ETFs AND TAXES
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ALTERNATIVE INVESTMENTS A guide to 2019’s best strategies for diversification
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ISSUE 7.03
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CONTENTS
22
@WealthProCA facebook.com/WealthProCA
UPFRONT 02 Editorial
Knowing your client is more important than ever
FEATURES
36
WHAT TO EXPECT DURING TAX SEASON
A guide to helping clients understand the tax implications of ETFs
04 Head to head
Are advisors going for gold?
06 Statistics
Where are the Canadian dollar and other major currencies heading?
08 Opinion
Why Bitcoin is more of a gamble than an investment
10 News analysis
A look at the biggest trends and debates in the ETF space
12 Intelligence
This month’s big movers and shakers
14 ETF update
A new ETF brings quant strategies to retail investors
SPECIAL REPORT
LOOKING FOR ALTERNATIVES
From hedge funds to private equity, WPC examines the best ways to diversify client portfolios with alternative investments in the current environment PEOPLE PEOPLE
INDUSTRY ICON
Canoe Financial president and CEO Darcy Hulston discusses the challenges of building a mutual fund company from the ground up
18
44
16 Alternative investment update
Canadian venture capital hits a new high
FEATURES 40 Unlocking mortgage investments
ADVISOR PROFILE
Faisal Karmali’s holistic approach to retirement has had a major impact on his clients’ lives
How MICs simplify access to a lucrative alternative investment
52 Advantages of real estate debt Why advisors looking for uncorrelated investments should give real estate debt a glance
PEOPLE
FEATURES
46
A PLACE FOR LIQUID ALTS
The lowdown on newly accessible alternative mutual funds
54 Career path
Adelaide Kim has made her mark as a leader by building connections
56 Other life
Going the distance with Ironman competitor Jason Trueman
WEALTHPROFESSIONAL.CA CHECK IT OUT ONLINE www.wealthprofessional.ca
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UPFRONT
EDITORIAL wealthprofessional.ca
Why knowing your client is crucial
I
n February, the 12th annual Inside ETFs Conference took place in Hollywood, Florida, where experts from around the globe speculated on what’s next for the industry. Advisors who attended heard about new products, the development of alternative ETFs, advancements in fixed income, the importance of socially responsible investing and even radical thinking such as the evolution to direct indexing. Yet underlying all of these issues was the need for better ‘know your client’ initiatives for advisors. In discussions about environmental, social and governance [ESG] investing, one of the predominant themes was the difference between European and North American investors. Rory Tobin, executive vice-president for State Street Global Advisors and global head of its SPDR ETFs, pointed out that ESG isn’t even a discussion in Europe anymore – investments are automatically screened according to ESG benchmarks.
To incorporate ESG effectively, advisors need to understand their clients’ specific needs and beliefs. That’s where the knowing your clients thoroughly becomes even more paramount Sanjay Arya, head of indexes at Morningstar, echoed this but emphasized that it depends on what region investors are in – to incorporate ESG effectively, advisors need to understand their clients’ specific needs and beliefs. That’s where knowing your clients thoroughly becomes even more paramount. Inside ETFs’ Matt Hougan and ETF.com’s Dave Nadig took this concept one step further in their “State of the ETF Union” address, proposing the idea of direct indexing, or removing the vehicle and customizing indexes for investors. Central to their idea was the need to go deeper than the usual questions advisors pose to their clients. They believe questions must be specific for this idea to work: “How do you feel about gun stocks, fossil fuels, labour rights, gender diversity in the boardroom? What about stem cell research? Or adult entertainment?” Asking these types of questions will help advisors gain more specific knowledge about their clients, incorporating what they believe in and excluding things they don’t – a core concept that can be applied to any strategy. Ultimately, knowing your client better will only increase your value proposition. The team at Wealth Professional Canada
ISSUE 7.03 EDITORIAL
SALES & MARKETING
Managing Editor Joe Rosengarten
Director, Client Strategy Dane Taylor
Editor Darren Matte Writers Libby MacDonald Leo Almazora James Burton Executive Editor Ryan Smith Copy Editor Clare Alexander
CONTRIBUTORS Mike Connon
ART & PRODUCTION Designer Marla Morelos Production Manager Alicia Chin Traffic Manager Ella Dayandante
Sales Executive Alan Stewart Vice President, Sales John Mackenzie Project Coordinator Jessica Duce
CORPORATE President & CEO Tim Duce Office/Traffic Manager Marni Parker Events and Conference Manager Chris Davis Chief Information Officer Colin Chan Human Resources Manager Julia Bookallil Global COO George Walmsley Global CEO Mike Shipley
EDITORIAL INQUIRIES
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UPFRONT
HEAD TO HEAD
Is now a good time to add gold to portfolios? Will 2019 be the year advisors turn back to the classic safe haven – and if so, how do they plan to incorporate it?
Leo Belmonte
David Harquail
Hans Albrecht
CEO Security Financial Services & Investment Corp.
CEO Franco-Nevada Corporation
Vice-president, portfolio manager and options strategist Horizons ETFs
“Gold is at a five-year resistance – it’s unloved and under-owned. Gold hit bottom in October 2018. The downtrend line from 2011 has broken to the upside. Relative performance versus all commodities is stronger, which signals a breakout to the upside, and the GLD ETF has formed the classic head-andshoulder formation, signalling an upside. Fast-forward to today: Central banks have the highest demand for gold in 50 years, a ‘wait and see’ stance on rates, and some investors have forsworn cryptocurrencies for gold. The signals are mixed; if the economy seems headed for a soft landing, gold could see the end of its run.”
“Every portfolio needs gold, but now is an especially good time to increase the weighting to gold. Gold is a highly liquid yet scarce asset; it’s bought as a luxury good as much as an investment. Thus, gold can play four fundamental roles. It is at once a source of long-term returns, a diversifier against times of market stress, a liquid asset with no credit risk that has outperformed fiat currencies, and a means to enhance overall portfolio performance. Gold can be bought in many forms: physical bars or coins, exchange-traded products, gold royalty companies or gold operating companies.”
“I like gold here. The great central bank experiment of the past decade, which has expanded balance sheets and driven yields to extreme lows, has created a false sense of stability. Rampant stimulus has ballooned earnings and asset prices – a dangerous trend. Central bank goldbuying is at 50-year highs as they attempt to hedge their own monetary misdeeds. World debt levels are high, and gold has severely lagged US debt levels. Miner exploration budgets have collapsed, and supply should stay tight. The expanding Chinese and Indian middle classes are massive consumers of gold. Inflation? Gold wins. Low/negative rates? Go for gold.”
ALL THAT GLITTERS While gold has found some support from the current occupant of the White House and demand from European investors mired in Brexit uncertainty, the precious metal is a long way from its glory days in the early 2010s, when prices topped $1,800 per ounce and gold bugs were convinced that the sky was the limit. But by early 2013, bullion had dropped below $1,500 and hasn’t recovered since, habitually foundering in the $1,300s. “For gold prices to firm further, we need to see signs of easing trade tensions,” Suki Cooper, precious metals analyst at Standard Chartered Bank, told Reuters in early February. “Gold is likely to consolidate above $1,300 before we see the next move higher.”
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UPFRONT
STATISTICS
The value of a dollar
THE LOONIE AND THE GREENBACK The Canadian dollar was relatively strong against the US dollar in the first half of 2018 before market volatility brought it down in the fall. However, in February, the loonie showed some signs of regaining its previous momentum.
How do currencies around the world stack up – and what do currency trends portend for 2019? LIKE MANY other world currencies, the Canadian dollar had an up-and-down year in 2018 but seems to be rebounding after a relatively low start to 2019. The strongest global currencies right now lie in oil-producing countries like Kuwait, Bahrain and Oman, and those currencies could strengthen further if oversupply subsides. Meanwhile, countries with political turmoil and international sanctions find them-
$1.08
All-time high of the Canadian dollar against the US dollar (in November 2007)
selves at the bottom of the currency scale. Then there’s the hot topic of cryptocurrency, which has been in a free fall since its high in December 2017. Once the up-and-coming investment darling, Bitcoin has now become an alternative investment that many investors and advisors avoid. With all that the currency sector has seen over the past year, it appears to be no safe haven from volatility.
$0.62
$0.81
All-time low of the Canadian dollar against the US dollar (in January 2002)
$0.73
The highest point of CAD to USD in 2018 (on January 22)
The lowest point of CAD to USD in 2018 (on December 24) Sources: The Globe and Mail Investing and Report on Business
HOW HAVE OTHER MAJOR CURRENCIES FARED?
THE WORLD’S STRONGEST The five strongest currencies compared to the US dollar are dominated by oilproducing countries in the Middle East.
Much like the Canadian dollar, the euro appeared to be experiencing a resurgence against the US dollar in the first half of 2018 before trending downward in the fall along with the global economic slowdown. The British pound, meanwhile, proved somewhat volatile in the face of ongoing Brexit negotiations. The uncertainty in the UK and Europe have benefited the Japanese yen, which saw a steady rise through most of 2018. EURO
3.5
POUND
YEN
1.5
1.5
115
1.4
1.4
112
1.3
1.3
109
1.2
1.2
106
1.1
1.1
103
3.0 2.5 2.0 1.5 1.0
USD
0.5 0.0
Kuwaiti dinar
Bahraini dinar
Omani Jordanian rial dinar
British pound
Source: FXSSI.com, Bloomberg.com, as of February 5, 2019
6
1.0
Mar
Jun
Oct
Feb
1.0
Mar
Jun
Oct
Feb
100
Mar
Jun
Oct
Feb Source: Bloomberg.com
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USD
1.0
0.9
0.8
0.7
0.6
Mar 2018
Apr 2018
May 2018
Jun 2018
Jul 2018
Aug 2018
Sep 2018
Oct 2018
Nov 2018
Dec 2018
Jan 2019
Feb 2019
CAD
Source: The Globe and Mail Investing
BITCOIN CONTINUES TO PLUNGE
THE WORLD’S WEAKEST
Investors in the market’s most popular cryptocurrency were riding high at the end of 2017, but 2018 proved to be a tough ride for Bitcoin. Since topping out at nearly US$20,000 in December 2017, Bitcoin’s fall has continued almost unabated; the cryptocurrency has lost more than 80% of its value in just over a year’s time.
Several currencies remain very weak on the world stage, but they’re all dwarfed by Iran, where economic and political sanctions continue to devalue the rial. 1.0
$20,000
$15,000
USD
0.00012 0.00010
$10,000
0.00008 0.00006 0.00004
$5,000
0.00002 0.00000
$0 Source: Coinmarketcap.com
Lao kip
Guinean Indonesian Vietnamese franc rupiah dong
Iranian rial
Source: FXSSI.com, Bloomberg.com, as of February 5, 2019
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UPFRONT
OPINION
GOT AN OPINION THAT COUNTS? Email editor@wealthprofessional.ca
Bitcoin buyers beware Advisors who disregard the fundamentals of cryptocurrency do so at their own risk, writes Mike Connon AS ADVISORS, we typically counsel families to take a patient, long-term approach to investing in the market, but the markets themselves often spin on today’s breaking news and hottest holdings. This means we must take the time to learn about the latest financial fads alongside our clients. Cryptocurrency is a prime example. I eased into the ‘cryptocurrent’ by watching a few Netflix specials about Bitcoin. Not surprisingly, they were surface-level, focusing on asides such as the true identity of Bitcoin founder Satoshi Nakamoto, who may actually be a composite of individuals across time and space. Next, I dug a little deeper by taking to the Internet. There, I found that most Bitcoin coverage comes from two divergent sources. First there are the technologists. They focus on the intricacies of the infrastructure, but often display little understanding of the economics involved. Then there are the economists. They’re steeped in economic theory but are often daunted by the technology behind this dramatically new global trading system. As financial advisors, we’re seeking to bridge this gap and advise our clients accordingly. Looking past the buzz and excitement, what makes Bitcoin and other cryptocurrencies tick? That’s blockchain technology. It operates as the back office for cryptocurrency transactions. But rather than having centralized bookkeepers who own the process, the worldwide public can participate by ‘mining’ for cryptocurrency. Cryptocurrency mining
8
typically calls for a lot of computing power, but essentially, anyone with the correct equipment can use it to solve complex problems and verify transactions. How does that work? Bitcoin and other cryptocurrency miners mine for blocks to chain together and enter into bookkeeping ledgers, which document what trades have occurred and who owns what. If those ledgers go awry, all hell breaks loose.
the mining process, especially for Bitcoin. At least in theory, there will only ever be 21 million legitimate bitcoins in circulation. (Currently, 17 million bitcoins are already in circulation.) Those enamoured by the technology may be ignoring the classic economic reality of supply and demand. It’s tempting to think that eliminating governmental red tape will set the process free. But Economics 101 still dictates that a cryptocurrency’s spending power is based on its total circulation (supply) versus its total use (demand). Just as a company cannot issue new shares ad infinitum without diluting all shareholders’ values, cryptocurrency miners cannot be compensated with new coins forever. And yet, the system itself might collapse if miners are no longer incentivized to continue mining. Remember the 2000 dot-com crisis? Companies kept issuing shares in exchange for work, diluting shareholder value. Eventually the music stopped, and the party was over. So should investors buy into this trend? I’m not saying no one should buy cryptocurrency. But I would contend that because it’s
“Those enamoured by the technology [behind Bitcoin] may be ignoring the classic economic reality of supply and demand” Miners are drawn by the potential to earn transaction fees (themselves paid as cryptocurrency). Higher transaction fees attract miners to verify the transaction more quickly. Lower fees might cause the requested transaction to linger in limbo, awaiting verification. In some respects, mining for cryptocurrency represents raw capitalism at work. This is the system’s beauty and curse. With the technology and infrastructure involved, these monetary transactions no longer have to rely on central banks or similar financial institutions. If you’re not a fan of bureaucracy, this might sound great. But this freewheeling system also operates outside of the usual protections associated with legal tender and regulated financial institutions. This brings me to my next big point about
reliant on the ‘greater fool’ theory, Bitcoin is more of a wager than an investment. For those who are intrigued by Bitcoin anyway, I advise them to think of it more like a gold substitute – OK to throw some ‘fun money’ at, but not the core of their investment strategy. Like gold, the price of Bitcoin is based entirely on current demand for it. It’s not like a stock or bond in a company or organization that ultimately produces goods or services of value. Cryptocurrency may continue to dazzle or it may drastically disappoint; there’s no dependable data to inform us either way. Mike Connon is a senior financial planner with the McClelland Financial Group at Assante Capital Management.
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UPFRONT
NEWS ANALYSIS
The future of ETFs Alternatives, ESG and fee reductions are among the major trends that will drive the evolution of ETFs in 2019
THE GLOBAL ETF industry has grown tremendously since the 2008 financial crisis. Back then, total ETF assets were around $700 billion, but now the industry holds approximately $5 trillion worldwide. In mid-February, ETF experts from around the globe descended on Florida for the Inside ETFs Conference, where they discussed, among other things, where the industry is headed. Some of the common themes that emerged were the trend toward lower product fees, as well as innovation in alternatives, fixed income and ESG. “I think there is so much opportunity [in the ETF industry] because of the expanded
and investors to diversify portfolios. “That access to alternative classes through ETFs is so critical,” she says. “Beyond that, ETFs are a great way to get exposure to active strategies. There is a misconception that ETFs are synonymous with index investing, and that’s not the case. ETFs can provide alpha by focusing on factors, so I think we’ll see more focus on factors – not only in equity, but also in fixed income.” Fixed income is one area of the ETF industry that Sanjay Arya, head of indexes at Morningstar, believes is ripe for further innovation. As more advisors build model portfolios for investors, he says, fixed-income
“In the fixed-income space, there has been more information available ... and I think that will help the innovation” Sanjay Arya, Morningstar product mix,” says Kristina Hooper, chief global market strategist at Invesco. “It works with my view that investors, going forward, need to diversify and gain exposure to a variety of asset classes and alternatives.” In particular, Hooper feels alternative ETFs represent an attractive way for advisors
10
ETFs can help simplify portfolio construction. “In the fixed-income space, there has been more information available in the past few years, and I think that will help the innovation,” he adds. Arya doesn’t see the fixed-income conversation going away, especially in light of recent
market volatility, which has highlighted the necessity of fixed-income exposure. “People forget you need the role fixed income plays in your portfolio,” Arya says. “They have the risk-on mentality, but you need fixed income to provide that cushion and safety of capital. We don’t look at hot things, but we look at how things are delivered, and you might see that change. Active [management] has changed from security selection to portfolio constructing. For longterm portfolio construction, you have to make sure, during bull markets, you don’t forget the value of asset classes that bring stability to your portfolio.” Another trend both Hooper and Arya have observed is the lingering discussion around lower management fees. Arya believes the beta side hasn’t reached its end yet, but active managers who can prove their
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PROJECTED GLOBAL ETF ASSET GROWTH 2018
$5 trillion
2019
$6 trillion
2020
$7 trillion
2021
$8.5 trillion
2022
$10 trillion
2023
$12 trillion
$0
$2trn
$4trn
$6trn
$8trn
$10trn $12trn
Source: BlackRock; Global Business Intelligence, as of April 2018
value won’t have trouble competing with low-fee products. “I think the story will be like what you see on the active side,” he says. “If there is a good
that can weather volatility, investors will pay less attention to prices and more to improved products.” Environmental, social and governance
“ESG is an area [where] we will see significant product development going forward” Kristina Hooper, Invesco active manager, people will be willing to pay for that service, if they are consistently able to deliver on objectives.” Hooper, meanwhile, believes the fee discussion still has room to evolve. “In the current environment,” she says, “with the need for downside protection and solutions
[ESG] investing was another major theme of the conference; every speaker seemed to have a prediction about where ESG is headed. As Arya points out, the approach to ESG in Europe has already advanced far beyond where it is in North America. “Long term, I think [ESG] will evolve,”
he says. “People will think about it in their portfolios. When we have conversations with investors from Europe, it is not even a discussion. No matter what they do, ESG is integrated.” Hooper also believes ESG will continue to be a dominant theme in the ETF industry and could eventually manifest itself in ESG portfolios that emphasize a particular factor of the strategy. “ESG is an area [where] we will see significant product development going forward, and the best application will be ESG ETFs,” she says. As the ETF industry continues to press forward (global ETF assets under management are expected to climb to $12 trillion by 2023), these are just some of the topics advisors can expect to dominate the discussion and materialize in the product offerings on the market.
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UPFRONT
INTELLIGENCE CORPORATE ACQUIRER
TARGET
PRODUCTS COMMENTS
Canaccord Genuity
Petsky Prunier
The acquisition of the New York-based M&A advisory firm will bolster Canaccord Genuity’s US capital markets business
Willis Towers Watson
Integra Capital
The mega-brokerage has acquired Integra Capital following a successful multi-year partnership
PARTNER ONE
PARTNER TWO
COMMENTS
CPPIB
Caisse Fédérale du Crédit Mutuel Nord Europe
The joint venture will invest in real estate projects linked to the massive €35 billion Grand Paris Express public transport project in the French capital
Fiera Infrastructure
EllisDon Capital
Its partnership with the construction capital group will give Fiera increased access to the public-private partnership market
Sprott
Tocqueville
Sprott has entered into a joint venture with Tocqueville to co-manage a gold equities investment strategy
Wealthsimple
TurboTax
The deal will allow Canadians preparing taxes via TurboTax’s online system to conveniently open, fund or transfer an RRSP with Wealthsimple
Wealthsimple introduces premium service
Wealthsimple has added a new top-tier premium service, Wealthsimple Generation, for investors with at least $500,000 deposited across their accounts. The new service offers portfolios that are personalized according to clients’ financial goals and exposures, and also provides tax optimization via individualized asset allocation, tax-loss harvesting and tax-efficient funds. Eligible clients will also have the opportunity to connect with financial advisors and receive a customized report to help them achieve their goals. The new service comes with a management fee of 0.4%.
Sprott and Tocqueville go for gold
Sprott, through its subsidiary Sprott US Holdings, has inked a joint-venture agreement with Tocqueville Asset Management to co-manage a new gold equities investment strategy. The strategy aims to invest in a concentrated portfolio of low-risk/high-reward opportunities as a growing wave of consolidation sweeps through the gold mining industry. The partnership will allow Sprott and Tocqueville to help companies bridge gaps in access to financing, value realization and market perception. “We are pleased to partner with John Hathaway and the Tocqueville team to offer this new strategy to investors,” said Sprott president Whitney George. “John is one of the most respected investors in the precious metals sector, and Sprott is a recognized leader in the space with a global brand and platform. By combining the strengths of both of our teams, we will offer investors a unique precious metals investment strategy.”
12
Franklin Templeton launches embedded fee series
Franklin Templeton Investments Canada has introduced four new embedded fee series with preferred pricing and daily auto-switching for commission-based advisors and their clients. Investors will be switched from Series A, A (Hedged), T and T-USD to the respective lower-fee option upon reaching a minimum investment of $200,000. To reach the minimum more easily, clients will be able to link related accounts within a single household. “This new preferred pricing ensures that commission-based advisors always have their clients in the lowest-priced option they qualify for,” said Franklin Templeton president and CEO Duane Green.
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PEOPLE CIBC rolls out suite of investment portfolios
CIBC has launched CIBC Smart Investment Solutions, a series of investment portfolios composed of traditional and non-traditional investments, as well as a blend of active and passive investment strategies. The portfolios also include the CIBC Multi-Asset Absolute Return Strategy, an alternative investment fund launched in 2018. Targeting a range of goals, life stages and risk profiles, the lineup includes the CIBC Smart Income Solution, Smart Balanced Income Solution, Smart Balanced Solution, Smart Balanced Growth Solution and Smart Growth Solution.
NAME
LEAVING
JOINING
NEW POSITION
Whitney George
N/A
Sprott
President
Arni Johannson
Canadian Nexus Ventures
Block X Capital
CEO
Kristi Mitchem
Wells Fargo
BMO Global Asset Management
CEO
Geneviève Morin
Fondaction
Anges Québec Capital
CEO
Doce Tomic
Credential Financial
Guardian Capital
Head of wealth management
Ralph Vizl
Great-West Life Assurance Company
FP Canada
Chief strategy officer
TD Asset Management expands cash flow series
BMO GAM names new head
PIMCO Canada unveils new fixed-income options
Anges Québec Capital appoints new CEO
TD Asset Management has unveiled new cash flow series options for select TD Mutual Funds and TD Managed Assets Program [TD MAP] Portfolios. Designed to give mutual fund investors more cash-flow options, TDAM’s new FT8 series extensions target an annualized distribution rate of 8%. For its US Blue Chip Equity Fund, TDAM is rolling out both FT5 and FT8 series, giving investors a choice between potential 5% and 8% payout rates. The firm also announced new US dollar purchase options on F and W series of selected TD MAP Portfolios to provide investors with additional US dollar investment options.
PIMCO Canada has launched two funds for Canadian investors in search of new fixed-income solutions. The PIMCO Low Duration Monthly Income Fund (Canada) is an active strategy that seeks to generate income, preserve capital and lower interest-rate risk through a multi-sector approach that spans multiple opportunities from across the world. The PIMCO Global Short Maturity Fund (Canada) is an active enhanced cash strategy that seeks to dynamically manage risk and liquidity through ultra-short, high-quality fixed-income securities. Both funds are available as either mutual funds or ETFs.
BMO Global Asset Management has named Kristi Mitchem as its new CEO, replacing Richard Wilson, who led the firm to surpass $320 billion in AUM. Mitchem has a wealth of experience in leading global teams across all major asset classes through collaboration with investors and clients. Most recently, she served as CEO and head of Wells Fargo Asset Management, where she led 28 independent investment teams managing roughly US$500 billion. “Kristi brings an excellent track record of transformative leadership,” said Joanna Rotenberg, group head of BMO Wealth Management. “Her asset management expertise, creativity and technological acumen will be a strong catalyst in our next chapter of growth.”
Anges Québec Capital, the largest group of angel investors in Quebec, has announced the appointment of Geneviève Morin as its new CEO. Morin joins the firm from Fondaction, a $2 billion labour-sponsored fund committed to sustainable development, where she had served as chief investment officer since 2011. Prior to that role, Morin served as Fondaction’s chief financial officer and head of corporate development, and she currently sits on the boards of Anges Québec, the Canadian Venture Capital Association and Investissement Quebec. “[Geneviève] has everything it takes – vision, expertise – to bring Anges Québec Capital to the next level,” said outgoing CEO François Gilbert. “That will allow me to focus my energy on the growth of Anges Québec.”
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UPFRONT
ETF UPDATE NEWS BRIEFS Vanguard adds two more ETFs to its asset allocation lineup
Vanguard Investments Canada has added to its popular low-cost asset allocation ETF suite with two new funds. The Vanguard Conservative Income ETF Portfolio (VCIP) aims to provide a combination of income and some longterm capital growth through a portfolio of 20% equities and 80% fixed income. The Vanguard All-Equity ETF Portfolio (VEQT) seeks to provide long-term capital growth through investments primarily in equities. Both funds have exposure to Canada, the US and other countries, and carry a management fee of 0.22%.
National Bank fires its first shots into the ETF space
National Bank Investments has launched its first four ETFs on the TSX. The NBI Global Real Assets Income ETF (NREA) invests in a portfolio of global companies in industries associated with real assets. The NBI Active Canadian Preferred Shares ETF (NPRF) targets tax-efficient dividend income via preferred shares or other income-generating securities of Canadian companies. The NBI Canadian Family Business ETF (NFAM) follows a Canadian equity index of publicly listed, family-owned Canadian companies. Finally, the NBI Liquid Alternatives ETF (NALT) invests primarily in long and short positions on financial derivatives with exposure to major global asset classes such as government bonds, currencies, equities and commodities.
Desjardins ventures into the alternative ETF space
Desjardins Global Asset Management has launched a new alternative ETF, the Desjardins Alt Long/Short Equity Market Neutral ETF (DANC). Designed
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to provide uncorrelated returns with all asset classes, the fund makes direct and indirect investments in long and short equity positions, Treasury bills, money-market instruments and other short-term debt securities. Carrying a management fee of 1%, DANC is diversified across a number of pairs of correlated issuers, which generally fall within the same industry sector; its strategy effectively neutralizes the net market value of long and short positions, creating a reduction in sector biases and market exposure.
Invesco adds CAD-hedged series to its low-vol ETF
Invesco has launched a new CAD-hedged series for its Invesco S&P International Developed Low Volatility Index ETF (ILV.F). Trading on the TSX, ILV.F seeks to provide downside protection, long-term capital appreciation and global diversification by replicating the performance of the S&P EPAC Ex. Korea Low Volatility Index on a hedged basis. The fund invests primarily in low-volatility equity securities of developed market companies within Europe and the AsiaPacific region, excluding Korea.
BMO gets into the asset allocation ETF game
BMO Asset Management has launched three risk-based asset allocation ETFs on the TSX. The low-cost ETF portfolios, which are rebalanced quarterly, are designed to complement investors’ holdings with a disciplined, passive approach that covers broad markets. The BMO Conservative ETF (ZCON) has exposure to 60% fixed income and 40% equity, the BMO Balanced ETF (ZBAL) has exposure to 40% fixed income and 60% equity, and the BMO Growth ETF (ZGRO) has exposure to 20% fixed income and 80% equity.
Opening up quant strategy A new ETF provider is committed to giving everyday investors access to sophisticated active management
The Canadian ETF industry already boasts around 800 products, so the possibility of entirely new ideas has gotten quite thin – but there’s still some room for innovation. SmartBe Wealth recently debuted its first-ever ETF on the NEO Exchange. Trading under the symbol SBEA, the SmartBe Global Value Momentum Trend Index ETF uses a quantbased strategy run by Alpha Architect’s Wes Gray, who studied at the University of Chicago under Nobel laureate Dr. Eugene Fama. “This ETF is affordable, very transparent, and we feel this brings some of the best strategies to the average Canadian,” says SmartBe co-founder and CEO Rod Heard. According to Heard, at least half of all Canadian ETFs follow indexes that track exchanges, bonds and other simple strategies. On the active side, most are still fairly close to an index with slight factor tilts. In contrast, SBEA curates a portfolio of around 230 Canadian, US and international stocks via a series of factor screens, including value, which seeks high-quality names trading at low multiples; momentum, which looks at the top 10% stock performers in the last year that also have conservative accounting practices and minimal bankruptcy risk; and trendfollowing, which moves the fund into cash when the overall market isn’t performing well. “The strategy is all about safety and uncovering pricing anomalies on value
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and momentum, and we just exploit those mispricings on the market,” Heard says. “Our ticker price when we launched was $20, and there are no commissions, so many people can now get into this space that’s traditionally been the territory of high-fee hedge funds.” The desire to provide access to small investors also factored into SmartBe’s deci-
“The strategy is all about safety and uncovering pricing anomalies on value and momentum” sion to list the ETF on the NEO Exchange, which has speed bumps that keep highfrequency traders from getting pennies on the trade as people try to buy and sell. In addition, the NEO has technology that prevents institutions with large books and high pricing power from overwhelming two people trying to make a natural trade. “NEO is also very data-rich and sophisticated on their back end, and they’re very transparent,” Heard says. “We share many of the same value systems.” One of those core values is making technology work for investors. While most other mature economies like the US, Britain and Singapore are fairly far along in adopting quantitative investing, Heard says, Canada is behind. The consensus of academic research, he adds, is that 95% of humans don’t earn as much as machines making investment decisions using rule-based algorithms. “This is about getting the best minds and research to work in Canadians’ favour,” he says.
Q&A
Lee Goldman Senior portfolio manager/ portfolio manager CI SIGNATURE/ FIRST ASSET
Years in the industry 25+ Fast fact The First Asset Canadian REIT ETF (RIT) recently won a FundGrade A+ Award for excellent relative performance over the past 10 years
The riskreducing edge of REIT ETFs How have attitudes toward REITs and REIT ETFs changed in recent years? I think investors are, more so than in the past, looking at REITs as a stable alternative income source. It’s a common perception that REITs are interest-rate-sensitive. But the way we see it, it depends on the magnitude and speed of the move and why rates might be moving up. There were a lot of reasons to believe that interest rates would go up in 2018, which is essentially what happened up to October. We also saw some good sell-offs throughout the year, during which REITs tended to have shorter downturns than the broader market. In the end, real estate was the second bestperforming GICS sector in Canada, returning around 6% as the TSX dipped about 9%.
How has the First Asset Canadian REIT ETF (RIT) performed? We have a few decent-sized REIT ETFs in Canada, including XRE from iShares, ZRE from BMO and our own RIT, which is the only active REIT ETF that I’m aware of. Over the past five years ending January 2019, we have outperformed XRE by 3.56% and ZRE by 3.14% annualized and were the top performing ETF in four of the past six calendar years, being runner-up in the other two years. Since being converted to an ETF around three years ago, RIT has grown from $60 million to almost $400 million.
How does the performance of REITs and REIT ETFs look relative to other sectors and asset classes? On average, REITs had a dividend distribution of around 5.4%, which is favourable against other dividend-yielding sectors and in line with the utilities sector, but better than both the telecom and financials sectors. They have also done a fairly good job of lowering both leverage and payout ratios over the past several years, so distributions are mostly very sustainable and, in many cases, growing every year or couple of years. The S&P/TSX Capped REIT Index yield has a spread of around 3.5% over the 10-year Canada bond yield at the moment, a little wider than the historical ballpark of 3%. Fundamentally, we think the underlying real estate is, for the most part, very positive across various asset types and across jurisdictions, except Alberta because of what’s going on in the oil environment. There are a few strong-performing individual REITs, but from a risk/reward perspective, the REIT ETF generally has beaten all but one or two individual names over the last several years.
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UPFRONT
ALTERNATIVE INVESTMENT UPDATE
Venture capital soars to new heights While the public markets grappled with anxiety, VC deal-making was hectic and fruitful in 2018
predicts that “corporate investors will likely participate in more deals this coming year as investors recognize the growing market opportunity within Canada.” Toronto and Vancouver were 2018’s leading markets in terms of deal activity, snagging a total of 160 and 101 deals, respectively. The two cities also saw 47% and 14% year-overyear increases in funding – Toronto raked in US$1.3 billion in 2018, marking its fifth
“The increase in total investment was mostly driven by larger cheque sizes in expansion- and later-stage deals”
Canada’s venture capital space was stronger than ever in 2018. According to a recent report by PwC Canada and CB Insights, the VC sector closed out 2018 with a record-breaking US$3.5 billion in funding, largely driven by the US$983 million invested in the fourth quarter, which represented a 79% surge over the previous quarter. The number of deals also increased quarter-on-quarter, bringing 2018’s deal total to 471 – another new annual high in Canada’s VC space. “The Canadian startup ecosystem is doing
NEWS BRIEFS
well, as funding and deals hit record highs this past year,” said Anand Sanwal, co-founder and CEO of CB Insights. “Sectors of strength include artificial intelligence, fintech and digital health, [which] all hit record funding highs in 2018.” Canadian AI companies raised 51% more than they did in 2017 to reach US$418 million. Fintech funding also inched higher in 2018, reaching US$456 million, compared to 2017’s US$441 million. Digital health, meanwhile, saw US$177 million in investment. Sanwal
CPPIB debuts euro-denominated green bonds
Following its inaugural sale of green bonds in June 2018, the Canada Pension Plan Investment Board has completed the sale of its first eurodenominated green bonds, amounting to €1 billion in 10-year fixed-rate notes, which will enable it to invest in renewables, water and wastewater management, green realestate projects, and other eligible assets. The CPPIB hopes to take advantage of a strengthening European green-bond market, driven by increased EU targets for renewable energy consumption.
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consecutive year of funding growth, while Vancouver attracted US$388 million. Startups in Montreal, Quebec City and Calgary also saw notable increases in the amount of funding and number of deals. One of the most noteworthy trends in Canadian venture capital in 2018 was the shift toward later-stage funding. “While deal count has risen across all stages of funding, the increase in total investment was mostly driven by larger cheque sizes in expansion- and later-stage deals,” said Michael Dingle, national technology sector leader for PwC Canada. “Notable is the 26% increase in average deal size of expansion-stage deals year-over-year, which is an indicator of scale in the sector.”
New venture capital firm targets laterstage startups
Framework Venture Partners, a new venture capital firm launched by BDC Capital, has announced the first close of a $150 million AI and fintech fund. With initial commitments from Cadillac Fairview, RBC, the BC Tech Fund and BDC, the fund will support rapidly scaling Canadian tech companies that focus on incorporating machine learning technology. According to co-founder Peter Misek, the fund will tap into an unmet investment need by focusing on later-stage startups looking to raise additional funds for continued growth.
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Q&A
Amar Pandya Senior investment analyst and associate portfolio manager PENDERFUND CAPITAL MANAGEMENT
Years in the industry 7 Fast fact The Pender Value Fund is a concentrated portfolio that takes advantage of the best strategies from the Pender investment team, unconstrained by market cap or geography
Finding small-cap value amid volatility What got investors primed for panic during the final months of 2018? Coming out of the longest bull market expansion in history, a lot of investors were half-fearing a pullback. Those fears were stoked by tightening financial positions, rising interest rates, the impact of shrinking consumer discretionary income and increased borrowing costs for companies. General household wealth in Canada has also decreased as housing prices either stabilized or declined. Globally, eyes were on US-China trade tensions and the drama around Brexit. In the energy space, prices collapsed just when sentiment was starting to improve; that was made worse here by a huge blowup in the differentials. Everything came together to stir negativity in the market. The various sentiment indicators we follow – CNN’s Fear and Greed Index, Citigroup’s Panic/Euphoria Model, and the CBOE Volatility Index – all spiked early this year.
What have you been seeing among small- and mid-cap companies in terms of their value? Value indicators have been rising among the small- and microcap companies we track. A lot of it has to do with the momentum and strength in the businesses: Their fundamentals are solid, their markets are still growing, and management appears largely constructive on their prospects. Canadian companies with US exposure are benefiting from a fairly robust US economy, low unemployment, and high wage growth and consumer
Venture capital investors’ appetite for data grows
In a recent survey on venture capital research, PitchBook found that 86% of venture capital investors across the US, Europe and Asia believe data is important in evaluating investments. However, personal networks and inbound leads remain the most popular channels for sourcing and evaluating investment opportunities. Nearly two-thirds of respondents (64%) said they’re not yet using machine learning technology to inform venture capital investments, but half said they plan to increase their technology usage in the future.
confidence. In Canada, we believe the economic reality is better than relatively low confidence indicators suggest, and market valuations have fallen off considerably.
What opportunities has the Pender Value Fund has gleaned from the recent market downturn? There tends to be an industry misconception that funds with large cash balances through a cycle generate returns despite holding it. In our view, generating good returns takes cash that can be strategically deployed. We’re perfectly willing to sit on cash in our main area of focus: small, misunderstood companies where the window of opportunity is rare and generally doesn’t last long. We’ve been watching a few high-quality investment ideas develop for some time. We never know where share prices will be in the next month or even the next year, but we generally have a higher degree of confidence on the businesses that will get more intrinsically valuable in three to five years, and those are what we’ve bought in the last couple of quarters.
What’s your outlook for the small- and mid-cap space at the moment? We’re finding a lot of opportunities in the small-, midand microcap space right now. Prices haven’t moved much for Canadian companies for a number of years. It’s also a great environment for large US companies that have the benefit of currency, which creates some potential for M&A opportunities going forward.
CSI unveils alternative strategies course
The Canadian Securities Institute has announced a new course that will cover alternative investment strategies, including hedge funds and liquid alternatives. Aiming to prepare advisors to advise on and sell alternative mutual funds, the online course provides an overview of the different features, benefits and risks of alternative strategies. It also explains the role of such strategies in a client portfolio, as well as the due diligence process required to determine suitability and performance benchmarks.
Investors pile on gender-diversity pressure
In a recent survey of more than 800 institutional investors, KPMG found that the majority (84% of women and 76% of men) agree that gender diversity is a business imperative for alternative investment firms. Seventy-five per cent of investors said they plan to ask investment teams to report their diversity efforts, up from 60% last year. Meanwhile, 42% of investors said they will require the alternative investment firms in their portfolios to improve diversity, up from just 11% last year.
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PEOPLE
INDUSTRY ICON
STARTING FROM SCRATCH Darcy Hulston helped build Canoe Financial from the ground up. Now that the company has surpassed $5 billion in AUM, he reflects on the culture and vision that have driven its success
IN 2010, a group of business and financial industry veterans got together in Calgary to form what is now Canoe Financial. The next year, the company launched its first suite of open-end funds. Today, Canoe Financial has expanded to 21 mandates with a combined $5.5 billion in AUM. At the heart of its success is its team, led by president and CEO Darcy Hulston. A three-decade veteran of the financial industry, Hulston was recruited off campus and spent 10 years with a major Canadian bank in multiple progressive roles. He then moved to a large US-based mutual fund company as a regional vice-president; while in the States, he completed a three-year graduate program in organizational behaviour at the University of Pennsylvania’s Wharton School of Business. This eventually led to a role as VP of sales for Western Canada with a Canadian insurance company before forming Canoe. “I think every professional experience has contributed to many parts of my current role,” Hulston says. “Whatever job I was in, I tried to master it and was excited to learn. What I didn’t realize is these experiences all set me up perfectly to build Canoe. Those jobs, as random as I thought they were, all contributed to my success.” Growing up on a farm in Saskatchewan,
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Hulston traces his desire to enter the financial industry to one of his greatest inspirations – his father. “My father was a farmer but wanted me to go into accounting or financial services,” Hulston says. “He was a business guy, kept his own books and records. He was very prac-
Setting the stage for growth His experiences, combined with his background in organizational behaviour, have helped Hulston create his best team yet at Canoe. He attributes the organization’s success to its culture. “This is the best team I have worked
“Our ambition was to create a highly consumable and focused product offering, suitable for every stage of life of the Canadian investor … As we grow, our offerings may take on more complexity, but for now, we just want to keep it simple and focused” tical about allocation of capital and borrowing and always included me in those discussions. Being the steward of his own business and finances inspired me.” Those early lessons on how to run a business served Hulston well in his senior leadership positions. “I have been in general management most of my life,” he says. “I have hired, fired, trained and designed compensation plans. In leadership, you need to attract, retain, create, foster and fuel talent.”
with,” he says. “They are very talented, and as a leader, it’s awesome to watch it happen. It’s a very strong culture. The senior people at the firm are all fully invested in the equity of Canoe and 100% invested in the funds we manage. With that, you get extreme stakeholders. Everyone here is an owner, and they all care. When you are an owner, you act differently. As a privately held company, our success is directly tied to our investors; in other words, we do not succeed unless our
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PROFILE Name: Darcy Hulston Title: President and CEO Company: Canoe Financial Based in: Calgary Years in the industry: 31 Fast fact: Outside of his work at Canoe, Hulston sits on the board of the Canadian Cancer Society and has been involved in Canadian Minor Hockey as a division coordinator and disciplinary liaison and has served on several hockey boards
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Bleed Trim
Live
PEOPLE
INDUSTRY ICON
investors succeed first.” Canoe has grown impressively in the years since it launched its first three funds. “Our ambition was to create a highly consumable and focused product offering, suitable for every stage of life of the Canadian investor,” Hulston says. “We have a number of strategies for income distribution and downside protection. As we grow, our offerings may take on more complexity, but for now, we just want to keep it simple and focused.” Based in Calgary, Canoe first gained recognition for its strong energy competency. However, the firm has built on that to become a more diversified player.
“There are a number of very specific needs unique to the Canadian marketplace. Building this business has been very hard. In the ’90s, in Canada, you needed a good brand and to be a good fiduciary. That was kind of it. Today, you need to be perfect – absolutely excellent at everything you do.” Striving for perfection is something the Canoe team takes very seriously. “There is a lot of pressure on perfection that our team feels that I didn’t necessarily feel early in my career,” Hulston says. “There is a competitiveness that drives our success. To the outsider, it might look ferocious, but we ferociously care. The public deserves an excellent experience.
“Building this business has been very hard. In the ’90s in Canada, you needed a good brand and to be a good fiduciary. That was kind of it. Today, you need to be perfect – absolutely excellent at everything you do” “I think our fixed-income competency surprises a lot of people,” Hulston says. “Our domestic fixed-income manager has 27-plus years of experience and has won multiple Lipper Fund Awards. Our largest strategy is our large closed-end fund, roughly $1.3 billion in assets; it’s a diversified equity portfolio that generates income. Our ambition is to be a full economic cycle suite of products.” Canoe acquired O’Leary Funds in 2016 and is currently finalizing a deal to acquire Fiera Capital’s Canadian mutual fund assets. Hulston says the firm will continue to look for these types of opportunities to accelerate growth and continue to reduce fees.
In search of perfection Despite Canoe’s success, Hulston says building a mutual fund company from scratch has been the biggest challenge of his career. “We’re in a very dynamic market,” he says.
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It’s more challenging but more rewarding when we succeed.” Despite the investment industry’s competitive nature, Hulston is optimistic about its future and continues to encourage young people to sign on. “I always tell students that I speak to to stay a generalist as long as you can,” he says. “If you start in a bank or asset management firm, try as many departments and things as you can. It certainly helped me. Even though the narrative in the industry right now is that it is becoming consolidated, the barriers to entry are harder and there’s maybe no room, I think those are the moments you want to embark on this flight path. It is a growth industry – even with the growth of ETFs, it is like anything in the business cycle, and all industries go through this. I think there is tremendous opportunity for those who choose this industry.”
CANOE FINANCIAL AT A GLANCE
Founded in 2008
Headquartered in Calgary
$5.5 billion in assets under management
160% growth in AUM since 2012
Offers 21 mandates via open-end mutual funds and private energy equity funds
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Engineered for the optimist, pessimist, and I’m not sure-ist.
A lineup of investment solutions as diverse as your clients. Our wide range of defensive growth Mutual Funds and ETFs –– including BMO Tactical Dividend ETF Fund and it’s new ETF Series (ZZZD), and BMO Low Volatility ETFs –– are designed with your clients in mind. Learn more at bmogam.com/defensivegrowth BMO Global Asset Management comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO’s specialized investment management firms. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and a separate legal entity from Bank of Montreal. BMO Mutual Funds refers to certain mutual funds and/or series of mutual funds offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal. Commissions, management fees and expenses may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts or prospectus before investing. Mutual funds and ETFs 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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SPECIAL REPORT
ALTERNATIVES
LOOKING FOR ALTERNATIVES As advisors increasingly turn to alternative investments to reduce risk and generate returns amid market volatility, WPC examines seven of the most popular alternative strategies out there THE END of 2018 saw the return of volatility to the equity markets, and with it, a rise in advisor interest in including alternative investments in portfolios. There are numerous ways that these strategies can be implemented, all with the goal of mitigating risk, dampening volatility and finding returns during down times. As the market experienced its long bull run, the need to look at alternatives was less of a priority for both advisors and investors. However, now that a global economic slowdown has appeared on the horizon, alternatives strategies will become even more important as a way to preserve wealth. On the following pages, WPC takes a look at some of the many alternative investment options, highlighting their benefits and risks. From hedge funds to commodities such as oil and gold to private investments in equity and real estate, there are many ways to diversify portfolios with alternatives.
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ABOUT THE SPONSOR Mackenzie Investments has been helping Canadians since 1967, when we started with one person managing investments for one investor in Toronto. Now 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 and 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. For more information, visit mackenzieinvestments.com.
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Brought to you by
HEDGE FUNDS
Headed for a spike in popularity? Advisors are taking a new look at hedge funds as a way to reduce risk, which could make them increasingly desirable in 2019 OVER THE past few years, hedge funds have failed to produce the returns investors have been looking for. Driven by the perception that equity markets have only been on the rise for the past 10 years, many investors have focused on gaining returns from straight equity exposure, avoiding the seemingly less fruitful, yet also less risky, strategies offered by hedge funds. However, when the equity markets experienced a meaningful pullback in the final quarter of 2018, hedge funds once again proved their worth. Now, with volatility apparently here to stay, hedge strategies could see renewed popularity. “If volatility is going to continue, as we think it will, having hedge in portfolios does make sense,” says Paul McKenna, an investment advisor at Richardson GMP. “I use it to mitigate risk, dampen volatility and smooth out returns in my clients’ portfolios.” McKenna, whose many years of experience in this area include a stint as part owner of a hedge fund company, recognizes that investors who used hedge funds over the past few years might have felt they detracted value. However, that all changed late in 2018. “If you simply bought the S&P 500 and rode it, you would have been further ahead,” McKenna says. “Then the last quarter of 2018 hit, and you recognize that having a little protection might be a good thing.” There is a trade-off with hedge strategies:
As markets trend upward, investors might forfeit some of the gains at the higher end, but when volatility spikes, hedge funds can better mitigate risk and losses. Studies show that investors fear losses more than they enjoy
gains, so this trade-off tends to be appealing to high-net-worth investors who have made their money and want to keep it. McKenna believes the recent uneven performance of hedge funds can be attributed to heightened uncertainty and unpredictability in the markets. “As the market bounces around for unexpected reasons – most notably frequent and random tweets from the White House – it makes it harder even for more sophisticated hedge strategies to anticipate what is going to happen and to implement successfully,” he says. Despite those factors, McKenna feels the current landscape will lead more investors back to hedge funds. “At Richardson GMP, we are leaders in the hedge space, so we are seeing more people in hedge strategies,” he says. “Leading up to the quarter we just had, people had become complacent towards volatility. My team has seen a huge move
ADVISORS’ FAVOURITE HEDGE FUND STRATEGIES Equity long/short
70%
Multi-strategy
48%
Market neutral
41%
Long/short credit
30%
Private credit
30%
Event-driven
22%
Relative value arbitrage
22%
Global macro
22%
Other
19%
Equity long only
19%
CTA/futures
11% Source: AIMA Wealth Advisor Survey, October 2018
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SPECIAL REPORT
ALTERNATIVES “Hedge is meant to hedge away risk. A lot of people think of hedge as risky, but if used properly, it should allow you to lower volatility in a portfolio” Paul McKenna, Richardson GMP
towards index ETFs; however, after what they witnessed recently, investors might not like that ride. I think you’ll see more people return to hedge funds. It is a form of active management, and I think you’ll see more of that going forward.” Even though 2019 has started strong, McKenna sees the bounce-back in the market slowing down, opening the door for active hedge managers to demonstrate their value. He believes managers will return to focusing on holding companies with solid fundamentals and shorting those without. McKenna identifies a number of hedge fund strategies advisors might want to consider. One common strategy is market neutral, which aims to be equally long and short in the market – and sometimes even each sector – at all times. This largely removes the broader moves of the markets (the beta)
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and focuses on the stock-picking ability of the manager (the alpha). Theoretically, this means the strategy can make money in up or down markets. However, when equity markets rise sharply, the strategy doesn’t work as well, as the shorts will always be a drag on performance. In a long/short strategy, managers go long on the companies they like and short a handful of the ones they don’t. This strategy seeks to earn profits from strong companies while using the shorts to either hedge the long portfolio or seek gains on weak companies. In global macro strategies, managers take a top-down approach to identify areas around the world that offer the most attractive opportunities to invest, then dig deeper to find the sectors or companies in those areas that offer the greatest opportunity to employ their hedge strategies.
Finally, merger arbitrage is a lower-risk/ lower-return strategy that looks at pending corporate deals, taking a position on how the deal will play out as the close date approaches. While each strategy is different, they all attempt to generate returns that don’t simply rely on the market going up, which can lower portfolio volatility when compared to the broader markets. “Hedge is meant to hedge away risk,” McKenna says. “A lot of people think of hedge as risky, but if used properly, it should allow you to lower volatility in a portfolio. Over a longer timeframe, this can help achieve the goal of outpacing the market.” The risk with hedge funds, especially those using a long/short strategy, is that a manager could be wrong on both sides. However, McKenna says the bigger risk is that if investors don’t understand the strategy, they might think it’s underperforming and want to deviate. “They forget that it’s meant to be doing its own thing, showing its value in different ways than simply following the everyday up-anddown market movements,” he says. “In volatile periods, clients appreciate having those strategies in their portfolios. Without getting too technical, it’s important for advisors to have clients understand why it’s in the portfolio.”
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PRIVATE EQUITY
The key to repositioning portfolios Private equity can provide certain investors an attractive shelter from market volatility AS INVESTORS search for alternative ways to reposition their portfolios, many have begun to turn to private equity. “We are seeing the proliferation of private
have day-to-day trading data like their publicly traded counterparts, Kinkaide says investors have been drawn to the space by recent public-market volatility.
“There is definitely stronger demand for investments that aren’t linked to the market, especially when the market is volatile” Peter Kinkaide, Raintree equity funds,” says Peter Kinkaide, CEO of Raintree. “There is more capital being set aside to invest in the private equity industry, which is indicative of what investors globally are looking for – higher risk-adjusted returns.” While it can be tough to evaluate recent performance because private equities don’t
“What we are hearing from advisors is clients calling them looking to reposition their portfolios as a function of that volatility,” he says. “There is definitely stronger demand for investments that aren’t linked to the market, especially when the market is volatile.” Kinkaide adds that investors have been
drawn to private equity by expectations of returns north of 10%. Some funds distribute dividends along the way, while others generate returns on capital and profit when the private equity fund exits the investment. “At its very basic notion, you can purchase a business for a multiple of earnings that you can’t find in the public markets,” Kinkaide says. “What that does is it gives you the opportunity to make a better return. If all other things are equal, and you have a business that trades on the public market at 20 times and you can buy it at six to eight times in the private market, you are generally better off purchasing it for less.” As with any investment, the higher returns in private equities come with greater risk; Kinkaide highlights illiquidity and less information about the investment as the major ones. “What are you exchanging is the ability to trade those securities,” he says. “If you don’t like those securities, it’s difficult to bail out. There tend to be trade restrictions or restrictions against redemption. Another key risk is that reporting standards are significantly lower than a public company. You won’t receive as much information about the investment over time.” At Raintree, Kinkaide and his team have zeroed in on the right investments by looking for opportunities where the team has expertise. Current areas of focus include industrial services and a dental rollup strategy, which he believes will be more resilient if and when another recession hits. He notes that the amount of capital in the private equity space has made it very competitive, so having that specialization is what sets his firm apart. While Kinkaide believes private equity can complement most portfolios, he cautions that it’s not right for everyone. “You have to have a risk tolerance that comes in line with purchasing higher-risk securities,” he says. “You also have to have a timeframe for the capital you are deploying that matches the illiquidity of the investment. It is really important for investors to talk to their financial advisor to see if it is a good option for them.”
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SPECIAL REPORT
ALTERNATIVES
GOLD
The gold standard of protection With an inverse correlation to the market, gold can provide the insurance portfolios need during times of turmoil WHEN THE bull market was raging on, investors paid very little attention to gold, but the pullback in the fall sparked renewed interest in the precious metal. Given its longstanding history of wealth preservation and its inverse correlation to the market, gold could see even more interest in the near future. “The last couple years have been tough
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for gold because the S&P 500 and NASDAQ have outperformed it and interest rates have been going up, which can affect gold’s performance,” says David Harquail, CEO of Franco-Nevada and chairman of the World Gold Council. “Now, in the last quarter, the momentum has come out of some of those markets, and the prospects for interest rate
increases have subsided. You are starting to see more interest from institutional and retail investors in gold.” While the bull market made things difficult for gold, Harquail points out that the commodity has actually remained fairly stable at around $1,200 to $1,300 an ounce. “Gold itself has performed OK,” he says. “If you look in terms of annual returns, it has been competitive with other asset classes. Those who are negative towards it point to how awful it has been since its peak in 2013, but if you look at longer-term trends, it has performed well.” While gold can have a long-term risk of underperforming against the markets, Harquail is optimistic for its outlook in the near future. He believes the current market volatility will drive more money into gold, especially as physical demand continues to grow in places like India and China. “In terms of physical demand, the retail side is good,” he says. “The investment side will always be cyclical and a function of
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GOLD VERSUS OTHER SECURITIES AVERAGE ANNUAL RETURN US cash
US bond aggregate
US stocks
Emerging market stocks
Commodities
Gold
Europe, Australasia and Far East stocks
16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Since 1971
20-year
10-year
Source: Bloomberg, ICE Benchmark Administration, World Gold Council, as of December 31, 2018
when people feel they need gold. When the markets – equity or bond – are hot, investors forget about gold because they want to make money elsewhere. Gold is a powerful thing to have in your portfolio because it’s one of the few assets that has an inverse correlation to the market.” Harquail says another one of gold’s key distinguishers is the variety of ways investors can own it: physical gold, exchange-traded products, gold operating companies, or royalty and streaming companies. He notes that while those who invested in gold stocks or mining companies have had a tough time, those who invested in the royalty and streaming companies have done all right. “If you bought into the royalty and streaming sector, they have outperformed the gold price, paid dividends and been a growth area in the sector,” he says. That’s largely because royalty and streaming companies such as Franco-Nevada aim to provide access to gold with less risk by offering a more diverse reflection of the sector.
“If you are worried about what might happen with global debt, the US dollar, currencies or international trade relations … gold is the ultimate risk-off investment because it isn’t anyone else’s IOU” David Harquail, Franco-Nevada “We don’t have the challenges of an operating company,” Harquail says. “We don’t have the risks if there is a capital overrun, inflation, tax changes or a major operations breach. We just take a percentage of the gold that comes from a mining operation. The advantage is we can be more diversified. I have 372 properties, including over 50 gold mines, in my portfolio. We can reflect the entire industry without the risk of an individual country or site.” And, Harquail adds, gold has the benefit of not being tied to any particular currency. “If you are worried about what might happen
with global debt, the US dollar, currencies or international trade relations and you want to preserve capital,” he says, “gold is the ultimate risk-off investment because it isn’t anyone else’s IOU.” Add to that its inverse correlation with the market, and gold’s appeal increases. “I think everyone should have a bit of gold in their portfolio as an insurance component,” Harquail says. “There is a cost to having it there, just like insurance, and no one needs it until the storms, floods and hurricanes come. But when they do, it becomes valuable.”
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SPECIAL REPORT
ALTERNATIVES
PRIVATE DEBT
Finding consistent returns Private debt can offer the benefit of stable returns – if advisors are willing to do their homework ONE ALTERNATIVE investment that has consistently offered steady returns is private debt. According to Wayne Ehgoetz, president and CEO of Waygar Capital, private debt can be a fruitful sector as long as investors and advisors understand what they’re investing in and who they’re investing with. “I think private debt vis-à-vis the benchmarks has done well,” says Ehgoetz, who also serves as subadvisor for the Ninepoint Canadian Senior Debt Fund. “There aren’t a lot of us in the space, and the returns for the various funds have been quite good. Private debt has had a very consistent and reasonable return over the last number of years, including last year. So for investors, there has been that level of consistency.” The private debt market isn’t as developed in Canada as it is in the US, in part because of regulation and the smaller population, which presents Waygar and other alternative lenders with great opportunity. When companies are rejected by the major banks, they turn to this
relatively small cohort of lenders, allowing them to create more investment opportunities. “I think we should see an increase in alternative lenders in this space,” Ehgoetz says. “What it will take for entrants is capital. That is probably the easiest thing. The difficulty will be finding the people who under-
stand and have experience in the space.” If advisors can pinpoint the right opportunities, Ehgoetz says there are great benefits. “From my perspective, the returns have been very good,” he says. “Private debt tends to do well in good and bad times. In good times, private debt lenders are lending to companies that are growing, maybe doing acquisitions and building their business. In bad times, it can help companies that are having some difficulties. A recession doesn’t mean the fund returns will diminish, which creates some comfort for investors.” Of course, there are risks investors need to be aware of; in private debt, the main one is whether the lender is fully, partially or not secured by collateral – fully collateralized private debt is less risky. “We are a private debt lender that requires all loans be supported by collateral, fully collateralized,” Ehgoetz says. “We assess the
PRIVATE DEBT VERSUS TRADITIONAL ASSET CLASSES Correlation to traditional asset classes, 1999–2015; 1.00 = absolute correlation Corporate bonds
High-yield bonds
Mid-market loans
10-year US Treasury bonds
Corporate bonds
1.00
High-yield bonds
0.52
1.00
Mid-market loans
0.30
0.75
1.00
10-year US Treasury bonds
0.37
-0.46
-0.48
1.00
S&P 500 Index
0.12
0.69
0.52
-0.64
S&P 500 Index
1.00
Source: TIAA Global Asset Management; Ninepoint Private Debt Guide, 2018
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company and the collateral in terms of if it were to fail and we liquidated the collateral, would we get our money out for investors? If the answer is no, then we won’t do the loan. You do have other lenders that are not fully collateralized that may do loans based on cash flow. The risks will be higher, because when a business has problems and relies on cash flow, you may lose money.” Moving forward, Ehgoetz believes there will be a good market for private debt, driven by the strengthening Canadian dollar and more stringent credit requirements at the major banks. “That will tighten the market,” he says. “We are a big supporter of lending to sectors that banks don’t, such as military and security.
“Private debt tends to do well in good and bad times … A recession doesn’t mean the fund returns will diminish, which creates some comfort for investors” Wayne Ehgoetz, Waygar Capital We see a terrific market where there will be demand for private debt funds and an environment where Canadian banks won’t be able to respond to the demands.” For advisors and investors, Ehgoetz emphasizes the importance of knowing the investment and the companies that are being funded. “The fundamental core of our fund at
Ninepoint is that any company we lend to has to have extremely strong management and collateral,” he says. “Entering into investments in companies that have those, you should be relatively comfortable that your risk is low. If your risk is low, your returns will be strong. The returns in this sector can be double-digit, consistently.”
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SPECIAL REPORT
ALTERNATIVES
LIQUID ALTERNATIVES
More than just a buzzword New regulations that went into effect in January could usher more liquid alternative options for retail investors into the marketplace LIQUID ALTERNATIVES – officially known as alternative mutual funds – are mutual funds that have adopted fundamental investment objectives that permit the fund to invest in physical commodities
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or specified derivatives. They can borrow cash or engage in short-selling in a manner not permitted for other mutual funds. At the beginning of 2019, new regulations concerning liquid alternatives took effect,
opening up the domain to retail investors. “The CSA has amended National Instrument 81-102 to allow for hedge funds to be launched in a mutual fund format,” explains Claire Van Wyk-Allan, director of the Alternative Investment Management Association Canada [AIMA]. “There are constraints on leverage and shorting and a host of other options, but essentially it is like a hedgefund-lite product that will now be available by prospectus. It can be launched as mutual fund, ETF or closed-end fund.” Liquid alternatives have been a hot trend worldwide; early estimates project the sector could reach anywhere between $20 billion and $100 billion in AUM in the next five years. “I will probably temper those expectations. I think we will see cautious growth and adoption because there are a few bottlenecks to distribution in this space,” Van Wyk-Allan says, pointing to the amount of competition
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ADVISORS’ ATTITUDES TO LIQUID ALTS How much would advisors allocate to liquid alternative funds? 35% 30%
30%
26% 25% 22% 20%
15% 11% 10%
7%
5%
4% 0%
0%
0%
0-5%
5-10%
10-15%
15-25%
25-50%
50%+
Source: AIMA Wealth Advisor Survey, October 2018
in the retail channel and challenges with product approval and risk classification. However, she adds, “it is incredibly exciting because it is bringing innovation to the Canadian marketplace.” According to Van Wyk-Allan, liquid alternatives offer numerous benefits: diversification, risk reduction, volatility reduction and non-correlated returns. “If you look at, say, a 10% or 20% allocation to alternative investments in a balanced portfolio, the end result is you will dampen volatility through large market events, up and down. We want to take away that large volatility exposure, especially on the equity side, by adding these investments. If you look at bond exposure in portfolios, hedge fund managers can actually neutralize a rising rate environment by shorting equivalent government Canadian bonds.” While critics of liquid alts have highlighted their higher fees and potential to suffer losses in
“Even asset managers who only played in the mutual fund or ETF space are launching alternative mutual funds to dip their toe in the hedge fund world” Claire Van Wyk-Allan, Alternative Investment Management Association Canada a downturn, Van Wyk-Allan says risks should be evaluated within the context of specific investments – an area where the AIMA is working to help educate advisors and investors. “You need to understand the manager who is managing the money and what their experience is,” she says. “What is the risk culture like at their firm? You need to understand how trading decisions are made, monitor for style drifts and really understand the strategy.” Despite the distribution challenges,
boutique managers have begun to launch more liquid alt funds. “Even asset managers who only played in the mutual fund or ETF space are launching alternative mutual funds to dip their toe in the hedge fund world,” Van Wyk-Allan says. “I do think it will have a huge impact on the way our investment industry is run. It is very important that Canadian investors ask about these types of strategies and the benefits for their portfolios to better preserve their wealth for the future.”
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SPECIAL REPORT
ALTERNATIVES
REAL ESTATE
Rethinking the old standby Real estate has long been a staple of alternative investing, but new trends are reshaping its potential
ADVANTAGES OF INVESTING IN REAL ESTATE Yield/cash flow and growth
Hedge against inflation
Strength of the underlying security
Increases the efficiency of a portfolio Source: Axcess Capital Advisors
WHILE SOME alternative investment strategies can confuse investors, the concept of investing in real estate tends to be easier for clients to grasp. Real estate investing has proven to be a consistent source of returns, and now that private options are opening up to more investors, many advisors are looking to differentiate their strategies by adding real estate to portfolios. “We have noticed significant advantages to being in the real estate space, particularly because we focus on the private investment
not correlated to the public market and also that performance.” One trend Jarman has noticed recently is Canadian investment dollars going towards US properties, which he feels is being driven by better values and new opportunities in the US. “Because of the tax relaxation and economic growth increasing in specific urban centres, it is a great time to invest in US properties,” he says. Axcess’ strategy is to look for the best in class in a variety of real estate sectors to
“If you target your mandate at middleclass rentals, where most income earners can pay rent, you almost have an annuity-like performance” Peter Jarman, Axcess Capital Advisors space,” says Peter Jarman, COO at Axcess Capital Advisors. “Private capital markets are aggressive in going after real estate, primarily because it is not correlated to the market.” Axcess works with companies that have significant experience in the space and have shown consistent net asset value [NAV] performance of over 11%. “That’s what draws people to real estate,” he says. “They are looking for diversification, something that is
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protect capital and find the most consistent returns for investors. Jarman notes that returns in the areas his team invest in have been in the 9% to 12% range. “The higher yields are coming out of our mortgage investment corporations across Canada,” he says. “If you are looking for combined [yield and NAV], it would be in private REITs, due to the asset pool being valued by appraisal, not market.”
While conserving capital and consistent returns are the major benefits of real estate investing, Jarman adds that smart decisions in the space can pay off as well. “Smart acquisitions derive value off that asset, which is likely to appreciate in its market segment,” he says. “That is one of the main things we look for.” As for the risks advisors and investors need to be aware of, “I think the most significant risk in the space would be illiquidity if there is a significant market change,” Jarman says. “One of the issues is that your commercial or residential property may have vacancy, and that will affect yield.” In addition, he emphasizes the importance of having a good manager – a manager who hops around with an active and reactive strategy can be a red flag. “Look for managers with significant experience and make sure there is ongoing due diligence with that manager and team,” he advises. “Make sure they are following the original mandate.” Moving forward, Jarman believes real estate will continue to draw investment as the public markets remain volatile. “I think the sophisticated money is looking towards alternatives,” he says. “If you target your mandate at middle-class rentals, where most income earners can pay rent, you almost have an annuity-like performance. There is a considerable need in the rental space, so outlooks are pretty strong.”
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COMMODITIES
Beyond the doom and gloom Opportunities still exist in oil and energy – if investors are willing to look past recent headlines WHEN IT comes to the energy sector, it’s easy to focus on the negatives. The price of commodities fluctuates based on supply and demand, and the oil industry specifically has taken a hit recently. Oil isn’t correlated to the public market, and issues like oversupply have made oil a frustrating industry for investors in recent years. Investors have typically been involved in the oil industry indirectly, by buying stock in oil companies or ETFs with holdings of multiple companies. However, direct investing through the purchase of oil futures or oil futures options is another way investors
can gain access to the sector. In addition, new developments in ETFs such as partnership units in the US Oil Fund (USO), which holds near-month New York Mercantile Exchange futures contracts on WTI crude oil, or the Canadian Crude Oil Index ETF (CCX) have helped increase direct access to the commodity. Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, hasn’t given up on the energy sector yet. With investor interest at an all-time low, he believes there’s never been a better time to get involved. “The narrative coming [into 2018] was
overwhelmingly positive,” he says. “We had a continuation of inventory drawdown, producers in the US underspending or spending within their cash flow, countries within OPEC that were in decline and no real signs of economic decline. You had signals that general interest was coming back to the sector.” However, that positive sentiment quickly changed. Overproduction from Saudi Arabia, intended to counter threatened sanctions against Iran, resulted in the market going from undersupply to oversupply in a matter of months. Oil crashed to an unsustainable level, and despite a rally early in 2019, the lack of investors in the space has kept oil trading below other commodities. “There has been a growing trend of people questioning the investability of the energy sector,” Nuttall says. “With the past four or five years having negative double-digit returns, the sector has become incredibly volatile and complicated.” Nuttall points to factors such as US policy towards Iran and now Venezuela, changes in OPEC’s views on stabilizing oil prices, and a focus on the future of oil versus electric energy, all of which have contributed to the mispricing in the sector. Today, he says, there’s little to distinguish between highand low-quality companies – something
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SPECIAL REPORT
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ALTERNATIVES
CRUDE OIL HIGHS AND LOWS $120 Average closing price per barrel
Year open
Year high
Year low
Year close
$100
$80
$60
$40
$20
$0
2014
2015
2016
2017
2018
2019 Source Macrotrends.net, as of February 4, 2019; all figures in US$
that should be an advantage for active money managers. For the global energy industry to get back on track, Nuttall believes three things need to happen. First, oil prices need to stabilize at approximately US$55 a barrel. Second, the US-China trade discussions need to see some positive developments, which Nuttall believes will go a long way. Finally, oil & gas companies need to rethink their business models. “For too long, the sector overspent cash flow, chasing growth at the sacrifice of maximizing returns,” Nuttall says. “This year, what you are seeing is companies saying they will be disciplined in using a low oil price in their budgeting. In 2019, any excess cash flow won’t go back into the ground, but rather to shareholder returns with buyback and dividends. If people see that this year, it will significantly improve sentiment towards the sector.” Despite the negative feelings about the oil industry, Nuttall does see benefits for investors. “What excites me is the extreme level of apathy towards the energy sector,” he says. “I think we are in a $60-a-bar-
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“With the past four or five years having negative double-digit returns, the sector has become incredibly volatile and complicated” Eric Nuttall, Ninepoint Partners rel-plus world going forward. If the level of disinterest in the sector continues, then companies will increase their level of share buybacks. I know there is a buyer at the end of the day for the stock – if it’s not investors, it’s the companies themselves.” The major risk Nuttall sees for oil is demand, not supply. “I think the biggest risk is a worry on demand growth,” he says. “If we do go into a global recession and demand growth lessens below 1 million barrels per day, then you do have a loosening and are at the whim of OPEC to see if they would further constrain production to balance the market.” While the health of the global economy
concerns Nuttall, one development that could benefit Canada is the current political tension in Venezuela, which he believes could create opportunity for Canadian oil to replace its Venezuelan counterpart at US refineries. Nuttall’s biggest message to advisors and investors is to look past the short-term noise in the sector. He says that if oil prices can get between $55 and $60 a barrel, opportunities can be found at a discount because of the overall disinterest in the sector. “It could be an opportunity of a lifetime,” he says, “even with the acknowledgement that it has been a frustrating place to be invested in over the past five years.”
Hor Sha imp
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Gain Tax-Efficient Exposure to Canadian Preferred Shares Horizons Laddered Canadian Preferred Share Index ETF
HLPR
Learn more at www.HorizonsETFs.com/HLPR
Horizons ETFs is a member of Mirae Asset Global Investments. Commissions, management fees and applicable sales taxes all may be associated with an investment in the Horizons Laddered Canadian Preferred Share Index ETF managed by Horizons ETFs Management (Canada) Inc. (the “ETF�). The ETF is not guaranteed, its value changes frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing.
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SPECIAL PROMOTIONAL FEATURE
TAX PLANNING
What to expect during tax season BMO Global Asset Management’s Mark Raes discusses some of the issues advisors need to be aware of when it comes to ETFs and taxes
NO MATTER the investment, it’s important for advisors to help prepare their clients for tax management. As ETFs continue to grow in popularity, both advisors and investors need to be aware of how their tax implications differ from other investments. ETFs’ distributions, the accounts they’re held in, where they’re listed and the impact that has are all crucial issues to an advisor’s understanding of their clients’ full financial picture and important considerations for successful long-term financial planning. “People should realize that ETFs are taxed in the same manner as mutual funds,” says Mark Raes, managing director and head of product management at BMO Global Asset Management. “Investors should expect to see something similar to what they have seen with other holdings. At year-end, the ETF will essentially make sure it has paid out its underlying taxable income and gains to unitholders, who will receive a tax slip. If the ETF is held in a taxable account, the unitholder will receive a tax slip showing interest income, dividends, capital gains and potentially the return of capital.”
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What’s different about ETFs The principal tax difference between ETFs and mutual funds is that ETFs are typically tax-efficient because they tend to be less active in their portfolios compared to mutual funds. Since unitholders trade on exchange, there typically isn’t a daily inflow and outflow that would cause the portfolio manager to trade.
at year-end, irrespective of if you continue to hold, because the underlying portfolio has potentially had gains.” There two key ETF tax considerations advisors and investors need to understand: the treatment of distributions paid by the ETF and the treatment of the gain or loss. Both affect how the ETF and underlying portfolio will be impacted by tax. “Most ETFs in Canada typically try to pay out a set rate, monthly or quarterly, and they pay out in cash, which means your net asset value [NAV] will drop,” Raes explains. “The cash payment will reflect the underlying portfolio. At year-end, there will be a distribution if needed, which will cover off capital gains or any other extra income the portfolio may have received.” One area of difference with ETFs is phantom distributions, where the capital gain from the reinvested distribution adds to the investor’s adjusted cost base, resulting in a lower capital gain once the ETF is sold. “Typically the ETF reinvests those distributions, so the NAV doesn’t drop,” Raes says. “They don’t pay them out in cash because they are reinvested. It’s something to watch for – you may get a tax slip when the value of the investment has remained the same because it is reinvested.”
“People should realize that ETFs are taxed in the same manner as mutual funds. Investors should expect to see something similar to what they have seen with other holdings” Mark Raes, BMO Global Asset Management “Much like a stock, you expect to get a capital gain when you sell,” Raes says. “You might get dividends throughout year, but only a gain when you sell it. An ETF works like a mutual fund – you can get capital gains
In addition, by having a set rate of distribution, ETFs can see greater return of capital. “If a fund is growing, expanding the unitholder base, you will typically see more return of capital,” Raes says. “That is tax
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TYPES OF ETF DISTRIBUTIONS efficiency because you are spreading that income over more unitholders.” Much like other investments, the types of accounts that ETFs are held in affects what can be taxed. If investors hold ETFs within a tax-sheltered account such as an RRSP, RRIF, RDSP or TFSA, they will not be taxed on distributions. If the ETF is held within a taxable account and has a taxable distribution, the investor can expect to receive a tax form. “An ETF trades on the exchange, which means anyone can buy them as long they can trade securities in an account – that can mean taxable or non-taxable,” Raes says. “In
CANADIAN DIVIDENDS Dividend distributions occur when an ETF invests in Canadian equity securities that pay dividends.
CAPITAL GAINS An ETF may incur capital gains if investments in the ETF’s portfolio are sold for more than their purchase price.
RETURN OF CAPITAL An ETF might have a distribution that returns a portion of the initial investment.
FOREIGN INCOME AND FOREIGN TAX PAID An ETF may earn dividends or interest on foreign investments and have to pay foreign withholding tax.
INTEREST AND OTHER INCOME Fixed-income ETFs earn interest on their investments in bonds and other debt obligations. Source: BMO ETFs
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SPECIAL PROMOTIONAL FEATURE
TAX PLANNING
something like an RRSP or RESP, you won’t have to deal with tax until you exit that plan. However, if you hold it in a regular, taxable, non-registered account, you will get a tax slip.”
Home bias Another area that can greatly affect the tax on ETFs is the geographical location where the ETF is listed. Dividend income received from non-Canadian investments may be
is reporting and filing. There is a Canadian form called the T1135 that you have to file if you hold foreign property over $100,000 in value. So, one is a tax concern and the other a tax reporting concern.” The positive news for Canadians is that this country’s ETF industry, of which BMO is one of the leading players, has matured and now offers a full suite of products that closely mirror what can be found in US and inter-
“In something like an RRSP or RESP, you won’t have to deal with tax until you exit that plan. However, if you hold [an ETF] in a regular, taxable, non-registered account, you will get a tax slip”
BMO ETFs AT A GLANCE
M
94
Number of ETFs
$50.6 billion
ETF assets under management
Mark Raes, BMO Global Asset Management subject to withholding taxes; if a Canadian resident holds a US-listed ETF that holds international securities, investors could be subject to two levels of withholding tax. If international securities are held indirectly through a US ETF, withholding taxes are not recoverable, but foreign tax credits can be claimed for investments held in taxable, non-registered accounts. Raes notes that it’s important for advisors to keep in mind that Canadian ETFs are not subject to additional taxes and don’t require the foreign reporting that needs to occur with US or international ETFs. “There are tax benefits to holding a Canadian vehicle as opposed to a US vehicle,” he says. “One is the estate taxes. When you hold US property and you have assets that exceed a certain level – global estate of greater than US$11.4 million for 2019 and US assets with a value that exceeds US$60,000 – you could be subject to US estate taxes. The second
national funds. “It’s important to recognize that the industry has been maturing,” Raes says. “I think it is advantageous to look at the local market now because it has grown. Most Canadian ETFs are as cost-effective, efficient to trade and low-cost to hold as their US equivalents.” This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus. BMO ETFs and ETF series trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/ or elimination. BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms. ®/™Registered trade-marks/trade-mark of Bank of Montreal, used under license.
$381 million
Net new creations in January 2019
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Number of BMO ETFs among the top 25 ETFs by AUM
30.9%
BMO’s share of the Canadian ETF market
Source: CETFA Monthly report, January 31, 2019
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EXCHANGE TRADED FORUM2019
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CANADA’S LARGEST ETF EVENT! Monday, April 1 & Tuesday, April 2 Susanne Alexandor
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Director, Investment Research, World Gold Council
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SVP Institutional Strategy & Portfolio Manager, Forstrong Global
Head of Distribution, First Trust Portfolios Canada
Pat Bolland WESTIN HARBOUR CASTLE TORONTO
Deborah Frame
Ahmed Farooq
President & CIO, Frame Global Asset Management
Vice President, ETF Business Development, Franklin Templeton Investments Canada
Mary Hagerman
Portfolio Manager, Desjardins Wealth Management / Securities
Michael Kovacs
President & Chief Executive Officer, Harvest Portfolios Group Inc.
Daniel Straus, Ph.D.
M.Fin., ETF Research & Strategy, Derivatives & Structured Products, National Bank Financial
TORONTO
Vishal Bhatia
Director, Portfolio Manager, Exchange Traded Funds, BMO Global Asset Management
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Executive Director, Canadian ETF Association (CETFA)
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Dr. Nick Bonti
Director, Harvest Portfolios Group Inc., Chair, Strategic Management, McMaster University
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Vice President, Head of SPDR ETFS Canada, State Street Global Advisors
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Executive Director, Institutional ETF Services, Equity Markets, CIBC World Markets
Head, BMO Global Asset Management Canada, Global Head of ETFs and Chief Investment Officer, BMO Global Asset Management
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George MillingStanley
Chief Economist & Assistant Deputy Minister, Office of Economic Policy (OEP), Ontario Ministry of Finance
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Deputy Chief Economist, CIBC World Markets Inc.
Vice President, Head of Gold Strategy, State Street Global Advisors
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President & CEO, PUR Investing
IIROC and CFP credits available for qualified advisors* *Available only to qualified IIROC investment advisors at the discretion of Radius Financial Education.
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To register, please contact: 416.306.0151 or info@radiusfinancialeducation.com
8/03/2019 3:40:32 AM
SPECIAL PROMOTIONAL FEATURE
MORTGAGE INVESTMENTS
Unlocking mortgage investing Mortgage investment corporations offer investors an attractive way to put their money into professionally managed mortgages
MORTGAGE INVESTMENT corporations [MICs] aren’t exactly new in Canada, but like other alternative investments, they have typically been difficult for the average investor to access. However, things have changed in recent years, and the level of interest in mortgage investing among both advisors and investors has increased. Today, it’s easier than ever to gain access to these types of investments. “Mortgage investment corporations have been around since the 1970s,” says Bryan
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Jaskolka, COO of Canadian Mortgages Inc. [CMI]. “However, as a funding vehicle, they have not been that prominent outside of the commercial mortgage sector.” After seeing its investment arm grow, CMI was inspired to bring a MIC opportunity to advisors via a new fund on the NEO Connect to help them better diversify their clients’ portfolios. “Mortgage lending is an easy concept to understand,” Jaskolka says. “The fact that there is an underlying asset, a mortgage, is
a key element of this type of investing. Most people have a home and understand the concept of a mortgage. So I think that because the underlying asset is tied to a piece of security, something a typical investor will have familiarity with, makes it straightforward compared to some other seemingly complicated alternative investments on the market.” Investing in a MIC offers investors an easy way to participate in the potentially lucrative alternative lending space. “All of the income that is collected must be paid out every year to the shareholders,” Jaskolka explains, “so the MIC is essentially a flow-through vehicle in that respect. It gives the investor a chance to invest in a pool of professionally managed mortgages with a low barrier to entry. You don’t need $500,000 to participate in the asset class, compared to what it has been traditionally.” That access is vital, especially now that many investors are rethinking the traditional 60/40 split in their portfolios. Mortgages have the same benefit as other alternatives of low correlation to the public markets, and their risk-adjusted returns have been stable – and, in some cases, higher than traditional assets such as bonds. “On a simplistic level, a MIC enables a level of risk-sharing and accessibility not otherwise available for people trying to purchase these individual assets themselves,” Jaskolka says. “It means that anyone can do it, and I think that’s important because every
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investor, large or small, should be given the opportunity to invest in an alternative if it’s something they feel comfortable with. All of the research we have done has shown that alternative investments are the fastestgrowing asset class globally.” CMI’s MIC owns multiple mortgages and has many investors. If there is a nonpayment on one of the mortgages, the others in the fund balance it out so the investors’ income stream is preserved. On the flip side, the fund has a loss reserve that is consistently increasing. Even if CMI is forced to sell an underlying asset, the buffers insulate the income stream and protect the initial capital. “The MIC provides an easy accessibility point for all investors,” Jaskolka says, “and they get all the benefits of a passive income stream, as opposed to managing all the
or lends to land development and construction is a very different asset mix than one lending to houses with first mortgages.” The CMI fund is a mid-yield fund that generally looks for a mix of higher-yield first mortgages and low-/mid-yield second mortgages. The key considerations, Jaskolka says, are whether the property is marketable and whether CMI can liquidate it in a reasonable timeframe in the event of non-payment. As institutional lenders continue to tighten their mortgage qualification requirements, Jaskolka sees the alternative lending space as a continued opportunity moving forward, not least because the quality of credit on the alternative lending market has vastly improved. “What is a non-qualified borrower today is leaps and bounds from 10 years ago,” he says. “We feel that the regulators’ changes
“The fact that there is an underlying asset, a mortgage, is a key element of this type of investing. Most people have a home and understand the concept of a mortgage” Bryan Jaskolka, Canadian Mortgages Inc. underlying assets themselves.” When assessing an investment option like a MIC, Jaskolka believes advisors should focus on the management style, the assets invested in and the ability of the MIC manager to source a reliable stream of investments. “We say that because we see lots of MICs that have capital but not the deal flow to keep themselves invested,” he says. “That can lead to a number of challenges, including pressure on the MIC to purchase mortgages not suitable to investors, or alternatively, having funds sitting idly by, reducing the income return. Ultimately, [it’s about] the underlying assets they buy themselves. For example, a corporation that lends exclusively second mortgages at 85% of property value
are positive for the market long-term. The changes are also positive for the alternative space, where we have been seeing growth for our company and the market in general. We don’t anticipate any major slowing of that.” Given these prospects, Jaskolka feels more advisors will be looking to MICs to help their clients gain diversification with alternatives. “Being able to gain access to a managed pool of mortgages gives advisors the ability to work with a proven manager who has a track record and can look at passive income opportunities for their clients,” he says. “We feel it is important to diversify among alternatives and think [allocation of ] 5% to 10% in a product like this is reasonable for people to consider in their portfolios.”
TYPES OF MORTGAGES IN THE CMI MIC
19.7% Blanket
Average interest rate: 10.49%
19.7% First
Average interest rate: 9.16%
67.2% Second
Average interest rate: 10.87%
3.3% Third
Average interest rate: 11.49% Source: Canadian Mortgages Inc.
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8/03/2019 3:41:06 AM
LIQUID ALTERNATIVE FUNDS: GOLD RUSH 2.0 Everyone is familiar with the Gold Rush of the mid-1800s. After gold was discovered in California, roughly 300,000 speculators — pickaxe and shovel in hand — flocked to California in a quest for instant riches. While some managed to succeed, most people lost money… or worse, no longer had the means to return home. They saw dollar signs but didn’t understand the science behind gold mining.
Today, history may be repeating itself as new regulations in Canada have opened access to the potentially lucrative alternative investment market. According to David Picton, CEO and a founding partner of Picton Mahoney Asset Management, “Canada’s mutual fund industry is encountering its own Gold Rush.” Once the exclusive domain of institutional and accredited investors, alternative strategies are now available to retail investors under a prospectus. “Liquid alts,” or alternative funds as they are commonly called in Canada, have caught the attention of fund companies looking to capitalize on the next big trend. David Picton notes that “most managers of traditional mutual funds in Canada currently do not short-sell securities or use active hedging tactics, which are important alternative strategies.”
While alternative assets and strategies have a role to play in improving the quality of returns in a portfolio — that is, increasing return without adding incremental risk — you are well advised to travel with an experienced guide as you explore this new frontier. You need to differentiate between managers who can uphold the gold standard and those who merely aspire to it. For over 14 years, Picton Mahoney’s core focus has been fortifying portfolios with alternative investment strategies. How many managers in Canada can say that? David Picton, for example, has decades of investing expertise, specializing in alternatives. His team of 37 investment professionals has proven experience managing money — long, short and hedged positions. When it comes to investing, Picton Mahoney is battle-tested through all phases of the economic cycle.
fortifiedinvesting.com Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with alternative fund investments. Please read the prospectus before investing. Alternative mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer that is permitted to distribute them and are available only in those jurisdictions where they may be lawfully offered for sale.
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ADVERTORIAL
True grit and determination. As one of the pioneering firms in alternative investment strategies in Canada, Picton Mahoney has spent many years honing and refining its portfolio construction process. Like the fortune seekers of the Gold Rush, it hasn’t been for the faint of heart. “We’ve survived and thrived by building a resilient process we call 'Fortified Portfolio Construction'. We use not just one, but four levels of fortification to reinforce our portfolios," explains Picton. As seen in the chart below, each distinct level of fortification is designed to move up the efficient frontier (enhancing return), without moving to the right (increasing risk). Together, the four levels are designed to fortify portfolios with the potential to enhance quality of returns through all market cycles.
Before hitching your wagon... 5 important questions for your alternative manager. 1. Do you have more than five years of hedging experience, with at least $300 million in hedged assets under management? 2. How did your fund or strategy perform during the 2008 global financial crisis and other major geopolitical or macroeconomic events? Did your strategy exist in 2008? 3. Do you have a fundamental mismatch between offering daily liquidity and your underlying investments? If required, how fast could you liquidate your portfolio? 4. How much experience does your team have executing different trades related to short-selling, options and leverage? 5. Can you show numerically how your alternative strategies improve portfolio outcomes (e.g., volatility, correlation, quality of returns)?
FORTIFIED PORTFOLIO CONSTRUCTION IN ACTION
Level 1: The universe of tradable global assets is distilled down to nine unique asset classes, which are then combined using proprietary portfolio construction methods, to determine our strategic asset allocation. Level 2: Tactical allocation shifts are made in response to prevailing macroeconomic conditions, seeking to maximize risk-adjusted returns in each phase of the cycle. Level 3: Factor risk premia strategies are applied systematically to take advantage of unique sources of return when there are anomalies in the market. Level 4: Built to tap the experience and intuitive judgment of our investment team to generate differentiated, non-correlated sources of alpha. To learn more about fortifying your clients’ portfolios with alternative investments, visit fortifiedinvesting.com
1-833-955-1344 service@pictonmahoney.com pictonmahoney.com
us an le.
Picton Mahoney Asset Management® is a registered trademark of Picton Mahoney Asset Management.
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8/03/2019 3:41:46 AM
PEOPLE
ADVISOR PROFILE
The retirement specialist Faisal Karmali tells WPC how he developed a signature strategy that’s helping his clients enjoy all phases of their retirement
SAVING FOR retirement is one of the main reasons people invest and one of the most important subjects advisors tackle with their clients. Faisal Karmali, first vice-president, portfolio manager and investment advisor at Popowich Karmali Advisory Group, has embraced this aspect of financial planning and has developed a tried-and-true method to help his clients achieve all of their retirement goals. While working as an assistant to a financial advisor at the age of 16, Karmali observed the positive impact advisors can have on people’s lives. “I was watching what he was doing for individuals in planning for their financial future, and it really caught my attention,” Karmali says. “I wanted to help people. Seeing it being done in an area like financial planning was something I wanted to be part of.” Karmali started his career selling insurance, which imparted some lessons on prospecting and how to handle rejection, but he realized it wasn’t the path he wanted to be on. He moved into an advisor role at two other financial institutions before partnering with Dave Popowich to start Popowich Karmali Advisory Group, which became part of CIBC Wood Gundy in 2014. There, the duo carved out a niche in working with clients who are already retired or are fewer than 10 years away from retirement.
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“I think it is one of the most complex times,” Karmali says. “Not only are they in a financial transition, but also an emotional one. We focus on what retirement means to them and how it fits into their lifestyle. Our mission statement is for our clients’ lifestyles to never retire.” To help clients achieve their goals, the team has adopted a strategy known as asset dedication. The approach takes retirement assets and divides them into four buckets: income, growth, health and legacy. “Our approach allows me to be focused on this specific group,” Karmali says. “Our objective is to look at how we can help individuals solve these problems associated with retirement by focusing on all important areas. We want to preserve their lifestyle throughout different stages of retirement.”
Karmali’s main challenge has been reconditioning his clients to embrace this strategy. Because clients have been taught all of their lives to look at growth, he’s had to educate, inform and motivate them to consider their assets in different buckets. While establishing his firm and implementing this strategy successfully have been career highlights for Karmali, the effect he has had on his clients has been the true standout. “When clients want to spend money in retirement and call us to ask our counsel, it makes me feel good,” he says. “Having the confidence and trust from our clients is a big plus.” By sticking to his core values and beliefs, Karmali has been able to have the effect he hoped for when he got his first taste of the industry as a teenager. “One thing I have
TUNING IN Karmali has had the opportunity to share his knowledge of retirement planning via various media outlets – including More Than Money, his and Popowich’s weekly radio show on 770 CHQR in Calgary – which is something he takes great pride in. “TV and radio have been a great way for us to educate and inform the public,” Karmali says. “We do market updates and have our own show talking about money and matters beyond money – [we] talk about everything for people in or transitioning to retirement. We are fortunate to be in the position we are because we realize many advisors don’t have the same opportunity.”
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FAST FACTS: FAISAL KARMALI
PRACTICE Popowich Karmali Advisory Group
FIRM CIBC Wood Gundy
LOCATION Calgary
YEARS IN THE INDUSTRY 22
“When clients want to spend money in retirement and call us to ask our counsel, it makes me feel good. Having the confidence and trust from our clients is a big plus” always been told is never give up on what you believe in,” he says. “I really believe in helping individuals and families reach their financial goals. If you are true to yourself from that perspective, everything else from a business perspective – portfolios, assets, onboarding – will all work out.” Karmali’s passion for the industry is clear,
and he hopes other advisors will find similar inspiration. “For advisors starting out, it is probably the best business in the world to be part of because you get to make an impact on people’s lives,” he says. “It used to be a sales role, but now it is a coaching, counselling and education role, which is phenomenal for the right type of individual.”
CERTIFICATIONS CFP, CIM, FCSI, CDFA
APPROACH Asset dedication
TARGET CLIENTS Retirees or those approaching retirement
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8/03/2019 3:42:10 AM
SPECIAL PROMOTIONAL FEATURE
ALTERNATIVES
A place for liquid alts Mackenzie Investments’ Allan Seychuk talks to WPC about what liquid alternatives can do and what advisors need to be aware of when incorporating them into client portfolios
RECENT REGULATIONS have improved the accessibility of liquid alternatives, making them an area of interest for investors and advisors seeking to add diversification, reduce volatility and better shape risk/ return profiles. The Alternative Investment Management Association estimates that the market for liquid alts could rise to
family offices and large institutional investors. “These new regulations are great because managers can build strategies and return profiles that are not dependent on upward movement in the equity or bond markets alone,” Seychuk says. “It allows managers the ability to build more efficient portfolios.” Some of the areas now opened up to
“Managers can build strategies and return profiles that are not dependent on upward movement in the equity or bond markets alone” Allan Seychuk, Mackenzie Investments $100 billion within the next five years. Allan Seychuk, vice-president and senior investment director at Mackenzie Investments, applauds the new rules, which open the door for the limited use of tools that allow leverage and short-selling within portfolios. He believes the changes will give everyday Canadian investors access to the sorts of strategies previously only available to
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provides the benefit of diversification. “With these investment strategies and asset classes, you can diversify your sources of return,” Seychuk says, “which may reduce risk and smooth out the ride for investors.”
A foundation of understanding investors via liquid alt mutual funds include commodities and the use of leverage. To be effective in these areas, Seychuk says managers need to have the ability to go long and short and to use futures, forwards, and other derivatives to make highly efficient use of portfolio capital. Having access to these different asset classes and strategies, which are not dependent on the equity market,
While liquid alts can provide diversification, risk mitigation and reduced volatility, Seychuk cautions advisors that they must truly understand the strategy they’re implementing and what they hope to achieve. “It’s all about understanding strategies and the role they play in portfolios,” he says. “Are you looking to enhance an equity position, say, to attempt to juice up returns? Or are you looking to diversify an equity
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LIQUID ALTERNATIVES VERSUS CONVENTIONAL FUNDS The CSA’s final changes to National Instrument 81-102 went into effect on January 3, opening up alternative mutual funds to a greater number of investors. Here’s how these funds’ strategies stack up to traditional mutual funds and ETFs.
Borrowing
position by adding an absolute return strategy that has low correlation to broad equity markets? It all depends on what you’re trying to do and how much reliance you want on the equity market. Or are you looking for a totally new allocation within the portfolio, such as an allocation to commodities, currencies or to a global macro strategy? Adding these strategies can help diversify, but it all depends on the objective.” Seychuk emphasizes that advisors and investors must be aware of the investment objective and the strategy’s potential effect on a portfolio. “Just because it is labelled as a liquid alt doesn’t mean it provides risk-reduction benefits,” he says. “Being an alternative investment doesn’t mean risk has
Short-selling Concentration in one user Leverage (gross aggregate exposure) Illiquid assets
Alternative mutual funds
Conventional mutual funds and ETFs
50% of NAV*
5% of NAV with restrictions
50% of NAV Cash cover no longer required
20% of NAV 150% cash cover
20%
10%
Three times NAV
None
10% of NAV
10% of NAV *50% combined between borrowing and short-selling Source: Investing in Liquid Alternatives, Mackenzie Investments
been mitigated.” He uses the example of adding a long/ short equity strategy to a long-only equity portfolio. In that scenario, where the long strategy is already exposed to broad equity market trends, adding the long/short alternative strategy could end up increasing
risk by maintaining full market exposure and then adding stock-picking risk on both the long and short sides. In contrast, if the long/ short equity strategy is market-neutral, then it should reduce exposure to broad equity market trends. “If you are just adding amped-up alpha
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SPECIAL PROMOTIONAL FEATURE
ALTERNATIVES
TOP 10 HOLDINGS IN THE MACKENZIE MULTISTRATEGY ABSOLUTE RETURN FUND The Mackenzie Multi-Strategy Absolute Return Fund has a total of 830 equity holdings and 39 fixed-income holdings. The top 10 holdings represent 14.4% of the fund.
1 The Korea Development Bank 2 Nomura Holdings 3 Government of Japan
on top of your pre-existing market beta, you are leveraging up your equity exposure and adding short positions,” Seychuk says. “What’s important to remember is that liquid alts are not automatic risk-reducers and that leverage can cut both ways. However, that may be OK, because managers can use these strategies in different ways in portfolios if more risk is what they want.” While Seychuk believes certain liquid alt strategies can be appropriate for all investors, he reiterates the importance of understanding a client’s risk tolerance and desired outcome before diving in. “The main things to be aware of are
classes, including developed and emerging bond and equity markets, 19 commodities, and 20 currencies. “The strategies are designed to work together to deliver a positive absolute return over a cycle, be generally uncorrelated to each other and to also have a low reliance on upward movements in equity and bond markets to generate returns,” Seychuk says. Mackenzie has recently supplemented its liquid alt lineup by offering three strategies used within the Multi-Strategy Absolute Return Fund as stand-alone funds. “In February, we launched three new strategies: global macro, credit absolute return and
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4 Mackenzie US TIPS Index ETF (CAD-Hedged)
5 Meiji Yasuda Life 2014 Fund Special Purpose Co.
6 Westpac Banking Corp. 7 Osaka Prefecture 8 Barclays Bank
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Allan Seychuk, Mackenzie Investments
9 East Nippon Expressway Co. 10 Japan Student Services Organization
elements such as time horizon and risk tolerance,” he says. “We believe that liquid alts can be for everyone if the right strategy is implemented. It has to be based on the client’s risk profile, and you need to understand how liquid alts interact with the existing assets and strategies in the portfolio.”
Embracing liquid alts Mackenzie launched its first alternative mutual fund strategy, the Mackenzie MultiStrategy Absolute Return Fund, in the spring of 2018. Designed for all investors, the fund aims for returns of cash plus 5% over a fiveyear period* and is built around a combination of strategies based on exploiting valuation anomalies and macroeconomic and behavioural trends such as momentum and overshooting. These sources of return are implemented across a wide array of asset
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long/short equity,” Seychuk says. “This way, if a manager wants to use one strategy that can stand alone, it is an option.” No matter the products, it remains incumbent upon advisors to determine how best to implement a liquid alt strategy. “Advisors need to look at their existing portfolios and determine exactly how they want to diversify their equity or fixed-income allocations, because they could use liquid alts as a diversifier or as a return enhancer,” Seychuk says. “Or they can look at portfolios that are already balanced across traditional assets and strategies and use liquid alts to introduce new return profiles uncorrelated to stock and bond markets.” *There can be no assurance that the fund’s return target will be met, or met over any particular time horizon. Targeted returns should be evaluated over the time period indicated and not over shorter periods. Targeted returns are not actual performance and should not be relied upon as an indication of actual or future performance. Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.
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RetirementCanadaDialogue2019_Ad_190305a_WealthProfessionals.pdf 1 3/5/2019 11:49:57 AM
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SPECIAL PROMOTIONAL FEATURE
REAL ESTATE
Opportunities in the apartment sector With a solid track record, multiple ways to take profits and a continued rise in demand, the Canadian apartment sector is a lucrative prospect for investors OVER THE past three decades, not only have private Canadian apartments outperformed Canadian bonds and equities by 61% and 12%, respectively, but they have also never had a year with an annual negative return. Apartments have historically offered high risk-adjusted returns and a relatively low correlation with other traditional investment categories, including other property sectors. These features, combined with attractive demographics and market fundamentals, suggest that the current environment is favourable for apartment investing.
ities they present. “Private, multi-residential apartments offer investors a unique investment opportunity,” he says. “They have the potential to create returns through three sources: consistent cash flows from operations, increases in equity from mortgage principal repayment and potential increases in property value over time.” By tapping into these three profit sources, investors can benefit in multiple ways. Revenue from rental income covers operating expenses, and the net income is available to distribute to investors. With increases in
“The multi-family sector is expected to continue to see steadily increasing rents, along with low vacancy rates, for the foreseeable future” Jason Roque, Equiton “During the financial crisis of 2008, the single worst year in global investing since the early 1930s, private Canadian apartments posted a positive return of over 6%, while Canadian equities and US equities both fell by over 30%,” says Jason Roque, CEO of Equiton. Equiton’s residential income fund specializes in residential income properties, including apartments. Roque says now is a good time to be looking at residential apartment investments because of the opportun-
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equity, tenant rents are used to cover mortgage payments on the properties; in essence, the tenants are buying the apartment for investors, increasing their share of ownership. In addition, a building’s value usually appreciates over time, and active management can accelerate this increase in value. Roque adds that private apartments are a stable investment because they fall under the basic human need for shelter. “It has been this way since the beginning of time and will
continue to be this way for the foreseeable future,” he says. “Everyone needs shelter, and for a huge portion of the population, that need is met by apartments.” Roque notes that the demand for affordable housing is projected to increase in the coming years and that rent increases, in response to demand, will provide investors with a nice hedge against inflation. He highlights numerous factors that are driving demand for affordable housing, including immigration, the cost of homeownership, different demographic sectors renting longer and lifestyle choices that favour renting. At the same time, supply is being restricted because of limited new developments and the economics of buying and constructing new properties, creating a favourable environment for apartment investors. “With solid employment growth, the high costs of homeownership and a preference for millennials to rent, it is underpinning the strong demand for apartments,” Roque says. “Record immigration levels are expected to drive demand even higher. These factors, together with insufficient and constrained rental supply, are expected to only intensify housing challenges, especially in Canada’s gateway markets. Due to the growing imbalance between housing demand and supply, the multi-family sector is expected to continue to see steadily increasing rents, along with low vacancy rates, for the foreseeable future – all of which make the space even more favourable.”
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S:10.125”
“I want asset management companies to share their expertise in a way that respects my time.” At TD Asset Management, we know advisors expect more. Sharing our expertise is something TD Asset Management takes seriously. After all, with less time and more pressure to deliver for your clients, it’s never been tougher to be an advisor. That’s why we provide our Market Minute Podcasts featuring Bruce Cooper – the CEO and CIO of TD Asset Management – personally sharing insights on the year ahead, so advisors are better prepared to help their clients. Learn more at tdadvisor.com
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 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 PROMOTIONAL FEATURE
REAL ESTATE DEBT
The advantages of real estate debt Real estate debt has become more accessible to everyday investors. Sterling Global’s Stephen Tiller tells WPC how it can help protect capital and drive returns FOR MANY years, real estate debt investing has been limited to major banks and institutional investors, but the rise of boutique firms like Sterling Global Financial has opened up its benefits – namely, the ability to provide consistent returns while protecting capital – to a wider swath of investors. “Real estate investing is considered more
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conservative because there is a large cushion of borrowed equity that has to be lost before it affects the debt,” explains Sterling president and COO Stephen Tiller. “Our current loanto-value is 47%, so there would have to be a 53% loss to equity before it touches the debt.” Sterling has a wealth of experience in this sector. Its team members boast expertise in
a variety of relevant backgrounds, including major bank lending, development investing and debt restructuring. Tiller explains that capital preservation is one of the firm’s key tenets. “Every deal we structure is around safety and protecting that capital,” he says. In addition to its conservative nature, real estate debt has the ability to produce
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ALLOCATION OF THE STERLING MORTGAGE INCOME FUND Geographic exposure
65% Caribbean 21% North America 14% Global
Asset class exposure
43% Residential 27% Mixed use 19% Commercial 11% Other
consistent returns thanks to its lack of correlation to the stock market. “Our current fund, the Sterling Mortgage Income Fund, was started in February 2012 and has averaged a return of above 12% annually for our investors,” Tiller
we also take a macro approach to markets Sterling wants to be in. We have found that you can generate above-average returns while maintaining liquidity, multiple exit strategies and low leverage on a relative basis.”
“We are most proud of the fact that, even during the 2008 financial market crisis, we experienced zero capital losses” Stephen Tiller, Sterling Global Financial says. “We are most proud of the fact that, even during the 2008 financial market crisis, we experienced zero capital losses.” Tiller also points out that real estate debt comes with the benefit of liquidity. “You can always syndicate or sell down,” he says. “We look for multiple exit strategies in all of our loans so we aren’t stuck to one exit, and
Unlike traditional long-term lending, which can span 10 or 20 years, Sterling looks for properties that are going through a material enhancement to value, then structures shortterm loans to help finance the project. The principals at Sterling invest in the fund, and they won’t participate in a loan if they wouldn’t own the asset themselves. Deals the firm tends
to avoid include unzoned land and specialized buildings that don’t have alternate uses. Tiller notes that investing in real estate projects can help Canadians diversify their portfolios. “It is a diversification strategy out of the Canadian real estate market,” he says. “As a Canadian, it is a way that you can participate in a more global investment.” Now that more clients can access real estate debt, Tiller believes it’s a good time for advisors to look at the sector for their clients, but he stresses the importance of making sure the funds and firms they’re working with understand the investment. “I think the benefits of real estate debt are its conservative nature, its diversification and the fact it is not correlated to the stock market,” he says. “However, you really need to have an understanding of the asset, because these are not like commodities. Alternative lending is more sophisticated and focused on different aspects of the market.”
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PEOPLE
CAREER PATH
MAKING CONNECTIONS Her drive to engage with others makes Adelaide Kim a born leader
Her high school accounting teacher, who would bring in his guitar and play songs in class, engaged Kim in the field early. While majoring in finance and economics at the University of Toronto, Kim became president of the university’s accounting society. “I was always motivated to get people together and connect them with each other. In my third year, an accounting firm offered me a FALLS IN LOVE WITH full-time position on graduation; it was a contact made via ACCOUNTING the accounting society.”
1990
2000 DISCOVERS THE INVESTMENT WORLD After moving into corporate finance in a new position with Alliance Atlantis, which required her to handle some investor relations duties, Kim had her eyes opened to investment management. “I realized there was another world out there; it was very different, and it intrigued me. I met with Macquarie and Goldman Sachs but went with BMO Nesbitt Burns. There’s a stigma that accountants don’t think outside the box, but BMO was looking for someone more innovative.”
1996
BECOMES A TEAM BUILDER In her first accounting job at Coopers and Lybrand, Kim discovered a natural aptitude for putting together and managing teams. “I was always setting people up in teams and changing the teams so everyone would work with a lot of different people and personalities. I enjoy leadership – being able to help people and offer direction.”
2004
CHANGES LANES Hankering to try the buy side of investing, Kim moved to OMERS, where she ultimately reached the position of associate portfolio manager. “It took a long time to find the right culture, to find the place that I wanted to be. The fiduciary duty on the buy side was the draw for me to go to OMERS – my mom is an OMERS pensioner; I had a sense of responsibility towards the pensioners who depend on us.”
2011 JOINS MACKENZIE Against a backdrop of strategic and culture changes at OMERS, Kim turned her attention to new opportunities, coming onboard at Mackenzie. “I was still trying to figure out where I wanted to go and looking for the right team dynamic – and I found it at Mackenzie.”
2018 CHAMPIONS WOMEN Now a VP at Mackenzie, Kim has gotten involved in several internal initiatives, including a working group focused on gender parity.
“The target is to have more women in top levels of management. If I can survive this industry having had three children, I have to tell my story, encouraging women to join and stay in the industry”
2013
SHAPES LEADERS After two years at Mackenzie, Kim was selected to be part of the firm’s LEADing program, which identifies emerging employees with management potential. With the help of a coach to guide their development, the selected employees are given a live case and a team and tasked with developing a solution that is then presented to the C-suite. “[LEADing] is a great way to enhance those leadership skills. Not everyone gets selected.”
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PEOPLE
OTHER LIFE
TELL US ABOUT YOUR OTHER LIFE Email editor@wealthprofessional.ca
MADE OF IRON
The trials of wealth management are no match for the tests of endurance Jason Trueman faces in Ironman competitions JASON TRUEMAN was 10 years old when he first saw an Ironman competition and thought to himself, “That’s so cool!” But it wasn’t until 2009 that the Kingston, Ontario-based portfolio manager, who had typically thought of himself as a runner, competed in his first half Ironman before ratcheting up to the full Ironman triathlon: a 2.4-mile swim, 112-mile bike ride and 26.2-mile run. While he’s recently been sidelined by a knee injury, Trueman has his sights set on completing another Ironman in August. He often trains at night; his proximity to Queens University makes it easy for him to use the school’s pool and gym for his workouts. While he’s drawn to the Ironman by the endorphin rush, Trueman’s competitive spirit also plays a part – and he’s found that the nature of the training also helps with work. “Our industry attracts competitive people – type-A personalities,” he says. “I’m competing against my prior time. It clears my mind. A lot of information is thrown at me at work, and the brain activity helps sort my thoughts in preparation for the next day.”
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Number of Ironman races Trueman has completed
10
Hours of training Trueman puts in each week
11:35
Trueman’s best Ironman time to date
True ma n’s weekly training schedule includes three hours of ru nning, five of cycling a nd two of swimming 56
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GETTING THERE. TOGETHER. M O R N I N G S TA R C A N A D A
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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, 2019 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. Morningstar Star Ratings reflect performance of Series F as of January 31, 2019 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 Monthly Income Conservative Portfolio Series F, Global Fixed Income Balanced category: 1 year n/a stars 2.1%, 3 years - 5 stars (394 funds) 5.1%. Mackenzie Canadian Growth Balanced Fund Series F, Canadian Equity Balanced category: 1 year - n/a stars 3.1%, 3 years - 5 stars (377 funds) 8.9%, 5 years - 5 stars (312 funds) 10.3%, 10 years - 4 stars (167 funds) 9.1%. Mackenzie Strategic Income Fund Series F, Canadian Neutral Balanced category: 1 year - n/a stars 0.7%, 3 years - 5 stars (565 funds) 7.9%, 5 years - 5 stars (446 funds) 5.9%, 10 years - 5 stars (161 funds) 10.5%.
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