealth Professional is part of an international family of B2B publications and websites for the finance and insurance industries LIFE HEALTH PROFESSIONAL david.keelaghan@kmimedia.ca T +1 416 644 874O
INSURANCE BUSINESS CANADA john.mackenzie@kmimedia.ca T +1 416 644 874O
INSURANCE BUSINESS AMERICA cathy.masek@keymedia.com T +1 720 316 0154
Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributions are invited, but copies of work should be kept, as the magazine can accept no responsibility for loss
2
www.wealthprofessional.ca
02-03_Editorial-SUBBED.indd 2
10/02/2017 6:44:28 AM
17DY
SETTING NEW BENCHMARKS IN ETF INNOVATION. REINVENTI N G THE ETF WI TH LEGI TI M ATELY AC TI V E M A N AGEM EN T™ .
Introducing a new suite of actively managed ETFs from Dynamic Funds and iShares by BlackRock. Dynamic iShares Active ETFs bring together Dynamic’s active management investment philosophy with BlackRock’s market knowledge and technical capabilities. This first-of-its-kind partnership brings you the best of both worlds to create a unique investment opportunity. Talk to us about our new active ETFs.
ACTIVELY MANAGED ETFs FROM DYNAMIC FUNDS AND iSHARES BY BLACKROCK Dynamic iShares Active Crossover Bond ETF
DXO
Dynamic iShares Active Preferred Shares ETF
DXP
Dynamic iShares Active Canadian Dividend ETF
DXC
Dynamic iShares Active U.S. Dividend ETF
DXU
Dynamic iShares Active Global Dividend ETF
DXG
Find out more at dynamic.ca/ActiveETF Commissions, management fees and expenses all may be associated with investments in Dynamic iShares Active ETFs. Please read the prospectus before investing. Investments in ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license and a division of 1832 Asset Management L.P. iShares and BlackRock are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission. ™Trademark of its owner, used under license.
02-03_Editorial-SUBBED.indd 3 17DYN005_DF_ETF_WP_FP_Feb_V1_1.indd 1
10/02/2017 6:44:39 AM 2017-02-01 10:04 AM
UPFRONT
STATISTICS
The TSX: the facts
THE RECORD RISE CONTINUES
The Toronto Stock Exchange is following up a record year with a rip-roaring start to 2017 THE TSX started the new year off with a bang – by early February, the TSX S&P 500 had hit 15,729, a figure that eclipses the heady days of late 2014 and its record-setting high of 15,657. The events of a lively 2016 benefited the TSX mightily – the landscape of political shocks and attendant upheaval played to Canada’s safe-haven status and contributed
15,729
All-time high the TSX S&P 500 reached on February 10, 2017
18
Number of stocks originally listed on the TSX when it launched in 1861
to a sustained upsurge that saw the S&P/TSX Composite Index rally more than any other developed market index and close out the year with its sixth straight monthly advance. It was a welcome reversal, coming off an underperforming 2015 that saw the index slip 11%, its worst annual decline since the dark days of 2008. The question now is: Can the party continue?
1,487
Number of listings currently on the exchange
The past 12 months have proven fruitful for all the major indices across the globe – especially the TSX S&P Composite Index, which had reached a record high of 15,729 by early February. The index rose by nearly 30% over the past year, and has gained 2.16% so far in 2017.
17
New issuers added in January 2017, compared with eight in December Source: TMX Group, January 2017; Trading Economics
INSIDE THE TSX/S&P
THE SECTOR BREAKDOWN Within the TSX/S&P Composite Index, Canada’s three dominant industries (financials, energy and materials) account for more than 70% of the listings.
The index covers approximately 95% of the Canadian equities market
Energy 19.6%
Financials 37.7%
249 constituents in the index The top 10 constituents form 37.6% of the index, or $770 billion 1. Royal Bank of Canada 2. Bank of Montreal 3. Toronto-Dominion Bank 4. TransCanada Corp 5. Bank of Nova Scotia
6. Enbridge 7. Canadian National Railway 8. BCE 9. Suncor Energy 10 Manulife Financial
$2,045.8 billion
adjusted market cap as of February 10, 2017 Source: TMX Money, February 2017
4
Materials 13.3%
Healthcare 0.6%
IT 2.7% Utilities 2.8% Consumer staples 3.7%
Telecommunication services 4.9%
Industrials 8.8% Consumer discretionary 5.7% Source: TMX Money, February 2017
www.wealthprofessional.ca
04-05_Statistics-SUBBED.indd 4
11/02/2017 7:38:12 AM
25,000
Hang Seng (Hong Kong) 20,000 Dow Jones Nikkei (Japan)
15,000
TSX S&P 500 (Canada) 10,000
FTSE (UK) NASDAQ (US)
5,000
S&P 500 0 Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17 Source: TMX Money, February 2017
BIG BANKS COME OUT AHEAD
ETFS ON THE TSX
Four of Canada’s Big Six banks fall within the TSX/S&P Composite Index’s top 10 constituents by market cap – and all have seen their stock prices rise by more than 35% in the last 12 months.
There are 454 exchange-traded products on the TSX; the ETFs below saw the highest percentage change in price over the past year.
$99.94
$97.03
Name
$79.83 $70.29
$68.27
$66.19 $49.70
$52.66
Feb 10, 2016 Feb 10, 2017
Royal Bank of Canada
TorontoDominion Bank
Bank of Montreal
Bank of Nova Scotia Source: Yahoo Finance, February 2017
Symbol
Latest
Change
BP S&P 500 VIX Short-Term Future
HVI-T
$22.96 258.7%
BMO S&P/TSX Base Metals ETF
ZMT-T
$11.02
iShares S&P/TSX Gb Base Metals
XBM-T
$13.15
108.3%
BP S&P/TSX Energy Bull+ETF
HEU-T
$11.36
94.7%
BP S&P/TSX Financials Bull+ETF
HEU-T
$35.42
90.9%
116.8%
Source: Globe and Mail, February 2017
www.wealthprofessional.ca
04-05_Statistics-SUBBED.indd 5
5
11/02/2017 7:35:34 AM
UPFRONT
HEAD TO HEAD
Has the bond sell-off affected your fixed-income strategy? Will advisors hold firm on fixed income this year, despite the global dip in bonds in the latter months of 2016?
Steve Tate
Valerio Cattelan
Rob Tetrault
President Tate Financial
Portfolio manager and director, private client group HollisWealth
Vice-president and portfolio manager Tetrault Wealth Advisory Group
“Despite last year’s late bond sell-off, we have no plans to change the fixedincome strategy that we have been employing for the past six months. We are going to continue to hold funds with a mix of corporate and government bonds with a focus on lower duration and low fees. Because of the volatility in the market, we favour diversification and a ‘safety first’ approach. Current discussions with our clients are that returns on bonds in 2017 may be flat to slightly negative, but that bonds still play an important role in diversifying portfolios.”
“In managing clients’ portfolios, we take a pension-style approach, focusing on goals-based investing and balanced mandates to mitigate risk. For that reason, fixed income is an integral part of our portfolios, given the need to preserve capital and generate income for clients. As such, we reduced our allocation to fixed income only slightly during 2016, but tilted weightings to shorten duration and increase our ex-North American exposure. We believe the lows in inflation, interest rates and bond yields are behind us. We currently hold actively managed strategies that will manage asset allocation and duration within our fixed-income portfolio as yields move higher in 2017.”
“The bond sell-off has not materially altered my strategy, but persistent low interest rates have. We’ve have very little traditional bond exposure in our portfolios for years. Gone are the days when a portfolio manager could throw 50% of a client’s assets into a laddered government bond portfolio and watch the returns come in. We expect low interest rates to persist for the short/medium term, so we must think outside the box for our fixed-income solutions. Specifically, we’re looking at mortgage investment corporations, some newer preferred shares with built-in interest rate protection, and equity-linked GICs as potential alternatives.”
THE TRUMP EFFECT KNOWS NO BORDERS The bond sell-off at the end of 2016 came on the heels of Donald Trump’s surprise victory in the US election, but crossed the border (Canadian government bonds dropped to a 52-week low mid-December) and was felt across the globe. Sparked by fears that the incoming administration’s policies – including major spending on infrastructure and significant tax cuts – could lead to inflation and drive interest rates higher, the sell-off pushed up yields. As a result, according to a Bloomberg Barclays index, up to US$3.8 trillion was erased from the global bond market in 2016’s closing quarter.
6
www.wealthprofessional.ca
06-07_Head to Head-SUBBED.indd 6
10/02/2017 6:45:42 AM
WP-E
INVESTING IS MORE THAN A SCIENCE... Emblem GIF Portfolios deliver tactical asset management, transparency and downside protection. Discover how Emblem brings together the art and science of investing.
Check out our Emblem tool kit
Go to emblem.empire.ca/tools for client materials, videos, investor profile questionnaire and more!
Policies are issued by The Empire Life Insurance Company. Empire Life Emblem GIF Portfolios currently invest primarily in units of Empire Life Mutual Funds. A description of the key features of the individual variable insurance contract is contained in the Information Folder for the product being considered. Any amount that is allocated to a Segregated Fund is invested at the risk of the contract owner and may increase or decrease in value. ÂŽ Registered trademark of The Empire Life Insurance Company.
02/17 E.&O.E.
WP-Emblem-InvestingArt-2017-02-EN.indd 1 06-07_Head to Head-SUBBED.indd 7
2017-02-09 1:51 PM 10/02/2017 6:45:51 AM
UPFRONT
NEWS ANALYSIS
Regulation and relationships Now that investors have received their first year-end statements under CRM2, is a storm brewing for advisors? CRM2: THREE LETTERS and a number that have dominated discourse in the wealth management space for years now. While those within the industry are well aware of the implications of CRM2 and are no doubt weary of hearing about it, many investors are still in the dark on what this regulation actually means for them. Earlier this month, the Ontario Securities Commission launched a new website designed to help investors understand their updated annual reports. Investment Reporting.ca offers guidance on the fees and charges an investor can expect, as well as the key performance indicators of a portfolio. If a recent study released by Tangerine Investments is any indication, the site will have great merit for many Canadian investors. In surveying those likely to be most affected by CRM2 – people with invest-
“I think the vast majority of investors don’t know about CRM2; they delegate a lot of their investment decisions to their advisors,” he says. “In some ways they are passive on their investments, and the only way they would know about CRM2 is if their advisors are being proactive on this.” While it isn’t that surprising that the average investor isn’t totally up to date with all the regulatory developments in wealth management, the survey did have some shocking findings – specifically, the fact that many respondents were unaware that putting their money into mutual funds did in fact carry a fee. “In this study, 47% of people claimed they didn’t pay any fees at all, or were unsure of the fees they were paying,” McGann says. “That’s a pretty staggering statistic. Now with it being broken down in dollars and cents, it will position Canadian
“In our study, 47% of people claimed they didn’t pay any fees at all, or were unsure of the fees they were paying” David McGann, Tangerine Investments ment accounts made up of mutual funds, bonds and stocks – the firm wanted to see if an information gap existed. The answer to that query was an unequivocal yes, reveals Tangerine Investments director David McGann.
8
investors to assess if they are getting value for their money.” While the ramifications of CRM2 are still yet to be felt in any tangible way, 2016 year-end statements should change that. Investors will now see exactly what they
are paying their advisor and how their portfolio performed over the year. Advisors who have generated solid returns for their clients over the past year will have little to worry about, but those who haven’t could have some interesting conversations in store. For Sean Harrell, partner and senior advisor with Toronto-based Howe, Harrell & Associates, CRM2 is more of an update than a seismic change for his business. While many respondents to the Tangerine survey were in the dark about the new reporting standard and the fees they pay, Harrell’s clients certainly aren’t. “We told them there would be extra sections on their statements showing net amount invested, deposits and withdrawals, in a dollar amount,” he says.
www.wealthprofessional.ca
08-09_News Analysis-SUBBED.indd 8
10/02/2017 6:47:14 AM
HOW MUCH DO INVESTORS KNOW ABOUT FEES?
83% 48% 44% 33%
are not aware that advisory fees will now be presented on their year-end reports in dollar amounts of investors who were aware that they pay fees to invest did not know what they pay in dollar amounts of investors feel the information provided about fees is not presented in a clear and transparent way of Canadian investors currently do not have a financial advisor to help choose their investments Source: Tangerine Investments
“When I review with my clients, we always use Morningstar to show how a portfolio is performing, and it always lists the MER as a percentage. So it wasn’t a hard
a move away from commissions, regardless of what the regulators ultimately decide on a trailer fee ban. “I can see my business moving 100%
“I can see my business moving to fee-based. I think everyone will be forced to go that way, which I don’t see as a bad thing” Sean Harrell, Howe, Harrell & Associates conversation to have – just a change from a percentage to a dollar amount.” Currently, Harrell’s business is a mix of commission and fee-based. That’s reflective of the industry in general, where many advisors are gradually preparing for
to fee-based,” Harrell says. “We have a fairly small book of business with a decent account size for each of our clients. So fee-based is probably the way to go for us in the future. I think everyone will be forced to go that way, which I don’t see as
a bad thing. I don’t think fees will go up or down, just expressed differently to clients.” The main criticism of an advisory world without commissions is that younger and lower-income investors will simply be cut out of the equation. It’s an argument with some merit, Harrell says, but in his practice, factors other than dollars and cents often come into play. “If you are a younger person just starting out, an advisor can’t really charge a fee that will compensate them to run your investment account,” he explains. “Maybe those advisors won’t take newer clients on. When we take on a smaller account, we look at potential – if they are a good saver, starting a new business or are expecting an inheritance, there is a reason to work with that client.”
www.wealthprofessional.ca
08-09_News Analysis-SUBBED.indd 9
9
10/02/2017 6:47:24 AM
UPFRONT
INTELLIGENCE CORPORATE ACQUIRER
TARGET
PRODUCTS COMMENTS
BDO Canada
Hazlitt Steeves Harris Dunn
The merger creates one of the largest accounting and advisory firms in the Sarnia-Lambton area of Ontario
Starwood Capital Group
Milestone Apartments REIT
Milestone’s multi-family property portfolio and 1,200employee operation is strategic to US-based Starwood’s growth plans
TD Securities
Albert Fried & Company
AF & Co.’s self-clearing, securities lending and prime brokerage tech platform (which is in the final development stages) will advance TD’s US growth strategy
PARTNER ONE
PARTNER TWO
COMMENTS
CIBC
UnionPay International
The partnership will let CIBC customers transfer money to China with no upfront fees
RBC Research
Alberta Machine Intelligence Institute
RBC will open a new Edmonton lab in conjunction with the AMII for artificial intelligence research that could potentially impact the finance industry
iA Clarington launches new responsible investing fund
iA Clarington has announced the latest addition to its suite of responsible investing funds: the iA Clarington Inhance Bond SRI Fund, a core plus fixed-income vehicle that will be primarily invested in a diversified basket of government and corporate debt securities, as well as preferred shares. Vancity Investment Management will be the fund’s subadvisor. Vancity’s integrated in-house investment management process, which accounts for environmental, social and governance [ESG] factors, is projected help the fund meet SRI criteria while achieving income and capital preservation.
Acquisition to advance TD Securities’ US growth strategy
TD Securities has completed its acquisition of New York-based Albert Fried & Company [AF & Co.], effectively advancing its US growth strategy. The financial terms of the transaction were not disclosed. AF & Co.’s services and capabilities include self-clearing, securities lending and a prime brokerage technology platform, all of which are expected to help drive long-term US growth for TD Securities. AF & Co. aims to complete its technology platform for full operation within the year. TD’s plans to acquire the broker-dealer were announced in September. “When some global banks are scaling back, we’re growing amidst industry changes, forming efficient infrastructures to deliver a global one-stop shop for clients, all within our risk appetite,” TD Securities US senior vice-president and vice-chair Glenn Gibson said at the time. “Finding a strong cultural fit was crucial to our decision,” added AF & Co. CEO Albert Fried Jr., who praised TD Securities’ client-centric approach and focus on providing best-in-class products.
10
Mackenzie Investments expands RDSP program
Mackenzie Investments has announced the expansion of its Registered Disability Savings Plan [RDSP] program, designed to help disabled individuals achieve long-term financial security by providing assisted savings and tax-deferred investment growth. Mackenzie Investments is the only independent fund company offering RDSP accounts. Five Mackenzie mutual funds – the Mackenzie Canadian Growth Fund, Canadian Growth Balanced Fund, Ivy Canadian Balanced Fund, Ivy Global Balanced Fund and US Growth Class – are now eligible for the firm’s RDSP offering, bringing the total number of available fund options to 40.
www.wealthprofessional.ca
10-11_Intelligence-SUBBED.indd 10
10/02/2017 6:49:08 AM
PEOPLE Arrow Capital plans to merge two funds Arrow Capital Management has announced a plan to merge two funds that it manages. Subject to regulatory and unitholder approval, Arrow Capital will combine the Exemplar US HighYield Fund and the Exemplar Growth and Income Fund; the former fund will be terminated and merged into the latter. A special meeting of unitholders is scheduled for Feb. 21; Arrow Capital informed those entitled to vote shortly after Jan. 20. If approved, the merger is expected to take effect after close of business on or before Feb. 28.
ScotiaFunds unveils fee model changes
ScotiaFunds has announced a simplified pricing framework for its entire lineup of 51 funds, consisting of four management fee levels: fixed income (1.1%), equity income/dividend income (1.5%), balanced (1.65%) and equity funds (1.75%). Meanwhile, Scotia Selected Portfolios will see management fee reductions from 0.05% to 0.2%, and Scotia Partners Portfolios will be priced at 0.25% above the equivalent Selected portfolio. Finally, the Scotia Aria Portfolios’ prices have been tweaked so that corresponding Series A and Premium Series offerings have equal management fees.
Wealthsimple announces new pricing structure
Online investment service Wealthsimple has unveiled a new two-tier pricing scheme. Wealthsimple Basic, for clients with assets below $100,000, includes a 0.5% management fee, a personalized portfolio, on-demand advice from experienced portfolio managers, automatic portfolio rebalancing and dividend reinvestment, and free management for the first $5,000. Wealthsimple Black, for clients with more than $100,000, has the same features, but also boasts a 0.4% management fee, a pass granting access to 1,000+ global airline lounges, goal-based financial planning with an experienced portfolio manager, tax-loss harvesting and tax-efficient funds.
NAME
LEAVING
JOINING
NEW POSITION
Howard Atkinson
N/A
Hamilton Capital Partners
Board member
Venkat Badinehal
Deutsche Bank
RBC
Co-head, US financial institutions investment banking
Dan Nowlan
CIBC
National Bank Financial
Vice-chair
Luke Seabrook
N/A
BMO Capital Markets
COO
Scott White
N/A
Mainstreet Health Investments
CEO
Philip Yuzpe
N/A
Sentry Investments
President and CEO
Three Deutsche Bank senior bankers join RBC RBC Capital Markets has welcomed three senior bankers from Deutsche Bank who specialize in advising banks. Among those hired is Venkat Badinehal, who served as Americas head of Deutsche’s financial institutions group. Joining Deutsche in 2009 from Merrill Lynch, Badinehal has brokered numerous deals, including BB&T’s $1.8 billion acquisition of National Penn Corp. and its $2.5 billion takeover of Susquehanna Bancshares. Badinehal will lead RBC’s US financial institutions investment banking unit alongside current head Jerry Wiant. Also joining RBC are managing directors Jason Braunstein and Saurabh Monga, who were also previously wooed to Deutsche Bank from Merrill Lynch along with Badinehal. The hires come amid increased speculation about bank mergers following a post-US election surge in financial firms’ stock prices.
Sentry Investments announces new CEO Sentry Investments has announced that its president and COO of more than three years, Philip Yuzpe, will be taking on the position of president and CEO. Yuzpe succeeds Sean Driscoll, who had held the position since 2013. Since joining Sentry in 2006, Yuzpe has become “a seasoned executive with proven operational and leadership skills,” said Sentry founder and chairman John F. Driscoll. “[We] could not be more pleased that he has accepted this expanded role.” “Our success starts and ends with a high-performance culture and an unwavering commitment to our clients and our core values of teamwork, collaboration and respect,” Yuzpe said. “I look forward to continuing to instill those values in our employees and to embody them in my new role.”
www.wealthprofessional.ca
10-11_Intelligence-SUBBED.indd 11
11
10/02/2017 6:49:16 AM
UPFRONT
ETF UPDATE NEWS BRIEFS Global ETFs close out 2016 with a new record high
According to preliminary figures from global ETF research and consultancy firm ETFGI, globally listed ETFs reached a new record high of US$3.546 trillion in assets at the end of 2016, exceeding the end-of-November bar set at US$3.444 trillion. Canadian ETFs accounted for $84 billion of the global total. Allowing this rise was a record net inflow level of US$65.25 billion into ETFs in December, the 35th consecutive month of net inflows. Over the course of 2016, globally listed ETFs enjoyed net inflows of US$389.3 billion, an improvement over 2015’s US$372.3 billion.
Horizons ETFs launches new global currency vehicle
Horizons ETFs has unveiled the Horizons Absolute Return Global Currency ETF (HARC), the first ETF to give Canadians long and short exposure to global currencies in one portfolio. Generally holding Canadian short-term securities and using short-term global currency instruments, HARC will aim for positive absolute returns through long and short exposures. Subadvising the fund is CIBC Management, which will rely on its proprietary active investment process that monitors more than 30 global currencies, along with tools such as fundamental analysis, macroeconomic analysis and factor-based ranking.
Expert warns of pitfalls in anticipated ETF rating system
ETF Facts, an ETF analog of the Fund Facts used for mutual funds, will be required from dealers starting in September. Both documents include a five-point risk rating section designed by the CSA, but the system’s effectiveness for ETFs has been called into question. “Product sponsors will calculate each
12
fund’s standard deviation … and map the number to one of the five risk labels,” wrote Dan Hallett of HighView Financial Group in a piece for The Globe and Mail. “Unfortunately, this simple-sounding method doesn’t tell investors anything about how much they could lose or how long they should hold a fund to minimize the chance of loss.”
Mackenzie introduces smartbeta emerging market ETF Mackenzie Investments has launched the Mackenzie Maximum Diversification Emerging Markets Index ETF (MEE), the latest addition to the firm’s smartbeta lineup, which promises enhanced diversification and risk-adjusted returns in emerging market securities. The funds’ underlying TOBAM investment methodology, an internationally acclaimed and multi-patented approach, aims to protect portfolios from structural bias and unmanaged risks common among cap-weighted indices. Mackenzie Investments became the exclusive provider of the TOBAM methodology to Canadian retail investors in June of last year.
Canadian giants partner for actively managed ETFs Dynamic Funds and BlackRock Canada have teamed up for a new suite of actively managed ETFs. The new lineup of five Dynamic iShares Active ETFs combines Dynamic’s style of active portfolio management with BlackRock’s ETF execution and operational expertise. The new funds include the Dynamic iShares Active Preferred Shares ETF (DXP), the Dynamic iShares Active Crossover Bond ETF (DXO), the Dynamic iShares Active Global Dividend ETF (DXG), the Dynamic iShares Active US Dividend ETF (DXU) and the Dynamic iShares Active Canadian Dividend ETF (DXC).
Top 5 ETF trends for 2017 There’s no doubt that ETFs’ popularity among investors will continue into 2017, but what else is on the horizon? The ETF sector saw continued inflows throughout 2016, but also a price war and a record 127 closings of global ETFs. With that in mind, the Wall Street Journal predicts that the coming year will present both challenges and opportunities for the space. The newspaper identified five ETF trends advisors should keep an eye out for in 2017. 1. Lower expenses will continue to be a factor, but fees will start to play a role. Plain index-fund ETFs typically have expense ratios lower than 0.05%, which accounts for their general outperformance. However, the growing market for smart-beta ETFs will expose more investors to additional costs. “Investors continue to learn more about the different facets that go into ETF prices and why they cost what they do,” Tim Coyne, head of global capital markets for State Street’s SPDR ETFs team, told the paper. 2. The Department of Labor’s fiduciary rule will drive assets away from funds with sales loads or trailer fees. Although there’s some speculation that the rule, which requires investment advisors to act in their clients’ best interests, could be scrapped by the Trump administration, Canada is already in the midst of a similar shift as new reporting rules imposed under CRM2 take effect. Even as funds announce changes in fee structures for the benefit of clients, ETFs and other lowercost index funds may retain their competitive advantage for some time. 3. Smart beta should get more of a
www.wealthprofessional.ca
12-13_Update ETF-SUBBED.indd 12
10/02/2017 6:50:14 AM
Q&A
push as non-passive products expand into fixed-income, value and dividend investing. Smart-beta products are getting some attention from cautiously optimistic institutional investors. In 2016, US-listed smart-beta ETFs
“Investors continue to learn more about the different facets that go into ETF prices and why they cost what they do” drew more than US$41 billion in new assets as of November 30 to end the period with an asset total of US$540 billion. Should these ETFs withstand the test of time, higher-cost quantitative strategies and struggling hedge funds could be in trouble. 4. The expanding adoption of automated advice will benefit ETFs. No longer the exclusive tool of robo-advisors, automated rebalancing via ETFs is now being married with a human touch, leading to hybrid products from established brands. Now that Vanguard and Charles Schwab have joined the fray with such offerings, ETFs will likely play a bigger role in retail investors’ portfolios. 5. The active approach will gain ground. The past year’s events have highlighted the benefits of overweighting or underweighting ETFs with specific investment mandates, allowing investors to capture gains or minimize losses. However, since such direction requires keen awareness and analysis of both domestic and international policy and international rhetoric, buy-and-hold investors will likely still be better off relying on low-cost broad-market funds.
Kevin McCreadie
AGF joins the ETF fray
President and chief investment officer AGF INVESTMENTS
Years in the industry 30+ Fast fact AGF Investments’ seven new ETFs are being seeded with $2.5 million each, for a total of $17.5 million in assets
How are your new ETFs different from the others that are already out there? Most of the products out there are index-replicating or index-like. If you think of the smart-beta versions that are out there, they offer you either low-volatility, which only gives you downside protection, or other types of actives that are fundamentally based and trying to give you upside. We think the next generation of products is this real intersection between return-seeking and downside protection. When you think about the products we launched, there are four building blocks that have that makeup: one for the US, one for Canadian equities, one for international equities and one for emerging markets. And on top of that we put three solutions – ETFs of ETFs – which will have components of those underlying ones in them, but also many other third-party providers. So it’s really a bestof-breed open architecture solution optimized for income, multiasset class or global equities.
Do you expect uptake of these products from current investors, or do you think you’ll attract new ones? We’re taking the view that the growth of the market is in the early innings, and certainly for the active ETF component. With the combination of regulatory change coming and many advisors moving to more fee-based models, [there’s an] opportunity for us to take share in that shift. We don’t look at this as a substitution from our existing fundholders, but actually a way to attract new unitholders who complement our existing fund company. In addition, we think there’s some institutional capability. Some of these more factor-based strategies are starting to get adapted by institutions.
How did you select the new investment platform, AGFiQ, that you put together to manage these ETFs? Several years ago, we made some serious investments in Highstreet, based in London, Ontario, which has really been a leader in quantimental thinking. In November, we purchased a majority stake in a US-based ETF strategist-manufacturer named FFCM. They have run the plumbing for some of the more complicated ETFs in the US, which we can’t do here in Canada. By marrying these two, we now have a group that [has] 21 investment professionals and six PhDs, so we have a pretty deep talent pool to draw from.
Are there any more trends in the ETF sector that you expect to benefit from in 2017? We’re probably one of the first to try to provide a solution inside an ETF, one that is more open architecture-based – it’s active in a sense, but still uses repeatable quantitative techniques. I think you’ll start to see the number of ETFs in that area increase versus the plain vanilla passives, which I think the marketplace here is fairly well covered in.
www.wealthprofessional.ca
12-13_Update ETF-SUBBED.indd 13
13
10/02/2017 6:50:32 AM
UPFRONT
ALTERNATIVE INVESTMENT UPDATE
More firms rushing into private debt Institutional investors are leading the way in the Canadian market’s increasing forays into private debt
mature. According to TD Asset Management, which launched two private debt funds last year, the market sees around $8 billion in investment-grade private market loans each year. “[Institutional investors are] kind of early days in the process of understanding how it fits within their portfolio,” said Bruce MacKinnon, head of private investments at TD Asset Management.
“I think people are much more aware of private debt as an alternative asset class than they once were”
Toronto-based asset manager Connor, Clark & Lunn Financial Group recently entered into a partnership with MidStar Capital Corp. to launch a private lending arm. In doing so, it became the latest in a series of firms and funds responding to an increasing clamour for private debt, according to The Globe and Mail. In light of new regulations and capital requirements in the wake of the financial crisis, banks around the world have exited the space, leaving it open to new entrants. On the demand side, institutional investors
NEWS BRIEFS
such as pension funds and sovereign wealth funds have developed a craving for higher returns, leading them to seek alternative assets. These shifts have combined to trigger a wave of new private lenders. “There’s a growth and acceptance of private debt as an alternative, and that’s being driven by the US,” MidStar Capital managing director Tanya Taggart told the paper. “I think people are much more aware of it as an alternative asset class than they once were.” The Canadian market, however, is less
Canadian firm launches marijuanafocused fund
Green Acre Capital has launched the Green Acre Capital Fund, which invests in vehicles throughout the legal cannabis industry in Canada, the US and other countries. The fund will be managed by a team with extensive marijuana industry experience and deep-rooted relationships with cannabis pioneers and leaders. “The goal of the fund is to build a diversified portfolio of the most compelling cannabis investment opportunities across numerous verticals within the industry,” said managing director Tyler Stuart, who co-heads the fund.
14
Other Canadian players had previously staked claims in the private debt space. Since CPPIB’s 2015 acquisition of Antares Capital, it has done more than US$120 billion worth of financing over the past five years. In 2016, the fund sold Toronto’s Northleaf Capital Partners a 16% stake in Antares. “[Our investors] see what the larger players are doing and are really looking for alternatives to what they can get in the traditional fixed-income market,” Northleaf managing partner Stuart Waugh said at the time. In terms of MidStar’s partnership with CC&L, Taggart said the team will shoot for $500 million AUM within five years. Highnet-worth investors will be able to access private debt through their portfolios with CC&L. Annual returns are expected to reach 7% to 9% once the portfolio hits its stride.
REIT outlook: positive globally, mixed for Canada
While rising interest rates have led many to predict hard times for REITs, Timbercreek Asset Management’s 2017 outlook is more optimistic, predicting 8.5% to 10.5% returns for global REITs. For Canada, the authors noted a market bifurcation stemming from declines in oil prices. The contrast is particularly stark between Toronto, where demand is pushing rents up, and Calgary, which has not recovered from the oil shock. However, Timbercreek projects stable cash flows will keep Canada’s apartment market attractive.
www.wealthprofessional.ca
14-15_Update ALT-SUBBED.indd 14
10/02/2017 6:51:53 AM
Q&A
Robert Goodall
MICs: an alternative to fixed income
CEO ATRIUM MORTGAGE INVESTMENT CAPITAL
Years in the industry 33 Fast fact Atrium is one of the few mortgage investment corporations [MICs] that is large enough to be listed on the TSX
What is your business model at Atrium? Atrium started in 2001 as a private company with about 20 investors and about $3.5 million in capital. We grew to the point that we went public in September 2012. Since then we have grown the portfolio from roughly $200 million to more than $525 million, and our investor base from about 600 when we were private to about 3,500 today.
income, but not with the 2% to 3% rates that you see with government and corporate bonds. We have been going for 16 years, and there has never been a time when we didn’t pay our dividends on time.
How do the mortgages you offer differ from what other lenders provide?
The Bank of Canada recently released a report that was critical of MICs regarding risky lending practices, which it said were helping to overheat the markets in Toronto and Vancouver. What safeguards do you have in place if a market correction were to occur?
Our average duration is about 13 months. That allows us to reprice and reassess the mortgages if there is a request for renewal. Roughly 50% of our portfolio turns over every year. We don’t compete on leverage, and we don’t lend on any higher loan-to-value than the banks or credit unions. The largest MICs in Canada do not do a lot of mortgages on existing single-family homes. Only 10% to 15% of our portfolio is on existing single-family homes. Most of our mortgages are to real estate investors and developers. Our average loan-to-value is under 65%, so the borrower will have more than 35% equity. The advantage of a MIC is that it is a hybrid. We are a hybrid between a fixed-income instrument and a stock. We offer a high yield of about 8% because we pay out 100% of our earnings. Over the past four years we have shown consecutive growth in our earnings. It is an attractive vehicle for someone who wants fixed
Our strategy has always been to lend in the major metropolitan centres. In 2015 we had close to 20% of our portfolio in Alberta – Edmonton and Calgary. We have since been able to reduce our exposure to about 7%. Because our mortgages are short-term, we can be very agile and move from market to market as we see fit. We are bullish on Toronto. Vancouver has flattened out, which we see as a good thing. The high-end market in Vancouver is not something we have ever chased – we are typically mid-range family homes. With an average loan-to-value of 65%, we are well insulated for a downturn. We are very much a defensive play. When the stock market is treading water, we tend to do well; when it takes off like a rocket, we are forgotten for the time being. Our stock for the year rose from 11.5% to 12% at the end of the year, but we also paid an 8% dividend to our shareholders.
Investment banking head starts private equity outfit
Adam Waterous, Scotiabank’s global head of investment banking, has left the firm to launch his own private equity fund, Waterous Energy. In an interview with the Financial Post, Waterous said he would use $400 million in startup capital to acquire controlling stakes in private companies “focused on the unconventional space across North America.” Noting unprecedented rates of return driven by hydraulic fracturing and horizontal drilling, he predicted a “tremendous renaissance” for the energy business.
Natural gas poised for strong year ahead
Analysts expect Canadian natural gas rigs to perform well in 2017. GMP FirstEnergy commodity analyst Martin King told the Financial Post that growing supplies from Canada will serve a hungry US market. Natural gas production from Canada’s Deep Basin is estimated to increase by 500 million cubic feet per day in 2017. US natural gas stores are expected to fall below their fiveyear average; while Scotiabank economist Rory Johnston predicted a rapid response from US shale drillers, King is unconvinced they can satisfy the existing demand.
Hedge fund 2016 returns beat stocks, bonds
Hedge funds outdid equities and bonds on a risk-adjusted basis in 2016, according to the Alternative Investment Management Association and data provider Preqin. Looking at the Sharpe ratio of more than 3,000 funds, they found that hedge funds achieved a risk-adjusted return of 1.45 for the year. This was better than the S&P 500’s record of 1.1, MSCI World’s 0.68 and the Barclays Global Aggregate’s 0.20. They also estimated that the 2016 net gain in value for hedge fund assets reached $120 billion.
www.wealthprofessional.ca
14-15_Update ALT-SUBBED.indd 15
15
10/02/2017 6:52:05 AM
UPFRONT
OPINION
GOT AN OPINION THAT COUNTS? Email wealthprofessional@kmimedia.ca
Keep investing simple A complicated investment is any one that the client doesn’t understand – and that can result in more downside than upside, writes Markus Muhs IF YOU’RE like me and don’t have an assistant acting as the gatekeeper for your phone calls, you’re probably being inundated with calls from fund wholesalers at this time of year, as well as from sellers or promoters of various other investments. Unless you’ve found a way to completely tune them all out, it can be a challenge to listen to all their ideas and keep yourself from buying what they’re selling, only to see your book of business become a jumble of hundreds of different fund codes that are impossible to keep track of. Simultaneously, we might also find ourselves being pulled into the realm of complicated investments by our clients, if they perceive – or we perceive that they perceive – that complex investment strategies add value to the relationship. So what do I consider a ‘complex strategy’ or ‘complicated investment’? I tell my clients that complicated investments are any investments that they themselves don’t understand. Even if I’m advising them and recommending something to them, I want to be sure they understand what they’re investing in. To some, owning anything beyond a simple mutual fund or ETF may be overly complicated. If it is, then there’s absolutely no need to go further. Investing doesn’t need to be complicated in order to achieve the desired result, and making things too complicated can result in more downside than upside. The core reason why we invest is to help transform liquid currency that we earn today
16
– which loses a bit of its value every year – into something that can help us meet our long-term objectives. It’s not to gamble. It’s not to tempt fate and hope to strike it rich. The stock market has provided an unbeatable vehicle for achieving our longterm objectives, and product innovation – from the first mutual funds to ETFs to discount brokerages – has democratized
a bit of complexity to our clients’ portfolios when we go beyond just owning one global fund. We add other asset classes to diversify because a particular client’s time horizon might not be 30 years or longer. We may also diversify by adding different investment styles. Importantly, as advisors, we also ensure that our client’s investments are compatible with their own psychological risk tolerance, and coach them through inevitable market events, which could trick the investor into making mistakes that could cost them dearly, such as selling at lows or even just abandoning contribution strategies. A professional advisor can add way more value to a client’s financial well-being by crafting a detailed financial plan and coaching them through market fluctuations than by flogging a variety of complex investments. Fee disclosures under CRM2 have made it all the more important for advisors to demonstrate their true value to their clients. If, as an advisor, you believe the only way you can demonstrate value is through
“An advisor can add way more value by crafting a detailed financial plan and coaching clients through market fluctuations than by flogging a variety of complex investments” investing to the point where anyone can instantly buy a tiny share in more than 1,000 companies with just one trade order, or have their money put into a diversified portfolio automatically via a ‘robot.’ It seems to me that, more often than not, the simple portfolio (one with just a few basic indices, or some broad-based longonly mutual funds that don’t try anything fancy) beats the complex one full of exclusive hedge funds, alternative investments or ‘stories.’ It is possible for someone to achieve their retirement goals by simply putting all of their money into one global all-cap fund of some sort, just shovelling more money into it every week/month/year and not looking at it until retirement. So where do advisors come in? We add
security selection and building complex strategies, then I think you have an uphill climb ahead of you. This article is solely the work of its author, a registered investment advisor at Canaccord Genuity Wealth Management. The views (including recommendations) expressed in it are those of the author alone, and are not necessarily those of Canaccord Genuity Wealth Management. The information contained herein is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it does the author or Canaccord Genuity Wealth Management assume any liability. Canaccord Genuity Wealth Management is a division of Canaccord Genuity Corp. Member – Canadian Investor Protection Fund.
Markus Muhs is an Edmonton-based investment advisor with Canaccord Genuity Wealth Management. He provides financial planning services and values independence and the ability to put his clients’ interests before all else.
www.wealthprofessional.ca
16-17_Opinion-SUBBED.indd 16
10/02/2017 6:53:02 AM
Equi
Make It Your Year NOMINATE NOW Nominations close on March 17th, 2017
Brought to you by
Event Partners
BRENT VANDERMEER Portfolio Manager, Vandermeer Wealth Management, Holliswealth WINNER of The CETFA Award for ETF Champion of the Year
Official Publication
Organised by
First Trust
Port folios Canada
®
WWW.WPAWARDS.CA #WPAWARDSCA 16-17_Opinion-SUBBED.indd Equisoft Award.indd 49 17
10/02/2017 7/02/2017 6:53:13 10:43:41AM PM
PEOPLE
INDUSTRY ICON
REBRANDING FOR SUCCESS TD Wealth’s Dave Kelly outlines how expectations for financial advisors have evolved, especially in the high-net-worth segment
IT’S NOW been a year since TD Bank rebranded its wealth management business as TD Wealth Private Wealth Management. In doing so, the bank has emphasized the need for holistic planning for the high-networth segment. According to Dave Kelly, senior vice-president of TD Wealth Private Wealth Management, this approach has proved a great success so far: The division added almost $12 billion in new assets throughout 2016, representing growth of close to 50%. “We exceeded all our new asset, earnings and new client goals for the year,” Kelly says. “We had a number of months where we exceeded $1 billion in net new asset growth. It was a phenomenal result, but I expect to eclipse that this year. Our value proposition for our clients is so much stronger.” A graduate of the University of Guelph, where he studied management economics in industry and finance, Kelly moved to TD Waterhouse from CIBC in 2007. He oversaw TD’s Private Investment Counsel business from 2008 to 2011 before becoming president and national sales manager of TD’s fullservice brokerage, Private Investment Advice. Today his remit extends to the full TD Wealth smorgasbord, which took on even greater importance last January when the firm’s brokerage joined with its private
18
banking, investment counsel and trust businesses. Kelly looks back on TD’s decision to marry its Private Investment Advice and Private Client Group divisions. “From an external perspective, it was really about making sure the marketplace knew TD was serious about doing something different in terms of how we serve high-networth Canadians,” he says. “From an internal perspective, it was important because we
table assets will have different needs than someone with a $100,000 portfolio. TD Wealth’s restructuring reflects that; the firm now makes a clear distinction between who serves which client – financial planner or investment advisor. “For us, the difference is about who they serve and how they meet clients,” Kelly says. “At TD, our financial planning team is resident in the branch network. They are focused
“We had two legacy organizations, each with a storied history. Moving to a new name that was neither one nor the other represented a good way to get the two teams focused on a new journey together” had two legacy organizations, each with a storied history. Moving to a new name that was neither one nor the other represented a good way to get the two teams focused on a new journey together.”
Client customization Wealth management, of course, is dependent on the needs of a particular investor. Someone with more than $1 million in inves-
on meeting the planning needs of the mass affluent client: $100,000 to $750,000.” An investment advisor, on the other hand, will go into much greater detail regarding not just the what and how much of investing, but the why. “In the high-net-worth space, the strategy is to focus on a broader discovery conversation with clients,” Kelly says. “We have been doing a lot of work in behavioural finance to
www.wealthprofessional.ca
18-21_Industry Icon-SUBBED.indd 18
10/02/2017 6:55:39 AM
PROFILE Name: Dave Kelly Title: Senior vice-president Company: TD Wealth Private Wealth Management Years in the industry: 20 Fast fact: TD Wealth investment advisors study behavioural finance in order to demonstrate to their clients the science behind financial planning. This field combines behavioural and cognitive psychological theory with economics and finance to provide explanations for why people make irrational financial decisions.
www.wealthprofessional.ca
18-21_Industry Icon-SUBBED.indd 19
19
10/02/2017 6:55:53 AM
PEOPLE
INDUSTRY ICON
help our advisors and clients have a better understanding of the financial personality profile of a client. In the high-net-worth space, you have a heightened need for estate planning capability and tax planning, so we bring that all to bear for those clients.” Clients in the HNW segment also have a lot more to lose should a shift in the market occur. Opinion is divided on whether 2017 will see a correction, but regardless, it is the advisor’s role to ensure that risk is mini-
has suffered substantial job losses in recent times. In Kelly’s view, the arrival of new blood is essential for the firm’s growth ambitions, and it is already well on the way to meeting its targets. “Across all teams in private wealth management, we brought in 45 new positions for investment advisors and wealth advisors last year,” he says. “I think it will be similar this year, but it will depend on market conditions a little bit. Certainly our long-term
“In the high-net-worth space, the strategy is to focus on a broader discovery conversation with clients. We have been doing a lot of work in behavioural finance to help our advisors and clients have a better understanding of the financial personality profile of a client” mized. For TD Wealth advisors, this increasingly means looking to alternative strategies, Kelly says. “We consider ourselves to be stewards of our clients’ hard-earned capital, rather than trying to dramatically outperform the markets by taking on more risk,” he says. “In the current market, we have been working very hard on mitigating risk – one is interest rate risk in the bond markets. We have been thinking more about alternatives, less correlated assets – market-neutral hedge funds, real estate and private equity.”
Human capital When TD Wealth Private Wealth Management launched 13 months ago, the bank announced plans to add 130 investment advisors by 2020. Not forgetting its mass affluent clients, it also revealed plans to hire an additional 275 financial planners for its branch network over a two-year period. That was welcome news for an industry that
20
goals are the same, and that is to continue to win market share. The only way to do that sustainably over time is to grow your advisory sales force.” Another significant change since TD’s wealth operation was reborn is the finalization of CRM2 last July. The implications of the new reporting standard are only really being felt now as investors receive their first year-end reports, so it remains to be seen how far-reaching the new standard will be for the industry. In Kelly’s view, it’s a step in the right direction. “This is absolutely the right move,” he says. “Transparency is terrific for clients. For advisors who run great practices, it is the best thing that has happened in the industry, certainly during my career. While there is some anxiety over how people will react to the information, our team is prepared. It is a big part of why we went with the Private Wealth Management brand and focused on the high-net-worth space.”
THE FOUR ELEMENTS OF TD WEALTH PRIVATE WEALTH MANAGEMENT
TD Private Investment Advice The bank’s full-service investment brokerage designs custom wealth strategies, including discretionary management for those with investable assets of $750,000 or more
TD Private Investment Counsel Portfolio managers assess the personal risk tolerance of clients, whether they are planning for retirement, running a business or acting on behalf of a charitable foundation
TD Private Banking Private bankers recommend a number of cash management, short-term investment and credit solutions for affluent clients
TD Private Trust TD’s specialist estate and trust professionals assist clients in developing an estate plan to help ensure their wealth is transferred according to their wishes
www.wealthprofessional.ca
18-21_Industry Icon-SUBBED.indd 20
10/02/2017 6:56:04 AM
18-21_Industry Icon-SUBBED.indd 21
10/02/2017 6:56:13 AM
FEATURES
COVER STORY: ETFs
RIDING THE
ETF WAVE The exchange-traded fund is quickly becoming one of the most popular investment vehicles in Canada. Wealth Professional talked to experts across the wealth management industry to get the full picture of ETFs’ past, present and future
CANADA’S RELATIONSHIP with the exchange-traded fund goes back a long way – to the very beginning of the investment vehicle, in fact. In 1990, the Toronto Stock Exchange introduced the world to Toronto 35 Index Participation Units, or TIPs – the precursor to what later became known as the ETF. Today, the ETF/ETP industry accounts for US$3.5 trillion in assets globally, and net inflows in 2016 alone were US$389.34 billion – a new record. In Canada, ETFs continue to attract both retail and institutional investors, and a slew of new players have entered the space. TD Asset Management, Wisdom Tree, Sphere Investments, Hamilton Capital, Harvest Portfolios and Mackenzie Investments all
launched ETF products in 2016, and AGF, Manulife and Desjardins are expected to enter the space in the near future. As a result, choice in the ETF market has never been better, although there are signs that certain areas have reached the point of saturation. Standing out from the growing number of competitors is becoming increasingly difficult for providers, which has meant a shift toward specialized smart-beta or actively managed ETFs. While the industry is still very much dominated by passive index-linked products, that is changing, and all the major firms are now providing a range of ETF products. Another consequence of increased competition in the space is that fees are
moving even lower – the latter half of 2016 saw a price war gather pace as the world’s largest asset manager, BlackRock, reduced fees on six of its smart-beta ETFs. According to Bloomberg research, more multi-factor ETFs were created in 2016 than any other strategy; expect more of the same this year. In particular, institutional investors are now gravitating toward smart-beta ETFs as a solid alternative to higher-cost quantitative strategies and hedge funds. Given that we’re in an era of fee transparency and greater regulatory pressure, the attraction to ETFs isn’t that surprising. But can the industry sustain its rapid growth heading forward? We posed that very question to some experts in the field.
ABOUT OUR SPONSOR Mackenzie Investments was founded in 1967, and is a leading investment management firm providing investment advisory and related services. With $64 billion in assets under management as of December 31, 2016, Mackenzie Investments distributes its investment services through multiple distribution channels to both retail and institutional investors. Mackenzie Investments is a member of the IGM Financial Inc. (TSX: IGM) group of companies. IGM Financial is one of Canada’s premier financial services companies with more than $141 billion in total assets under management as of December 31, 2016. For more information, visit www.mackenzieinvestments.com.
22
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 22
10/02/2017 6:57:23 AM
THE HISTORY OF ETFS While the Toronto Stock Exchange is credited with launching the first ETF with TIPs in 1990, the idea had been floated before, albeit with less success. A year prior, a federal court in Chicago blocked the launch of Index Participation Shares for the S&P 500. The delay provided the Toronto Stock Exchange an opportunity to make history instead, and TIPs still exist today as part of the iShares S&P/TSX 60 Index ETF, which is the largest Canadian ETF with more than $12 billion in assets. Eric Kirzner, a professor of finance at the University of Toronto’s Rotman School of Management, has authored or coauthored 13 books on investment finance and more than 1,000 articles on security analysis and portfolio management. During his long career, he has followed the development of exchange-traded funds since before they even had that name. “I had an article published in 1995 in the Handbook of Equity Derivatives on the history of IPUs [index participation units],” Kirzner says. “IPUs are what ETFs were originally called. I wrote that Canada was the world leader on IPUs. The Americans tried to introduce an IPU, but the stock exchanges and the mutual fund companies didn’t want it, while the futures exchanges did. A district court ruled that these were not stocks but futures contracts, so it never got off the ground.” America’s loss was Canada’s gain, and a marker was laid in the investment industry with the introduction of TIPs – the world’s first IPU. “It was the wave of the future, in my opinion, and a few years later I was appointed as chair of the discretions committee for TIPs, making decisions on changes to the product when the index changed,” Kirzner says. “First it was TIPs,
then came TIPs 100 and TIPs 35, then the Spider and the Diamond in the States. There was only a handful up until the mid-90s. Then manufacturers like Barclays got involved, and the name changed from IPU to ETF.” Canadian investors would be relatively slow to adopt these new low-fee products, at least in comparison to the US, where they caught on much more quickly. This was surprising to Kirzner, especially when considering the costs associated with mutual funds here. “I used to write a column in the Financial Post where I talked about exchange-traded
alternative options, although they were clearly fighting a losing battle in that regard. “There was a lot of resistance from the mutual fund industry and financial advisors because ETFs had very low trailer fees and didn’t pay commissions,” Kirzner says. “When the public became aware that these products had great applications and were low-cost, they became very popular.” So popular that there are now more than 500 ETF listings in Canada, a number that will likely be significantly
“There was a lot of resistance from the mutual fund industry and financial advisors because ETFs had very low trailer fees and didn’t pay commissions. When the public became aware that these products had great applications and were low-cost, they became very popular ” Eric Kirzner, Rotman School of Management funds,” he says. “Every time I wrote about ETFs, I would get all these letters from people who didn’t understand them. I still get lots of questions – for some reason, there is something elusive about them. Mutual fund fees are unconscionably high in Canada, but exchange-traded funds often offer the same thing for a much lower price.” Not surprisingly, ETFs were not universally welcomed in investment circles. The status quo, quite satisfied with a dominant market share, didn’t feel the need for
higher by year’s end. In Kirzner’s view, the industry’s huge growth in recent years means ETFs are now in a new evolutionary stage. “When you have innovation, there is always a period of consolidation,” he says. “I don’t think we have had that consolidation period yet with ETFs. Things start to fragment, and you get a large amount of products – we have thousands of ETFs worldwide. We will start to go through a period of consolidation where some of these ETFs start to disappear.”
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 23
23
10/02/2017 6:57:34 AM
MACKENZIE MUTUAL FUNDS MACKENZIE ETFs
Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
22-41_Cover story-SUBBED4.indd 24 40292_WealthPro_ETF_DPS_FINAL.indd 1
10/02/2017 6:57:43 AM
IN A CHANGING WORLD, REACH MATTERS Introducing Mackenzie Maximum Diversification Emerging Markets Index ETF (MEE). Easier access to emerging markets. Smarter diversification in emerging markets. All from our newest smart beta ETF. Extend your reach around the world with our suite of Mackenzie Maximum Diversification ETFs. mackenzieinvestments.com/tobam MEE Mackenzie Maximum Diversification Emerging Markets Index ETF
22-41_Cover story-SUBBED4.indd 25
MWD Mackenzie Maximum Diversification All World Developed Index ETF
MXU Mackenzie Maximum Diversification All World Developed ex North America Index ETF
MEU Mackenzie Maximum Diversification Developed Europe Index ETF
MKC Mackenzie Maximum Diversification Canada Index ETF
MUS Mackenzie Maximum Diversification US Index ETF
10/02/2017 6:57:52 AMAM 2017-02-02 11:42
FEATURES
COVER STORY: ETFs FIXED-INCOME ETFS Invesco is one of the industry stalwarts that newcomers are seeking to emulate. Fourth in the world in ETF assets, its PowerShares brand continues to add new products. Christopher Doll, vice-president of product and business strategy for PowerShares Canada, explains how 2016 turned out to be a bumper year for the firm. “Last year represented our strongest year on record in terms of flows,” he says. “Our focus on fixed income was the biggest driver of growth last year, particularly our PowerShares 1-5 Year Laddered Investment Grade Corporate Bond Index ETF (PSB). It is a short corporate bond ETF, so it performed quite well when you saw the pullback from the rise in interest rates in the latter half of the year. It was close to half our flows last year, so it’s a very successful product.” PowerShares entered the Canadian ETF space in 2009, a few years later than originally intended thanks to the market crash. As it turned out, delaying the launch of its ETF business was a wise move. The investment sentiment after the financial crisis was markedly different than before, which made conditions perfect for the emergence of a new kind of product. “Since the financial crisis, there has been a lot of attention paid to the low-cost
nature of ETFs, their ability to be traded seamlessly in a client account, as well as their transparency,” Doll says. “The lowercost nature of ETFs is probably the most important factor – advisors like to know there is transparency there, but they don’t always take advantage of it.” PowerShares now has 24 ETFs trading in Canada, a selection that includes both smartbeta and active products, as well as traditional index-tracking funds. The most recent arrivals are additional series on PowerShares’ US low-vol and global momentum equity ETFs, launched at the end of January. “The bulk of our products are index-based, but include some form of intelligent weighting or security selection within index construction,” Doll says. “We have two funds, PTB and PLV, that are pure quantitative and active ETFs where the portfolio manager has set up rules for the starting universe. It then selects and reweighs the universe based on those rules.” As one of the more established names in the space, Invesco has witnessed firsthand the rapid-fire growth of the industry over the past number of years. This isn’t entirely positive – some observers do foresee plenty of ETFs failing to build the assets required to succeed, as Doll explains. “There are certainly portions of the ETF market that are quite saturated. Historically
“A lot of development in the last few years has really centred on factors ... I think the next big evolution is extending that into fixed income, and maybe alternatives or commodity investing” Christopher Doll, Invesco PowerShares
26
there has been a lot of development around traditional market-cap weighted indices. The providers have already sliced and diced every different sector, geographical region and country allocation by market-cap that you can imagine. More recently, a lot of development in the last few years has really centred on factors as it relates to equity factor investing. I think the next big evolution is extending that into fixed income, and maybe alternatives or commodity investing.” As far as finding the next big thing, Invesco has a simple but effective method of R&D, honed over decades. “Input from our clients is a big driver in where we move with our product plans,” Doll says. “Given our history in Canada as an asset manager for nearly 40 years now, our relationship with the Street and advisors in the marketplace means we do really rely on their voice in the development of new products.” As an asset manager, Invesco is keen to stress that ETFs are far from the only game in town. They are a growing slice of the pie, but still a relatively minor one. ETFs offer competition to their mutual fund predecessor, but the rivalry is still very much one-sided in terms of asset size. That said, ETFs are now much more than simply a low-cost option. PowerShares will undoubtedly remain at the forefront of how ETFs evolve across Canada and the world. “The ETF vehicle is really putting a lot of pressure on other portions of the asset management industry. It’s a good evolution for investors,” Doll says. “We are agnostic to the choice investors take – we offer both active mutual funds and passive ETFs; that’s entirely to their discretion. There is a lot of fee compression right now, and that’s why you haven’t seen a lot of additional marketcap-weighted indices. A lot of the new products are really focused on factors or active, or some combination of both.”
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 26
10/02/2017 6:58:01 AM
POWERSHARES’ BEST=PERFORMING FIXED-INCOME ETF POWERSHARES ULTRA LIQUID LONG TERM GOVERNMENT BOND INDEX ETF (PGL) PGL seeks to replicate the performance of the FTSE TMX Canada Ultra Liquid Long Term Government Bond Index (formerly the DEX Ultra DLUX Long Government Bond Index), or any successor thereto. This PowerShares ETF invests primarily in Canadian government bonds.
CHARACTERISTICS Weighted-average YTM
Weighted-average duration
Interest yield
TRADING INFORMATION 2.91%
15.18 years
3.61%
Distribution yield
3.32%
TOP HOLDINGS Canadian government bond
6.20%
Canadian government bond
5.56%
Canadian government bond
5.29%
Canadian government bond
5.21%
Province of Ontario
4.43%
Ticker
PGL
Exchange
Toronto Stock Exchange
Province of Ontario
4.41%
Marginable
Yes
Canadian government bond
4.14%
Shortable
Yes
Province of Quebec
3.55%
Province of Ontario
3.48%
Province of Quebec
3.39%
Total top holdings
45.65%
Options available
Yes
RRSP-eligible
Yes
Above information current as of February 6, 2017
POWERSHARES’ BEST-PERFORMING FIXED-INCOME ETFs Ticker
Name
Inception date
One-year return
Two years
Three years
Five years
Since inception
PGL
PowerShares Ultra Liquid Long Term Government Bond Index ETF
June 15, 2011
1.08%
2.75%
7.52%
3.53%
5.86%
PTB
PowerShares Tactical Bond ETF
August 24, 2012
2.96%
2.59%
4.31%
N/A
2.77%
13.00%
4.75%
4.19%
5.22%
5.19%
2.13%
2.28%
2.73%
2.78%
2.98%
9.39%
3.16%
2.38%
N/A
3.51%
PFH.F PSB BKL.F
PowerShares Fundamental High Yield June 21, 2011 Corporate Bond Index ETF – CAD hedged PowerShares 1-5 Year Laddered Investment Grade Corporate Bond June 15, 2011 Index ETF PowerShares Senior Loan ETF
April 16, 2012
Commissions, management fees and expenses may all be associated with investments in exchange-traded funds. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Invesco at www.powershares.ca. There are risks involved with investing in ETFs, including the risk of error in replicating the underlying Index. Please read the prospectus for a complete description of risks relevant to the ETF. Ordinary brokerage commissions apply to purchases and sales of ETF units. Each PowerShares ETF seeks to replicate, before fees and expenses, the performance of the applicable Index and is not actively managed. This means that the Subadvisor will not attempt to take defensive positions in declining markets but rather continue to hold each of the securities in the Index regardless of whether the financial condition of one or more issuers of securities if the Index deteriorates. ETFs are not diversified investments.
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 27
27
10/02/2017 6:58:11 AM
FEATURES
COVER STORY: ETFs CANADA’S VOICE ON ETFS In 2016, Canadian ETFs saw assets under management grow by more than $24 billion, an increase of 26.8% on the previous year. This was driven by an estimated $17 billion in inflows; the monthly average inflow was approximately $1.4 billion. Those numbers point to a robust industry, which naturally means the Canadian ETF Association [CETFA] is growing in influence and scope. Incorporated in December 2011, the CETFA was established to represent ETF providers in what was, at that time, still a niche industry in the Great White North. “Three ETF providers – Horizons, Claymore and BMO – felt they needed a voice,” says CETFA executive director Pat Dunwoody. “IFIC speaks on behalf of all investment funds, but traditionally they only spoke for mutual funds. Those three providers realized they needed to market and educate the industry on this product.” Thus the Canadian ETF Association was born. Five years later, the numbers indicate that its goal of educating the masses on the benefits of ETFs has been successful. “In December 2011, assets were just over $43 billion – we ended 2016 at $113 billion,” Dunwoody says. “There were four providers back then: Horizons, Claymore, BMO and BlackRock. Now we have 19 in Canada.” AGF Investments is merely the latest addition to the ranks; there will be more in the months to come. Among major fund companies, it’s now a case of singling out those that don’t offer ETFs rather than the ones that do. It makes for a competitive environment, especially when you're up against huge institutions with the resources to match. “The firms that are coming into the market now are looking for a niche,”
28
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 28
Dunwoody says. “They need to be able to differentiate themselves from the rest of the marketplace. Active products are a way to do that. You can’t compete with a BlackRock or a Vanguard if you are just
propel the shift toward lower-fee products. “It’s a perfect storm for ETFs. People are taking a closer look at their investments, and while I don’t think they mind paying their advisor that 1%, they do want more
“The firms that are coming into the market now are looking for a niche. Active products are a way to do that. You can’t compete with a BlackRock or a Vanguard if you are just following a basic index” Pat Dunwoody, CETFA following a basic index.” The fact that ETFs’ growth has largely coincided with increased transparency around fees is surely no coincidence. Dunwoody agrees that CRM2 will likely
control over what they are spending their money on. With ETFs, they will obviously be in fee-based accounts, so they will have an easy way to see the cost of the product versus what they are paying their advisor.”
CANADIAN ETF PROVIDERS BY MARKET SHARE 2.1%
1.1%
2.2%
0.9%
2.7% 46.6%
5.5% 30.2%
8.6% iShares BMO Vanguard
Horizons PowerShares First Asset
RBC GAM Purpose Others Source: BMO ETFs
www.wealthprofessional.ca
28
10/02/2017 6:58:20 AM
CANADIAN ETF AUM AND INFLOWS BY PROVIDER iShares BMO Vanguard Horizons PowerShares First Asset RBC GAM Purpose FT Portfolios Questrade Auspice Lysander Mackenzie TD GAM Sphere Hamilton Harvest Portfolios Wisdom Tree Assets under management 2016 net inflows
$0
$10 billion
$20 billion
$30 billion
$40 billion
$50 billion
$60 billion Source: CETFA
THE GLOBAL PERSPECTIVE While the growth of ETFs in Canada is impressive, the industry here has some way to go to match our neighbour to the south. Of the US$3.546 trillion in ETF/ETP AUM globally, the United States accounts for US$2.543 trillion; Europe, US$571 billion; and Asia-Pacific (excluding Japan), US$135 billion. By the end of 2016, the global industry stood at 6,625 ETFs/ETPs, with 12,526 listings from 290 providers, listed on 65 exchanges in 53 countries. It’s a massive undertaking to keep abreast of all the major developments in the ETF world, but that’s exactly what Deborah Fuhr, managing partner at ETFGI, is tasked with.
An independent research and consultancy firm launched in London in 2012, ETFGI offers paid research subscription services covering trends in the global ETF and ETP ecosystem. Previously a managing director and global head of ETF research and implementation strategy at BlackRock/Barclays Global Investors, Fuhr has developed a keen sense of the ETF industry and where it’s headed, and she concurs that the current regulatory environment has had a large part to play in the rise of ETFs. “Regulation in Canada is very different than elsewhere,” she says. “It’s interesting to see the usage patterns change. Canada is
much more open to active ETFs because of some of its regulatory differences. Even robos use active ETFs – that’s not the case in other markets.” CRM2 represents this country’s shift toward a fee-based model, but other nations have been even more emphatic in their approach, banning commissions outright. One of the consequences of this has been that more and more advisors are embracing ETFs. “Regulators have changed the distribution model for many financial advisors,” Fuhr says. “They no longer can be paid to sell products if they are independent.
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 29
29
10/02/2017 6:58:29 AM
FEATURES
COVER STORY: ETFs
Similar to CRM2, we have had the Retail Distribution Review in the UK and Holland, so as advisors move to being paid for advice versus selling products, they start to embrace ETFs.” Another factor that has boosted the appeal of ETFs is a favourable comparison to mutual funds. In Canada in particular, there’s a growing sentiment that most mutual funds are simply not providing value for money. For those offering an alternative, it’s a clear opportunity. “If you look around the world, it is very difficult for an investor to pick securities that beat a benchmark,” Fuhr says. “It is also difficult for a mutual fund to consistently beat its benchmark. If you look at June to June last year, 86% of large-cap active funds in the
“Canada is much more open to active ETFs because of some of its regulatory differences. Even robos use active ETFs – that’s not the case in other markets” Deborah Fuhr, ETFGI US underperformed the S&P. Looking at the performance of hedge funds over the past five years, their asset rate-of-return average was below the S&P. Then you have limited transparency and limited liquidity.” ETFs, typically viewed as a competitor of mutual funds, have evolved to the point where they can now can fill different functions for different investors.
“The number of investors continues to grow, and that is partially due to the fact that ETFs have evolved from mostly being seen as a trading product to investors seeing them as a core strategic move,” Fuhr says. “You find that people are using ETFs as both long- and short-term investments, using them tactically – even hedge funds use ETFs now.”
TOP 20 GLOBAL ETF PROVIDERS BY ASSETS iShares Vanguard SPDR ETFs PowerShares NomuraAM DB/x-trackers Schwab ETFs Lyxor AM First Trust WisdomTree Nikko AM Daiwa Guggenheim UBS ETFs Van Eck ProShares BMO AM Amundi ETF Source ETF Securities
30
$1.3 trillion $647 billion $538 billion $115 billion $78 billion $77 billion $59 billion $53 billion $41 billion $40 billion $35 billion $34 billion $31 billion $30 billion $30 billion $26 billion $25 billion $25 billion $21 billion $19 billion
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 30
10/02/2017 6:58:40 AM
TOP 10 ETFs IN CANADA 1. iShares S&P/TSX 60 Index ETF (XIU) Year-over-year AUM growth: 9.9% 2016 performance: 21.1% 2. iShares Core S&P 500 Index C$-Hedged ETF (XSP) Year-over-year AUM growth: 23.0% 2016 performance: 11.1% 3. BMO S&P 500 Index ETF (ZSP) Year-over-year AUM growth: 19.1% 2016 performance: 8.2%
CANADIAN ETF INFLOWS BY PROVIDER, 2016 BMO $7.9 billion Vanguard $2.6 billion BlackRock iShares $1.9 billion Horizons $1.3 billion Invesco PowerShares $512 million
4. iShares Core S&P/TSX Capped Composite Index ETF (XIC) Year-over-year AUM growth: 38.5% 2016 performance: 21.0%
First Asset
5. iShares Canadian Short Term Bond Index ETF (XSB) Year-over-year AUM growth: 5.8% 2016 performance: 0.8%
Purpose
6. BMO Aggregate Bond Index ETF (ZAG) Year-over-year AUM growth: 138.7% 2016 performance: 1.5%
First Trust
7. iShares Canadian Universe Bond Index ETF (XBB) Year-over-year AUM growth: 8.4% 2016 performance: 1.4% 8. iShares 1-5 Yr Laddered Corporate Bond Fund (CBO) Year-over-year AUM growth: -9.5% 2016 performance: 1.6% 9. BMO S&P/TSX Capped Composite Index ETF (ZCN) Year-over-year AUM growth: 61.8% 2016 performance: 20.9% 10. iShares Canadian Corporate Bond Index ETF (XCB) Year-over-year AUM growth: 11.9% 2016 performance: 3.3%
$507 million RBC GAM $666 million $388 million Harvest $180 million $147 million Mackenzie $113 million WisdomTree $89 million TDAM $30 million Lysander $25 million Sphere Investment $23 million Questrade $18 million Hamilton Capital $14 million Auspice $10 million
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 31
31
10/02/2017 6:58:50 AM
FEATURES
COVER STORY: ETFs SMART-BETA/ACTIVE ETFS While certain providers might find it difficult to gain a foothold in what is now a crowded marketplace, Mackenzie Investments is putting its faith in its new smart-beta suite. Smart-beta ETFs weigh their holdings according to complex formulas, including volatility, valuation and myriad other factors. Mackenzie joined the ETF space last year with four active fixed-income products and quickly followed with five smart-beta equity ETFs. That lineup has since expanded to add a new smart-beta emerging market equities ETF. “When we decided how we were going to enter the marketplace, we were very surgical,” says Anthony Chouinard, VP of ETF distribution at Mackenzie. “We wanted to make sure we had something that was different, innovative, and was needed by advisors and investors in today’s environment. That was why we went smart-beta and active ETFs.” Mackenzie’s smart-beta equity suite replicates the underlying indexes provided by TOBAM’s Maximum Diversification Index Series. TOBAM, an independent asset manager, uses its own methodology to select and weigh individual stocks to reduce correlations between holdings, making it a
natural partner for Mackenzie. “If you think about the equity side, it is about enhancing diversification and using the patented TOBAM methodology, which is not available anywhere else for retail investors,” Chouinard says. “Mathematically, this methodology will give the most diversified portfolios in different regions of the marketplace. At this stage of the market cycle, in the later stages of the recovery and with geopolitical and macro risks in the market, it makes a lot of sense to utilize the most diverse portfolio.” Last year saw government bond yields hit record lows during the summer, then bounce back after Donald Trump’s election fuelled a huge sell-off. Such volatility made Mackenzie’s decision to actively manage its fixed-income ETFs a wise one. “If you think of a typical passive structure for fixed-income ETFs, the biggest issues become your biggest positions,” Chouinard says. “For an aggregate bond ETF in Canada, you have a lot longer duration exposure than you might want because of the issuance of debt over the last few years. Basically, it exposes you to higher interest-rate risk and therefore capital loss in an environment when rates have gone up.” After almost a decade of ultra-low rates,
“One could argue we are at the end of a 35-year bull market in fixed income, so having an active manager is of huge value” Anthony Chouinard, Mackenzie Investments noises from the Fed seem to suggest that further rate hikes could be on the way after December’s increase, so active funds will have plenty of opportunities to gain solid returns. “Our portfolio managers were able to have
32
lower duration exposure and position themselves with bonds that are less sensitive to interest rate increases, so we have been able to outperform our passive benchmarks,” Chouinard says. “Being active has had huge value for investors.” Most recently, the firm introduced its Mackenzie Maximum Diversification Emerging Markets Index ETF (MEE) at the end of January – an indication that after a strong debut year, Mackenzie has every intention of carrying its momentum forward. “There are a lot of opportunities in these markets,” Chouinard says. “Most passive benchmarks in emerging markets, they tend to overexpose you to very large companies. A smart-beta strategy will provide the potential for added risk-adjusted returns.” Mackenzie is keen to redefine what ETFs can offer investors. While the industry has come a long way since the financial crisis, some misconceptions about these products still remain. “Traditionally, what investors and advisors associated with ETFs was low-cost market exposure,” he says. “The evolution of smart beta means ETFs can have exposure to specific factors or multiple factors. Active and smart beta is growing fast, although passive, market-cap and inexpensive is still the lion’s share of ETF assets.” Mackenzie has put its faith in the smaller end of the market, albeit the side with the most growth potential. As ETFs evolve, providers at the forefront of smart beta and active innovation will likely be the ones that thrive. “More education is needed among advisors and investors to understand what a smart-beta ETF is and why you use one in your portfolio,” Chouinard says. “Also, why would you choose active ETFs? One could argue we are at the end of a 35-year bull market in fixed income, so having an active manager is of huge value for an investment professional today.”
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 32
10/02/2017 6:59:02 AM
MACKENZIE ETFs Ticker
Name
Management Category fee
MKB
Mackenzie Core Plus Canadian Fixed Income ETF
0.55%
Canadian fixed income
MGB
Mackenzie Core Plus Global Fixed Income ETF
0.60%
Global fixed income
MFT
Mackenzie Floating Rate Income ETF
0.65%
Global fixed income
MUB
Mackenzie Unconstrained Bond ETF
0.55%
Alternative strategies
MKC
Mackenzie Maximum Diversification Canada Index ETF
0.60%
Canadian equity
MUS
Mackenzie Maximum Diversification US Index ETF
0.60%
US equity
MEU
Mackenzie Maximum Diversification Developed Europe Index ETF
0.60%
European equity
MWD
Mackenzie Maximum Diversification All World Developed Index ETF
0.60%
Global equity
MXU
Mackenzie Maximum Diversification All World Developed ex North America Index ETF
0.60%
Global equity
MEE
Mackenzie Maximum Diversification Emerging Markets Index ETF
0.60%
Emerging markets
Commissions, management fees, brokerage fees and expenses all may be associated with Exchange Traded Fund investments. Please read the prospectus before investing. Exchange Traded Funds are not guaranteed, their values change frequently and past performance may not be repeated. TOBAM Maximum Diversification Index Series, TOBAM S.A.S. All rights reserved. “TOBAM” and “Diversification Ratio” are registered trademarks and service marks of TOBAM S.A.S. or its affiliates (“TOBAM”) and is used under license for certain purposes by Mackenzie Financial Corporation. Reproduction of the TOBAM data and information in any form is prohibited except with the prior written permission of TOBAM S.A.S. Mackenzie ETFs or Mutual Funds are not sponsored, endorsed, sold or promoted by TOBAM and TOBAM makes no representation regarding the advisability of investing in such fund. TOBAM does not guarantee the accuracy or completeness of any data and information and is not responsible for any error or omission or for the results obtained from the use of such data and information. TOBAM give no express or implied warranty, including any warranty of merchantibility or fitness for a particular purpose. Solactive AG is the third-party calculation agent of the TOBAM Maximum Diversification Index Series and received compensation in that capacity. Solactive AG does not sponsor, endorse, sell, or promote any investment vehicle that is offered by any third party that seeks to provide an investment return based on the performance of any index. It is not possible to invest directly in an index. The Maximum Diversification® (Ratio) and the “Anti-Benchmark Strategy” are registered patents in US, Australia and Japan.
MACKENZIE’S LATEST SMART-BETA ETF MACKENZIE MAXIMUM DIVERSIFICATION EMERGING MARKETS INDEX ETF (MEE) WHY INVEST IN THIS FUND?
MEE seeks to increase diversification to reduce biases and enhance risk-adjusted returns Enhances diversification in emerging markets, which are dominated by the financial and information technology sectors Offers TOBAM’s proven, award-winning diversification methodology to all Canadian retail investors
ETF FACTS
Inception date
January 23, 2017
Eligible for registered plans
Yes
CUSIP
55453Q108
Exchange
Toronto Stock Exchange
Rebalance frequency
Quarterly
Distribution frequency
Quarterly
Investment programs
DRIP
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 33
33
10/02/2017 6:59:11 AM
FEATURES
COVER STORY: ETFs AN ETF TRAILBLAZER While Canada is now fully on board with ETFs, the nation that invented the exchange-traded fund was slow to embrace the product at first. The financial crisis changed all that, but there were individuals who realized the vast potential of ETFs long before Lehman Brothers bit the dust. Som Seif is currently the CEO of Purpose Investments, but those within investment circles probably know him best as the founder of Claymore Investments. Seif was an early believer in the merit of ETFs and built Claymore’s business on that foundation. “Our first ETF, CR2, was based on seminal research by Rob Arnott, the chairman of Research Affiliates,” Seif says. ”He had written a journal article about non-market-cap-weighted indexing in 2004, and I was fascinated by the concept. I partnered with Rob, and we brought in the fundamental index ETF – the very first public product using this strategy in the world.” Today that strategy is used by some of the globe’s largest financial institutions, accounting for hundreds of billions of dollars in assets. While many associate the growth of ETFs with the fallout from the Great Recession, in Seif ’s view, the wheels were already in motion. “Regardless of the financial crisis, there was a trend happening,” he says. “The crisis did create an awareness and took people’s complacency off the table, so it accelerated this trend toward lower-cost investment management. We are now seeing regulatory shifts that are also driving increased awareness and transparency. It’s a trend that will continue for some time globally.” Another significant shift in the industry has seen ETFs become much more of a retail product, popular with small-scale retail investors and huge institutional
34
bodies alike. This was something Seif foresaw with Claymore, which was crucial to that firm’s success. “Really an ETF is just a mutual fund that trades on an exchange,” he says. “What it has done is break down some barriers of access. In the past, if you were an individual investor and wanted to go get the lowest-cost mutual fund, you couldn’t do it because there were distribution forces blocking that. ETFs have circumvented that.”
more. His faith in ETFs was well placed, and ultimately led to BlackRock’s acquisition of Claymore in 2012. “If you think about the first generation of ETFs and indexing being benchmarks, the S&P 500, the S&P Composite, what I did with Claymore was going one step further,” Seif says. “I wanted to build investment products that had the best elements of indexing – transparency and low fees – but with risk management:
“The financial crisis created an awareness and took people’s complacency off the table, so it accelerated this trend toward lower-cost investment management” Som Seif, Purpose Investments In building Claymore into a provider with $8 billion in assets under management, Seif saw an industry that was growing, but had potential for so much
reducing the risk of drawdowns, meeting outcomes and finding the solutions to what investors want rather than just riding the waves of the market.”
ETF INDUSTRY GROWTH, 2000–2016 $120 billion $100 billion $80 billion $60 billion $40 billion
Portfolios Commodities Emerging International US equities Canadian equities Bonds + prefs Cash
$20 billion $0 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: CETFA
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 34
10/02/2017 6:59:21 AM
SELLING ETFS While BMO currently ranks second among Canadian ETF providers in terms of assets under management, its performance since it entered the space in 2009 points to a company that has ambitions to lead the pack. BMO ETFs far exceeded its competitors in terms of inflows in 2016 – the sixth consecutive year the firm has achieved that feat. With $8 billion in inflows throughout the year, representing 48% of the industry’s total, BMO has now cornered 30% of the Canadian ETF market. It also had seven of the 10 top-selling ETFs in Canada last year, which is pretty impressive considering that competition has never been tougher. Tasked with selling these products in Quebec and Atlantic Canada is Alain Desbiens, vice-president of sales for BMO ETFs. Having previously worked in mutual funds and hedge funds with Fiera Capital and Talvest, Desbiens understands the merits of ETFs and why they are proving so popular with BMO’s clients. “Transparency is key,” he says. “I speak to a lot of portfolio managers and investment advisors across the country, and outside of the fact that exchange-traded funds have low fees, they like the fact that the vast majority of the industry is transparent.” Although the number of ETF providers has grown markedly over the past 12 months, the industry’s top dogs remain dominant, as Desbiens outlines. “I have compared the data for 2015 and 2016, and the top four ETF providers in terms of sales – iShares, BMO, Vanguard and Horizons – captured 87% of the sales and 91% of the assets in Canada,” he says. “That did not change, even as the number of providers increased from 12 to 18 between 2015 and 2016.”
In Desbiens’ view, simply looking at where investors are putting their money is a good way to spot trends in the market. In that respect, it appears that while smart-beta and active funds are growing in popularity, indextracking ETFs still stand apart. “The top 10 for inflows is a good proxy to understand where the business is going,” he says. “ZAG is the most-bought ETF in Canada, and it replicates the FTSE TMX
Another trend that really started to gather pace last year is the increased use of fixed-income ETFs. BMO’s Aggregate Bond Index had inflows far above any other ETF in Canada in 2016, driven by investors searching for fixed-income yields away from a traditional bond exposure. “Last year we began to see more smartbeta ETFs,” Desbiens says. “In terms of trends for this year, we will see more smart-
“We see tremendous growth with fixed income. We saw an acceleration of sales there in 2016 both in retail and institutional, and that will carry into this year” Alain Desbiens, BMO ETFs index. ZDY is one of our smart-beta ETFs; Vanguard’s ZLB also is smart-beta. ZCN is our TSX index replication; ZCS, ZFS, XSP and ZMP are all index, too. Horizons’ HPR is active, and that is managed by Fiera Capital. So we have seven ETFs in the top 10 that are index-based, two smart-beta and one active.”
beta ETFs that generate income, like a cover call or a dividend ETF. On the index side, we see tremendous growth opportunity with fixed income. We saw an acceleration of sales there in 2016 both in retail and institutional, and that will carry into this year.”
TOP 10 CANADIAN ETFs BY 2016 INFLOWS BMO Aggregate Bond Index ETF (ZAG) BMO US Dividend ETF (ZDY) Vanguard Canadian Aggregate Bond Index ETF (VAB) BMO Low Volatility Canadian Equity ETF (ZLB) BMO S&P/TSX Capped Composite Index ETF (ZCN) BMO Short Corporate Bond Index ETF (ZCS) BMO Short Federal Bond Index ETF (ZFS) iShares Core S&P 500 Index ETF CAD-H (XSP) BMO Mid Provincial Bond Index ETF (ZMP) Horizons Active Preferred Share ETF (HPR)
$1.29 billion $835 million $625 million $563 million $445 million $406 million $390 million $376 million $368 million $362 million
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 35
35
10/02/2017 6:59:31 AM
FEATURES
COVER STORY: ETFs THE DEMOCRATIZATION OF ETF INVESTING Unlike most of its Canadian ETF competitors, Horizons is an ETF company first and foremost. Without other distractions, it has been able to compete with huge global institutions like BlackRock and Vanguard, and it’s presently the fourth-largest ETF provider in Canada. Even more impressive has been its pioneering of – and commitment to – actively managed ETFs, which are becoming more prevalent throughout the industry. Horizons leads the way in Canada for truly active ETFs with more than $3 billion in assets. Its latest addition to this suite is the Horizons Absolute Return Global Currency ETF (HARC). HARC offers low-cost access to a widely used institutional currency strategy subadvised by CIBC Asset Management. HARC allows for both long and short positions in a basket of global currencies, based on the subadvisor’s discretion. Steven Hawkins, president and co-CEO of Horizons ETFs Management (Canada), says the launch of HARC is a real point of pride for the company. “It’s a product we have been working on for a while,” he says. “We launched a ‘lite’ version of this in Q3 last year – the Horizons Global Currency Opportunities
ETF (HGC). That is a long-only, global currency product that offers a lower risk profile and the prospect of steady but more modest returns. Now we are broadening our active currency lineup with HARC, which has a long/short ability and is allowed to have notional leverage in its portfolio. It is much more like a traditional currency hedgefund strategy, which historically has not been available to Canadian retail investors.” Even though currency is the largest asset class in the world, significant expertise is needed to actively manage these products, which is why Horizons has selected CIBC Asset Management as the funds’ subadvisor. CIBC Asset Management has one of the largest currency investment teams in North America, so investors in HGC and HARC can be confident that the firm always has its finger on the pulse of the global currency environment. “Both HARC and HGC each have an investment universe of approximately 30 different currencies from around the world,” Hawkins says. “The subadvisor to these ETFs runs more than $30 billion in active currency products for their clients. CIBC Asset Management has a team of investment professionals that are looking at all the fundamentals, both on a macro and micro
basis, on all currencies. They have different risk profiles and overlay strategies on these currencies, and make their portfolio investment decisions swiftly and with conviction.” The mere fact that products like HARC are now showing up in the portfolios of retail investors highlights how much the industry is changing. Since Horizons launched its first ETF in 2007, the company has developed a reputation for introducing innovative products that democratize exchange-traded funds. Although it’s a relatively new phenomenon for the everyday retail investor to use ETFs, it’s now clear that the genie is out of that particular bottle. “With these ETFs, we are providing access to what traditionally would have been institutional-only types of strategies,” Hawkins says. “They have never been sold in a retail form before and give all types of investors access to actively managed baskets of global currencies, both for long-only investors and those who want long and short exposure. Traditionally, only accredited and institutional investors would have had this access.” In that respect, the differences between mutual funds and ETFs are narrowing all the time. Some investors might still
“We are providing access to what traditionally would have been institutional-only types of strategies. They have never been sold in a retail form before and give all types of investors access to actively managed baskets of global currencies” Steven Hawkins, Horizons ETFs Management (Canada)
36
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 36
10/02/2017 6:59:40 AM
KEY FEATURES OF HORIZONS’ ABSOLUTE RETURN GLOBAL CURRENCY ETF (HARC)
The only long/short global currency ETF in Canada: HARC gives investors both long- and short-position access to the world’s largest securities market, paired with the expertise of a world-class currency management team. Direct exposure to currencies: In the past five years, currencies have contributed to approximately 30% of the annualized total return on an S&P 500 investment by a Canadian investor.*
Non-correlated returns: Currency returns tend to be driven by factors that are distinct from those of traditional asset classes.
A high level of expertise: With $32 billion in currency-related assets under management, HARC’s subadvisor, CIBC Asset Management, is one of the largest currency investment teams in North America.**
Absolute returns: HARC seeks to generate positive returns in all market conditions.
Leverage: HARC may be exposed to leverage. Under normal market conditions, the maximum amount of leverage used, expressed as a ratio of total underlying notional value of the securities and/or financial derivative positions, divided by the net assets, will generally not exceed 3:1.
*Source: Bloomberg, for the five-year period ending December 30, 2016 **Source: CIBC Asset Management, as of November 1, 2016
regard ETFs largely as passive products that provide exposure only to equities or fixed-income asset classes. That’s definitely no longer the case, and HARC is just the latest example of the innovation that’s coming to the actively managed ETF space. “Actively managed ETFs are no different than an active mutual fund where the manager is looking at the underlying holdings every day, running it through their investment models and risk controls, and then allocating to the portfolio,” Hawkins says. “These are not static methodologies in any way, and there is no closet or factor-tilted beta applicable. These types of strategies allow for active calls to take advantage of market inefficiencies, particularly in asset classes like fixed income, where market depth and liquidity can be an issue. This can result in a noticeable outperformance over time, and more importantly, reduce risk during
periods of market impairment.” Horizons’ commitment to actively managed ETFs is longstanding – in 2009 it became the first Canadian provider to launch a family of actively managed products. Its approximately $3.3 billion AUM in these products makes up roughly 50% of its total ETF assets in Canada. Horizons’ success in this area has not gone unnoticed – more providers have begun to enter the space, and Hawkins expects a significant number of new active products this year. “Last year almost $16.5 billion came into ETFs in Canada,” he says. “We estimate that active ETFs were somewhere between 12% to 15% of that total. In the past six months we have seen five new providers launch active ETFs, and several newcomers continue to come in – Dynamic being the latest, and Redwood recently announced they are launching too.”
ETFs have received so much attention lately that it’s easy to forget that this is still a budding industry. Growth has been constant over the past decade, and 2016 set a record pace. Naysayers decree that this will level out eventually, but in Hawkins’ opinion, a downturn in the ETF space won’t occur anytime soon. “At the end of 2014, we had nine ETF providers,” he says. “In 2015 it was 12, and in 2016 it rose to 18. We know this trend will only continue. There will be some consolidation here and there, but people are entering this arena quickly because it is a growth space. Mutual funds are becoming very static, have lost their sales momentum and are losing overall market share. You don’t see many, if any, new mutual fund companies popping up. ETFs are in a growth phase, and we believe that is only going to continue.”
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 37
37
10/02/2017 6:59:53 AM
FEATURES
COVER STORY: ETFs THE MARKET LEADER BlackRock iShares is the undisputed leader in the ETF space, both in Canada and worldwide. Its global AUM exceeds $1.3 trillion, representing 36% of total market share. Its dominant position in this country is no less pronounced – it accounts for seven of the top 10 ETFs, representing $53 billion. It’s an enviable position to be in, but not without its own challenges. It’s one thing to get to the top, but it’s another thing to stay there, especially when competition among ETF providers has never been hotter. Pat Chiefalo, head of product for iShares in Canada, explains how the world’s largest asset manager keeps its finger on the pulse. “In the last few years, the feedback we got from investors was they wanted to see ETFs do more,” he says. “They want the building blocks, but they also want to access more varied exposures with ETFs. Smart beta was the second evolution, and now we are starting to get more stylized, strategic exposures, whether that’s a minimum-volatility tilt or a dividend-yield tilt.” The iShares S&P/TSX 60 Index Fund (XIU) is Canada’s largest ETF by AUM, claiming more than $12 billion in assets. The index is composed of 60 of the largest securities (by market capitalization) listed on the TSX, selected by Standard &
“Investors want to access more varied exposures with ETFs. Smart beta was the second evolution, and now we are starting to get more stylized, strategic exposures” Pat Chiefalo, iShares Canada Poor’s. BlackRock has built its ETF business primarily through index-tracking funds like XIU, but that doesn’t mean it’s ignoring the shift toward smart-beta and active funds. “We are looking at stocks to provide better downside protection for investors and with minimum volatility,” Chiefalo says. “We are coupling various other factors and marrying stocks with good value or good momentum, and then packaging that as an exposure. That really has been the smart-beta evolution, and we are seeing a pickup of that everywhere in the world.” Choice is the name of the game in the ETF business in 2017, which is why BlackRock has just teamed up with Dynamic Funds to launch a new product suite. The five Dynamic iShares Active ETFs began trading on the TSX on January 25; the lineup includes fixed-income, preferred shares and dividend offerings. The partnership with Dynamic was somewhat of a no-brainer, Chiefalo says, given the current expectations of investors.
“As we see an evolution of the retail market in Canada,” he says, “and advisors are seeking more scale in their business, the one question they have is, ‘Why can’t we have more active exposure with ETFs?’ Traditionally that was the realm of mutual funds, but now in our product suite, we have a more active model.” The changes currently happening in the ETF industry are making these products more attractive to a growing number of retail investors, but also to institutional ones, where the numbers involved are mammoth. “The propensity for retail investors to use ETFs is growing,” Chiefalo says. “With the regulatory reform coming with CRM2 and the OSC looking at banning trailer fees, that lends itself to ETF investments. In the institutional space, as these products have much larger scale and greater liquidity, and from a cost perspective, they become extremely competitive to what some institutions traditionally use, like swaps or futures.”
(DWG) began trading on the NEO in March of last year and will be joined by two more Invesco offerings in the near future. BlackRock has also shown its faith in the new exchange, making headlines last year when it decided to migrate five of its iShares ETFs away from
the TSX to the NEO. It was quite the coup for Aequitas, and now that Redmond Asset Management has committed to four new ETFs later this year, the exchange is really starting to take shape. “Invesco, BlackRock and Redwood have
TRADING ETFS The Aequitas NEO Exchange was launched in 2015 as ETFs were really starting to gather momentum, so it wasn’t too surprising that the first listing on the new exchange was an ETF. The PowerShares DWA Global Momentum Index ETF
38
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 38
10/02/2017 7:00:01 AM
played a key role in being the trailblazers for this exchange,” confirms Jos Schmitt, CEO of the NEO Exchange. With decades of experience in financial services, both in North America and internationally, Schmitt has observed the growth of the ETF market closely. In his view, because mutual funds aren’t offering the returns they once did, it was inevitable that investors would seek alternatives. “There are a number of factors at play with the growth of ETFs,” he says. “A lot of people bring it back to the cost. I also think it has a lot do with the way the markets have evolved over the last 10 years. Despite some hiccups, it has been a very positive market, so it’s difficult for actively managed funds to beat more
“Despite some hiccups, it has been a very positive market over the last 10 years, so it’s difficult for actively managed funds to beat more passive funds like ETFs” Jos Schmitt, NEO Exchange passive funds like ETFs.” Of course, ETFs are no longer simply a passive product, and Schmitt believes the trend toward more factor-based and active ETFs will only intensify in the years ahead. “I think active management will re-emerge,” he says. “When you look at more recent data around stocks in some of the big
benchmarks, you start to see a correlation between those stocks declining. That’s usually a sign that stock-picking and active management are going to become more interesting again. ETFs will continue to see growth on the passive side, but you will also see more and more smart-beta, rules-based ETFs.”
IS THE PRICE RIGHT? Perhaps the number-one characteristic investors associate with ETFs is their low cost. Fees are very much in the spotlight in Canada as regulators contemplate a ban on commissions, and advisors’ shift toward a fee-based business model means ETFs will play an increasingly important role in many portfolios. Vanguard is the third largest ETF provider in Canada, having launched its first six products on the TSX in December 2011. From the very beginning, providing investors and advisors with low-cost, highquality ETFs was a priority, says Jason McIntyre, head of distribution for Vanguard Investments Canada. “We launched a Canadian equity product, an aggregate bond product, a short-term bond solution, as well as an emerging market, a global and a US ETF,” he says. “Those are building block ETFs
– market-cap-weighted and approximately about a third of the cost of other ETFs in the marketplace, so it was quite the entry.” In 2011, BlackRock and Claymore ruled the roost as far as ETFs in Canada went, so when Vanguard announced its intention to launch six passive products (two fixed-income and four equity), it raised some eyebrows among the incumbents. However, there was a key difference with the Vanguard lineup. “Some of the other providers were asking why Vanguard would come to Canada and replicate what was already there, instead of trying to innovate,” he says. “Our response was, when you consider the cost and quality of our ETFs, it is fairly innovative. It grabbed a lot of attention and allowed us to launch our business.” The firm’s commitment to lower fees has only intensified – since 2012, asset-weighted MERs for Vanguard ETFs have declined by
almost half, from 0.27% to 0.15%. It’s a policy that’s at the core of Vanguard’s global business, McIntyre says. “The fact that we came into Canada with lower fees was not a marketing ploy or an asset grab – it is inherent in our business,” he says. “When we earn profits on the nearly US$4 trillion in assets we manage globally, at the end of the year, we look to pay off business expenses and return the excess to the unitholders in the form of lower fees.” While low fees are a constant for the firm, Vanguard has seen plenty of changes since 2011 – its product range, for one, which now numbers 33 ETFs. Like its competitors, this meant branching out into the actively managed space. “Before we only had the aggregate bond ETF; now we have building blocks within the aggregate bond portfolio,” McIntyre says. “We have also launched factor funds
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 39
39
10/02/2017 7:00:10 AM
FEATURES
COVER STORY: ETFs
– our foray into active ETFs. That is not reacting to trends in the marketplace – Vanguard has over $1 trillion in actively managed funds globally – but is part of the evolution of our business.” Last year was a tumultuous period for the bond markets, but volatility presents opportunity, particularly for those long starved of decent bond yields. Vanguard launched four new fixed-income ETFs on February 7, which is a reflection on how well its bond products have done in recent years. Close to 35% of Vanguard Canada’s ETF assets are in fixed income, while about 40% of flows went there last year. Regardless of where the yield curve may be, McIntyre believes investors will always need fixed-income exposure. “Investors that traditionally would have looked at bond markets are seeing that liquidity is tough and inventories are low, while fixed-income ETFs have very reasonable prices today,” he says. “In launching the four fixed-income ETFs, we know there will be consistent flows, and we truly believe that investors need balanced portfolios that have fixed-income products.” Vanguard’s move into active ETFs, or factor ETFs, is another area where it hopes to distinguish itself from its peers.
Launched last year, VVO, VVL, VLQ and VMO offer investors a chance to navigate the vagaries of the market through active management. “One of the challenges in the industry is education,” McIntyre says. “All the new fund companies and the proliferation of products means the market can be very confusing. Our factor ETFs don’t track an index, so they are
commit to just one product; rather, a mix provides the best growth opportunities, but with safeguards built in should a market correction occur. Increasingly, the ETF market is the best place to find this balance. “We don’t like to suggest to people that now is a good time to buy active or fixed income,” McIntyre says. “If you look at
“The fact that we came into Canada with lower fees was not a marketing ploy or an asset grab – it is inherent in our business” Jason McIntyre, Vanguard Investments Canada not smart beta – it is true active investing. Our four factor ETFs – a minimum-volatility factor, a value factor, a momentum factor and a liquidity factor – in each case, the active management would be highlighting those factors, looking at the different variables within those factors, then managing the portfolio through that.” In adding new options, Vanguard is emphasizing that balance is key. It would be foolish to
Vanguard’s business globally, it still breaks down just like a traditional 60-40 balanced fund. It’s why we have been as successful as we have, for as long as we have. We try to avoid making strong, specific market calls and instead focus on building core, balanced portfolios that have components of equities, fixed income, passive and active – and at a low cost. That’s what is important to us.”
VANGUARD’S FACTOR ETFS
40
Ticker
Name
Investment universe
Management fee
Inception date
Exchange
Currency
VVO
Global Minimum Volatility ETF
FTSE Global All Cap Index
0.35%
June 14, 2016
TSX
CAD
VVL
Global Value Factor ETF
FTSE Developed All Cap Index, Russell 3000 Index
0.35%
June 14, 2016
TSX
CAD
VMO
Global Momentum Factor ETF
FTSE Developed All Cap Index, Russell 3000 Index
0.35%
June 14, 2016
TSX
CAD
VLQ
Global Liquidity Factor ETF
FTSE Developed All Cap Index, Russell 3000 Index
0.35%
June 14, 2016
TSX
CAD
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 40
10/02/2017 7:00:22 AM
Overall Morningstar rating
HHHHH
PowerShares Canadian Dividend Index ETF
Performance and Morningstar ratings are as at January 31, 2017. 1-year 3-year 5-year Since inception†
23.44%
8.83%
11.37%
HHHH
HHHHH
Canadian Dividend & Income Equity category: out of 395 funds
9.71%
out of 290 funds
High conviction means we go beyond traditional indices. Think beyond average. Visit invesco.ca. Commissions, management fees and expenses may all be associated with investments in exchange-traded funds (ETFs). Unless otherwise indicated, rates of return for periods greater than one year are historical annual compound total returns, including changes in unit value and reinvestment of all distributions, and do not take into account any brokerage commissions or income taxes payable by any unitholder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at powershares.ca. The Morningstar Rating™ for funds, or “star rating,” is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. ETFs and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Nasdaq®, OMX®, and Nasdaq OMX® are registered trademarks of The Nasdaq OMX Group, Inc. (“Nasdaq OMX”) and LadderRite® is a registered trademark of LadderRite Portfolios LLC (“LadderRite”). Nasdaq®, OMX®, Nasdaq OMX® and LadderRite® are collectively the “Marks”. The Marks are used under licence to PowerShares Capital Management LLC and Invesco Canada Ltd. The product(s) have not been passed on by Nasdaq OMX or LadderRite as to their legality or suitability. The product(s) are not issued, endorsed, sold, or promoted by Nasdaq OMX or LadderRite, and NASDAQ OMX AND LADDERRITE MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). There are risks involved with investing in ETFs. Please read the prospectus for a complete description of risks relevant to the ETF. Ordinary brokerage commissions apply to purchases and sales of ETF units. Most PowerShares ETFs seek to replicate, before fees and expenses, the performance of the applicable index, and are not actively managed. This means that the sub-advisor will not attempt to take defensive positions in declining markets and the ETF will continue to provide exposure to each of the securities in the index regardless of whether the financial condition of one or more issuers of securities in the index deteriorates. In contrast, if a PowerShares ETF is actively managed, then the sub-advisor has discretion to adjust that PowerShares ETF’s holdings in accordance with the ETF’s investment objectives and strategies. † Inception date is June 8, 2011. Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence. PowerShares® and all associated trademarks are trademarks of Invesco 41 www.wealthprofessional.ca PowerShares Capital Management LLC (Invesco PowerShares), used under licence. © Invesco Canada Ltd., 2017
22-41_Cover story-SUBBED4.indd 41
10/02/2017 7:00:31 AM
PEOPLE
PORTFOLIO MANAGER
A valueoriented approach Empire Life Investments CIO Ian Hardacre outlines his investment strategy and extols the benefits of having a contrarian mindset
THE PAST year was one of great upheaval for Ian Hardacre. His time with Invesco Canada (formerly Trimark) came to an end last February after 19 years, but by May, he was already back in the saddle as a senior portfolio manager for Canadian equities at Empire Life Investments. His 2016 was bookended by a promotion – Empire Life selected him as its new chief investment officer in December. In doing so, the board chose a portfolio manager with decades of investment experience and a strong belief in what he does. Canadian equities had a record year in 2016, but chasing the markets isn’t part of Hardacre’s strategy. “We are value-oriented investors – we don’t change our strategy depending on the market,” he says. “We focus on a longer timeframe, three to five years usually. What I like to do is buy high-quality companies when they are out of favour.” These companies aren’t exactly easy to come by; otherwise, every investor would take this approach. It’s a strategy that requires patience, which is a virtue not often found in the investment industry. But for Hardacre, patience is a basic tenet of an
42
investment strategy that has served him well for decades. “You need to be contrarian and think outside the box,” he says. “You need to take a long-term timeframe and not worry about what is happening this quarter or the next. If a company misses earnings and the stock goes down based on that, we will take advantage. I like to call it ‘time arbitrage.’” The most important part of this process is finding companies that have flown under the radar, but have great potential to take off. Discovering such firms may be akin to locating the proverbial needle in a haystack, but the rewards can be huge. “For a margin of safety and to avoid a permanent loss of capital, we do that by staying away from companies that have too much debt or are over-leveraged,” Hardacre says. “We also avoid unethical or dishonest management teams.” While accessing the financials of publicly listed companies is easy enough, Hardacre’s approach involves examining more abstract factors as well. If a company’s earnings results don’t tell the full story, then he embarks upon a closer investigation before
committing to an investment. “You make sure to meet with the CEOs and senior management of any Canadian company you plan to invest in,” he says. “The track record of the management team and the overall culture of the company is key. If you look at companies that have had large price declines after large run-ups, you will probably see that the culture of the company is somewhat flawed. Compensation almost always dictates the performance of the management team, so you also have to look at how that is structured.” It’s an investment strategy he has developed over many years, first at the Ontario Teachers’ Pension Plan, then with Trimark and now Empire Life Investments. Such tenure gives Hardacre perspective, especially when it comes to outside forces and the impact they can have on an investor’s portfolio. The past year saw large market swings facilitated first by Brexit and then by the surprise election victory of Donald Trump. For a value-oriented investor like Hardacre, the uncertainty such events create is often a positive. “Volatility in the markets is good for us –
www.wealthprofessional.ca
42-43_Ad-led Empire Life-SUBBED.indd 42
10/02/2017 7:01:45 AM
WHO IS IAN HARDACRE? Promotion: Was named Empire Life Investments’ chief investment officer in December 2016, seven months after joining the company as a senior portfolio manager Role: Leads the investment team for Empire Life’s segregated funds and mutual funds, as well as managing the firm’s US and Canadian equity and dividend growth investment portfolios Industry pedigree: Prior to joining Empire Life, was head of Canadian equities at Invesco Canada (Trimark), where he managed more than $2 billion in assets; prior to that, he worked for the Ontario Teacher’s Pension Plan, Scotiabank and Hong Kong Bank of Canada
it creates buying opportunities,” he says. “Our model is to do our homework on companies we want to own, pick a buy price that we feel is a discount to what the company is worth, and then macro events like Brexit provide opportunities to buy those stocks.”
on developments across the Atlantic. Closer to home, the ramifications of Donald Trump’s victory are being felt far and wide. The stock markets have rallied strongly since November, while bond values sank on expectation of inflationary pressure.
“You need to take a long-term timeframe and not worry about what is happening this quarter or the next. If a company misses earnings and the stock goes down based on that, we will take advantage. I like to call it ‘time arbitrage’” Ian Hardacre, Empire Life Investments In the case of the UK referendum, the markets reacted violently immediately after the results of the vote were announced, but stabilized soon after. Negotiations are ongoing over the terms of Britain’s exit from the EU, and the future is still very much unknown, but value investors will be keeping a close eye
For the team at Empire Life Investments, the uncertainty generated by Trump’s presidency means taking a closer look to find some hidden gems. “The unfortunate thing about Brexit for us was that it really only lasted two days,” Hardacre says. ”We were buying in the UK and
Education: An honours bachelor of commerce and MBA from McMaster University; he also holds the Certified Financial Analyst designation Strategy: “My investment strategy is exactly the same at Empire Life Investments as it was at Trimark – high-quality companies that are out of favour. Really, that’s how you make money over time, going against the crowd” Europe right after the election. I think we will have a lot of volatility this year due to some of the policies coming out of Washington.” Domestically, he expects growth trends to continue in the same vein as last year, with Canada’s main drivers in 2017 coming from the traditionally dominant industries. “When it comes to Canada, it is really driven by three sectors,” Hardacre says. “Energy should continue to do well this year. The banks and the insurance companies I see doing well too. Materials is a bit harder to analyze and predict. When it comes to the US market, we have had a large run-up since the election. We would be a little more cautious on the US market in terms of valuations, but that doesn’t mean there aren’t good opportunities on a one-off stock basis.”
www.wealthprofessional.ca
42-43_Ad-led Empire Life-SUBBED.indd 43
43
10/02/2017 7:01:56 AM
PEOPLE
ADVISOR PROFILE
Growth mindset Richardson GMP advisor Simon Partington shares how his investment strategy has helped him build a successful new business
THE FACT that advisor Simon Partington increased his assets under management by an impressive $11 million last year, bringing his total AUM to $155 million, poses an obvious question: How? “A lot of our Canadian equity strategy still has a core of dividend stocks,” he says. “We will use different funds and other investments to go after growth, depending on the client. Our strategy was up over 20% last year – the banks did really well, premium brands too.” The results are even more laudable when you consider that 2016 was Partington’s first full year running his own business, Partington Wealth Management, under the umbrella of Richardson GMP. To achieve such returns, he has developed a strategy that limits risk for his clients, but not at the expense of achieving growth. “We use a customized solution based on a quantitative approach,” Partington says. “We look for dividend growers, higher than 2%. Our strategy is to invest in a 20-stock solution, but we limit our stocks in each sector – no more than five stocks out of the 20 in any one sector.” Another characteristic of his business is the fact that bonds make up only 20% to 25% of his portfolio, which reflects the current challenge of finding returns in that space. Yields hit record lows last summer, and the combination of Donald Trump’s election and an interest-rate hike from the Fed prompted a huge sell-off at the end of the year. Partington placed his faith in
44
certain funds he thought could navigate the volatility of the bond markets. “The core fixed-income funds we use have done well – Manulife Strategic Income had a 4.1% yearly return. PIMCO Monthly Income did 7.5%, and Canso Corporate Value Class did 8.1%,” he says. “We don’t buy government bonds; instead, we look to find value in bond managers who can produce returns when interest rates increase.” While other advisors have been gravitating toward ETFs for their fixed-income exposure, Partington has eschewed this approach. ETFs might have had a record year in 2016, but he believes recent history suggests there is risk attached to these products that should not be ignored. “We don’t use a lot of ETFs, especially for bonds,” he says. “ETFs are good at the moment, but in August 2015, there was a flash crash and liquidity seized up. If you are an average investor using ETFs, you need to be cautious. If investors decide to sell, then market values will drop drastically.” While Canadian equities make up the
bulk of Partington’s investment strategy, he’s also delving into alternatives with greater regularity. It’s a good example of an investment where he’ll accept some risk because the returns can be substantial. “Europe and a lot of international markets have become a little less of a go-to for investors here,” he says. “Canada and the US are doing well, and you don’t have to worry about FX in Canada, so people are staying close to home. We are more willing to take on some of that risk with the euro to try to generate some income.” In 2016 that meant real estate – the European Central Bank’s key rate has made investing in property pretty enticing, so Partington elected to put some money into the continent’s largest economy. “We had a fairly large weight in German real estate last year,” he says. “You can borrow at very low rates over there – the negative interest rates there mean some of these commercial properties have lending rates of 1.75%. The income these properties are generating is still 7% to 8%.”
CLIMBING THE LADDER It’s becoming less common to stay at one company for a long period of time, but Simon Partington has proved that staying the course brings plenty of rewards. In 2005, he got his start in the business as an assistant to an advisor with Richardson Partners Financial (now Richardson GMP). From there, he joined Lorna and Stuart McKay’s team at Richardson as an associate investment advisor in 2009. His success there meant he was ultimately able to buy their practice in 2015, thus creating Partington Wealth Management.
www.wealthprofessional.ca
44-45_Advisor Profile-SUBBED.indd 44
10/02/2017 7:02:45 AM
PARTINGTON’S FIXEDINCOME FUND PICKS The Bank of Canada recently maintained its 0.5% key rate, and rates remain ultra-low in Europe, but all signs point to the Fed continuing to increase rates moving forward. The spread between US 10-year treasuries and the German equivalent is 210 basis points, which is close to its widest level since before the Berlin Wall came down in 1989. In light of the very real challenges of finding returns with government bonds, Partington relies on the following funds for fixed-income yields:
Manulife Strategic Income Fund F Launched in November 2005, the fund seeks to provide income with an emphasis on capital preservation. It invests primarily in government and corporate debt securities from developed and emerging markets.
“We don’t buy government bonds; instead, we look to find value in bond managers who can produce returns when interest rates increase” Closer to home, Partington believes the US economy could be in for a boost, spurred by the new occupant of the Oval Office and his “America first” mantra. The outlook globally is less certain, which investors should bear in mind when they’re choosing which equities to buy in 2017. “I think the domestic US companies could
do well, but the multinational companies might have a bit of a challenge,” Partington says. “It depends on how aggressive Trump will be. A lot of his policies are very pro-business – reducing corporate taxes, potentially allowing companies to repatriate money back in the US tax-free so they can spend on infrastructure, facilities and jobs.”
Canso Corporate Value Class F Launched in August 2009, the fund seeks to achieve above-average income returns through a diversified portfolio composed primarily of debt and money-market securities.
PIMCO Monthly Income F Launched in January 2011, the fund aims to maximize current income consistent with preservation of capital and prudent investment management. It invests primarily in a diversified portfolio of non-Canadian-dollar fixed-income instruments of varying maturities.
www.wealthprofessional.ca
44-45_Advisor Profile-SUBBED.indd 45
45
10/02/2017 7:02:56 AM
FEATURES
SAVING
Saving and the generational divide Recent studies by Manulife and TD Bank show contrasting attitudes toward financial planning among baby boomers, gen x-ers and millennials
CANADA HAS a problem with saving. Last year, the nation reached an unwarranted milestone as personal debt exceeded GDP for the first time. Spurred by ultra-low interest rates, too many people are now living beyond their means and aren’t adequately preparing for the future. Canada is currently in the midst of a demographic shift that will decide the country’s economic future. baby boomers, gen x-ers and millennials represent
a diverse mix, but one thing unites them all – none are saving enough. A recent study on debt commissioned by Manulife confirmed as much, and indicated that a generational divide has emerged when it comes to people’s attitudes toward money. Rick Lunny, CEO of Manulife Bank of Canada, says that while the findings of the study weren’t exactly shocking, they did concern him.
“Interest rates have been so low for so long that you have a generation of homeowners who have never seen interest rates go higher. A significant proportion of them are not prepared for what inevitably will be rising interest rates” Rick Lunny, Manulife Bank of Canada 46
“The most surprising element that came out of this was the attitude of millennials – one-third of millennial homeowners thought that mortgage interest rates were too high,” he says. “Interest rates have been so low for so long that you have a generation of homeowners who have never seen interest rates go higher. A significant proportion of them are not prepared for what inevitably will be rising interest rates.”
www.wealthprofessional.ca
46-49_Generational Divide-SUBBED.indd 46
10/02/2017 10:58:09 PM
The Bank of Canada has resisted such a move so far, but the Fed finally raised its key rate in December. After years of quantitative easing, it now appears we are slowly entering a new interest rate environment. And if the Manulife survey is any indication, it will be a painful transition for many people. The data revealed that among Canadian homeowners, almost three in 10 spend more than 30% of their net income on mortgage
“Millennials want to make sure they are saving for the future and retirement, but how do you do that when you are also paying off student loans or saving for a down payment on a home?� Sophia Bera, Gen Y Planning www.wealthprofessional.ca
46-49_Generational Divide-SUBBED.indd 47
47
10/02/2017 10:54:24 PM
FEATURES
SAVING
payments. This means one out of every six respondents would experience financial difficulty if there were any increase to their mortgage payments. “Traditionally a mortgage should be about 30% of income; once you get past that level it becomes challenging,” Lunny says. “Also, you have to be prepared for unforeseen expenses. About half of the people in this survey have less than $1,000 in rainy day savings. If you have to get your car repaired or need a new furnace, often there is nowhere to go but relying on high-interest credit card debt.” Aside from Canadians’ somewhat blasé attitude toward keeping an emergency fund, the fact that so many are comfortable living on credit is another red flag. In this case, a preference for plastic appears to be a proclivity for younger Canadians. Among millennial respondents to the study, 31% felt it was “not a big deal” to carry a balance on their credit cards. By comparison, only 24% of gen x respondents and 21% of baby boomers felt the same way. “The older the generation, the longer the memory on higher interest rates, so they tend to be conservative,” Lunny says. “If you look at credit cards, the older you get, the less comfortable you are carrying credit card debt. They have the experience of seeing mortgage interest rates as high as 22% in the past.”
market has sheltered many people from the realization that they aren’t setting enough aside to sustain themselves in old age. “With baby boomers, 80% of their net wealth is in their house,” he says. “That could mean they live in Toronto or Vancouver and won the housing lottery, but it could also mean that Canadians generally haven’t done a great job saving. Many people do not have enough savings and are relying on the equity in their house to finance their retirement.” When it comes to the children of the ’60s and ’70s, this problem is even more pronounced. Only around one in three gen x respondents expressed confidence in their ability to maintain their lifestyle in retire-
“In some cases we even see people who are married and have children moving back with their parents. So there are three generations in the household” Tim Raposo, TD Wealth Problems with debt and savings aren’t the preserve of those born after 1980, however. In his position as CEO of Manulife Bank, Lunny sees plenty of examples of people nearing retirement with a nest egg that is nowhere near large enough. He believes the property
48
ment, compared to 41% for millennials and 45% for boomers. Not being able to save for retirement was the top source of stress for gen x respondents (41%). Rather than losing sleep over debt or savings, Lunny recommends seeing a professional, no matter your age.
“Canadians who are feeling overwhelmed by their debt could really benefit from professional advice – someone sitting down with them and looking at their expenses and seeing where they can save or reduce their debt,” he says.
Multi-generational living Manulife isn’t the only institution crunching the numbers to try to identify why Canadians are saving less and taking out more debt. A TD Wealth survey released in January revealed that many parents are taking a hit on their retirement savings in order to help their children financially. This often involves the adult offspring moving back into the family home, or what is known as the ‘déjà-boom’ effect. The report found that 62% of Baby boomers believe the déjà-boom effect is preventing them from saving enough for retirement, and 58% feel financially stressed. Most glaring was the revelation that one in four Canadian baby boomers supports their adult children or grandchildren. Tim Raposo, a senior financial planner at TD Wealth, concedes that while this situation is far from ideal, it can have benefits for both sides. “When we sit down and look at their circumstances, we can put an action plan in place to address any shortfalls,” he says. “In some cases it works out even better for boomers living with their millennial children.
www.wealthprofessional.ca
46-49_Generational Divide-SUBBED.indd 48
10/02/2017 10:54:35 PM
There is cost-effectiveness there for both sides of the equation if the children are in a position to offer some financial support.” As housing prices and the general cost of living spiral ever upward, and wage growth remains pretty static, the concept of parents and children living in the same home until much later in life is a growing phenomenon. In fact, in many cases, a large part of the family tree can be found under the same roof. “It could be a temporary thing – maybe they’ve just finished school and are working part-time,” Raposo says. “As a younger person establishes themselves in the workforce, having that crutch helps. It’s not as common for people in their 30s to do this, but in some cases we even see people who are married and have children moving back with their parents. So there are three generations in the household.” While these sorts of arrangements can be beneficial in the short term, the long-term impact of the déjà-boom effect is much less positive. If a person in their late 20s or 30s can’t afford to pay a mortgage or rent, chances are they aren’t saving for retirement either.
involved when it comes to wealth management. The internet makes research much easier than in the past, so younger clients aren’t a blank canvas when it comes to financial planning. “I have noticed that millennials want to be educated about their money, whereas previous generations tended to be more hands-off,” she says. “They would trust their advisor and take whatever advice they were given. I think millennials want to know what choices they should be making and why. Financial education is a huge component of what I do.” At the Toronto-based New School of Finance, many of the clients who walk into Shannon Lee Simmons’ office also are on the younger side. Winner of the award for digital
“They are thinking about retirement, but there are a lot of other financial priorities when you are younger,” Simmons says. ”It’s hard to prioritize retirement when you are 29 with student debt and are still saving for a deposit on a house.” The client base at the New School of Finance ranges from students to those entering their golden years; in advising them, Simmons has noticed an obvious factor that separates boomers and millennials with regard to their assets. “In urban centres, housing is the big divide between the generations,” she says. “That plays into a retirement plan as well. If you plan on renting forever, then it means you don’t have an asset where equity is
“If you plan on renting forever, then it means you don’t have an asset where equity is building, so you have to do double duty on your retirement portfolio” Shannon Lee Simmons, New School of Finance
Wealth management and millennials Sophia Bera, founder of Gen Y Planning, believes millennials are no more negligent when it comes to saving than the older clients she used to serve. Having worked in the wealth management business since 2007, Bera started her firm in 2013 to help young people manage student loans, reduce debt and increase savings while directing their investment, insurance or tax planning needs. “It’s about how you balance all your financial priorities,” Bera says. “[Millennials] want to make sure they are saving for the future and retirement, but how do you do that when you are also paying off student loans or saving for a down payment on a home? Often there is a life event that will motivate them – getting engaged, getting married, having a baby or a new job.” Another difference Bera has noticed is that millennials generally want to be more
innovation at the 2016 Wealth Professional Awards, Simmons operates a fee-only practice that provides cash management, portfolio assessment, tax and retirement planning to professionals, families, retirees and entrepreneurs. The services a client requires are often linked to their age, Simmons explains. “We have clients from all demographics, but we get a lot of millennials, usually between the ages of 25 and 35,” she says. “If they are just looking to pay back debt and get some financial literacy, it can be as young as 25. When you get more into deep financial planning and retirement, it tends to be 35 to 40.” Are Canadians putting off saving for retirement for too long, though? People live longer now, so those extra years require a larger pension. It takes time to accumulate such funds, however, and often 25 years simply isn’t enough time.
building, so you have to do double duty on your retirement portfolio.” Another issue is the changing work environment younger Canadians must contend with now. The ‘one job for life’ dynamic of their parents’ and grandparents’ era is almost extinct. Instead, they’re pursuing part-time and contract positions that offer flexibility, but the trade-off is a lot less security and limited benefits. This changes the conversation a financial advisor must have with a client. “Student debt and precarious work are two issues that change the way I give financial advice,” Simmons says. “Emergency accounts have to be bigger, and you have to account for longer periods of time between contracts potentially. The whole steady pension, group RRSPs, employee-matching programs – I’m seeing fewer and fewer of those.”
www.wealthprofessional.ca
46-49_Generational Divide-SUBBED.indd 49
49
10/02/2017 10:54:49 PM
FEATURES
DRIVING CHANGE
Driving change in your business Taking an established business in a new direction can be a daunting prospect. Here, change and leadership expert Michelle Gibbings presents a step-by-step approach to making change happen
THERE’S A famous saying: “May you live in interesting times.” There’s debate as to its origin, but there’s certainly no doubt that it applies today. Change is everywhere, impacting both large and small organizations. For leaders, this means they are leading in an environment that is often: • Ambiguous: The environment in which they are working is uncertain and shifting, which can leave people questioning their roles and what they need to do. • Boundary-less: Things are changing, and the normal boundaries of roles, organizations and work are altering. • Complex: Problems are not predictable, nor are the solutions. • Disruptive: People and organizations are constantly searching for the ‘next big thing,’ and the quest to be innovative is never-ending. To survive and flourish in this environment, organizations need to master four key steps: 1. Build and implement a sustainable approach. 2. Know the landscape. 3. Develop leadership followship. 4. Maintain momentum.
50
1
Build and implement a sustainable approach
A 2013 Towers Watson study reinforced what other studies have shown – that the majority of organizations’ change efforts fail. This is due to a number of factors, including a lack of leadership, the difficulty of sustaining momentum, and ineffective or absent mechanisms to support the change. Many change efforts are started before the necessary planning and analysis takes place. For example, there’s often no assessment of the organization’s capacity to absorb the change, or understanding of the capability of impacted stakeholders to adopt the change. Instead, there are multiple change programs occurring at the same time, often impacting the same group of people. This creates confusion, particularly when the implementation efforts are disconnected from each other. All the end user sees is a barrage of changes coming down the pipeline, but little information as to how the changes connect back to the organization’s strategic agenda and what it means for them holistically. Your organization needs to ensure its change approach is thoughtfully considered and executed. There are five elements to this:
• Ensure strategic alignment. This involves understanding what’s driving the change. Are the factors external (such as new regulation or new entrants) or internal (such as a new CEO or productivity challenges)? Also be clear on where your organization wants to get to, and how this change connects and supports your organization’s vision and strategic agenda. • Consider the options. Develop and review the options available, and their potential risks and impacts. The options selected should have a clear benefits case. That way you can measure if the intended benefits of the change have been delivered.
www.wealthprofessional.ca
50-53_BIZSTRAT Driving change-SUBBED.indd 50
10/02/2017 7:06:13 AM
• Develop the plan. Undertake the necessary planning to map out the steps that need to be taken to make the change happen. This is not about creating an inflexible plan; it’s about having a strong sense of direction and clarity on the way ahead and what is needed for success. • Check the infrastructure. Identify and ensure that the necessary infrastructure to implement the plan is available and in place. This involves architecting the way in which the change program is sequenced, monitored, governed and executed to account for the organization’s capacity, capability and objectives.
• Balance the people equation. This is one of the most important elements, and it entails more than just communication and training. Helping people to cope with and thrive through change is most effective when it operates at a mindset, values and behaviour level. This includes providing people with the personal and technical skills and tools to help them best operate in changing environments.
2
Know the landscape
Once the approach to the change has been outlined, it’s a good idea to take stock and determine if your organization is ready, willing and able to change. This assessment
will help your organization understand if there are gaps or areas that need to be addressed to help improve the likelihood of a successful and sustainable change. • Ready: Your organization knows where it wants to get to and has a plan for execution, with a logically and thoughtfully sequenced change roadmap. There are always unknowns with change, and it is impossible to plan for everything. Your organization can, however, ensure it is ready to be flexible and adaptive through the change. This way it can take advantage of opportunities and respond swiftly to issues as they arise.
www.wealthprofessional.ca
50-53_BIZSTRAT Driving change-SUBBED.indd 51
51
10/02/2017 7:06:23 AM
FEATURES
DRIVING CHANGE TAKING ACTION IN YOUR PRACTICE
Go through the change checklist (opposite page) to ensure your ambitions are realistic
Identify who in your practice will support or resist change (especially if working in a partnership)
• Willing: Your organization has effective leadership, and the roles and responsibilities of those involved in the change are clear. For example, there may be a sponsor who is accountable for the change and a project team helping to deliver the change. They need to know what roles they must play. So, too, do the leaders across your organization. Their accountability in leading the change can’t be delegated to someone else. • Able: Your organization has the capacity and capability to execute the change and is able to invest the resources to ensure that impacted stakeholders are well prepared for the change. Your organization needs to devote both financial and people resources to ensuring that those impacted by the change are not only able to cope with it, but also know what is expected of them and have the behavioural and technical skills to thrive through it. If your organization doesn’t meet all of these criteria, you need to do further work on designing and refining your change approach.
Define some goals that your changes will involve and ultimately achieve
52
3
Develop leadership followship
Warren Buffett said that “a leader is someone who can get things done through other people.” Leaders don’t lead if there is no one following them. Leaders who can inspire and support those around them are essential in times of change, and this requires your organization’s leaders to be able to build engaged and healthy teams – teams that, in turn, create a groundswell of support and movement toward the change. In times of change, it is not just the team and individuals who need to change. To consciously lead change, leaders need to be prepared to change themselves – their mindsets, operating styles and leadership behaviour. This is more than just pinpointing new technical skills. It’s about delving into the meaning that drives your leaders’ behaviour and the mental models they are applying to the decisions they make. One way to do this is for leaders to identify
their ‘leadership moments of truth.’ These are the actions that they take – often subconsciously – that define how their leadership style is viewed by colleagues, peers and team members. They include, for example: • What they pay attention to • What they prioritize • How they react to issues and when things go wrong • What they say, and what they do and don’t do • How they allocate resources and rewards, and recruit and promote Red flags arise when a leader’s behaviour is inconsistent or if they are playing favourites with team members. Team members quickly notice when a leader says one thing and then does another. If leaders want followship, they need to create an environment in which people feel valued and that their opinions matter. How leaders engage with, support, involve and communicate with their teams will determine if a change is landed safely or not. It’s therefore critical to ensure that leaders at all hierarchical levels are equipped and motivated to lead their teams through change. This is critical, as the change needs to be driven by the leaders, and they need to have the confidence and accountability to take this on.
4
Maintain momentum
Harvard professor Rosabeth Moss Kanter talks about the trap of failing in the middle. In regard to getting change to happen, she says: “Everyone loves inspiring beginnings and happy endings; it is just the middles that involve hard work.” This is natural. As a change starts, challenges will inevitably be encountered. Unexpected obstacles and roadblocks will arise, making progress slower and more difficult than planned. What looked easy in the beginning seems much harder in the middle. As reality hits home, leaders can become anxious and uncertain as they see momentum waning and milestones slipping. The team starts to question their ability to deliver, and
www.wealthprofessional.ca
50-53_BIZSTRAT Driving change-SUBBED.indd 52
10/02/2017 7:06:34 AM
This is not about creating an inflexible plan; it’s about having a strong sense of direction and clarity on the way ahead and what is needed for success teamwork starts to suffer as people look for someone to blame for the lack of progress. It is at this point that deliverables start to be de-scoped and activities reprioritized, and the project team is often restructured. This is the time when change leadership really needs to come to the fore. Leaders have two options: They can lose their nerve, or they can confront the challenges head-on. If they choose the latter, they need to: • Be clear on the project’s goals and what every person on the team needs to do to get there. Don’t get sidetracked by interesting but irrelevant matters.
• Be open with the team about what is and isn’t working. Seek their input on how the team can work better to produce more effective results. While it is hard battling through the ‘middle,’ bravery and tenacity will pay off.
5
The change checklist
Compelling case • Is the appetite for change enough to sustain your organization through the transition from current to new state?
• Ensure these goals are able to be delivered in a meaningful and relevant time frame so the team can show regular progress.
• Is the change linked to your organization’s strategy and mission so its purpose and rationale are clear to stakeholders and team members?
• Highlight the progress being made and ensure it is visible to every team member. Celebrate this progress in a way that is meaningful to each team member, and share this success with your stakeholders.
Clear vision • Is there a compelling vision of the future? How was this vision created and shared across your organization? Is it understood, and do team members buy into it?
• Know where the leader’s and team’s efforts will produce the most effective results. This is the old 80/20 rule. Focus on where you know you will get results.
Leadership alignment • How much time are your executive team and other leaders devoting to the change? Do they see leading the change as a core part of their role?
• Work to eliminate friction in the system that makes the change harder than it needs to be. This may involve removing bureaucratic processes and unnecessary activities. • Make it safe to fail so the team is encouraged to try new things and new ways of working. Otherwise, the team will be discouraged from trying to find better and faster ways of achieving good results.
Benefits realization • Is there an agreed benefits realization framework and approach that helps ensure that the expected benefits from the change will be realized? Program governance and monitoring • Is there an agreed way of monitoring and reporting on progress with the change?
Process for change • Is there an agreed-upon methodology or process for designing and implementing the change? • Is the change appropriately resourced with the right mix of skills, expertise and decision-making authority? Sequencing and integration • Has your organization’s capacity to absorb the change been assessed? If necessary, have adjustments been made to implementation timings to ensure the best outcome? Maintaining momentum • In what ways will momentum be sustained through the change, particularly during periods of difficulty (i.e. the ‘hard middles’)? Culture and communication • Is your organization’s culture considered a critical aspect that can affect the success of the change? What culture changes are needed to support the change? • Will communication be frequent enough, targeted and two-way, enabling team members to provide feedback and contribute through the change process? • What level of experience do leaders have in coaching and guiding their teams through change? Empowering team members • Do team members have the competencies, skills and tools to be able to change? • If not, what will be done to support and upskill them? How will they be involved in the change?
Michelle Gibbings is a change and leadership expert, founder of Change Meridian, and the author of Step Up: How to Build Your Influence at Work. She works with leaders and teams to help them accelerate progress.
www.wealthprofessional.ca
50-53_BIZSTRAT Driving change-SUBBED.indd 53
53
10/02/2017 7:06:48 AM
Make It Your Year NOMINATIONS NOW OPEN
ISHARES BY BLACKROCK Winner of The EquiSoft Award for Fund Provider of the Year 2016
Brought to you by
Event Partners
Official Publication
Organised by
First Trust
Port folios Canada
®
WWW.WPAWARDS.CA #WPAWARDSCA 54_KMI WP48 Awards 2.indd 48 EquisoftMarketing Award.indd
10/02/2017 5/01/2017 7:07:22 1:03:28AM AM
PEOPLE
CAREER PATH
THINKING BIG
Throughout his career, Sam Albanese has focused on making things happen – or as he puts it: “As a man thinketh, so he is” Born in Italy’s poorest province, Albanese still recalls the privations of growing up without electricity or running water. He came to Canada following the death of his younger sister, who, he says, died because of poverty “The funeral is entrenched in my mind forever. We came to this wonderful country so we wouldn’t die poor. I started school in Grade 1 at age 9 – I didn’t know what a pencil was – so I was three years behind”
1956
COMES TO CANADA
1969 1974
CHANGES COURSE After spending some time in the corporate world, Albanese realized that plugging away for a steady paycheck was too limiting, so he joined Montreal Life as an insurance advisor
“I wanted to rely on myself. In January 1974, I walked into this office, and I never looked back. You’ve got to think big – if you think small, you get small things; if you think big, you get big things” 1995
GOES NATIONAL Albanese Financial Group’s 1993 decision to expand nationally required Albanese to secure his licence in provinces beyond Ontario, a feat that took years. The name of the company was also changed to AFG Canada to reflect its new national presence “Between 1995 and 1999, we grew exponentially. We became a force nationally, and in 1995, for the first time, the industry recognized brokerages. I was one of the key individuals to push for that; it was my fight for a long time”
2013
PUBLISHES A BOOK Albanese was inspired to write his book, Right Answers: The Answers to 260 of Your Retirement Questions, when he noticed that those approaching retirement always tended to ask the same questions “It came to me that there’s got to be a way to put all of that together and hand it to someone; then the consumer can ask dedicated questions of their advisors. The consumers don’t know what to ask – this way they can have a meaningful conversation”
WORKS FOR HIS EDUCATION Always self-sufficient, Albanese worked from childhood, ultimately putting himself through university, where he earned a chemical engineering degree. His first job at age 12, cleaning an office on Saturday for a dollar, has had a lasting effect on him “I realized early in life that the only way I was going to get ahead was by having a proper education. I realized I could have an office like this and get someone else to clean it for me – I thought of what could be, not what is”
1979
REACHES A TURNING POINT In search of greater flexibility, Albanese made the move to Commercial Life. It became Halifax Life in the mid-1980s, prompting Albanese to rethink his career again, eventually launching Albanese Financial Group “That was a turning point; it allowed me to expand my thinking. The brokerage system was up my alley. Once the merger happened, I wanted to do my own thing”
2005
TRAINS THE NEXT GENERATION When Albanese realized that the age of the average financial professional was climbing into the mid-50s, it crystallized his lifelong dream to develop and train the next generation of advisors. So he approached Seneca College with a proposition “We had greying tsunami; I saw a serious problem. I presented my case to Seneca; I said I would raise the money and give [the college] a year of my life free – I just needed to be backed by the brand. We launched in the fall of 2006; in May of 2008, the ministry approved our academic status”
www.wealthprofessional.ca
55_Career Path-SUBBED.indd 55
55
10/02/2017 10:52:11 PM
PEOPLE
OTHER LIFE
TAKING A DIVE Warren Lo escapes the hectic investment world by finding peace underwater – usually with a camera in his hand
TELL US ABOUT YOUR OTHER LIFE Email wealthprofessional@kmimedia.ca
WHEN WARREN LO first tried scuba diving “on a whim” 13 years ago, the Toronto-based portfolio manager never imagined it would turn into a passion that would take him to settings like Mexico, Belize, the Bahamas, the Maldives, the Philippines, Colombia and the Cayman Islands – not to mention the quarry outside Ottawa where he learned ice-diving. Lo says he’s drawn by the challenge of diving (“You have to be aware that it can kill you,” he says) and the need to constantly augment his skills. However, the real lure of diving for Lo is the sense
of peace that comes beneath the waves. “You can leave everything behind,” he says. “It’s tranquil; noise disappears. It’s so different from everyday life.” Also an accomplished photographer, Lo finds that his subaquatic experiences complement his other hobby – so well, in fact, that his work has been published in dozens of diving magazines. “Being in nature is a big part of it – exploring the underwater world and seeing up close marine life that most people will never ever see in their lifetimes,” he says.
150 to 200 Number of dives Lo typically undertakes each year
56
10
Certifications Lo has earned, including open water, cave diving and dive master
200,000
Estimated number of photos Lo has taken on diving expeditions
www.wealthprofessional.ca
56_Other Life-SUBBED.indd 56
10/02/2017 7:10:33 AM
LOOKING FOR LOW-RISK YIELD? GET THE ACTIVE ADVANTAGETM SHORT-DURATION BONDS
HFR & HUF.U HIGH YIELD BONDS
HYI
PREFERRED SHARES
HPR & HFP CORPORATE BONDS
HAB
GLOBAL FIXED INCOME
HAF
LOW MANAGEMENT FEES INDEPENDENT CREDIT ANALYSIS LIQUID AND TRANSPARENT INVESTMENTS LOW RISK Are you getting the Active Advantage? Learn more at horizonsetfs.com. Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by AlphaPro Management Inc. (the “Horizons Exchange Traded Products”). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing. 17-44 0117 IBC_Horizon ETFs.indd 48
10/02/2017 7:58:45 AM
IN AN EVOLVING INVESTMENT LANDSCAPE, POOL YOUR POTENTIAL. Dynamic Private Investment Pools are designed to stand out in an evolving investment landscape.
REAL PRICING POWER Forward-looking, competitive fees and discounts to dollar one specifically designed for fee-based platforms and Advisors licensed as Portfolio Managers.
REAL CHOICE Access the depth and breadth of Dynamic’s portfolio management expertise with thirteen differentiated mandates that span every major asset class.
REAL ACTIVE MANAGEMENT Tap into the Legitimately Active Management™ styles, resources and techniques of Dynamic’s most talented investment minds.
Speak with your Dynamic Sales Representative today.
dynamic.ca/PrivatePools Commissions, trailing commissions, management fees and expenses all may be associated with investments in pools. Please read the prospectus before investing. Investments in pools are not guaranteed, their values change frequently and past performance may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P. TMTrademark of its owner, used under license.
OBC.indd 10 16DYN115_DF_DPIP_WP_FP_Feb_V1_1.indd 1
10/02/2017 7:14:41 AM 2017-02-01 10:08 AM