ia
THE SIREN SONG OF AMERICAN TAXES
What your clients need to know before they set up shop south of the border
FIXED-INCOME DEVELOPMENTS
From social responsibility to new ETF launches: how the asset class is reinventing itself WWW.WEALTHPROFESSIONAL.CA ISSUE 6.03 | $12.95
ALTERNATIVE INVESTMENTS What are the best ways for retail investors to diversify in 2018?
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CELEBRATING 1 YEAR OF
ACTIVE INNOVATION It’s been one year since Dynamic Funds joined forces with iShares. This first-of-its-kind partnership brought together high-conviction portfolio management with unmatched technology and ETF expertise to launch Dynamic iShares Active ETFs.
DYNAMIC iSHARES ACTIVE ETFs TICKER
DXP DXO DXC DXU DXG
PRODUCT NAME/BENCHMARK
1 YR
INCEPTION
Dynamic iShares Active Preferred Shares ETF
13.8%
16.7%
10.9%
12.8%
5.5%
5.7%
6.7%
6.8%
14.3%
12.3%
6.7%
5.5%
26.0%
24.0%
S&P/TSX Preferred Share Index Dynamic iShares Active Crossover Bond ETF Bloomberg Barclays U.S. Corporate Crossover Index (hedged to CAD) Dynamic iShares Active Canadian Dividend ETF S&P/TSX Composite Index Dynamic iShares Active U.S. Dividend ETF S&P 500 Index (C$) Dynamic iShares Active Global Dividend ETF MSCI World Index (C$)
19.0%
16.2%
24.9%
24.3%
18.4%
16.0%
SEE THE DIFFERENCE LEGITIMATELY ACTIVE MANAGEMENT™ CAN MAKE
dynamic.ca/innovation
Performance as at January 31, 2018. Inception date for Dynamic iShares Active Crossover Bond ETF, Dynamic iShares Active Preferred Shares ETF, Dynamic iShares Active Canadian Dividend ETF, Dynamic iShares Active U.S. Dividend ETF, and Dynamic iShares Active Global Dividend ETF is January 20, 2017. Commissions, management fees and expenses all may be associated with investments in Dynamic iShares Active ETFs. Please read the prospectus before investing. The indicated rates of return (a) are the historical total returns including changes in net asset value per unit, and (b) assume reinvestment of all distributions during the period in additional units at the net asset value per unit at the time of the distribution. The reinvestment of distributions increases returns. These returns do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Investments in ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Dynamic iShares Active ETFs are managed by BlackRock Asset Management Canada Limited and invest in selected mutual funds managed by 1832 Asset Management L.P. 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.
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d d t t e . e t s
ISSUE 6.03
CONNECT WITH US Got a story or suggestion, or just want to find out some more information?
CONTENTS
@WealthProCA facebook.com/WealthProCA
UPFRONT 02 Editorial
A wake-up call from the market
04 Head to head
FEATURES
44
EVERYDAY ALTERNATIVES
26
Mackenzie Investments reveals how it’s opening up new alternative strategies to retail investors
46
ALTERNATIVES IN PORTFOLIO CONSTRUCTION
PEOPLE
INDUSTRY ICON
Greystone Managed Investments head Rob Vanderhooft explains why his firm has increased its allocation toward alternative assets in recent years
22
06 Statistics
What does commodities performance portend for the wider economy?
08 Opinion
Ignore cryptocurrency at your peril
10 News analysis
Businesses drawn to the US by recent tax reforms should proceed carefully
12 Intelligence
This month’s big movers and shakers
14 ETF update
Will active managers soon get their due?
16 Alternative investment update
SPECIAL REPORT
Wealth Professional Canada explores some of the many alternative options – from REITs to cryptocurrency – that are available to advisors searching for new ways to diversify client portfolios
Cryptocurrency: yay or nay?
ESG integration expands to fixed income
18 Life insurance update
US tax reform takes a toll on earnings FEATURES
A BASIC TRUTH OF INVESTING
Fixed income will always be a crucial portfolio building block, but there are new ways to get that exposure
20 Health insurance update
Are over-the-counter meds overused?
FEATURES 50 Cannabis and health plans Inside Sun Life’s historic decision to cover medical marijuana
PEOPLE 48 Advisor profile
John Klotz outlines his tax-efficient approach to investing
52 FEATURES
WHAT TO CHANGE ABOUT YOUR BUSINESS Three updates every business owner should undertake this year
55 Career path
An early crash course in prospecting set Cory Garlock up for success
56 Other life
On the run with advisor and marathoner Melissa Rush
WEALTHPROFESSIONAL.CA CHECK IT OUT ONLINE www.wealthprofessional.ca
IFC-01_TOC-SUBBED.indd 1
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9/03/2018 5:53:41 AM
UPFRONT
EDITORIAL
A wake-up call for investors
S
tability is destabilizing.” The famous words of American economist Hyman Minsky took on added relevance at the beginning of February. After reaching a record high on January 26, global markets lost $5.2 trillion in a 12-day period up to February 7; the S&P 500 alone declined by $2.5 trillion. Although this particular shock was relatively short-lived – equities bounced back soon after that slump – it was certainly cause for concern for many investors. Minsky’s theories on investing were regularly cited during the 2008 financial crisis – specifically, his belief that during long periods of economic stability, financial agents become complacent and therefore take on greater risk. That certainly was the case in the lead-up to the financial crisis, but is the situation in 2018 any different? Opinion is divided on that front, but it is clear that volatility has returned to the equity markets, which is something financial advisors have to consider when creating investment plans for their clients.
The reliability of the equity markets has already been thrown into question in 2018, so risk reduction should be a priority for advisors heading forward According to a new study by Sun Life Financial, the need for proper financial planning has never been greater. The research showed that an increasing number of Canadian retirees (25%) are struggling to manage their debt. Personal debt levels are an ongoing issue for policymakers, but the fact that older citizens are being burdened by mortgage and credit-card payments is especially worrying. “We recognize that managing finances can be overwhelming, particularly for those who are no longer working,” said Jacques Goulet, president of Sun Life Financial Canada, in a statement accompanying the findings. “Seeking sound advice and working with a financial advisor can help you reach your goals.” In the past, retirement income was mainly generated through a healthy exposure to fixed income. Things aren’t so simple today, as low interest rates have made bonds less of a comprehensive solution. It’s why alternative investments have grown in popularity, both in Canada and worldwide, and why a majority of asset managers now provide a variety of such products for investors. Given that the reliability of the equity markets has already been thrown into question in 2018, risk reduction should be a priority for advisors heading forward.
wealthprofessional.ca ISSUE 6.03 EDITORIAL
SALES & MARKETING
Editor David Keelaghan
National Accounts Manager Dane Taylor
Writers Libby Macdonald Leo Almazora Joe Rosengarten
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Executive Editor – Special Features Ryan Smith
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CONTRIBUTORS Fred Pye Jack Tatar Stephen Barnes
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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
9/03/2018 5:33:58 AM
S&P DJI can factor in more Fine-tune your portfolio by combining factor indices that enhance returns and manage risk. S&P DJI provides tools so you can dial your exposures up or down and mix factors with systematic precision. Set your own levels and factor in more.
indexology® syncs up factors
spdji.com/indexology © S&P Dow Jones Indices LLC, a division of S&P Global 2017. All rights reserved. S&P ® and Indexology ® are registered trademarks of Standard & Poor’s Financial Services LLC. Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. It is not possible to invest directly in an index. S&P Dow Jones Indices receives compensation for licensing its indices to third parties. S&P Dow Jones Indices LLC does not make investment recommendations and does not endorse, sponsor, promote or sell any investment product or fund.
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UPFRONT
HEAD TO HEAD
Do you intend to invest in cryptocurrency? Bitcoin and its ilk have made for an exciting investment story – but are advisors and asset managers ready to get on board?
Head of product, ETFs and mutual funds BMO Global Asset Management
Mark Raes
President and CEO Purpose Investments
Som Seif
Christian Jaehn-Kreibaum
“We recognize cryptocurrencies’ growing importance for payments while monitoring the infrastructure develop ment, consistent with the Bank of Canada’s 2017 research paper suggesting that central banks proceed incrementally and cautiously. We balance innovation with a thoughtful approach to launching ETFs, considering investor expectations, port folio construction, trading and liquidity. While the potential of cryptocurrency ETFs is compelling, the underlying valu ation is difficult to assess, and crypto currencies have proven highly volatile. While innovation benefits investors, we prefer to let this market mature further before considering an ETF.”
“I would not be putting significant amount of personal wealth [into this space] unless you are intimately engaged – maybe a developer or a technologist who is in the space already. I do think people should have exposure to it, but my view is that Bitcoin and things like that are not necessarily things you want to be chasing. I do think Bitcoin has a shot as a store of value in the long run just because it was the first [cryptocurrency]. You don’t know about anything in the crypto space unless you know about Bitcoin, and therefore it has an allure to it.”
“No – not as an advisor, and not as a person. I don’t have any connection with it or interest in it. People have strange or sometimes unreal expectations of portfolio perform ance; I see myself as a relationships manager. My job is to sit down with my clients, listen to them and what’s important to them, and put a plan together that addresses that. I like boring investment options that have a consistent track record.”
Financial advisor Living Financial/Raymond James
ON THE BLOCKCHAIN GANG Bitcoin, the highest-profile of the emerging blockchain technologies, currently has a market cap of US$171 billion. A brutal reversal in Bitcoin’s fortunes earlier this year saw it plummet from a peak of nearly US$20,000 to below the US$6,000 mark. The massive cryptocurrency sell-off culminated in $550 billion being wiped off the total crypto market – but it ended with expectations of a rally to follow. “One possible appetizer for the bulls, or catalyst for recovery, will be the release of another cryptocurrency-backed instrument listed on a major exchange,” noted Thomas Glucksmann, head of APAC business development at Gatecoin. “It’s only a matter of time until we have a cryptocurrency-backed ETF.”
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Is momentum driven by unprecedented growth? Or unsustainable greed? Data is nothing without context. At AGFiQ, we judge an investment by combining and weighting up to 140 factors, and then our multi-disciplined team goes beyond, digging for the meaning behind the numbers. That’s the process behind our multi-factor investment approach. Our suite of products offer access to a wide variety of market exposures and desired client goals. They also allow for change. We’re constantly tweaking and tuning, looking to improve. That’s how we ensure stability for our clients, and yours. 9 ETFs
3 Mutual Funds
AGFiQ.com
™ The ‘AGFiQ’ logo is a trademark of AGF Management Limited and used under licence. Investment advice should be tailored to the specific needs of an investor. We strongly recommend you consult with a financial advisor prior to making investment decisions. The information is general and not to be considered as an offer or solicitation to buy or sell securities.
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UPFRONT
STATISTICS
Seeing into the futures
COMMODITIES ON AN UPWARD TREND The Dow Jones Commodity Index – which tracks energy, metals, and livestock and agriculture – offers a broad measure of the commodity futures market. The index turned in a steady performance in 2017, but historically it remains at a low ebb, especially compared to pre-financial crisis levels.
Systemic change is afoot in global commodities as the balance of power shifts in the energy markets THE COMMODITIES market is always an interesting gauge as to where the world economy might be headed; so far, 2018 has been marked by a number of interesting developments in the resource space. Most notable is the fact that the United States is set to become the world’s largest oil producer this year, dethroning Saudi Arabia. The Saudi government is attempting to diversify its economy, and is planning to sell 5% of Aramco
250,000
Estimated increase (barrels per day) in US oil production in 2018
10.3 million Estimated US oil production (barrels per day) in 2018
– the world’s biggest oil producer – through an IPO later this year. Metals and minerals, meanwhile, are riding high on the back of a strong 2017 – the S&P GSCI Industrial Metals Total Return Index saw a return of 24% last year. Gold had some pretty wild swings in 2017, bottoming at US$1,200 last March, but it hit a high note of US$1,362 this January as turmoil in the equities markets saw investors flock to the longtime safe haven.
620
High point of the Dow Jones Commodity Index over the last decade (in July 2008)
225
Low point of Dow Jones Commodity Index over the last decade (in January 2016) Source: S&P Dow Jones Indices
OIL PEAKS
COMMODITY FUTURES RECOVER
Although global demand for oil is increasing, the ramping up of supply in the US will likely drag on the price of crude in 2018. WEST TEXAS CRUDE ONE-YEAR PRICE
After a dismal performance in 2015 as the oil shock took hold in Canada and across the world, returns in commodity futures, measured by the Dow Jones Commodity Index, experienced a solid recovery in 2016. However, they dipped again slightly last year.
2/1/17 3/1/17 4/1/17 5/1/17 6/1/17 7/1/17 8/1/17 9/1/17 10/1/17 11/1/17 12/1/17 1/1/18 2/1/18
$53.83 $54.01
40% 30%
$50.60 $48.84
20%
$48.32 $46.04 $49.16 $47.23 $50.58 $54.30 $58.36 $60.42 $65.45 Source: CNN Money, Oil Price; figures in US$
6
50%
10% 0%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
-10% -20% Total returns -30% -40%
Excess returns Spot returns Source: S&P Dow Jones Indices
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600
500
501 456
431
400
430
400
384 316
300
322
240
285 274
200
100
0 1/1/08
1/1/09
1/1/10
1/1/11
1/1/12
1/1/13
1/1/14
1/1/15
1/1/16
1/1/17
1/1/18
Sources: S&P Dow Jones Indices
DIVERGING FORTUNES FOR PRECIOUS METALS
HEAVY ON RESOURCES
Confidence in the stock market dragged the price of gold in 2017, but the opposite held true at the beginning of the year. As equities faltered in January, gold prices experienced a steady increase.
Canada’s economic well-being is strongly linked to its energy and materials sectors, as evidenced by the makeup of the country’s main exchange.
16 years +342.95%
GOLD PRICE PERFORMANCE 1 year +7.83%
10
0 -5
5
Financials 37.37% Energy 18.51% Materials 11.55% Industrials 9.61% Consumer discretionary 5.96% Telecommunications services 4.64% Utilities 3.67% Consumer staples 3.67% Information technology 3.00% Healthcare 0.93%
0
30 days -0.62%
-5 30 days -4.01%
-10
-10
-15
-15
-20
TSX SECTOR BREAKDOWN
10
6 months +4.27%
5
16 years +260.41%
SILVER PRICE PERFORMANCE
5 years -17.45%
-20
6 months -1.10% 1 year -8.02%
5 years -44.70% Source: Goldprice.org, as of February 14, 2018
Source: TMX Money
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9/03/2018 5:35:52 AM
UPFRONT
OPINION
GOT AN OPINION THAT COUNTS? Email wealthprofessional@kmimedia.ca
Every bit as good Despite its volatility, Bitcoin makes for a compelling alternative asset, argue Fred Pye and Jack Tatar
AS WE WRITE, the price of Bitcoin has just corrected below $10,000, and the topic has moved away from fringe discussion boards to become daily fodder for conversation on 24-hour finance channels and nightly news. To put its current price in perspective, back in January 2017, Bitcoin was trading at $1,000. Clearly, anyone who put money into it back then would now have huge profits, even with the recent correction. But the question remains for many investors and investment managers: Is it an investment? Perhaps the first question should be: What the heck is Bitcoin? Bitcoin grew out of the 2008 financial crisis. It was created by an anonymous entity known as Satoshi Nakamoto. In October 2008, six and a half weeks after Lehman Brothers declared bankruptcy and Merrill Lynch was sold to Bank of America to save it, Satoshi released the Bitcoin white paper. The document, which outlined a new method for electronic transactions, is the genesis for every single blockchain implementation deployed since. Satoshi summed up the white paper by saying, “We have proposed a system for electronic transactions without relying on trust.” For those of us in North America, it may be disconcerting to think that we cannot trust our governments or our banks, but we must remember that the concept of Bitcoin as a potential global currency or store of wealth is bigger than just North America. Accordingly, investors and advisors must be prepared to discuss the concept of money changing form in our lifetime. Bitcoin is currently traded on numerous
8
exchanges throughout the world on a 24-hour basis. Anyone can trade fiat currency for Bitcoin through exchanges such as Coinbase (in which the New York Stock Exchange is an investor). At any time, traders can recognize a price for Bitcoin and many other cryptoassets, including Ethereum and Litecoin. Currently there are more than 1,800 cryptoassets trading on exchanges around the world. Over the past year, Bitcoin has been on
us with the Sharpe ratio, which helps to calibrate the returns against the risk taken. The higher the Sharpe ratio, the more the asset is compensating investors for the risk. Evaluating the Sharpe ratio for Bitcoin and equities from Facebook, Amazon, Netflix and Google over this same time period shows that not only did Bitcoin exhibit the highest volatility and highest returns over this time, but it also had the highest Sharpe ratio of these assets by a significant level. Bitcoin compensated investors twice as well for the risk they took as the aforementioned equities. As investors and investment managers, we always have the need to implement effective risk/reward holdings into our portfolios. Using the Sharpe ratio helps to identify those assets that can provide significant returns while balancing the risk profiles of our funds and investors. The significant returns exhibited by Bitcoin over the last couple of years are nudging investors of all levels to explore it and other cryptoassets within the context of their investment portfolios. Could Bitcoin fit the
“Investors and advisors must be prepared to discuss the concept of money changing form in our lifetime” a wild price ride, but a look at its historic volatility shows that this volatility has been significantly decreasing since its inception. That may not bring a lot of comfort to volatility-averse investors; however, an asset class with a volatility of zero usually has a similar rate of return. Also, Bitcoin’s volatility must be measured against its return profile and against other more conventional assets such as stock in Facebook, Amazon, Netflix and Google. To effectively address asset allocation in clients’ portfolios, advisors are always on the quest for non-correlated assets. All of these assets have seen absolute returns over the last few years; however, Bitcoin shows very little correlation to any of them. Second, although returns and volatility are important, those of us who study assets recognize that putting the two together provides
model of being an alternative asset? One of the major functions of an alternative asset is to provide a level of non-correlation to other assets, which would then provide a lower level of risk in a portfolio. As responsible investment professionals, it is vital for us to become educated on this new asset class and consider how these assets should be appropriately recommended and positioned for investors. Dismissing Bitcoin and ignoring the entire cryptoasset space is something investors and investment managers do at their peril. Fred Pye is president and CEO of 3iQ Corp. Jack Tatar is an advisor with 3iQ and co-author of the book Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond.
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9/03/2018 5:46:11 AM
UPFRONT
NEWS ANALYSIS
Cross-border dilemma Following tax reform in the US, Canadian business owners are questioning if a move south is in their best interests. But when comes to tax, it’s never quite that simple
THE FEDERAL budget was of particular interest to financial advisors this year. As expected, Finance Minister Bill Morneau walked back his plans to limit income sprinkling, passive income investment and the conversion of earnings into capital gains. Widely criticized by Canada’s business community after announcing his reform plans last July, Morneau made a number of concessions in his third budget. His critics remain, however, and in certain circles, the feeling persists that the Liberals’ tax policies are anti-business. Matt Altro is president and CEO of MCA Cross Border Advisors, which specializes in
resident,” he says. “But in the past year I have seen a big increase in Canadians and Americans living in the US wanting to come to Canada. The political situation is a big driver in that.” The Trump administration is having a push-and-pull effect, it seems: The president’s tax reform is pulling Canadian business owners in, while many of his other policies are motivating both Canadian and US citizens to head north. “The two biggest drivers for Canadians wanting to move to the US are the tax rate and the weather,” Altro says. “And when the Liberals came out with their reform plan last
“When the Liberals came out with their reform plan last summer, I had many clients say that enough was enough” Matt Altro, MCA Cross Border Advisors financial planning for both Canadian and US citizens. The past year has been a busy one, he says, as citizens of both countries have shown a desire to make a move. “Historically, 80% of my clients were Canadians going to the US because there is a significant tax benefit to becoming a US
10
summer, I had many clients say that enough was enough. The plan was attacking small businesses and would take away all the benefits of having a corporation.” The US went in the opposite direction with its recent tax overhaul, reducing the country’s corporate tax rate from 35% to
21%. Passed through Congress in December, the Tax Cuts and Jobs Act marked the biggest upheaval of the US tax code in a generation. The long-term impact of this reform and what it could mean for the federal deficit is yet to be revealed, but in the short term, its effect is already being felt. Christina Koshman, a senior tax and estate planner with MLD Wealth Management Group in Calgary, says policy in both Ottawa and Washington has been a frequent talking point in her office recently. “The main question I have been getting from clients is, ‘Should I go to the US to incorporate rather than here?’” she says. “It’s dangerous to over-generalize; it’s really dependent on each person’s individual circumstances. It demands fresh thinking by both US and Canadian tax professionals because it’s a new world.” Koshman believes that both the prov-
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CORPORATE TAX WORLDWIDE Until January, the United States had one of the highest corporate tax rates in the world, but the recent Tax Cuts and Jobs Act lowered it from 35% to 21% Canada’s average corporate tax rate is approximately 27%, which puts it is close to the global average of 22.9% The United Arab Emirates has the world’s highest corporate tax rate at 55% Uzbekistan has the lowest rate at 7.5% Certain jurisdictions – including Jersey, the Bahamas, Bermuda and the Cayman Islands – have no corporate tax at all Sources: PwC, KPMG, Deloitte
incial and federal governments in Canada are setting policy that is detrimental to enterprise. It’s a view shared by many small business owners – the government received
Canadian business, it does make sense to incorporate in the US,” Koshman says. “That isn’t easy, so you have to look at the pros and cons and decide if it is worth it, because it’s a
“At certain stages in the life cycle of a Canadian business, it does make sense to incorporate in the US” Christina Koshman, MLD Wealth Management Group almost 21,000 responses during the consultation period for its tax reform plan last fall. That doesn’t mean incorporated business owners should necessarily consider relocating south of the border, however. For an issue as complex as the tax code, there’s a lot to consider. “At certain stages in the life cycle of a
huge undertaking. In some cases your taxes could be higher, so it’s a case-by-case basis, and that’s why you need the proper advice from someone who is well versed on both US and Canadian tax.” Navigating that complexity is what Altro has built his practice on. There are crucial differences between the Canadian and US
systems, and it’s not as simple as comparing a corporate tax rate of 27% to 21%. “In the US, there are two types of corporate structures – one is C-corps, then there are S-corps, LLCs, and partnerships, which can be considered flow-through entities,” Altro says. “Because the corporate tax rate was so high in the US and personal rates were so low, people wanted the protection of a corporation at their personal rate.” Another thing for US or Canadian citizens living abroad to consider is that often the same rules do not apply; that is certainly the case with flow-through businesses. “They are great for Americans, but terrible for Canadians who want to have a US business, because Canada does not recognize flow-through income,” Altro says, “so you end up with double taxation, paying personal and corporate income – that’s something they need to be aware of.”
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UPFRONT
INTELLIGENCE CORPORATE ACQUIRER
TARGET
PRODUCTS COMMENTS
Canaccord Genuity
Cash Management Group
The newly added team specializes in institutional cash management and private wealth management
Fairfax Financial Holdings
Carillion Canada Holdings
Toronto-based Fairfax will acquire Carillion’s services business in Canada
Invesque
Care Investment Trust
The US$425 million acquisition expands Invesque’s portfolio to 84 healthcare properties
Scotiabank
Jarislowsky Fraser
The merger will create the third-largest active asset manager in Canada
PARTNER ONE
PARTNER TWO
COMMENTS
CPPIB
Thomson Reuters
Along with two other firms, CPPIB will assume a 55% equity stake in Thomson Reuters’ financial and risk business via the $25 billion deal
National Exempt Market Association
Private Capital Markets Association
The merger forms the largest private capital markets community in Canada with around 2,000 members
Sentry proposes fixed administration fees
Sentry Investments has proposed a fee change designed to provide investors with increased predictability and transparency of investment costs. Sentry has proposed taking over payment for operating expenses of certain funds and instead charging a fixed administration fee for Series A, T, B, BT, F, FT, O and X of the participating funds. The asset manager estimates that, if approved by securityholders, the change will result in the same or a lower projected management expense ratio for each fund.
Scotiabank to purchase Jarislowsky Fraser
Scotiabank has announced plans to acquire Jarislowsky Fraser, a leading Canadian independent investment firm with more than $40 billion in assets managed on behalf of institutional and high-net-worth clients. The combined business will form the third-largest Canadian active asset manager, with $166 billion in AUM as of December 2017. “This transaction aligns with our strategic commitment to diversify our global wealth management business by building out a platform of rigorous, process-driven investment capabilities for institutional investors across our footprint in Canada and the Pacific Alliance,” said Scotiabank president and CEO Brian Porter. The transaction has been unanimously supported by all partners of Jarislowsky Fraser, which will retain its name and investment autonomy, and will continue to be led by its founder, Stephen A. Jarislowsky. The $950 million transaction is set to close in the third quarter of 2018, pending regulatory approval.
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Sun Life cuts fees on several Excel funds
Series A units of Sun Life’s recently acquired Excel India Fund have outperformed 1,007 Canadian mutual and ETFs over the 15year period ending Dec. 31, 2017, according to Morningstar. Sun Life Global Investments and Excel Funds Management responded by announcing management fee reductions ranging from 0.2% to 0.45% for certain Excel mutual funds. The reductions cover the Excel India Fund, the Excel New India Leaders Fund, the Excel India Balanced Fund, the Excel Emerging Markets Balanced Fund and the Excel High Income Fund.
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PEOPLE Ninepoint announces two new equity funds
Ninepoint Partners has launched two new equity funds. The first, the Sprott International Small-Cap Fund, relies on diligent research and risk management practices to identify growing companies and industries, spread across at least nine GIC-classified sectors and 18 industry groups. The other fund, the Sprott Concentrated Canadian Equity Fund, will select Canadian companies through a comprehensive process that includes value screens, discount verification, profit sustainability analysis and security valuation; positions that don’t meet a minimum return threshold will be excluded from the fund.
NAME
LEAVING
JOINING
NEW POSITION
Neil Cunningham
N/A
PSP Investments
President and CEO
Stephane Dulude
SFL
Peak Financial Group
Vice-president of business development
Kelly Hanczyk
Edgefront REIT
Nexus REIT
CEO
Manraj Sekhon
Fullerton Fund Management
Franklin Templeton
Chief investment officer, emerging markets equity
Daniel Smith
N/A
CIBC Mellon
Chair of the board of directors
PSP Investments names new CEO
Brompton Funds completes mutual-fund merger
Brompton Funds has announced the successful completion of the merger of two of its funds. Unitholders gave approval in mid-December for the firm to merge its Goldman Sachs US Income Builder Trust (GSB) into its Symphony Floating Rate Senior Loan Fund (SSF). SSF invests in an actively managed, diversified portfolio consisting primarily of short-duration floating-rate senior secured loans. GSB Class A unitholders were automatically converted to SSF Class A unitholders; the units are trading on the TSX under the symbol SSF.UN.
Fiera lowers fees for international funds
Fiera Capital has announced fee reductions for certain series of two of the funds it manages. Management fees for Series F, Series FH and Series O units of the Fiera Capital International Equity Fund have been reduced by 0.15%, bringing them to 0.75%, 0.77% and up to 0.75%, respectively. Meanwhile, Fiera has applied a 0.2% reduction to Series F, Series FH and Series O units of the Fiera Capital Defensive Global Equity Fund, lowering its management fees to 0.75%, 0.77% and up to 0.75%, respectively. The new fees went into effect on February 7.
The Public Sector Pension Investment Board [PSP Investments] has appointed Neil Cunningham to succeed André Bourbonnais as president and CEO. Cunningham has been with PSP Investments since 2004, following successful stints at Merrill Lynch, Brazos Advisors Canada, National Bank of Canada and Coopers & Lybrand. He was named SVP and global head of real estate for the pension fund in 2015 and also took the reins of PSP Investments’ natural resources team in late 2016. “[Neil Cunningham] has played a key role in developing and implementing the organization’s current strategic plan, and possesses a deep understanding of the business, mandate and stakeholders of PSP Investments,” said Martin Glynn, chair designate of the PSP board. “This extensive experience, along with Neil’s consistent demonstration of the core values of the enterprise, makes him the natural and ideal next leader of PSP Investments.”
Franklin Templeton hires new CIO
Franklin Templeton Investments has named Singaporebased Manraj Sekhon as its chief investment officer for emerging markets equity. In his new role, Sekhon will be responsible for overseeing more than 80 emerging markets equity investment professionals in 20 offices across the organization. Prior to joining Franklin Templeton, Sekhon was the CEO, CIO and director of Singapore-based asset manager Fullerton Fund Management. He also previously served as director and head of international equities at Henderson Global Investors. “We are pleased to bring on a leader who I am confident will best leverage the breadth of our investment talent across emerging markets equities,” said Stephen Dover, Franklin Templeton’s head of equities.
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UPFRONT
ETF UPDATE NEWS BRIEFS Mackenzie ETF portfolios target a variety of risk profiles Mackenzie Investments has rolled out new ETF portfolios that use its active, strategic beta and index ETFs to satisfy different risk profile and investment objectives. These include the Mackenzie Conservative Income ETF Portfolio (75% fixed income/25% equity), the Mackenzie Conservative ETF Portfolio (65%/35%), the Mackenzie Balanced ETF Portfolio (50% /50%), the Mackenzie Moderate Growth ETF Portfolio (40% /60%) and the Mackenzie Growth ETF Portfolio (25%/75%).
Harvest Portfolios unveils internationally focused ETFs Harvest Portfolios has launched Class A units of its Harvest Global Resource Leaders ETF (HRES), as well as Class A and Class U units of the Harvest US Bank Leaders Income ETF (HUBL and HUBL.U), on the TSX. All three ETFs will seek lower volatility using covered-call options on up to 33% of their portfolios’ holdings. “We are excited about the opportunities in the resource sector through the direct correlation to a growing world economy, and US financials with the positive growth dynamics that are presently occurring and projected to continue,” said Harvest president and CEO Michael Kovacs.
Franklin Templeton expands its Canadian ETF lineup Franklin Templeton has released three new Canadian LibertyShares ETFs on the TSX. The Franklin LibertyQT Emerging Markets Index ETF (FLEM) uses a multi-factor approach to select emerging market equities with reduced volatility. The Franklin LibertyQT Global Dividend Index
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ETF (FLGD) seeks high-quality companies that aim to sustain or increase dividends, capping each security it holds at 2%. The actively managed Franklin Liberty Core Balanced ETF (FLBA) targets a balance of long-term capital appreciation and current income through North American equity and fixed-income securities.
AGFiQ adds global ETFs to factor-based lineup AGFiQ Asset Management has launched two new ETFs on the NEO Exchange. A global equity fund, the AGFiQ Enhanced Global ESG Factors ETF (QEF) selects companies with strong ESG profiles to provide long-term capital growth and reduced volatility over a full market cycle. The multi-factor AGFiQ Enhanced Global Infrastructure ETF (QIF) aims to help investors access global diversification and income by investing primarily in equity securities issued by infrastructure companies, including those in related sectors like telecom, utilities, energy and transportation.
Canada’s marijuana ETF offerings continue to grow Investors in Canada’s marijuana ETF space saw a burst of activity in February with the launch of three new funds. Redwood Asset Management became the first asset manager in the world to launch an actively managed cannabis ETF, the Redwood Marijuana Opportunities Fund (MJJ), which trades on the NEO Exchange. Horizons, meanwhile, bolstered its status as a leader in this space with its second marijuana-focused ETF, the Horizons Emerging Marijuana Growers Index ETF (HMJR), also trading on the NEO. On the TSX, Evolve Funds ETFs introduced its own active fund, the Evolve Marijuana ETF (SEED).
Active ETFs could soon shine In a market riled by rising volatility, active management is poised to prove its worth In recent years, the intensified focus on costs, as well as an extended period of stock-market increases and low interest rates, has built a compelling case for passive ETFs – but some believe the tables could be turning. “We’ve already seen increased volatility in 2018,” says Rohit Mehta, president at First Asset Investment Management. “Couple that with rising rates, political uncertainty, global trade policy changes and other risks, and you’re starting to see an environment where active management shines.” The value in the passive space is undeniable, but Mehta believes it has become commoditized. As volatility rears its ugly head, the demand for active managers – particularly established ones – is bound to increase. “We started out partnering with quantitative and smart beta leaders like MSCI and Morningstar, and developed our own in-house team and mandates as we grew,” Mehta says. “Getting acquired by CI two years has given us access to best-in-class global managers. We’ve continued to focus on active strategies and delivering superior risk-adjusted returns with best-in-class products.” Last year, First Asset’s ETF business swelled by 53%, partly due to its fixed-income funds. The First Asset Short Duration Bond ETF, launched last fall, has already gathered assets of $270 million. Its First Asset Investment Grade Bond ETF has raised $295 million, returning 4.54% last year to become Morningstar’s top Canadian fixed-income ETF. “Long duration is your friend in a declining-
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rate environment, but it turns on you as rates rise,” Mehta says. “During those periods, investors will want to pay for active managers who can successfully navigate the risks.” First Asset also offers international equity and sector-based funds that Canadian advisors would be hard-pressed to replicate. Among those is the Tech Giants Covered Call ETF, which returned more than 33% last year, including cash flows of around 5%. It is invested across the 25 largest North Americanlisted tech companies, with calls written on
“[As rates rise], investors will want to pay for active managers who can successfully navigate the risks” 25% of the companies’ shares monthly. The First Asset Canadian REIT ETF, meanwhile, delivered 11.9% in returns last year to become Canada’s top-performing REIT fund. “The Canadian REIT benchmark contains 16 names, with the top three by market cap making up 40% of the index,” Mehta says. “Those three aren’t bound to be the only successful companies. That’s why investors can benefit from a team like First Asset’s.” Of course, Mehta clarifies, the firm doesn’t just sell funds based on past performance. “We develop our products by striving to identify the needs and challenges of tomorrow,” he says. “We’re big believers in active fixed income, so we’ll continue to expand on that in 2018.”
Q&A
Craig Basinger Chief investment officer CONNECTED WEALTH/ RICHARDSON GMP
Years in the industry 23 Fast fact Basinger leads the subadvisory team for the recently launched Redwood Behavioural Opportunities Fund (BHAV)
Finding opportunities in irrationality What prompted the decision to create a behavioural finance-based fund for Canadians? When we started going down the behavioural finance path, we were actually focused on trying to control our own behavioural biases and how we traditionally managed money. But around a year ago, we realized that if we can find more instances in the marketplace where behavioural biases are leading other investors to act irrationally and causing assets to be mispriced, then why wouldn’t we develop strategies to try to profit from those mispriced assets?
What are some of the behaviour-based strategies you’re using to manage this fund? A major one is the ‘earnings overreaction’ strategy. Because of availability and recency biases, investors as a whole react quickly to news of earnings surprises from a company, even if they don’t reflect the realistic long-term outlook. In cases of underperformance, we’ve found that high-quality companies have a better chance at recovering quickly. When there’s a positive surprise for a low-quality company, it’s more likely to give up gains in its stock price later on. So this strategy can be a long or short one, depending on other parameters. The other one we’re most active with right now is the ‘loved to less unloved’ strategy. When comparing recommendations for two companies, one of which has no holds or sells, while the other has a couple of buys and maybe a hold and a sell, investors tend to go with the herd and buy the first one. But based on our analysis of data in Canada and the US, the most loved companies actually tended to underperform compared to ones with a low percentage of buy ratings over the past 20 years. We’ve found that companies that go unloved for three months or longer get neglected, and when they start to garner upgrades, they become less unloved and tend to go on a strong performance run. For this strategy, we keep an eye on buy and sell recommendations, and watch out for opportunities to catch companies during that transition. We have a total of seven strategies built into the fund structure, which can be effective at different points in time when combined with other indicators. We’re not attached to the companies we invest in; we just look for instances where we think the asset seems to be mispriced because of behavioural biases and we can capture it as it reverts to being more correctly priced.
What type of returns do you hope to achieve? We’re the first behavioural fund, so it’s hard to say. But we’re in an environment wherein the market structure has changed, and I think active managers need new ways to find mispriced assets and add value for their clients. The success of traditional approaches seems to be waning, and we believe profiting from other investors’ behavioural mistakes could present an immense opportunity.
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UPFRONT
ALTERNATIVE INVESTMENT UPDATE
Social responsibility comes to fixed income After making major headway in equities, ESG integration is being embraced in the bond markets
gate how ESG factors impact credit risk,” she says. “The PRI’s Statement on ESG in Credit Ratings – in which investors and CRAs jointly and publicly commit to more transparent and systematic ESG consideration in credit risk analysis – has so far been signed by 15 CRAs and 129 investors, with US$23 trillion of AUM.” Still, there are challenges. “Credit practitioners are still struggling to build a more quantitative framework to take ESG factors
“There is a substantial opportunity to contribute to making the financial markets more sustainable”
As fund managers recognize that the consideration of environmental, social and governance [ESG] factors helps manage downside risks, enhance portfolio returns and guarantee stewardship, ESG integration has made great strides in the equity space – and is beginning to venture beyond. “Fixed-income markets are starting to see the benefits of considering ESG factors in bond valuation,” says Carmen Nuzzo, senior consultant with the credit ratings initiative of the UN’s Principles for Responsible Investment
NEWS BRIEFS
[PRI]. “There is a substantial opportunity to contribute to making the financial markets more sustainable, with nearly US$97 trillion of global bonds outstanding, according to the Bank for International Settlements.” But according to Nuzzo, technical considerations like different term structures, coupons and durations have caused fixed income to lag behind equities on ESG integration. “To address this ... the PRI has started to nurture a dialogue between investors and credit rating agencies [CRAs] to investi-
CSE launches token-based securities platform
The Canadian Securities Exchange is launching a securities clearing and settlement platform to allow companies to raise capital. Instead of initial coin offerings [ICOs], the platform will allow companies to issue security token offerings [STOs] to investors. The CSE is opening the platform to established companies and startups, both of which will “be subject to full regulation by applicable securities commissions.” Kabuni Technologies, a blockchain-based e-commerce company, was the first to use the platform to issue STOs.
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into account,” Nuzzo says. “Moreover, we have yet to see real influence on rating changes and outlooks, and shifts in asset allocation by sector or region. And both sides need to better communicate their ESG integration processes, externally and internally.” But pressure is mounting for insurers and pension funds, which have a fiduciary duty to their policyholders and beneficiaries, to disclose their ESG strategies. “Ontario was the first Canadian province to require local pension funds to disclose the extent to which they invest sustainably, and if so, how ESG factors are incorporated in their investment policies,” Nuzzo says. “And last year, the Canadian Securities Administrators launched a climate change disclosure review project.”
Addenda Capital introduces impact fixed-income fund
Multi-asset manager Addenda Capital has launched an impact fixedincome fund to generate positive impacts while delivering market-like returns. Focusing on climate change, health and wellness, education, and community development, the fund has invested around $8 million into hospitals, universities, solar projects and renewable energy companies, along with cities and provinces that have issued green bonds. Addenda evaluates all investments based on financial merits, as well as ESG risks and opportunities.
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Q&A
Marc Lustig CEO CANNAROYALTY CORPORATION
Years in the industry 16 Fast fact In partnership with Sprott and Stoic Advisory, CannaRoyalty recently co-founded Trichome Yield Corporation, which aims to provide asset-backed loans to emerging and established cannabis companies
Uncovering private-debt potential in cannabis The Canadian cannabis sector has enjoyed increased attention over the past year, particularly among public and private equity investors. Do you see many firms exploring asset-backed debt financing? Investors have generalized the cannabis sector to be composed of the large licensed Canadian producers. But in reality, the Canadian cannabis sector, from our perspective, is a whole supply chain that includes cultivation – which the Canadian licensed producers are focused on – as well as processing, real estate, facilities, infrastructure, equipment, formulations, finishing products, packaging, distribution and logistics. Large Canadian public producers can access equity capital easily, but the other links in that chain are much more restricted. Some aren’t public, while others represent opportunities that aren’t really well understood by investors. In many cases, they don’t really even understand what’s going to be allowed within the Canadian legal framework. So there are significant opportunities for us to make asset-backed investments, whether public or private, across the Canadian cannabis sector and potentially abroad.
Where do you expect capital support for Trichrome will come from? The response to both Trichome’s launch and its board of talent – which I believe is unmatched anywhere in Canada – has been exceptional. Given that response,
Commercial real estate to maintain robust pace
A recent outlook from Morguard Corporation predicts sustained robust commercial real estate investment activity in Canada, thanks to healthy demand for quality assets across the country. Morguard expects downtown Vancouver and Toronto to remain the most coveted investment markets in 2018, although the firm predicts limited opportunities will force investors to look farther afield. Morguard also expects strong investment activity in suburban Toronto, Ottawa and Montreal, as well as some reanimation in Alberta.
I expect we’ll get healthy levels of capital, whether it’s debt or equity. From the debt perspective, there have been some family offices and various institutional firms in Canada, while on the equity side, we’ve gotten attention from high-net-worth investors, family offices and institutions, as well as other strategic partners.
Are there any developing tailwinds in the cannabis industry that you expect Trichrome to benefit from? We believe Trichome will benefit from investors becoming more sophisticated. There are 90 licensed producers in the country today, and that’s projected to reach anywhere from 150 to 200 this year. Some of them will undoubtedly become the market leaders, but investors will really have to convince themselves that there’s value left in those types of companies. Eventually, we believe they’ll appreciate that producers just come up with an ingredient, and other types of companies are involved in delivering the finished product. And even with the wide range of firms providing financing to cannabis producers – that includes traditional and alternative models like royalty streaming – no one has really focused on producing yield in the form of interest plus warrant coverage. So we expect Trichome will grow as it fills that gaping void of providing secure, asset-backed loans that generate yield for investors.
Cryptocurrency collapse would hurt retail investors most
A new report from S&P Global Ratings warns that a potential collapse of the cryptocurrency market would primarily harm the retail investors who have been attracted to the asset class in growing numbers in recent months. “At this stage, we think that retail investors would be the first to bear the brunt in the event of a collapse in cryptocurrencies’ market value,” the report said. “We expect rated banks to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited.”
Oil sands could see bolstered production growth
A recent report from IHS Markit predicts continued, albeit slower, growth in Canada’s oil sands production over the next decade. The Canadian oil sector is suffering from a lack of investment in future infrastructure and industry consolidation, as well as bottlenecks in exportation due largely to a lack of pipeline infrastructure. Nevertheless, IHS Markit said that after topping at 2.6 million barrels per day, oil sands output could still rise by between 700,000 and 1.4 million barrels per day by 2030.
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UPFRONT
LIFE INSURANCE UPDATE NEWS BRIEFS Study shows millennials favour advisors for life insurance
New research from LIMRA shows that baby boomers are more likely than millennials or gen-xers to shop online for life insurance. The study found that 34% of baby boomers shopped for life insurance online, compared to 30% of gen-xers and 31% of millennials. In applying for a policy, the methods shifted somewhat; millennials were the most likely to purchase online (27%), followed by gen-xers (24%) and boomers (23%). In terms of using a financial professional, millennials again led the way at 38%, followed by gen-xers (34%) and boomers (31%).
Life insurance agents have licences revoked for exam cheating
The Insurance Council of BC has revoked the licences of 12 life insurance agents from the same brokerage for cheating on their qualification tests. The council called their scheme, which was revealed after a national audit of past qualifying exams, a “very unusual … level of cheating.” The audit was conducted by a third party last fall. After checking results of Life License Qualification Program tests from across the country, the auditing party found an “odd” group of multiple-choice exams with nearly identical right and wrong answers.
CLHIA praises updated Trans-Pacific Partnership
Canada’s life and health insurance body has welcomed the agreement on the updated Trans-Pacific Partnership. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership [CPTPP] differs from its predecessor in that alongside provisions for goods and services, it includes a number of other requirements, ranging from
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labour issues and the environment to government procurement. “This gives us the opportunity to continue to grow as a significant exporter of life and health insurance products and expertise,” said CLHIA president and CEO Stephen Frank. “The CPTPP will permit companies to compete and grow internationally.”
Tech revamps not enough to solve life insurers’ woes
Faced with declining premiums and low interest rates, many life insurers have invested in technology to become more cost-efficient. But according to a recent report from consulting firm Bain & Company, the industry has other problems. Citing a global survey of insurance customers it conducted last year, the firm said life insurers are failing to please customers. “Life insurers rely on a sales-led, agent-based approach to marketing, resulting in limited knowledge of their customers,” the report said. A lack of IT investment in the past has also meant insurers are burdened with cumbersome processes and legacy systems.
Annuities not a savings tool for most Canadians
A new survey conducted by Ipsos on behalf of RBC Insurance has found that 62% of Canadians aged 55 to 75 are concerned about outliving their retirement savings. Crucially, only 12% of those polled said they were using or planning to use an annuity to supplement their retirement income. When asked five questions about annuities, respondents gave an average of only three correct answers. “Most Canadians are unaware of annuities and lack an understanding of the product, which can be the very reason why few are building them into their retirement plan,” said Jean Salvadore, director of wealth insurance at RBC Insurance.
Industry giants post lacklustre earnings US tax reform impacted Q4 earnings, but both Manulife and Great-West Life are optimistic about the year ahead In the final quarter of 2017, US tax reform – which reduced the country’s corporate federal tax rate from 35% to 21% – hit earnings for both Manulife and Great-West Life. Manulife, Canada’s largest life insurer, announced a fourth-quarter net loss attributed to shareholders of $1.6 billion and a reduction in core earnings to $1.2 billion, compared to $1.3 billion in the fourth quarter of 2016. Looking at 2017 as a whole, net income attributed to shareholders of $2.1 billion represented an $825 million decrease compared to 2016. The firm attributed this to a $2.8 billion post-tax charge related to corporate tax reform in the US, as well as changes to its legacy businesses. More positive were Manulife’s core earnings of $4.6 billion in 2017, a $544 million increase over 2016. “We achieved strong operating results in 2017,” said Manulife president and CEO Roy Gori. “Core earnings increased 14% to $4.6 billion, and we delivered continued positive net flows and solid top-line growth in Asia. While net income was impacted by portfolio asset mix changes and US tax reform, these items will benefit us going forward.” It was a similar story for Great-West Life, where the firm’s US exposure meant a net charge of $216 million, as net earnings attributable to common shareholders fell to $392 million for the fourth quarter, compared
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to $676 million in the same period in 2016. The Winnipeg-based firm also had to contend with a further net charge of $122 million from the disposal of an equity investment, as well as restructuring costs of $4 million.
transformation initiatives in Canada and tuck-in acquisitions and investments across our geographies, set the stage for stronger future earnings growth.” Canadian business was a particular bright
“Strategic actions taken in the quarter and throughout the year, including transformation initiatives in Canada and tuck-in acquisitions and investments across our geographies, set the stage for stronger future earnings growth” “The company’s operating performance was solid in the fourth quarter, reflecting strong top-line results and controlled expense growth,” said Paul Mahon, president and CEO of Great-West Life. “Strategic actions taken in the quarter and throughout the year, including
spot for the insurer. “The Canadian segment had a great fourth quarter with healthy premium and deposit growth,” Mahon says. “The transformation we undertook earlier in 2017 is having a positive impact on our productivity and profitability.”
While Manulife and Great-West Life experienced an underwhelming end to 2017, both companies are confident of a turnaround, and they increased dividend payouts accordingly: Manulife announced a quarterly dividend of $0.22, up 7% on the third quarter of 2017, while Great-West Life increased its dividend by 6% over the previous quarter to $0.38.
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UPFRONT
HEALTH INSURANCE UPDATE
People are relying too heavily on pain meds Too many adults are taking dangerous doses of overthe-counter pain relievers like ibuprofen
per cent of participants reported taking at least one other NSAID during the week, but less than half of them knew that all the medications they were taking were NSAIDs. While the study focused only on recent and current ibuprofen users, who may not behave the same as sporadic or new users, it highlighted a downside of the wide availability of NSAIDs. “I believe that the message sent to the consumer when these drugs are widely available in convenience stores and gas stations is that these drugs are safe and you can use them
“These drugs can have serious side effects ... and are often taken without medical oversight”
A new study suggests that many adults who use non-steroidal anti-inflammatory drugs [NSAIDs] like ibuprofen are putting themselves at risk of serious side effects. The study, published in the journal Pharmacoepidemiology & Drug Safety, found that 15% of adults taking ibuprofen, aspirin, naproxen and other NSAIDs are taking more than the recommended daily dose, which increases the threat of symptoms like internal bleeding and heart attacks.
NEWS BRIEFS
“NSAIDs are among the most commonly used medicines in the US and worldwide,” the lead study author, Dr. David Kaufman of Boston University, told Reuters. “These drugs can have serious side effects, including gastrointestinal bleeding and heart attacks, and are often taken without medical oversight because many products are available over the counter.” Fifty-five per cent of the 1,326 study participants took ibuprofen at least three days of the week, and 16% were daily users. Thirty-seven
Canada’s generic drug prices top international levels
The most recent edition of the Generics360 report, published by the Patented Medicine Prices Review Board [PMPRB], has revealed that Canada pays more than other countries for generic drugs. The study, which focused on data from the last quarter of 2016, found that generic drug prices in Canada were the seventh highest in the OECD. In addition, average drug prices for the group of seven countries the PMPRB uses to benchmark drug costs (France, Germany, Italy, Sweden, Switzerland, the UK and the US) were 11% lower than Canada’s.
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safely for pain relief — thus no need for reading the label,” Dr. Gunnar Gislason, director of research for the Danish Heart Foundation in Cophenhagen, told Reuters. “If the recommended dosage does not give sufficient pain relief, it is easier to take more pills than seeking professional advice.” In addition, medical professionals are concerned that people are often using these drugs inappropriately to treat other ailments such as fever, flu and allergies. “In my opinion, NSAIDs should not be available as an overthe-counter drug because of all their deleterious effects,” Dr. Liffert Vogt of the Academic Medical Center at the University of Amsterdam told Reuters.
Federal government opens the door for national pharmacare
The federal government has announced the formation of a new advisory council on national pharmacare. Led by former Ontario Health Minister Eric Hoskins, the council will assess the feasibility of universal coverage. The council’s formation prompted speculation that national pharmacare will headline next year’s budget, ahead of the 2019 federal election. Last fall, the Parliamentary Budget Office calculated that a national pharmacare program would have an annual cost of approximately $19 billion.
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Q&A
Dave Patriarche Founder CANADIAN GROUP INSURANCE BROKERS
Years in the industry 21 Fast fact Canadian Group Insurance Brokers is an association of 200 brokers across Canada that focuses on education in the group benefits space
G19 will create “an adversarial relationship” The CLHIA has released its new Guideline G19, Compensation Disclosure in Group Benefits and Group Retirement Services. What implications will this have for brokers? I think it creates an adversarial relationship with the insurance companies. They are going right past us and direct to our clients. Whenever you have someone going past you, especially on something like compensation disclosure, everyone will get their back up. I think the effect will be a lot of people getting out of the business. I can see us losing 15% to 20% of the brokers in Canada.
Is there a standard in the industry for commissions? Every broker is free to charge whatever they want; sometimes the highest commission means a lot of value-add, and other times it’s just someone who is charging the highest price they can. The business owner needs to evaluate who the broker is – it shouldn’t just be the cheapest price, because that means just going direct where you have no advice and no protection. I think [G19] will drive things to the lowest price, but you have to consider what you are giving up. In the UK and Australia, where they have moved over to full fee-for-service, people don’t want to pay for advice, and everyone suffers.
The CLHIA recently announced a crosscountry tour to consult with advisors and
New initiative will slash generic drug prices by up to 40%
Drug costs in Canada will be coming down in 2018, thanks to a new initiative that will reduce the price of some of the most common generic medications. As of April 1, 2018, the prices of 70 different prescribed drugs will be reduced by 25% to 40%, which will provide an overall discount of up to 90% compared to brand-name equivalents. It’s estimated that the five-year initiative, spearheaded by two pharmacy industry associations, will save Canadians close to $3 billion through price reductions and the launch of new generic drugs.
brokers on the new guideline. Isn’t this a chance to discuss the new rule? When we have gone to the meetings, we have heard: “We are going to do this, it’s going to be a monetary amount, and it will be direct.” So what we can talk about is the content delivery and administration, but we don’t have any real say, and that’s why brokers are getting upset. They want to be involved in the whole process. At one of the meetings, one of our members said they felt like a student in grade school who wasn’t responsible enough to take their report card home, so it is sent to the parents instead.
In the investment space, CRM2 was mostly welcomed by advisors. Does G19 have similar intentions? CRM2, to my understanding, is to protect the consumer. But this isn’t a consumer purchase; it’s a business-to-business deal. I’m trying to understand why insurance companies feel it is so important that group benefits need to be disclosed, but individual life insurance doesn’t – that should have been years ahead of this.
What changes does your organization hope to see on G19? It has to be directed through the broker to the client. We can sit down with a client and explain what our value-add is, rather than them receiving an email out of nowhere saying what commission their broker was paid.
Most employers still not prepared for pot legalization
With only months to go before the legalization of marijuana in Canada, 71% of employers around the country are still not prepared for its potential effects on the workplace. That’s the finding of a new survey conducted by the Human Resources Professionals Association [HRPA], Business of Cannabis and the Public Services Health and Safety Association, which took responses from 680 HRPA members in January 2018. The survey also revealed that 48% of Canadian HR professionals were concerned about ensuring safe workplaces.
Ontario healthcare system losing millions to fraud
Citing Karen Voin of the CLHIA, journalist Josh Dehaas said in a recent analysis that the industry believes anywhere from 2% to 10% of healthcare dollars are lost to fraud each year. “Even if you take the conservative estimate – 2% – and apply it to Ontario’s $5.9 billion public drug plan system, it works out to $118 million lost each year.” A recent report revealed that the province is recouping only around $5 million from pharmacy inspections each year, including fake billing and money paid out in error.
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ALTERNATIVE VISION Rob Vanderhooft, head of Greystone Managed Investments, outlines how the firm’s investment strategy has evolved in recent years
WHILE TORONTO has emerged as a global financial centre in the last decade, that’s not to say there aren’t highly accomplished asset managers elsewhere in Canada. The Prairie region isn’t exactly the heart of the financial services industry, but that’s exactly where you’ll find the global headquarters of Greystone Managed Investments. Celebrating its 30th anniversary this year, the Regina-based firm is led by CEO Rob Vanderhooft, who has been with Greystone for almost its entire history, joining in 1991 after a successful stint as a US equity analyst at Great-West Life. Today, Vanderhooft combines the roles of CEO and chief investment officer, and strategy remains an important part of his day-to-day responsibilities. Since taking the top job in 2006, Vanderhooft has focused on making Greystone the place where institutional investors can count on consistent returns without loading on risk. The firm currently boasts assets under management of $33.6 billion, making it clear that Vanderhooft’s approach has proven popular with clients. “I don’t think a lot has changed in terms of how we are allocating assets – we are overweight in equities, US and international, and are probably neutral on Canada at the moment,” Vanderhooft says. “We have been underweight in bonds for a quite a long period and short duration, but we have
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added some bonds back to the portfolio as the Canadian tenure began to change.”
The move into real assets While fixed income will always remain a central part of any portfolio, Vanderhooft and his team have been quick to recalibrate asset allocation if it suits their clients’ needs. Presently, that has entailed greater focus on alternatives – and one area in particular.
duration of mortgages in general, it’s a good position to be in with an expectation of rising interest rates.” The firm’s current asset breakdown is 55% in real assets, 15% in public equities and 30% in fixed income. On the real asset side, Greystone’s real estate allocation is principally commercial; offices, shopping malls and industrial buildings are the firm’s most common targets for investment.
“In commercial mortgages, you are seeing spreads of 180 to 200 basis points over similar-term Government of Canada bonds, so that’s a pretty good yield advantage … Given the short duration of mortgages in general, it’s a good position to be in with an expectation of rising interest rates” “Where we are seeing a lot of interest from clients, given that interest rates are so low, is in mortgages,” Vanderhooft says. “In commercial mortgages, you are seeing spreads of 180 to 200 basis points over similarterm Government of Canada bonds, so that’s a pretty good yield advantage in what is a low interest rate environment. Given the short
A potential jewel in Greystone’s crown is its partnership with Menkes and Triovest Realty Advisors for a new mixed-use community in Toronto called Sugar Wharf. The development is set to include five condo towers, a public park, a grocery store and a public elementary school, and will house an estimated 8,000 residents. It’s an ambitious
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PROFILE Name: Rob Vanderhooft Title: CEO and CIO Company: Greystone Managed Investments Based in: Regina, Saskatchewan Years in the industry: 31 Fast fact: In addition to his responsibilities at Greystone, Vanderhooft also sits on the board of the Canadian Football League’s Saskatchewan Roughriders
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PEOPLE
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plan and a sign of the strides Greystone has made in its 30 years in business.
Calm in the storm It has been a tough marketplace for asset managers in Canada, and the industry has seen a raft of consolidations in recent years. Greystone differs from many of its competitors in that it is a private company, majority-owned by its employees. No single shareholder owns greater than a 12% stake, and more than 90% of employees – those who
folio. That’s not that uncommon. In virtually all markets globally, domestic equities as part of client portfolios have shrunk. It’s not just in Canada, and it puts a lot of pressure on traditional businesses.” Now in his 12th year as head of Greystone, Vanderhooft is confident he and the firm can navigate the various headwinds facing asset managers. Events like the market slump in early February are nothing new to him; in fact, they’ve been part of his career from the very beginning.
“You really need to stick to your disciplines and take a long-term view ... We saw a pretty significant rebound in markets after the financial crisis, so going to a very defensive position would have been detrimental to long-term returns” have been with the firm for more than a year – are shareholders. It’s a system that allows the company to preserve its identity and make the decisions it feels are best for its clients. In Vanderhooft’s opinion, asset managers need to be able to offer a range of investment solutions for clients, and those that don’t tend to be swallowed up by those with greater resources. “There has been pressure on asset managers, between passives competing and the price of beta continuing to go down, as well as pressure on fees,” he says. “The allocation in the US is maybe 40% passive; in Canada, it is 30%, but that’s an increasing number and could drive consolidation. “We saw one of our clients go from 40% Canadian equities down to 4%,” Vanderhooft adds. “They dramatically increased their alternatives component to 25% of their port-
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“The challenge is to continually assess the market and remain calm during very difficult periods,” he says. “I started my career in 1987 when we had a crash, so the lesson there was not to panic and to continue to hold the course and make adjustments, not make rash moves.” That lesson came into play again in 2008, when Vanderhooft was tasked with leading the firm through the financial crisis. Once again, his investment philosophy didn’t waver, despite the immediate pressure. “You really need to stick to your disciplines and take a long-term view,” he says. “It would have been easy to panic and switch asset allocation, go to cash and very defensive. We saw a pretty significant rebound in markets after the financial crisis, so going to a very defensive position would have been detrimental to long-term returns.”
GREYSTONE MANAGED INVESTMENTS AT A GLANCE
A privately owned institutional money manager, founded in 1988
Headquartered in Regina, Saskatchewan, with offices in Winnipeg, Toronto and Hong Kong
Currently has assets under management of $33.6 billion
Specializes in fixed income, Canadian equities, US equities, international equities, real estate, mortgages and infrastructure
Institutional clients include universities, pension funds, multi-employer groups, endowments and foundations, insurance companies, and nonprofit organizations
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Go beyond ordinary income.
16 fixed-income asset classes. No borders. An unconstrained, global approach can help investors who aren’t getting the income they need from traditional sources.
IA Clarington Global Bond Fund
Speak with your iA Clarington representative or visit iaclarington.com/gobeyond The information provided herein does not constitute financial advice. Always consult with a qualified advisor prior to making any investment decision. The opinions expressed herein are those of iA Clarington. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.
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SPECIAL REPORT
ALTERNATIVE INVESTMENTS
Alternatives in portfolio construction The recent dip in the equity markets underlines the need for advisors to look for other options to reduce risk for their clients IN ITS 2017 Global Alternatives Survey, Willis Towers Watson revealed that global alternative assets under management have reached just under US$6.5 trillion. It’s an impressive number, and one that proves the industry has come a long way over the past decade. Willis’ research focused on the top 100 alternative investment managers worldwide, which account for US$4 trillion in
AUM, a 10% increase over 2016. Within the top 100, real estate represents the largest share of assets (35%), followed by private equity (18%), hedge funds (17%), private equity funds of funds (12%), illiquid credit (9%), funds of hedge funds (6%), infrastructure (4%) and commodities (1%). Geographically, North America is the dominant market for alternatives (54% of total AUM), followed by
TOP 20 ALTERNATIVE INVESTMENT MANAGERS BY AUM Asset manager Bridgewater Associates TH Real Estate Blackstone Blackstone Macquarie Group PGIM Prudential Private Placement Investors CBRE Global Investor UBS Asset Management TPG Capital Blackstone AQR Capital Management J.P. Morgan Asset Management Principal Global Investors Kohlberg Kravis Roberts & Co. AXA Investment Managers Man Group Brookfield Asset Management Hines LaSalle Investment Management
Location US US US US Australia US US US Switzerland US US US US US US France UK Canada US US
AUM $116.8 billion $105.5 billion $101.9 billion $100.2 billion $96.2 billion $94.6 billion $80.9 billion $78.2 billion $78.0 billion $72.0 billion $71.1 billion $69.2 billion $61.3 billion $60.6 billion $58.4 billion $56.5 billion $54.7 billion $54.6 billion $54.0 billion $53.1 billion
Asset class Direct hedge funds Real estate Real estate Direct private equity funds Direct infrastructure funds Real estate Illiquid credit Real estate Real estate Direct private equity funds Funds of hedge funds Direct hedge funds Real estate Real estate Direct private equity funds Real estate Direct hedge funds Real estate Real estate Real estate Source: Willis Towers Watson Global Alternatives Survey 2017
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Europe (33%) and Asia Pacific (6%). In Canada, the alternatives market is still very much in its formative stages, but the majority of asset managers here now provide a variety of options in the alternative space. Diversification is cornerstone of any good investment philosophy, and alternative strategies are increasingly becoming the way to achieve that goal.
TYPE OF ASSETS UNDER MANAGEMENT AUM by asset class of the top 100 alternative investment managers Real estate $1.4 trillion Private equity $695 billion Hedge funds $674 billion Funds of private equity funds $492 billion Illiquid credit $360 billion Funds of hedge funds $228 billion Infrastructure $161 billion Source: Willis Towers Watson Global Alternatives Survey 2017
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EDUCATION
ALTERNATIVE LEARNING When it comes to what constitutes an alternative investment, there is some grey area. As CEO of the Chartered Alternative Investment Analyst Association – the global leader in alternative investment education – William Kelly is a noted expert in the space. “Like some things in life, it’s easier to describe what [an alternative investment] is not,” Kelly says. “I would consider it any asset class other than cash, stocks and bonds. With our curriculum, we focus on tradeable and non-tradeable strategies that an institutional investor would typically look at, like commodities, hedge funds, private equity and debt, infrastructure, and real estate.” Many of these investment options were once the preserve of institutional players, but they’re becoming more accessible to retail investors. “With the way the world is moving with the democratization of product, it seems that more and more of the mass affluent and average retail investors can get into some of these strategies,” Kelly says. That’s generally a positive, but there are pitfalls to giving retail investors access to alternative strategies. These products tend to be more complex than stocks or bonds, so investors either need to understand what they’re doing or seek the counsel of someone
who does. But for those who understand how to use alternative strategies properly, they serve as an important tool in portfolio construction. As the market crash at the beginning of February demonstrated, diversification is essential. “Volatility has woken up, and risk-ontrade is finally running out of legs,” Kelly says. “If you’re using a traditional 60-40 model, it will be a very bumpy road in 2018. There is no guarantee to avoid massive drawdowns, but with the right diversification, you can mitigate some of that risk.”
While it remains to be seen if a more devastating crash is around the corner, the February market slump made it clear that investors with one eye on the downside need to diversify their portfolios. “Investing is a long game, and trying to downsize your volatility is something all asset owners should be thinking about,” Kelly says. “If you have been in the equity markets, you have done very well, but if you haven’t looked at your portfolio in a while, you are probably over-allocated in equities, so I would consider pulling back on that and moving to less volatile assets.”
“If you’re using a traditional 60-40 model, it will be a very bumpy road in 2018” William Kelly, Chartered Alternative Investment Analyst Association While the markets quickly recovered after their recent slump, Kelly isn’t so sure this is a sign of equities’ overall strength. In his opinion, stock valuations at the beginning of the year were not grounded in reality, and corrections are an inevitable result of that disconnect. “In a risk-on market, investors were saying, ‘The S&P was up over 20% last year, so why do I need a risk mitigator in my portfolio?’” he says. “That works until it doesn’t work anymore, because there is no way the equity markets could continue to compound the way they had – the underlying fundamentals don’t support it.”
In Kelly’s case, that means a conversation with his financial advisor to discuss which products can provide the kind of returns he needs without loading on risk. “I’m talking to my advisor about various structured products where I can take an equity index with a fixed-income structure around it,” he says. “That will have a fixed upside in return, with some kind of downside protection – a structured note over six months, a year, a year and a half. When people hear ‘structured note,’ they get very nervous because it is a derivative security, but these can be great mitigators.”
ABOUT THE SPONSOR Mackenzie Investments has been helping Canadians since 1967, when we started with one person managing investments for one investor in Toronto. Today, we’re a holistic asset management partner for thousands of Canadian financial advisors and the investors they support across the country. Our commitment to them is to help investors achieve financial success and feel confident about the future. We partner with advisors and the investors they work with by bringing them innovative investment solutions, excellent asset management and superb service. Our team delivers innovation and expertise through mutual funds, ETFs, alternative investments, private wealth pools and managed solutions. We also offer a charitable giving program, as well as solutions for saving for a child’s education and giving financial assistance to people with disabilities. We strive to bring insights, data and tools to advisors to help them support their clients. Helping investors and advisors – that’s where everything starts for us. Always.
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SPECIAL REPORT
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ALTERNATIVE INVESTMENTS REAL ESTATE
THE DIFFERENCE BETWEEN REIT AND WRONG When investors look for options for their portfolios outside of stocks and bonds, real estate quickly comes to mind. It’s the world’s largest asset class by some measure – Savills puts the total value at US$228 trillion. To put that number in perspective, global GDP is just US$75 trillion, according to the World Bank. Real estate, especially in the world’s major urban centres, tends to be an investment that generates consistent returns with lower risk. Although market corrections occur from time to time (most notably during the 2008 financial crisis), the value of property tends to only go in one direction over the long term: up. Of course, not everyone can afford to go out and buy property as an investment, especially in those places where it’s likely to appreciate most. There are other options,
HOW MUCH IS THE WORLD WORTH?
Residential real estate $168.5 trillion Commercial real estate $32.3 trillion Agricultural land and forestry $27.2 trillion
Global real estate $228 trillion Outstanding securitized debt $100.2 trillion Equities $70.1 trillion Gold $6.5 trillion
Source: Savills; figures in US$
however, such as real estate investment trusts. As real estate in general has exploded, Canadian REITs have thrived in recent years. Cities like Toronto and Vancouver have among the highest property values in the world, so much so that the provincial governments in Ontario and BC saw fit to introduce various market-cooling measures.
While rising interest rates are a headwind for REITs, sentiment is still largely positive for the sector. Greg Romundt is the founder and CEO of Centurion Asset Management, a Torontobased firm that specializes in alternative investing in the real estate space. Its flagship fund, the Centurion Apartment Real Estate
PERFORMANCE OF THE CENTURION APARTMENT REIT GROWTH OF $10,000 INVESTED IN CENTURION APARTMENT REIT AT INCEPTION (AUGUST 2009) $26,000 $24,000 $22,000
Calendar returns Centurion REIT TR
2009 2.7%
Compound trailing returns Centurion REIT TR
2010 8.5%
2011 10.2%
2012 2013 20.0% 11.0%
1-year 2-year 17.30% 13.49%
3-year 4-year 12.38% 11.58%
2014 9.2%
2015 10.2%
2016 9.8%
2017 17.3%
5-year Since inception 11.46% 11.81%
$20,000 $18,000 $16,000 $14,000 $12,000 $10,000 Aug 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Source: Centurion Asset Management; REITs are not guaranteed, their values can change frequently and past performance is no guarantee of future results. Past performance may not be repeated.
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S:7.5”
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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts and prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated. TD Mutual Funds and the TD Managed Assets Program portfolios (collectively, the “Funds”) are managed by TD Asset Management Inc., a wholly-owned subsidiary of The Toronto-Dominion Bank and are available through authorized dealers. ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.
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SPECIAL REPORT
ALTERNATIVE INVESTMENTS ADVANTAGE OF A PRIVATE VERSUS PUBLICLY TRADED REIT GROWTH OF $10,000 INVESTED OVER A 10-YEAR PERIOD (AS OF FEBRUARY 20,2018) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 2008
2009
2010
2011
2012
2013
S&P/TSX Composite Index
2014
2015
2016
2017
2018
S&P/TSX Capped REIT Index
Calendar returns
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
S&P/TSX Composite Index TR
-33.0% 35.1%
17.6%
-8.7%
7.2%
13.0%
10.6%
-8.3%
21.1%
9.1%
S&P/TSC Capped REIT Index TR
-38.3% 55.3%
22.6% 21.7%
17.0%
-5.5%
10.4%
-4.6%
17.6%
9.8%
“In all of our core markets, rents have been rising strongly because house prices have gone to a level that people can no longer afford them. So people we would normally lose to buying a condo or a starter home are being forced into rentals” Greg Romundt, Centurion Asset Management
Source: Centurion Asset Management
Investment Trust, generated returns of 17.3% in 2017 as market conditions worked in its favour. “It was a very strong year for us,” Romundt says. “In all of our core markets, rents have been rising strongly because house prices have gone to a level that people can no longer afford them. So people we would normally lose to buying a condo or a starter home are being forced into rentals. There is also significant immigration into the country, particularly southwestern Ontario and Toronto.” Another thing working in REITs’ favour is the uncertainty surrounding stocks. Bull markets have to end eventually, and February’s slump should be a warning for investors, Romundt believes. “The only thing that surprised me was that it took so long,” he says. “The markets are exceptionally overvalued and have been for a very long time. Ultra-low interest rates have driven the markets to excessive highs. I
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don’t think I’m alone in thinking the market has been overvalued.” It’s exactly why the alternative space has grown so much since the financial crisis. Investors might have become accustomed to double-digit returns in equities, but history indicates that won’t last indefinitely. “One of the prime reasons that people come to alternatives is to diversify away from the primary holdings, which are generally stocks,” Romundt says. “Another reason is that a lot of alternative strategies have volatility at a lower core level than the stock market. Some strategies, like hedge funds or global macro, can be volatile, but things like real estate, corporate lending and mortgage lending tend to have very low levels of volatility.” Aside from its flagship apartment REIT, Centurion also offers alternative solutions in mortgages, as well as corporate and private debt through its Centurion Real Estate Opportunities Trust and Centurion
Financial Trust offerings. Although he can foresee some tough times for stocks in the near future, Romundt is more confident when it comes to the property market. Mark Twain famously advised, “Buy land, they aren’t making it anymore,” and although he likely didn’t take into account interest rates or stringent lending criteria, it remains a valid point in 2018. “For all the talk of the new condos being built, all of those condos are full,” Romundt says. “The vacancy rates are exceptionally low, so rents have really accelerated. In Toronto last year, we were into double-digit growth. We are not building fast enough – we keep on tightening the mortgage rules, and prices are high. They just brought in the B-20 rules, which increases the interest rate that people have to qualify at, which will take 20% of would-be buyers out of the pool. All of that is feeding through to our rental growth rates.” Another factor to consider is that even if
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REIT RETURNS VERSUS OTHER ALTERNATIVES REIT return and volatility 16% 14%
iShares S&P 500 ETF
12%
iShares S&P/TSX Capped REIT ETF
Centurion REIT
Total return
10% iShares iBoxx High Yield Corporate Bond ETF
8%
iShares S&P/TSX 60 ETF
6% 4% iShares Canadian Government Bond ETF
2% 0%
0%
2%
4%
6%
SPDR Gold Shares ETF
8%
10%
12%
14%
16%
18%
20%
Risk (standard deviation)
“The demand for rental apartments runs counter to the real estate market because when people are buying places, they aren’t renting. You start to see your margins and your revenues go up somewhat counter-cyclically to the economy” Greg Romundt, Centurion Asset Management
Source: Centurion Asset Management
the economy takes a nosedive, that doesn’t change people’s basic need for shelter. In fact, should a correction take place, funds like the Centurion Apartment REIT will likely prosper. “Commercial real estate, like apartment buildings, is different than houses and condos,” Romundt says. “The demand for rental apartments runs counter to the real estate market because when people are buying places, they aren’t renting. You start to see your margins and your revenues go up somewhat counter-cyclically to the economy.” While market-cooling efforts by provincial governments and the Bank of Canada have largely been in response to the overheated markets in Toronto and Vancouver, there is the rest of Canada to consider. As those two cities become unaffordable for many, the surrounding commuter belt expands. More people means increased demand for property, which, in the short term, will inevitably mean higher rents and better returns for real estate investors.
“There has been a ripple,” Romundt says. “People can’t afford to buy an 800-squarefoot condo in Toronto, so they go to Mississauga, where they get a 700-squarefoot condo, or out to Hamilton, where it’s maybe 500 square feet. It’s the same thing with rents in Toronto, and it is happening everywhere. People might decide they can’t afford to live in Toronto anymore and move to Kitchener, but there’s not that many apartments in Kitchener, so it doesn’t take a lot for rents to be sucked up there too.” This isn’t necessarily a bad thing, in his opinion; rather, it is evidence of a robust market, and one he has every confidence in right now. “It’s not that we have a fundamental imbalance in supply and demand – if we did, we would have a market with empty buildings, and it is all speculation,” Romundt says. “But the demand is there. Can the prices come down 10%? Absolutely, but I don’t think we are going to see a gigantic market wreck unless something dramatic happens with the economy.”
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SPECIAL REPORT
ALTERNATIVE INVESTMENTS
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REAL ESTATE
“I think diversification is the only free lunch left out there. By investing in a mortgage fund, the investor benefits from diversification in geographical, asset class and sponsor” Daniel Marchand, Trez Capital
MORTGAGE FOR THE FUTURE While Canada’s real estate market has experienced unprecedented growth over the past decade, that doesn’t mean mortgages are suddenly easy to come by. Quite the opposite, in fact, as revised B-20 mortgage underwriting guidelines have made qualifying for a personal mortgage increasingly difficult. Real estate developers often have similar difficulties when applying for commercial loans. In response, many alternative lenders have emerged to address that need. Since 1997, Trez Capital, one of the largest private commercial mortgage lenders in Canada, has provided more than $7 billion in commercial mortgages to real estate developers and owners. The firm offers a number of alternative debt investment solutions for investors as well; its clients are split 50/50 between the institutional and retail spaces. “Irrespective of short-term market fluctuations, people tend to gravitate towards us for very low volatility and stability of income,” says Daniel Marchand, Trez Capital’s head
of investor global sales. “We do commercial mortgages, and the end result is attractive and extremely consistent yield over long periods of time.” Focusing on private real estate debt, the Trez Capital Yield Trust is the firm’s flagship fund, with $550 million in total AUM. For investors worried about volatility in the equity markets, it acts as an important balancing tool in a portfolio. “We are not here to try and beat the stock market – we are completely uncorrelated to it,” Marchand says. “People come to us for absolute returns in the 7% to 9% range, depending on the strategy. We are there as a volatility reducer, as well as an income component for the portfolio.” For those seeking greater exposure to the United States, the firm also offers the Yield Trust US, which currently provides better returns than the Canadian vehicle, as interest rates in the US are higher and the lending regulatory framework is quite different. Prime Trust, targeted at those with a lower risk profile, completes the firm’s investment lineup. “Prime Trust is the smallest of the three
TREZ CAPITAL TRUST PERFORMANCE 140%
YTD return
120% 100%
Trez Capital Prime Trust (inception 2006)
80%
Trez Capital Yield Trust (inception 2009)
60%
Trez Capital Yield Trust US (inception 2013)
40% 20% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Trez Capital
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SPECIAL REPORT
ALTERNATIVE INVESTMENTS trusts, but unique in the market,” Marchand says. “I would argue that it is our most de-risked portfolio, in the sense that it has the lowest loan-to-value ratios with the least amount of leverage, and consists of only first-ranking mortgages. Since inception in 2006, it has generated a return of approximately 7%.” With offices in Vancouver, Toronto, Dallas and Palm Beach, Trez provides commercial mortgages in multi-residential, industrial, office and retail. As Marchand explains, the location of the company’s offices was no accident; rather, it reflects economic and demographic shifts across North America. “We are positioned in the two highestgrowth markets in the southern US,” he says. “That allows us to move between residential and industrial, Canada and the US, where we can find the best risk-adjusted returns in those core markets.” At the moment, that search centres around two of the biggest states in the US: Texas and Florida. “In Dallas, the population is now 7.2 million people, so there is a shortage of housing and industrial properties,” Marchand says. “It’s the same thing in Florida, where about 1,000 people a day move there. We also like the markets of Charlotte, North Carolina; Atlanta, Georgia; and Orlando, Florida.” When investors look to add real estate exposure to their portfolio, there are some important factors to consider. A mortgage trust and a REIT both provide exposure to that sector in broad terms, but the results can be quite different. “REITs are subject to risk-on, risk-off trades,” Marchand says. “With our mortgage funds, the net asset value has stayed consistently at $10 since inception of each of the funds. As such, fluctuations to the NAV have not been a factor of influence, and investors have consistently earned a high income.” Trez funds have many underlying parts, which is another advantage in terms of exposure, Marchand explains. “I think diversification is the only free lunch left out there,” he says. “By investing in a mortgage fund, the investor benefits from diversification in geographical location, asset class and sponsor.”
ALTERNATIVE STRATEGY
BEST OF BOTH WORLDS As head of Sprott Asset Management, John Wilson became a central figure in the rise of alternative investments in Canada. It was under his stewardship that Sprott became one of the leading asset managers in the alternative space. Despite that, the Sprott name was, and likely always will be, synonymous with precious metals. That realization led Wilson and partner James Fox to strike out on their own and form Ninepoint Partners last August. The duo brought the alternative funds they helped build under the Sprott banner with them to their new enterprise, and they have more launches planned for 2018. In Wilson’s opinion, there is a thirst for these kinds of strategies in Canada that would be foolish to ignore. “Back when we were inside Sprott,” he says, “we were very focused on how the industry landscape was changing and how difficult it was if you were trying to sell traditional mutual fund products, which basically were being replaced by ETFs that had much lower fees.” The growth of that side of the market
is well documented, but Wilson believed investors needed a lot more than just passive solutions. It was that ethos that drove business at Sprott Asset Management and continues to fuel Ninepoint. “We felt it was underserved in Canada, and there wasn’t really a leader in that category, so over the last five years we really became that leader,” he says. “When we split, Sprott wanted to get back to being all about gold, and we wanted to focus on alternatives, so it really allowed both groups to do what they wanted to do.” Now that Wilson and Fox have free rein over the types of funds they bring to market, investors can expect more alternative options in the months ahead. Like its predecessor, Ninepoint offers traditional equity and fixed-income mutual funds, but it is its alternative strategy lineup that really sets it apart. “By definition, the funds we run give the investor diversification from raw market exposure,” Wilson says. “Your typical longonly mutual fund or ETF will have a high degree of market correlation, and that type of investing has become incredibly popular in the last couple of years as the market has gone up a lot.” The nine-year bull market has been a powerful remedy to the pain of the
A CLOSER LOOK: THE SPROTT ALTERNATIVE INCOME FUND Top 5 investments Industry
Investment type
Description
Healthcare
Private debt facility
Provides working capital to a healthcare company for growth and an acquisition strategy
Construction
Private debt facility
Provides working capital to a company involved with P3 infrastructure, LEED and green energy projects
Mining
Private debt facility
Provides a facility to fully capitalize a major manufacturing project in Eastern Canada
Financial services
Private debt facility
Provides capital to a financing company for a specialty luxury project
Food and beverage
Private debt facility/ accounts receivable
Provides a working capital solution to a tomato processing and canning facility Source: Ninepoint Partners
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Great Recession, but over-confidence is a dangerous thing in the investment world. The higher you rise, the harder you potentially fall – if you aren’t prepared, that is. Having a balanced portfolio is the best protection against a market correction – a message Wilson and his colleagues at Ninepoint are driving home. “This upswing has been a long one, and that doesn’t mean it is necessarily over, but it is long in the tooth,” Wilson says. “It would be prudent to diversify your risk and take some money off the table and then allocate to the strategies that can deliver return without the risk you already have.” That became clear on February 5, when the Dow Jones Industrial Average saw its biggest one-day point drop in history; approximately US$4 trillion was wiped off global markets. If nine years of almost constant growth had made many investors forget the events of 2008, this was a wake-up call. “The investment world can be a dangerous place,” Wilson says. “There are a number of
retail investors who lost their entire investment that day. They were buying some of these short-volatility products and were entirely wiped out in one day. That speaks to some of the dangers that are there and the importance of getting good advice from an advisor and understanding what you are buying.” In terms of alternative strategy, the Sprott Alternative Income Fund offered by Ninepoint allows investors access to widespread diversification, bridging, credit income, senior debt, diversified bonds and private credit. It’s exactly the kind of product Wilson refers to when he talks about protecting on the downside – but with one important addition. “It gives a better liquidity profile; when you are doing private lending, you can’t offer daily liquidity, so the lock-ups tend to be longer,” he says. “With the Alternative Income Fund, we can blend some daily NAV products with some longer-term products, and it gives a better liquidity profile than a straight private lending fund.”
“This upswing has been a long one, and that doesn’t mean it is necessarily over, but it is long in the tooth. It would be prudent to diversify your risk ... and then allocate to the strategies that can deliver return without the risk you already have” John Wilson, Sprott Asset Management
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ALTERNATIVE INVESTMENTS HEDGE FUNDS
THE LONG AND SHORT OF IT Hedge funds are an oft-criticized part of the investment landscape. In January, Warren Buffett reiterated his distaste for this particular asset class, pointing out that hedge fund managers regularly failed to outperform low-cost, index-tracking ETFs. Buffett’s criticism that hedge funds have regularly failed to beat index funds over the past decade is indeed true, but that’s been during a period of consistent growth in the equity markets. It’s hedge fund managers’ responsibility to prove their worth when the S&P 500 isn’t providing a 20% annual return – and 2018 could very well be the year to do it. Ken Heinz is president of Hedge Fund Research, a US-based firm that runs 150 indices covering hedge fund benchmarking and performance. In 2017, the industry had its first year without a monthly decline since 2003 as total assets grew to US$3.21 trillion. Heinz identifies how hedge funds achieved these positive flows. “The equity hedge index was up 13.5% for the year in 2017, with different subsets under that,” he says. “In the category we call fundamental growth, it was up 19%, and that’s the most aggressive beta-oriented equity strategies with emerging markets and other types of growth-oriented strategies.” Risk appetite is an important driver for the hedge fund industry, and as investor sentiment grew, so too did flows into hedge funds. In 2017, cryptocurrency began to make its presence felt in this space for the first time in a major way. Hedge Fund Research began publishing blockchain indices in the middle of 2017; they were up almost 3,000% at the end of the year, but that all changed in January when those same funds plummeted. “It’s a smaller group of funds, and the volatility is quite high,” Heinz says. “It will be interesting to see how that plays out, whether we see a pullback from January’s sell-off or if the
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HEDGE FUND RESEARCH INDEX PERFORMANCE Monthly return Index name
Annualized return
Dec. 2017
Last 12 months
Last 36 months
Last 60 months
HFRI Fund Weighted Composite Index
1.05%
8.65%
4.24%
4.95%
HFRI Asset Weighted Composite Index
0.48%
6.61%
3.09%
4.62%
HFRI World Index
0.84%
5.63%
2.64%
3.71% Source: Hedge Fund Research
market recovers. You see more retail investors in this space than institutions, but it’s still early.” It’s clear that investing in certain hedge funds can be a risky proposition, but the same applies across most asset classes. Will the space continue the momentum it built up last year or return to the disappointing returns of 2015 and 2016? There are a number of factors that will dictate performance, Heinz says, including the ongoing drama in Washington. “A lot of us have Twitter fatigue trying to keep up with what our president is saying and how that might affect policy,” he says. “It is one year on, but there is still a lot of adjustment taking place with the markets. That is creating opportunities for people, particularly on a forward-looking basis in the infrastructure space. That’s where the new agenda will focus.” Trump’s tax reform bill is another factor to consider; if successful, it should mean increased corporate profits and a boost for the hedge fund space. “The idea that the tax cut will give incentive for US corporations to repatriate more of their offshore earnings is influencing things as well,” Heinz says. “So it’s a very fluid environment where people are trading, speculating and making money.” Heinz is also optimistic about the wider economy, particularly some of the major deals currently in the works. Last year saw some pretty mammoth acquisitions, but rather than viewing 2017 as an outlier, Heinz believes the world’s largest corporate entities are hungry for even more expansion. “In the latter part of last year, M&A was an
“People are now speculating on what the next big deal in retail will be … and how that will reshape the retail space. That’s driving stock prices up, but also creating short opportunities where things aren’t so good” Ken Heinz, Hedge Fund Research exciting space,” he says. “You had a lot going on in media with Disney, Time Warner and 20th Century Fox; a lot in the technology space with the blockchain trend; and even in retail, where you saw Amazon take over Whole Foods. People are now speculating on what the next big deal in retail will be – if it is with Amazon, Google, Facebook or Apple – and how that will reshape the retail space. That’s driving stock prices up, but also creating short opportunities where things aren’t so good. The combination of all those things means there are opportunities to make money.”
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G L O B A L
G L O B 9/03/2018 A L
7:13:08 AM
OIC
SPECIAL REPORT
ALTERNATIVE INVESTMENTS CURRENCY
THE COLOUR OF MONEY There are many ways Donald Trump is different than his predecessors in the Oval Office, and monetary policy is certainly one item on that lengthy list. Just before his inauguration in January 2017, Trump made clear his belief that the dollar’s strength was hindering US trade, specifically when it comes to competing with China. While there are a variety of other factors at play, his words certainly had the desired effect; since then, the US Dollar Index – which tracks the greenback’s value against a basket of global currencies – has fallen by more than 10%. That descent was compounded at the World Economic Forum in Davos in January, when Treasury Secretary Steven Mnuchin reiterated that a weak dollar was good news for the US. The currency duly sank to a three-year low, but according to Alfonso Esparza, senior currency analyst with OANDA, this has been an ongoing
trend since Trump took office. “The US economy is really strong, and the Fed has been raising interest rates, but the fact that there is so much political uncertainty is hurting the dollar and shifting the dynamic in the fx world,” Esparza says. “I think this year will be a continuation of 2017. The political uncertainty that we saw in Washington last year is still present.” The loonie, meanwhile, remains highly susceptible to outside forces, and ongoing trade negotiations are likely to play a major role in its performance in 2018. OANDA provides online trading services covering global market indices, commodities, treasuries, precious metals and currencies, so NAFTA will be a key focus for the firm in the coming months. “The Canadian dollar is closely tied to the US in terms of trade,” Esparza says. “If NAFTA ends this year, then we will see downward pressure on the loonie. If it survives, then the dollar will get a boost, based on that commercial relationship between Mexico, the US and Canada.” Farther afield, the euro grew consistently
throughout 2017 after years in the doldrums and has carried that momentum into this year. One need only look to central bank policy worldwide to see that a sense of optimism has returned in many global economies, which is clearly impacting currency rates. “The IMF improved its forecast for most major economies, so it’s looking good in terms of global growth,” Esparza says. “The EU seems to be on the right track, and central banks across the world are lifting rates after 10 years of a low-rate environment. It’s another reason the dollar has failed to gain traction – before, the Fed was the lone central bank lifting rates, but now we have the Bank of Canada with three hikes in 2017 and the ECB signalling a rate hike by the end of this year, which is good news for the economy. The only question mark is regarding inflation. That’s a concern because central banks will not want to lift rates for too long if inflation is still low.” The pound, however, remains vulnerable as the spectre of Brexit looms. Political
US/CANADIAN DOLLAR SPOT EXCHANGE RATE Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
1.3000
1.2500
1.2000
Source: Bloomberg
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“The US economy is really strong, and the Fed has been raising interest rates, but the fact that there is so much political uncertainty is hurting the dollar and shifting the dynamic in the fx world” Alfonso Esparza, OANDA turmoil creates instability, which drags a currency’s value. No more is this apparent than in Washington, where a capricious administration has harmed the greenback’s position as a safe haven. “The dollar was battered by the comments from Secretary Mnuchin [in Davos],” Esparza says. “His position was a departure from previous treasury secretaries and not something you usually see from such an influential figure. The Trump administration tried to do a bit of hedging and said Trump wanted a stronger dollar, but the damage was already done. That had an effect across the board, with the pound touching pre-Brexit levels almost.” After the dollar lost so much ground last year, traders started turning to the euro, the yen and the Swiss franc. Emerging markets have been another beneficiary. “Emerging markets are doing great, and that’s heavily correlated with the dollar’s performance,” Esparza says. “The dollar’s weakness favours the price of commodities, which go up when the dollar goes down. Also, if there is more growth around the world, there will be more demand for commodities, which will be good for emerging market economies.”
CRYPTOCURRECY
BOOM OR BUST? After stratospheric growth in 2017, Bitcoin came back to earth with an almighty bump in January, losing close to 70% of its value. Its December highs of nearly US$20,000 are a long way from its price of US$6,982 in early February. While the top cryptocurrency has recovered somewhat, that collapse did little to change the minds of the industry’s critics. But that’s not to say that Bitcoin and other cryptocurrencies don’t have their supporters, too, including Fred Pye of Toronto-based asset manager 3iQ. Pye’s firm recently launched Canada’s first mutual fund for cryptoassets. The Global Cryptoasset Fund (QGCF) will invest directly in units of Bitcoin, Ethereum and Litecoin and is available through Fundserv. Pye has
fund, Pye and his team at 3iQ are putting their faith in Bitcoin and its peers. In doing so, they are going against the grain, at least in relation to some of the investment community’s biggest names. Almost all of the major banks have taken a stance somewhere between a negative outlook and outright hostility, which is massively short-sighted, in Pye’s view. “They are allowed their opinion, but they are ill informed,” he says. “A lot of the younger generation understand cryptoassets. If the internet is the unsecured movement of information, is that worth more than the secured movement of money, value and ownership? If the internet is worth a gazillion dollars, then blockchain is worth a gazillion plus one.” While the established asset managers are still adopting a wait-and-see approach, some of those within their ranks are already convinced. In January, two of BlackRock’s
“Our argument is that this could be the single biggest technological advancement in our generation. If it is, your allocation needs to be more than zero” Fred Pye, 3iQ Corp. become a regular presence in Canadian financial media, especially when the sky appeared to be falling for Bitcoin earlier this year. However, he believes the criticism of this asset class has been overblown. “Volatility is not necessarily a bad thing in the investment business,” he says. “If you have a volatility of zero, your expected rate of return is zero. Volatility and risk are measured on the Sharpe ratio, and Bitcoin last year had a ratio of 3.0. So if you added it to your portfolio in 2017, you increased your return and lowered the risk.” In launching Canada’s first cryptoasset
leading fixed-income managers, Adam Grimsley and Michael Wong, decided to leave the world’s largest asset manager to launch their own cryptocurrency hedge fund. It’s a risk on their part, but a calculated one, in Pye’s opinion. The benefit of having exposure to a cryptoasset is that it provides greater diversification for a portfolio. Although Bitcoin had a miserable start to the year, the events of early February showed that volatility in the stock markets isn’t a thing of the past, either. “I think all cryptoassets trend in the same direction, but Bitcoin, Litecoin and
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SPECIAL REPORT
ALTERNATIVE INVESTMENTS INDUSTRY VOICE
THE RISE AND FALL OF BITCOIN BITCOIN VALUE
MEETING OF THE MINDS IN ALTERNATIVES
$20,000
In February, the Private Capital Markets Association of Canada [PCMA] and the National Exempt Market Association [NEMA] revealed plans to merge. Retaining the PCMA name, the combined entity will be the alternative investment industry’s voice in Canada. PCMA chair Doug Bedard and NEMA president and chair Craig Skauge offered their thoughts on why an amalgamation was in everyone’s best interests.
$15,000
$10,000
$5,000
Doug Bedard Chair Private Capital Markets Association of Canada
$0 Mar 2017
May 2017
Jul 2017
Sep 2017
Nov 2017
Jan 2018 Source: Bitcoin.com; figures in US$
Ethereum are not correlated to any of the other asset classes that an investor uses,” Pye says. “Investment advisors are always on a quest for the perfect non-correlated asset class, and this is it.” Pye believes 3iQ’s launch of the Global Cryptoasset Fund is the next step in the evolution of this industry. While Bitcoin’s gains last year made a lot of investors sit up and take notice, there is still a lot of confusion surrounding cryptocurrency. “It’s very difficult for a Canadian to create a wallet with a significant investment in these currencies,” Pye says. “It can be complicated, so people make mistakes. The investing public that wants to put this fund in a tax-free savings account or RSP knows that this [fund] is regulated by the OSC and can have a high degree of confidence that it is safe and secure.” The Ontario regulator’s blessing for 3iQ’s
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fund means that more asset managers will likely follow with their own cryptocurrency offerings. Rather than expressing concern over added competition, however, Pye believes the addition of more crypto funds will help to reduce negative sentiment surrounding the industry while also providing a boost for the public purse. “The best thing for the government is to approve regulated funds like mine,” he says. “When someone buys or sells my fund, the government will know exactly what the taxes due are. Regulation for Bitcoin is a good thing; the more it becomes regulated, the more valuable it becomes.” He adds: “Our argument is that this could be the single biggest technological advancement in our generation. If it is, your allocation needs to be more than zero. Right now, 99% of Canadians have zero exposure to the cryptoasset space.”
Craig Skauge President and chair National Exempt Markets Association
WPC: Why did NEMA and the PCMA decide to merge – and why now? Doug Bedard: Over the last few years, our respective associations have considered joining forces as one organization. It was readily apparent to our members that both associations were working on the same issues, and we have had representatives from our organizations working on the same committees with the regulators. As our efforts converged, it made sense to achieve some economies of scale and merge our associations. This was welcome news to members who belonged to both associations, as they
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would gain the benefit of a larger and very capable leadership team with a single annual membership fee. Craig Skauge: As time has gone by, our membership bases have started to overlap more and more, and as we found ourselves fighting alongside one another in order to get our industry the respect it deserves, uniting only made sense. Given that we’re not government-sponsored, running an advocacy association isn’t unlike running a small business. The economics of it aren’t structured in your favour. The amount of work to be done on behalf of participants in the private capital markets is vast, and resources are limited, so having everything under one umbrella also makes a lot of sense from a financial standpoint.
WPC: Do you feel there’s a lack of knowledge about the alternatives space in Canada? DB: Yes. As much as we work to inform stakeholders and the public at large, there remains a knowledge gap of the role private capital markets play in the Canadian economy. Last year we highlighted the fact that our members participated in raising over $8 billion in Ontario alone. Canadian investors on the whole invest more than 95% in public markets, yet large institutional investors and pension funds are nearly 50/50 in private- and public-market investments. We are committed to enlightening the investing public and businesses of the opportunities in exempt offerings. CS: I think there’s a problem with misinformation about alternatives more than a lack of knowledge. There’s this misconception that 100% of exempt market securities are extremely high-risk, and it’s a complete farce – a farce that plays into the hands of those who compete with exempt market dealers, mind you. There’s a lot of good stories in the exempt market, and those stories need to be told alongside the bad ones.
“As much as we work to inform stakeholders and the public at large, there remains a knowledge gap of the role private capital markets play in the Canadian economy” Doug Bedard, Private Capital Markets Association of Canada WPC: What are your plans for reaching out to the advisor channel? DB: The PCMA has developed vibrant regional chapters in four provinces – BC, Alberta, Ontario and Quebec – with member representation in the east that we expect to grow with the addition of our NEMA colleagues. This will provide a great opportunity to work with advisors and understand what opportunities and challenges they experience in their region. The PCMA holds an annual conference that provides an ambitious agenda and professional development sessions. Similarly, our chapters hold several events each year with a focus on professional and business development. CS: As a single voice for the private capital markets, I believe that we’ll have a much broader reach and even more credibility in the advisor world as a whole. NEMA held an event for outside advisors late last year, and it brought in a lot of people. I suspect a similar event by the PCMA will bring in even more, and with our combined resources, there’s a strong likelihood we could take the educational model for outside advisors across the country.
WPC: What preconceived opinions about alternatives would you like to change? DB: The three common misperceptions are risk, lack of liquidity and the ‘exempt category’ name itself. There is a continuum of risk in alternative investments; however, the current regulations require a risk acknowledgement
that identifies exempt market products as all high-risk. Recent discussions with some regulators have been productive in considering how products in this category may be riskrated and fall into a lower risk category. It is common practice in the market to address liquidity with a redemption mechanism. This offers a fair liquidity opportunity to investors where no secondary market exists for the product. We have been mindful of the ‘exempt’ description and connotation that invokes. We had carefully considered this when the association became the Private Capital Markets Association. It better describes the entire market and was more inclusive for many of our current members. CS: I think there’s still this belief that being sold under a prospectus exemption makes a security lesser than one sold via a prospectus. The exempt market has come a long way in recent years, and the point-of-purchase and ongoing disclosure regime for retail investors isn’t materially different than it is for companies that trade on the [TSX] Venture. In addition, this continued notion of lack of liquidity needs to be addressed. The fact of the matter is that many modern-day exempt products have liquidity provisions that surpass the so-called liquidity provided with many of the thinly traded stocks purchased by retail investors. The lack of secondary-market liquidity also means a lack of secondary-market volatility, which is what brings a lot of investors to the exempt market in the first place.
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Morningstar Star Ratings reflect performance of Series F as of January 31, 2018 and are subject to change monthly. The ratings are an objective, quantitative measure of a fund’s historical risk-adjusted performance relative to other funds in its category. Only funds with at least a three-year track record are considered. The overall star rating for a fund is a weighted combination calculated from a fund’s 3, 5, and 10-year returns, as available, measured against the 91-day treasury bill and peer group returns. A fund can only be rated if there are a sufficient number of funds in its peer group to allow comparison for at least three years. If a fund scores in the top 10% of its fund category, it gets 5 stars; if it falls in the next 22.5%, it receives 4 stars; a place in the middle 35% earns a fund 3 stars; those in the next 22.5% receive 2 stars; and the lowest 10% receive 1 star. For more details on the calculation of Morningstar Star Ratings, see www.morningstar.ca. Quartile rankings and peers beaten are calculated by Mackenzie Investments based on the fund series-level data Morningstar provides. The CIFSC categories, Star Ratings, number of funds in each category, and annual compounded performance for the standard periods are: Mackenzie Canadian Growth Balanced Fund Series F, Canadian Equity Balanced category: 1 year - n/a stars 12.7%, 3 years - 5 stars (377 funds) 8.6%, 5 years - 5 stars (294 funds) 12.61%, 10 years 170789_WealthPro_ETF_DPS_v6.indd 1 42-43_Mackenzie DPS.indd 42
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5 stars (156 funds) 7.44%. Mackenzie Strategic Income Fund Series F, Canadian Neutral Balanced category: 1 year - n/a stars 8.7%, 3 years - 5 stars (477 funds) 6.4%, 5 years - 4 stars (378 funds) 7.4%, 10 years - 5 stars (156 funds) 7.7%. Mackenzie Global Strategic Income Fund Series F, Global Neutral Balanced category: 1 year - n/a stars 10.8%, 3 years – 5 stars (939 funds) 6.7%, 5 years - 5 stars (638 funds) 9.3%, 10 years - 5 stars (248 funds) 7.3%. Mackenzie Ivy Global Balanced Fund Series F, Global Equity Balanced category: 1 year - n/a stars 7.9%, 3 years - 3 stars (717 funds) 5.8%, 5 years - 4 stars (489 funds) 11.1%, 10 years - 5 stars (249 funds) 8.1%. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of January 31, 2018 including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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SPECIAL PROMOTIONAL FEATURE
ALTERNATIVE INVESTMENTS
Everyday alternatives Rick Weed and Michael Schnitman of Mackenzie Investments discuss the emergence of alternative investments in the retail space
IT’S NO secret that Canada tends to follow the United States’ lead in the investment space. The rise of ETFs in recent years is one example of that phenomena, but there are many others. Alternative investments, for instance, have been a staple of American portfolios for years now, but the market for alternatives in Canada is still largely in its infancy. That disparity can mean opportunity, however, particularly for asset managers like Mackenzie Investments. Having celebrated its 50th anniversary last year, Mackenzie has committed to enhancing its alternative suite
alternatives have considerable growth potential in Canada, and Mackenzie’s products will reflect that. “Alternative assets are things that most mutual fund investors don’t invest in – currencies, infrastructure, private debt, private equity, micro caps,” Weed says. “Alternative strategies tend to use fixed income and/or equities strategies that rely on leverage, shorting and different techniques rather than just buy-and-hold.” Canadians have not fully benefited from alternative asset classes, which leaves them
“These alternative investments have very different return streams than your traditional equities and fixed income. If you can put a different return stream in that has differing risk-return ratios and correlations, you will have a much better risk-return ratio over time” Rick Weed, Mackenzie Investments in both mutual funds and ETFs. Rick Weed, head of Mackenzie Systematic Strategies, and Michael Schnitman, SVP of product, are both veterans of the US investment space. Formerly of Putnam Investments, both Weed and Schnitman believe
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exposed to greater overall portfolio risk, Schnitman explains. “Half of the assets in Canada are in balanced funds that are some flavour of 60% equity and 40% fixed income. They are balanced by asset allocation, but not by risk allocation, so 90% of the risk comes
from the 60% of the fund that is equity.” Although Mackenzie made its name with traditional mutual funds, the firm is determined to be positioned at the forefront of change in the industry. Increasingly, that means a commitment to non-traditional products, such as the Diversified Alternatives Fund it launched in 2016. Schnitman outlines the importance of having such a fund in your portfolio. “If you add alternative asset classes in a well managed portfolio that is constructed using systematic, quantitative strategies, you can blend asset classes that have different correlations and pair those with a traditional 60-40 balanced fund for a better overall risk-return profile for the whole portfolio.” In other words, it’s all about providing the kind of diversification an investor needs to protect their assets. “When we put assets in this fund, we look at a 60-40 fund and its risk-return and Sharpe Ratio,” Weed says. “Then we look at all the other alternative assets we can add – high yield, micro caps, distressed credit, bank loans, equity infrastructure and real estate. These alternative investments have very different return streams than your traditional equities and fixed income. If you can put a different return stream in that has differing risk-return ratios and correlations, you will have a much better risk-return ratio over time.” While alternatives are more tightly regulated on this side of the border than they are in the US, alternative strategies provide a chance for Mackenzie to distinguish itself as a forward-thinking asset manager. The Mackenzie Unconstrained Fixed Income Fund and Mackenzie Monthly Income Portfolios are proof of that commitment to innovation, Schnitman believes. “The Mackenzie Unconstrained Fixed Income Fund – that’s a benchmark-agnostic fixed-income strategy,” he says. “The Mackenzie Monthly Income Portfolios are separate funds that use that same unconstrained fixed-income strategy as their cornerstone. We then use options strategies, dividend-paying equities and fixed income for income, as well as commodities and growth equities for inflation protection over the long term.”
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“Pension funds generally have at least 6% to 7% of their total assets in alternatives. During times of stress, which all institutions go through, they have found these strategies to be very helpful for their portfolios, and we feel retail investors will feel the same way” Michael Schnitman, Mackenzie Investments The Mackenzie Monthly Income Portfolios are holistic strategies – one more conservative and the other more balanced – for those approaching the decumulation phase of their lives. These investors make up a sizeable portion of the market, and this
has been reflected in the performance of the funds. “I’m very proud to say that our Diversified Alternatives Fund is at $510 million in just the two years since we launched it, and the Unconstrained Fixed Income fund is
over $1 billion,” Schnitman says. Given that alternatives and ETFs have both been enjoying popularity in the retail space in recent years, it makes perfect sense to combine the two, which Mackenzie did with its Mackenzie Portfolio Completion ETF and Mackenzie Unconstrained Bond ETF. “The Mackenzie Portfolio Completion ETF is an investment strategy that, when paired with a balanced mandate, can improve the overall risk profile,” Schnitman says. Both ETFs and alternative products are relatively new developments in the Canadian retail space, but both investment vehicles have served institutional investors well for years now. The democratization of investing is opening up new avenues for the mass market, which is where firms like Mackenzie come in. “Pension funds generally have at least 6% to 7% of their total assets in alternatives,” Schnitman says. “Institutional investors have been doing this for 20 years, so what we are doing is bringing institutional thinking to the retail market. During times of stress, which all institutions go through, they have found these strategies to be very helpful for their portfolios, and we feel retail investors will feel the same way.” For those still unsure of the merits of alternatives, the market shock at the beginning of February provides a timely reminder of the need to protect assets and minimize risk. In the past, that might have been possible with a 40% fixed-income allocation, but the industry has evolved since then. It’s why Mackenzie has made such a commitment to alternative funds, and why Weed is confident these offerings will prove attractive to even more everyday investors over the long run. “This [Diversified Alternatives] fund held up really well [in February]; it did exactly what it was supposed to do,” he says. “During that shock, the average 60-40 fund was down something like 4.2%, but this fund was down around 2.6%. When we have those big swings, this fund won’t swing so much.” References to alternative strategies within the context of a Canadian mutual fund include asset classes such as real estate, infrastructure, currencies, derivatives, and non-traditional equity and debt securities, which can be accessed through publicly available markets in accordance with National Instrument 81-102.
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SPECIAL PROMOTIONAL FEATURE
FIXED INCOME
A basic truth of investing Fixed income is central to any portfolio, and ETFs make it much easier to get that exposure
THE DEMOCRATIZATION of investing facilitated by ETFs is perhaps the single most important development in asset management in recent years. ETFs allow investors of any means to efficiently access different exposures to build their portfolios. Canada, the birthplace of the ETF, was slow to embrace the investment vehicle at first, but that all changed after the financial
Mark Raes is head of product for ETFs and mutual funds at BMO GAM; for him, the spectacular growth last year came as little surprise, as it’s become something of a habit for the firm since it entered the ETF space in 2009. “One of the great benefits of ETFs is that they appeal to all investors,” Raes says. “More traditional investment products are targeted at a certain group of investors, but ETFs
“I think it’s important that we give people different types of exposures so they can make meaningful investment decisions. While we offer broad exposures, what we have chosen to do with fixed income is to segment so people can pick and choose” Mark Raes, BMO Global Asset Management crisis. The latest data from the Canadian ETF Association puts current ETF AUM in Canada at $147 billion, thanks in part to record-breaking inflows of $26 billion in 2017. Fuelling that growth is BMO Global Asset Management, which led the industry last year in terms of net creations, adding $10.3 billion. With assets under management of $46.5 billion – a 36.6% increase in 2017 – BMO GAM is consistently gaining market share on competitors.*
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really are broad. They could be held by institutional investors, asset managers, advisors or the direct investor.” Central to BMO GAM’s ETF suite is its fixed-income lineup. That sector makes up 28.5% of the Canadian ETF market,* and in a volatile rising-rate environment, it can be increasingly attractive to investors. BMO GAM’s fixed-income suite is divided into broad market or precise exposure, segmented by term or credit, along with
non-traditional exposures like emerging market bonds. Investors can cover a lot of ground with the current lineup, but the firm continues to explore new options. “I think it’s important that we give people different types of exposures so they can make meaningful investment decisions,” Raes says. “While we offer broad exposures, what we have chosen to do with fixed income is to segment so people can pick and choose.” It’s a strategy that is proving popular with investors across Canada and helped BMO GAM pick up seven awards at the 2017 Thomson Reuters Lipper Fund Awards. Three of those came in the fixed-income category: the BMO Mid Corporate Bond Index ETF (ZCM) was named Best ETF in the Canadian Fixed Income Space (over three years), the BMO Mid-Term US IG Corporate Bond Index ETF (ZIC) was selected as Best ETF in the Global Fixed Income Space (over
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there to reflect that position. “You might be a contrarian and believe the Bank of Canada isn’t going to raise rates in 2018 and that short-term bonds (one to five years) will rebound,” Raes says. “Or you might have a view that the BoC and the Fed will act aggressively, and you want to be on mid-term bonds (five to 10 years). You might have a view that the economy is going to do well and want more corporate bonds in your portfolio, or you might think we are going to have an equity correction and want a higher government bond exposure to better protect your portfolio. You might not have a view beyond that markets will be volatile, and then you want short-term bonds. ETFs give you the ability to move between these positions because they are efficient to trade and to hold because they are low-cost.” *Source: BMO Asset Management Inc. All data as of December 31 , 2017
three years), and the BMO Long Provincial Bond Index ETF (ZPL) took home the prize for Best ETF in the Canadian Long Term Fixed Income Space (over three years). Although accolades are nice, they can sometimes lead to complacency, but that’s not likely to happen at BMO GAM. The fixedincome team launched three new funds in February: the BMO Government Bond Index ETF (ZGB), the BMO Corporate Bond Index ETF (ZCB) and the BMO Short-Term Bond Index ETF (ZSB). For BMO GAM, Raes believes it comes down to providing the best choice for the investor. “The way our fixed-income shelf has been constructed until now is that we have broad market, then we have some precise exposures where we slice by both term and credit,” he says. “So instead of just a short bond, we will have a short corporate bond or a long federal bond. Our three new
ETFs will be wider exposures.” The products and the strategies involved in portfolio construction are evolving all the time, but there are some basic truths that remain constant. No matter how the equity markets are performing or what central bank policy is, fixed income will always have its place in a balanced portfolio. “If you think of the two traditional uses for fixed income, you are talking about yield generation and then capital protection,” Raes says. “Yield generation over the last couple of years has been more challenging, as we have been in an abnormal rate environment, which we are slowly coming out of. But capital protection to offset the equity market is as valid today as it always was.” While navigating complex bond markets can be difficult, ETFs offer an easy-to-use alternative. And no matter an advisor’s investment outlook, there are options out
The Lipper Fund Awards, granted annually, are part of the Thomson Reuters Awards for Excellence awarded by Lipper, Inc. and highlight funds that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The Lipper Fund Awards are based on the Lipper Ratings for Consistent Return, which is a risk-adjusted performance measure calculated over 36, 60 and 120 month periods. The highest 20% of funds in each category are named Lipper Leaders for Consistent Return and receive a score of 5, the next 20% receive a score of 4, the middle 20% are scored 3, the next 20% are scored 2 and the lowest 20% are scored 1. The highest Lipper Leader for Consistent Return in each category wins the Lipper Fund Award. Lipper Leader ratings change monthly. For more information, see www.lipperweb.com. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Lipper and Lipper Leader are trademarks of Lipper Limited, a Thomson Reuters Company, and have been licensed for use by the Bank of Montreal. BMO Mid Corporate Bond Index ETF (Ticker ZCM), was awarded the 2017 Lipper Fund Award in the Canadian Fixed Income ETF category for the three year period ending July 31, 2017 out of a total of 19 funds. The corresponding Lipper Leader ratings of the fund for the same period are as follows: 5 (3 years), 5 (5 years), N/A (10 years). BMO Mid-Term US IG Corporate Bond Index ETF (Ticker ZIC), was awarded the 2017 Lipper Fund Award in the Global Fixed Income ETF category for the three year period ending July 31, 2017, out of a total of 8 funds. The corresponding Lipper Leader ratings of the fund for the same period are as follows: 5 (3 years), N/A (5 years), N/A (10 years). BMO Long Provincial Bond Index ETF (Ticker ZPL), was awarded the 2017 Lipper Fund Award in the Canadian Long Term Fixed Income ETF category for the three year period ending July 31, 2017 out of a total of 5 funds. The corresponding Lipper Leader ratings of the fund for the same period are as follows: 4 (3 years), N/A (5 years), N/A (10 years). BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO’s specialized investment management firms. BMO ETFs are administered and managed by BMO Asset Management Inc., an investment fund manager and portfolio manager and a separate legal entity from the Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. “BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
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PEOPLE
ADVISOR PROFILE
Risk and reward John Klotz discusses the benefits of a good risk analysis and the importance of a tax-efficient investment strategy
TAX SEASON is always a particularly busy time of the year for financial advisors, but it is especially so in 2018. The new rules governing passive investment income by incorporated businesses will be keeping planners on their toes in the coming months as they adapt to the new regime. The government’s attempts to limit tax sheltering in passive investment accounts were not welcomed in the advisory space, to say the least. John Klotz, president of Northwood Mortgage Life, went one step further and gave Finance Minister Bill Morneau his opinion directly. “I wrote Morneau a letter,” Klotz says. “He was on CBC saying it wasn’t fair that someone making $50,000 a year working for the government pays the same tax as someone making $250,000 through their incorporated business. In my letter, I said the person working for the government has access to a pension, with a bump every year. If they start at age 35 and work until they are 65, they get 60% of an income that started at $50,000 and is bumped every year – it’s the equivalent of about $100,000 per year.” Because the majority of his clients are incorporated business owners, Klotz knows that being an entrepreneur means sacrificing a considerable amount of security – especially in the early stages of a business, when saving for retirement is often put on the back burner. Klotz believes Morneau totally disregarded this side of the argument.
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“I asked if he would give the first $2 million in the corporation at a preferred rate,” Klotz says. “I don’t know if he listened to me or all the other people who said the same thing, but he came back and said the first $1 million would be tax-efficient.” The backlash the government received from small and medium-sized businesses after the initial announcement on passive investment income resulted in a compromise of sorts. The Department of Finance announced a tax threshold of $50,000 on passive income per year, which would equate to $1 million in savings based on a nominal 5% rate of return. It’s Klotz’s role to offer guidance on how those savings are best used. His clients generally come from the IT sector and have assets ranging from $250,000 to $2 million. That sort of wealth can provide a comfortable life and retirement if managed correctly, which is something Klotz discusses with his
clients in their very first meeting. “I ask them what kind of assets they have; their appetite for risk; their retirement plans; whether their portfolio is strategic or tactical, value or growth; the geography of the portfolio; if there is any currency hedging; and how tax-efficient it is – that’s a big one. With a marginal tax rate of 53%, it’s better to get a 4% rate of return that’s tax-efficient rather than a 10% rate of return that’s not.” Klotz’s firm, Northwood Mortgage Life, is the life insurance and investment arm of Northwood Mortgage, one of the largest independent mortgage brokerages in Toronto. There’s a natural symmetry there, as clients shopping for a mortgage will likely be in the market for life insurance coverage, too. From there, the jump to investment products is a natural step, and with a host of options out there, it’s better to consult an expert.
LIMITING RISK A crucial component of effective financial planning is completing a risk analysis on a client. Everyone person’s financial circumstances are different, and this needs to be reflected in how they invest and save. “What might be a great portfolio for one client is a terrible portfolio for another,” Klotz says. “Then you do a budget and see how much investing they can afford. The higher your net worth, the more you can risk. You look at how much debt is on the mortgage, and then wills and powers of attorney from an estate planning perspective.”
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IT’S GOOD TO TALK Blessed with a natural ability for public speaking, Klotz channelled that into Toronto Talks, a monthly event he founded where experts in their field discuss ways to enhance business. All proceeds from each event go to the Make-A-Wish Foundation. Past sessions have included:
HOW TO TURN YOUR WEBSITE VISITORS INTO PAYING CUSTOMERS Kagan Mustafa of xodMedia.com offered guidance on how to monetize traffic on a website
ARE YOU RUNNING A SELLABLE BUSINESS? Phil Richardson of BizGrowthCoaching.ca asked the simple question: Would someone buy your company, and what price would they pay you?
“We have had a great run, and equity markets are ridiculously high ... But I caution [my clients] that what goes up can come down, too” In the current climate, Klotz advises his clients to not get too carried away with booming stock performance and always keep one eye on the downside. “We have had a great run, and equity markets are ridiculously high,” he says. “The Dow Jones had a 25% rate of return last year. The Canadian market is not so
exciting, but what I am saying to my clients is that there is a lot of good stuff going on internationally, and there are a lot of opportunities. But I caution them that what goes up can come down, too. The priceearnings ratios on stocks are high, but I still believe in having a properly balanced portfolio based on risk.”
HOW YOU CAN SELL MORE OF YOUR SERVICES TO MORE BUYERS FOR MORE MONEY Tibor Shanto of SellBetter.ca explained how to leverage past client experiences into future sales
HOW TO MAXIMIZE YOUR LEADERSHIP CAPABILITIES Melinda Sinclair of People Dynamics Learning Group spoke about the key resource that makes people effective leaders
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FEATURES
HEALTH INSURANCE
Insurer shifts stance on medical cannabis In March, Sun Life Financial made history by becoming Canada’s first insurer to offer medical cannabis coverage in its group health plans. Dave Jones, SVP of group benefits, explains the reasoning behind the decision
THIS SUMMER, Canada will become the first Western nation to fully legalize cannabis, although the drug has been available for medicinal purposes in this country since 2001. Despite that, insurers have been very cautious when it comes to cannabis coverage, only taking isolated cases under consideration. That all changed recently when Sun Life Financial announced it would add medical cannabis to its group benefits plans as of March 1. The firm provides health benefits to more than 3 million plan members and their families, or one out of every six Canadians, so its influence is substantial. There are a number of conditions attached to the coverage, of course, but it constitutes a significant step forward for advocates of the drug in Canada. For years, cannabis’ lack of a drug identification number from Health Canada was a sticking point for providers. Dave Jones, SVP of Group Benefits at Sun Life, explains how the insurer eventually got past that obstacle. “We are doing this under a process called prior authorization, so that allows us to receive an application from a plan member
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that includes their physician’s authorization and proves that cannabis has been dispensed from a Government of Canada-approved dispensary,” Jones says. “We adjudicate the claim that way so we don’t need a drug identification number.” Sun Life has also limited coverage to five conditions: cancer, multiple sclerosis, rheumatoid arthritis, HIV/AIDS and patients
medical cannabis patients across Canada – double the amount from a year ago. That, combined with other recent moves such as the Canadian Pharmacists Association’s statement that pharmacies should play a leading role in medical cannabis distribution and Shoppers Drug Mart’s application for a licence to dispense the drug, indicates that attitudes toward cannabis are clearly shifting.
“You have medical evidence that shows that … the health benefit to people outweighs the risk. We have an opportunity here to help Canadians get the treatment they need to manage their medical conditions” Dave Jones, Sun Life Financial requiring palliative care. There is growing medical evidence that those illnesses and associated symptoms can be alleviated using medicinal cannabis. According to a recent report from the Canadian Press, there are more than 235,000
Sun Life’s decision, therefore, doesn’t come as that much of a surprise. “It’s something we have been considering for some time,” Jones says. “Our clients have been looking more and more at medical cannabis. Client demand is driving us to offer
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it as an option outside of [health spending accounts] so that plans can increase coverage for the medical conditions that are covered.” Coverage for the drug will range from $1,000 to $6,000 per plan member, but Jones doesn’t foresee that having a major impact on premiums for plan sponsors. While the cost of cannabis prescriptions will be added to plans, it will likely mean less use of other, usually more expensive, drugs. “For plans that decide to have the coverage, they will see an increase in usage only with plan members who have one of those five disease states,” Jones says. “They may also see a decrease in other drugs and forms of therapy as plan members work with their treating physicians to manage their pain and care. It
will probably take a number of months to a couple of years to really know what the impact is, but we expect it to be minimal.” According to Jones, Sun Life made this decision in good faith to help people who are suffering. The insurer has been offering cannabis coverage through health spending accounts on a limited basis for a number of years, so this latest move simply builds on that position. “When we step back and look at our purpose as an organization, we see our role as helping our clients to live a healthier life – it’s not a tagline; we are true to that,” Jones says. “In this case, you have medical evidence that shows that for each of these illnesses and the associated symptoms, the health benefit to
people outweighs the risk. We have an opportunity here to help Canadians get the treatment they need to manage their medical conditions. It’s something we are only too happy to do.” Sun Life is also one of Canada’s largest life insurers; Jones says the increased use of cannabis, both medically and recreationally, won’t have a major impact on its life insurance underwriting process. “The definition of non-smoker includes a cannabis user,” he says. “If you don’t smoke tobacco but do smoke medicinal cannabis, you meet our underwriting guidelines as a non-smoker and are considered for non-smoking rates. We have been doing that for just over three years now.”
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FEATURES
BUSINESS STRATEGY
What to change about your business in 2018 If you run your own practice, there are three things you should consider doing differently this year, suggests management consultant Stephen Barnes
THERE IS a Latin phrase, omne trium perfectum, which means that everything that comes in threes is perfect, or every set of three is complete. It is a principle known as the Rule of Three, which suggests that events or characters introduced in threes are more humorous, satisfying or effective in executing a story and engaging the audience. The audience is also more likely to remember the information conveyed. This is because having three entities combines both brevity and rhythm by creating a pattern from the smallest amount of information possible. It makes the author or speaker appear knowledgeable, easy to understand and catchy. That rule can be applied to business, too. To help you get into gear for the year ahead, here are my Business Rules of Three – three things to change about your business in 2018.
1
Move from practitioner to business owner
Plumbers, electricians and builders go to trade school and undertake both practical and theoretical lessons as part of their training. Software developers, chefs, lawyers, hairdressers and doctors – they all learn the skills to do their jobs both capably and competently. Then they finish their education or
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apprenticeship and get their first job, and discover that they know less than they thought. So they continue learning. After a few years, they’re an expert. However, throughout this period, they are only learning to become an effective practitioner and not a successful business owner. Running a business is a separate job and
a skill too, and therefore it requires time and investment to learn and develop business skills to become capable and competent to do that job well. Unfortunately, business skills are not part of a plumbing, hairdressing or electrical apprenticeship, or part of the curriculum for lawyers, doctors or accountants. (Contrary to popular belief, accounting
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courses do not equip you with the skills to run a business.) If you look at most business startups, they either evolve from what was once the business owner’s hobby, or they are a result of someone wanting to work for themselves. Think of web designers or bookkeepers. These people are experts in their fields and have skills, but what often happens when they go out on their own, ill-prepared, is that they work hard and build up a customer and client base, then they get even busier, and later you hear that they’ve either gone out of business and/or their family life or relationships have broken down. Were these people incompetent or unskilled at what they did? No. Their mistake was that they did not work on their businesses. It’s human nature to spend more time doing what you enjoy and what you do best. So self-employed small business owners gravitate to what they like doing, rather than mastering the business skills they lack. The result is that they spend way too much energy in their business and not on their business. You’re running a business now, not just working. Stop being a worker and start being a director. You need to skill up and learn how to run a successful business.
2
Remember that every business is a family business
One of the nice things about working for yourself is the flexibility it gives you with regard to the hours you work. This reason alone is why lots of people head off and start their own businesses – myself included. “I’ll be able to take the kids to basketball practice,” or “I can have the whole summer off and we’ll head off camping.” Sound familiar? As the business grows, you start working harder – before the family wakes and after they have gone to bed. You take work calls while you’re driving to basketball practice. Your family are supportive, as they hope you are living your dream.
Father’s Day breakfast comes along, and you go to school with your children. (You can do this because you run your own business, right?) After the breakfast, you are invited to see the children’s work in their classroom. Your eldest daughter has written a poem about Dad, and one verse goes: “Daddy – talk, talk, talk on the phone all day.” You’ve got the message. And isn’t this the complete opposite of what you wanted when
were away, or it wouldn’t be a holiday because they would be tethered to their emails and phone calls and disengaged from their families, you’d be able to go on holiday yourself and still make money. How do you overcome this? Systemize your business. Systemizing is the process of documenting everything you do in your business – from answering the phone and opening the mail to pricing work and after-care service.
Self-employed small business owners gravitate to what they like doing, rather than mastering the business skills they lack. The result is that they spend way too much energy in their business and not on their business you started your own business? You have been isolating yourself and not engaging with your family. Before you know it, you’re not running a business – the business is running you. Business can destroy your family life and your family. You might be happy working 24/7, but they won’t be. Every business is a family business – but it is only a business and not your entire life. A business can have a profoundly negative impact on your life if you let it. It can also serve you and your family well as long as you start working more on the strategy and less on the tactical aspects of your business. If you have a family and you work for yourself, then you have a family business – so you must be fair to your family and make time for them away from your business.
3
Systemize your business
If you had a dollar for every time you’ve heard people say they were either too busy to have a holiday, or they couldn’t leave their business to others to run while they
Without systems and processes in place, your business will become all-absorbing, with endless tasks to complete. Systems and processes allow others to share the load. These people then become what a studio recording is to Taylor Swift. A Taylor Swift song can be played by millions of people all at the same time. It sounds the same every time it is played, and Taylor Swift collects a royalty every time the recording is played. Create a recording – a system – of your business, your talents, your way of doing something, and then, like a song, replicate it, market it, distribute it and manage the revenue.
Stephen Barnes is the principal of management consultancy Byronvale Advisors. He has spent more than 20 years advising clients, from new business startups to publicly listed companies, across a wide array of industries. He is also the author of Run Your Business Better: Essential Information Every Business Owner Should Know and Use. To find out more, visit byronvaleadvisors.com.
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PEOPLE
CAREER PATH
IN THE DRIVER’S SEAT A love for competition and an eye to the future have put Cory Garlock firmly in charge of his trajectory as an advisor
As a teenager, Garlock was bitten by the investing bug when his school mounted a stock-market challenge for students, complete with play money “I did well at the challenge. I really enjoyed it and put a lot of time into it – poring over stock changes in the Globe and Mail, reading articles, analyzing the numbers, doing research – and I thought, ‘I could see myself doing this’”
1995
DISCOVERS INVESTING
1998
2001
MASTERS THE COLD-CALL Garlock’s first job out of university – contacting customers to transfer their Mastercard balances to MBNA – imbued him with a comfort on the phone and an appreciation for the challenge involved. Six months in, he was winning awards and mentoring new employees “After graduating, I remember having stellar expectations, thinking the world was mine – I applied for 50 jobs and got a response from maybe three. I loved the competitive aspect of this job; there’s no better training than a year of cold-calling”
2007 BECOMES A PLANNER Despite persistent approaches from RBC, Garlock wasn’t sold on the idea of working in a bank. Once he finally gave in and took a role as an investment and retirement planner, however, he found the position to be more entrepreneurial than he had presumed “The position exceeded my expectations. RBC really encouraged and helped to foster various innovative methods for securing new clients. My experience getting out there and knocking on doors was very helpful. I did great”
2015 GOES BACK TO SCHOOL Garlock’s first year at TD saw him acquire several new qualifications, which necessitated a punishing schedule of putting in a full day of work, then going home and studying until he fell asleep “I realized I had already done a lot of financial planning; I offer comprehensive wealth management because I focus on many things at once. I follow a system so I can explain to clients what they can expect when working with me”
SAMPLES THE ENTREPRENEURIAL LIFE A football injury sustained during summer vacation from university left Garlock in a cast and forced him to quit his tree-planting gig. Instead, he approached a local fruit stand owner with an offer to run the business for the summer “He offered to sell it to me. It wasn’t very profitable, but it was such a valuable experience – one I draw on all the time. It gave me a whole new perspective”
2002
KNOCKS ON DOORS When Garlock joined Clarica, he took on the responsibility of finding prospective clients – an experience he credits with building his stamina
“I had no natural market; I had to rely on door-to-door marketing and calling prospective clients out of the phone book. I wanted to be more in control of my destiny. Most weeks I did 150 to 200 calls. It set the foundation for my entire career” 2015
MOVES TO TD After eight years at RBC, Garlock headed to TD Wealth Private Investment Advice, drawn by the prospect of becoming a full-service advisor “I approached the Big Five banks, but I didn’t take the offer with the most money; I took the offer that afforded a line of sight into the future. TD offered me a spot in a branch 500 feet from my previous bank; I had many clients in the neighbourhood, and many of them followed me”
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PEOPLE
OTHER LIFE
TELL US ABOUT YOUR OTHER LIFE Email wealthprofessional@kmimedia.ca
The social aspect of running is almost as enticing as the runner’s high for Rush, who has met hundreds of fellow runners via the hobby
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Number of marathons Rush has run
100
Kilometres Rush covers during a week of peak training
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Rush’s best marathon time, achieved in Reykjavik
RUN THE WORLD Outside of the office, Melissa Rush can most often be found on the run THE SEARCH for better scenery might have led selfproclaimed “workout queen” Melissa Rush to take her workouts out of the gym and onto the street, but the Toronto-based investment advisor has since made running an integral part of her life. Also an inveterate traveller, Rush often plans her vacations around a marathon in a major European city. “I land, run the marathon within two days of arriving, and then stay for two weeks,” Rush says. “I accomplish something, and then have fun and explore the city. I’m a traveller who runs.” So far, Rush has completed marathons in Stockholm, Copenhagen, Reykjavik and Berlin, as well as closer to home in Boston, Chicago, New York and Toronto. Rush says the pastime of running dovetails perfectly with her professional life: “Both are all about consistently doing the same things day-to-day and meeting your goals; both are about persistence, diligence, discipline and seeing the results of your efforts.”
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www.wealthprofessional.ca
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SUCCESSFULLY CONSISTENT: CONSISTENTLY SUCCESSFUL At Trez Capital we believe prudent investment is all about consistency. It’s about steady and attractive risk-adjusted yields. That thinking has driven our brand of investment for 20 years and will continue to guide us long into the future. Unexciting? Absolutely. Successful? Our track record speaks for itself.
CONTACT Daniel Marchand DanielM@trezcapital.com 514-515-9353 Vikram Rajagopalan VikramR@trezcapital.com 647-788-1787
trezcapital.com
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