WWW.WEALTHPROFESSIONAL.CA ISSUE 7.08 | $12.95
NEW FRONTIERS FOR ETFs The latest industry trends every advisor should have on their radar
THE R WORD
Why fears of a worldwide recession might be overblown
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ISSUE 7.08
CONNECT WITH US Got a story or suggestion, or just want to find out some more information?
CONTENTS
@WealthProCA facebook.com/WealthProCA
UPFRONT
st
02 Editorial
Canadians’ incomes are rising – and so is their need for financial advice
04 Statistics
Finding yield in the bond markets continues to be a tall order
44
06 Head to head
Weighing in on Facebook’s proposed cryptocurrency
FEATURES
22
IS A RECESSION LOOMING?
While some signs point to yes, one key factor indicates the answer is no
46
Why emerging markets present the most compelling fixed-income exposure
14 Alternative investment update The renewed case for investing in gold
16 Opinion
WPC takes a deep dive into the latest developments in eight different ETF sectors, from fixed income to strategic beta
How to milk the cannabis cash cow
FEATURES
FEATURES
BRAND LOYALTY
One ETF offers one-stop access to the world’s biggest brands
40 Beyond borders
ETFs are opening up global investments
50 Democratizing opportunities Inside Mandeville’s movement to bring new options to retail investors
TD Asset Management CEO Bruce Cooper is on a mission to raise his organization’s global profile
18
10 Intelligence 12 ETF update
NEW FRONTIERS FOR ETFs
INDUSTRY ICON
Why are tech companies holding so much cash right now? This month’s big movers and shakers
SPECIAL REPORT
PEOPLE
08 News analysis
PEOPLE 42 Advisor profile
FEATURES
48
AN OFFTHE-RADAR OPPORTUNITY
How to help clients give to charity by donating an unwanted life insurance policy
Serena Cheng on the psychology of ultra-high-net-worth clients
55 Career path
Chris Rawles has long embraced a client-first mentality
56 Other life
Playing on with advisor and guitarist Matt Wilhelm
WEALTHPROFESSIONAL.CA CHECK IT OUT ONLINE www.wealthprofessional.ca
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1
20/09/2019 5:54:34 AM
UPFRONT
EDITORIAL
Are Canadians really better off?
C
anadian households in the bottom half of the income distribution spectrum are better off than those at the same level in the US, according to a recent study by the Centre for the Study of Living Standards [CSLS] on household income in Canada and the US. One reason for this is the income inequality found south of the border. While the CSLS found that the average income in the US is higher than in Canada, that’s due to the high end of the spectrum bringing up the US numbers. The median income in Canada as of 2016, when adjusted using purchasing power parities from Statistics Canada, was US$59,438 compared to US$58,849 in America.
As household incomes continue to rise, more Canadians are in need of sound financial advice What’s interesting about the study is that not only are Canadians on the bottom level of the income scale better off, the majority are. The 2016 median Canadian household income of $70,675 has grown significantly from 2000, when it was $55,016 – a number that was relatively unchanged compared to the 1990 figure of $54,560. As household incomes continue to rise, more Canadians are in need of sound financial advice. A large number of Canadians are within range of the median income, yet many advisors’ efforts are focused on a much smaller percentage of consumers in the high- and ultra-high-net-worth segments. This study and its findings should serve as a wake-up call to advisors about the opportunities that exist among Canadians whose incomes fall in the middle of the road. With a bit of financial planning, this group might be able to grow its wealth to new heights, opening up even more opportunities for advisors. The team at Wealth Professional Canada
wealthprofessional.ca ISSUE 7.08 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 Nawan Butt
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
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Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributions are invited, but copies of work should be kept, as the magazine can accept no responsibility for loss
20/09/2019 3:58:22 AM
AT 93, A GREAT DRIVING RECORD [ DESPITE A FEW CRASHES ]
Since 1926, Loomis Sayles¹ has helped institutional and individual investors confidently drive toward their financial finish lines. Through bull and bear markets – and a crash or two – Loomis Sayles has grown to over USD$278 billion in assets under management. Investors seeking diversified global exposure, and a steady hand on the wheel, can access Loomis Sayles’ expertise through IA Clarington Global Allocation Fund. 1 year
2 years
3 years
Manager tenure2
IA Clarington Global Allocation Fund – Series F
7.8%
11.2%
10.6%
7.9%
60% MSCI AC World Index,3 40% FTSE World Government Bond Index (currency hedged)
5.5%
7.5%
7.1%
6.0%
Peer group (Global Equity Balanced)
1.4%
4.9%
5.0%
3.9%
As at August 31, 2019.
Speak with your iA Clarington representative or visit iaclarington.com/gaf to learn more.
INVESTED IN YOU.
Loomis Sayles is the tradename of Loomis, Sayles & Company, L.P. 2 Effective February 23, 2015, the sub-advisor of the Fund changed from Aston Hill Asset Management Inc. to Loomis, Sayles & Company, L.P. and IA Clarington Investments Inc. IA Clarington Global Allocation Fund (Series F) 1 year: 7.8%, 2 years: 11.2%, 3 years: 10.6%, manager tenure: 7.9%, 5 years: 7.6%, since inception: 8.4%. 60% MSCI AC World Index, 40% FTSE World Government Bond Index (currency hedged) 1 year: 5.5%, 2 years: 7.5%, 3 years: 7.1%, manager tenure: 6.0%, 5 years: 7.7%, since inception: 9.0%. Peer group (Global Equity Balanced) 1 year: 1.4%, 2 years: 4.9%, 3 years: 5.0%, manager tenure: 3.9%, 5 years: 5.2%, since inception: 7.2%. The inception date of series F of the Fund was July 19, 2010. Manager tenure data from March 1, 2015. There are various important differences that may exist between the Fund and the stated indices that may affect the performance of each. The benchmark is a blend of FTSE World Government Bond Index (Currency Hedged) (40%) and MSCI AC World Index (60%). The FTSE World Government Bond Index (or WGBI) (currency hedged) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently comprises sovereign debt from over 20 countries, denominated in a variety of currencies. The MSCI AC World Index (MSCI ACWI) is a free float-adjusted market capitalization weighted equity index comprising 23 developed and 23 emerging market country indexes. The Fund’s market capitalization, geographic, sector, credit quality and currency risk exposure may differ from that of the benchmark. The Fund may hold cash while the benchmark does not. Overall, the Fund’s bond and equity exposure can differ from the benchmark. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance. The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decision. Indicated mutual fund rates of return include changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Returns for time periods of more than one year are historical annual compounded total returns while returns for time periods of one year or less are cumulative figures and are not annualized. Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with mutual fund investments, including investments in exchange-traded series of mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. 3 MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license. 1
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20/09/2019 3:58:29 AM
UPFRONT
STATISTICS
The search for yield
GOVERNMENT BOND HIGHS AND LOWS
As interest rates are cut and bond yields fall, achieving fixed-income returns has never been more difficult THE BOND universe is not what it once was. As yields on Canadian government bonds have declined, the idea of using them as the basis for retirement has all but evaporated. In Canada, the bond yield curve has seen some inversions, which have historically been harbingers for a recession. To combat these fears, many countries have kept interest rates low or, in the case of the US, have reverted
1.79%
7.15%
Current yield on the 10-year US government bond
Current yield on the 10-year Brazilian government bond
from a previous path of rate increases. Some countries have also struggled to battle inflation, creating uncertainty in those economies. One appealing area of the bond market, however, is corporate bonds. Investment-grade corporate bonds have steadily increased returns over the past decade, making them a viable alternative as advisors look for the best fixedincome options for investors.
-0.51%
Generating yield in government bonds continues to be a challenge. Over the last two years, Canadian government bonds have seen numerous highs and lows, including multiple inversions (when returns on short-term bonds exceed those of long-term bonds).
0.63%
Current yield on the 10-year German government bond
Current yield on the 10-year UK government bond Source: Bloomberg, as of September 19, 2019
AROUND THE WORLD IN INTEREST RATES While the Fed’s July and September rate cuts have inspired much discussion, US and Canadian interest rates still fall squarely in the middle of the road compared to other nations. 8%
THE CORPORATE PICTURE While the performance of government bonds has varied over the years, a look at the S&P Canada Investment Grade Corporate Bond Index shows a steady overall increase over the last decade, indicating a potential opportunity to add credit to portfolios. 300
287.03 280.00
TOTAL RETURN, S&P CANADA INVESTMENT GRADE CORPORATE BOND INDEX
271.34 264.14
6.5% 5.4%
291.58
5.5%
249.06
250
4.35%
244.39 231.55
2%
216.49
1.75% 0.75% 0%
Canada US
UK
EU
203.35
-0.1%
China Japan India Indo- Mexico Brazil nesia Source: Global-Rates.com
4
200
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 Source: S&P Dow Jones Indices
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3.0%
2.5%
2.0%
1.5%
January February March 2018 2018 2018
April 2018
May 2018
June 2018
1-year Canadian government bond
July 2018
August 2018
Sept 2018
Oct 2018
Nov 2018
2-year Canadian government bond
Dec January February March 2018 2019 2019 2019
April 2019
5-year Canadian government bond
May 2019
June 2019
July 2019
July 2019
10-year Canadian government bond
Source: CETFA, as of June 30
THE AGGREGATE STORY Similar to the corporate bond index, the S&P Canada Aggregate Bond Index, which includes government, quasigovernment, corporate, securitized and collateralized securities, has seen growth throughout the last decade. However, its growth has been less consistent on a yearly basis, making it more difficult to find returns without breaking the aggregate down into sub-categories like government and corporate bonds. Total return, S&P Canada Aggregate Bond Index
500
Total return, S&P Canada Investment Grade Corporate Bond Index
Total return, S&P Canada Sovereign Bond Index
THE ISSUE WITH INFLATION Inflation rates are another area that many involved with bonds are keeping an eye on, as inflation that outpaces bond yields can eat away at investors’ returns. 15.01%
GLOBAL INFLATION RATES
400
5.98%
300 2.83% 1.94%
1.75%
3.22%
3.16%
Brazil
Mexico Turkey
1.69% 0.59%
200
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 Source: S&P Dow Jones Indices
Canada
US
UK
China
Japan
India
Source: Global-Rates.com
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20/09/2019 6:02:21 AM
UPFRONT
HEAD TO HEAD
What impact will Facebook’s digital currency have? The social media giant has revealed plans to develop its own cryptocurrency. What should the markets expect?
Mary Hagerman
Grant White
Jason Pereira
Portfolio manager, investment advisor Desjardins Wealth Management Securities
Portfolio manager Endeavour Wealth Management, Industrial Alliance Securities
Senior financial consultant Woodgate Financial, IPC Securities Corp.
“Big Data rules, and with 2.2 billion users, Facebook won’t overlook any opportunities to monetize that data. If they could create a global currency, would they do it? It could happen. The big banks have already gone on record to say they are scrambling to stay ahead of the curve when it comes to fintech. Last September, we saw the most significant revisions to the Global Industry Classification Standards in its history, reclassifying Facebook as a communications stock instead of an information technology stock. What’s to stop it from being reclassified in the future as a financial company? Imagine that!”
“Libra is the first cryptocurrency with the potential to be a trusted and reliable medium for global transaction, based on Facebook’s network for broad distribution and its structure. This has pros and cons. The true power of Libra will be its ability to further democratize financial services, giving more people the opportunity to participate, especially considering that 2 billion people still don’t have a bank account. However, potential for great political risk exists, as Libra could be more stable than some countries’ currencies. Whether it’s Libra or another stablecoin, change is inevitable, and Canadian financial services companies should be prepared.”
“I can’t think of any company I would trust less to do something like this. They’ve proven you can’t trust them with your personal information, so they want you to trust them with your money? I think this is a signal of something far more interesting – they are testing governments in a way they’ve never been tested before. They are pushing into the domain of sovereign nations. Seeing how this shakes out is going to be very informative and is going to have ramifications for any international cryptocurrencies. This development will test the bounds of where a corporation can go.”
SIGN OF THE TIMES Rumours of a Facebook blockchain project first emerged in 2018, but it wasn’t until early this summer that the social media site confirmed it was planning to release Libra, a digital coin backed by such marquee names as Mastercard and Paypal. Pushback was swift. “Libra raises serious concerns regarding privacy, money laundering, consumer protection and financial stability,” Federal Reserve chair Jerome Powell told a congressional committee. “These are concerns that should be thoroughly and publicly addressed.” Other voices raised against the planned new global cryptocurrency included Bank of England governor Mark Carney, who implored that the coin not be allowed to launch until it was “rock-solid.”
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UPFRONT
NEWS ANALYSIS
Cash is king in tech Technology companies have a lot of cash on hand, but what does that mean in terms of their role in investors’ portfolios? WHEN MAJOR technology companies reported their earnings this summer, a common trend was the large amounts of cash many have on hand. Apple, for instance, reported that it now has $210 billion in cash. To put that in perspective, that’s enough to purchase every professional sports franchise in North America, except for the bottom four NHL teams. The spending power these companies have makes the tech industry both interesting and challenging for advisors looking to incorporate these stocks in portfolios. Joseph Alfie, an investment advisor at HollisWealth, a division of Industrial Alliance Securities, sees that cash as a result of three factors. “First, given today’s interest rate environ-
“some of the tech companies have advanced tax structures and earn a lot of their income overseas. In the United States, foreign-source income earned by US companies is only taxed once repatriated back to the US. The increase in cash position is likely to continue unless we see a tax change. “Third, companies such Apple, Google, Amazon and Microsoft have reinvested in their business tremendously over the last 10 years, which led to them being able to pile a lot of cash. In these current uncertain market conditions where valuations are high, they are comfortable sitting on a tremendous amount of cash in order to be prepared for the next pullback, whether it means purchasing more stock or for mergers
“While many of the large technology firms have been cash-heavy for quite some time … sentiment for technology stocks has changed rapidly this year” Adam Pulla, Northstone Wealth and Estate ment, it is a great strategy to raise debt in order to deduct the interest at the end of the fiscal year,” he says. “This allows companies to sit on a lot of cash and have flexibility to do as they please. If we see rates going up, it’s probable that these companies’ cash positions will start dwindling down. “Second, in regard to taxation,” he continues,
8
and acquisitions.” Adam Pulla, financial advisor and partner at Northstone Wealth and Estate, stresses that the level of cash isn’t the only thing investors should be looking at. “How the company uses the cash is more important than how much cash a company has,” he says. “While many of the large tech-
nology firms have been cash-heavy for quite some time, not just quarterly, sentiment for technology stocks has changed rapidly this year. Technology companies with high cash but lower growth will likely give the cash back to investors in the form of dividends, whereas companies that continue to see growth opportunities will not need to return that cash to investors.” Tech companies have been spending on things such as adding hardware suppliers, further developing their own services, and real estate for office space, warehouses, and data centres. Yet they still have strong cash positions. Alfie believes that may have something to do with the timing of the current market cycle. “I think they are probably waiting for a pullback,” he says. “They have had tremendous growth over the last five years, so it might be a defensive strategy. They might be a little concerned about where the market is at – maybe in a vulnerable position.”
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CASHING IN MAJOR TECH COMPANIES’ MOST RECENT REPORTED REVENUE $70bn
$60bn
$63.4 billion $50bn
$53.8 billion
$40bn
$38.9 billion
$30bn
$33.7 billion
$20bn
$16.9 billion
$10bn
$0
Apple
Amazon
Alphabet (Google)
Microsoft
Source: Apple IR, Amazon IR, Alphabet IR, Microsoft IR, Facebook IR
Such a defensive strategy would allow tech companies to weather some of the headwinds they’ve been experiencing. “Privacy concerns, potential anti-trust legislation and thoughts
in the market,” he says. “If there is a recession, they are going to have plenty of cash to buy back their stock, so they are borrowing to invest at all-time lows. To me, it is a great
“Most of the tech companies sitting on large piles of cash are great businesses – leaders in their industry and brand names that people want to own” Joseph Alfie, HollisWealth, a division of iA Securities about some technology firms being too big has been concerning for not just governments, but also the general public,” Pulla says, also pointing to ongoing trade disputes as an issue that could add to those headwinds. Despite those fears, Alfie remains bullish on tech companies. “Cash is king; they are preparing themselves for the next position
business decision.” If the trade disputes continue, Alfie believes the tech sector will be one of the most volatile, yet he also feels it will offer the most opportunity when things settle down. “Most of the tech companies sitting on large piles of cash are great businesses – leaders in their industry and brand names
that people want to own,” he says. “The fact that they have cash and are still able to grow reassures me. I feel very comfortable investing in these companies. I believe having cash on the balance sheet and being in a growth industry offers the best of both worlds – growth and a little safety blanket.” Even with the potential volatility and headwinds, Alfie feels it’s important to find ways to get tech companies in his clients’ portfolios. “I think advisors should keep buying big names, especially the ones with recurring revenue models,” he says. “But I think now more than ever, given the valuations, the key is to buy strategically. If you were thinking of allocating 10% of a client’s portfolio in tech, then allocate 5% and, if necessary, dollar cost average any future purchase over time.” Joseph Alfie is an investment advisor with HollisWealth®, a division of Industrial Alliance Securities Inc., which is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. The opinions expressed herein are those of Mr. Alfie alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.
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20/09/2019 3:38:32 AM
UPFRONT
INTELLIGENCE CORPORATE ACQUIRER
TARGET
PRODUCTS COMMENTS
CIBC Private Wealth Management
Lowenhaupt Global Advisors
The acquisition further expands CIBC’s ability to reach ultrahigh-net-worth families in the US
PenderFund Capital Management
Vertex One Asset Management
Pender has agreed to acquire the investment fund management contracts for five funds managed by Vertex One
Sprott Asset Management
Tocqueville Asset Management
Tocqueville’s sale of its gold strategy asset management business to Sprott is expected to close by January 2020
PARTNER ONE
PARTNER TWO
COMMENTS
Ontario Teacher’s Pension Plan
Alphabet
The OTPP is teaming up with Google parent company Alphabet and its Sidewalk Labs subsidiary to launch Sidewalk Infrastructure, a new infrastructure investment company
Wealthscope
Wealthica
Investors on the Wealthica platform will be able to access to Wealthscope’s portfolio and planning analytics
Wealthsimple
Grayhawk Investment Strategies
Grayhawk, a Calgary-based firm that caters to 30 of Canada’s richest families, will receive technology, dealer and advisory services through Wealthsimple for Advisors
CI unveils global asset allocation ETF
CI First Asset ETFs has launched the CI First Asset Global Asset Allocation ETF (CGAA) on the TSX, following a merger with the Skylon Growth & Income Trust. Actively managed by Signature Global Asset Management, the fund will invest in equity and fixed-income securities from companies and countries anywhere in the world. According to CI First Asset ETFs president Rohit Mehta, the fund is “designed to provide investors with income and growth through exposure to multiple asset classes while quickly adapting to changing market conditions.”
Wealthsimple expands its services to the ultra-high-net-worth space
Wealthsimple has inked a partnership with Grayhawk Investment Strategies, a Calgary-based independent wealth management firm that serves 30 ultrahigh-net-worth families across Canada. Grayhawk will benefit from technology, dealer and advisory services through the Wealthsimple for Advisors platform, which automates account opening, compliance and account administration processes, in addition to providing clients with useful resources and easier access to their portfolios. The partnership also opens Grayhawk’s investment strategy, which it describes as “a total portfolio solution that offers access to capabilities generally only available to large institutional investors,” to advisors with highnet-worth clients on the Wealthsimple for Advisors platform. In an interview with BNN Bloomberg, Wealthsimple CEO Michael Katchen said Grayhawk is “a very ultra-high-net-worth professional shop that’s been growing very fast ... that understands the value of a platform like ours.”
10
Invesco expands shelf with managed portfolios
Responding to client demand, Invesco has introduced a new suite of five managed portfolios targeted to risk tolerances ranging from conservative to high growth. Managed and developed by the Invesco Investment Solutions team, the portfolios offer a relatively low-cost, single-ticket option for multi-asset exposure. Constructed using strategic long-term asset allocation, each portfolio invests in active mutual funds and passive, factor-based ETFs. Equity exposure spans both developed and emerging markets, while bond exposure is focused solely on developed markets.
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20/09/2019 3:39:39 AM
PEOPLE RBC iShares gets into asset allocation
RBC iShares has introduced three new asset allocation ETF portfolios on the TSX. Made up of investments in other iShares ETFs, the portfolios provide exposure to Canadian, developed and emerging market equities, as well as Canadian and international fixed income. The three options include the iShares Core Equity ETF Portfolio (XEQT), which invests exclusively in equity ETFs; the iShares Core Conservative Balanced ETF Portfolio (XCNS), which targets a 60/40 split between equities and fixed income; and the iShares Core Income Balanced ETF Portfolio (XINC), which targets an 80/20 equities-to-fixed income ratio.
First Trust introduces ‘buffer’ ETF
First Trust has unveiled a new ‘buffer’ ETF that it believes offers investors unique downside protection in a crowded Canadian market. The First Trust Cboe Vest US Equity Buffer ETF, trading on the TSX under the ticker symbol AUGB.F, offers exposure to the S&P 500 but with built-in downside protection: If the market is down 10% or less, clients will get their money back, net of fees. “This is the only product on the TSX with a defined outcome,” said First Trust’s Karl Cheong. “You know exactly what your performance will be depending on the price performance of the S&P 500.”
Mackenzie lowers fees on 13 mutual funds
Mackenzie Investments has announced management fee reductions on 13 of its mutual funds. Fees for five ETF portfolios, two fixed-income funds and six funds sub advised by TOBAM were reduced by 5 to 15 basis points. “We continue to put the focus on the needs of the investor and their financial success,” said Mackenzie Investments president and CEO Barry McInerney. “Reducing the fees on these funds supports our ongoing commitment to providing competitive, simplified and transparent pricing, enabling our clients to keep more money in their portfolios.”
NAME
LEAVING
JOINING
NEW POSITION
Jordy Chilcott
N/A
Sun Life Global Investments
President
Peter Lindley
State Street Global Advisors Canada
OPTrust
President and CEO
Kurt MacAlpine
WisdomTree
CI Financial
CEO
Jaime McKenna
Minto
Fengate Asset Management
Managing director and group head, real estate
Derek Neldner
N/A
RBC
Group head, capital markets
Sun Life Global Investments names new president
Sun Life Global Investments [SLGI] has appointed Jordy Chilcott as president of SLGI and senior vice-president of investment solutions. Chilcott joined SLGI in 2017 as head of investment distribution, where he led the development and strategic growth of SLGI’s distribution team. Before joining Sun Life, Chilcott held leadership roles at Scotiabank and Dynamic Funds, overseeing multiple asset management companies across Canada, Mexico and Asia. “Jordy has been integral to SLGI’s success since he joined Sun Life,” said Sun Life Canada president Jacques Goulet. “His breadth of experience, clientcentric approach and track record of leading high-performing teams make him a great fit to lead the business.”
CI Financial gets new CEO
CI Financial has tapped Kurt MacAlpine as its new CEO. MacAlpine comes to CI from WisdomTree, where he served as executive vice-president and head of global distribution, helping to diversify and globalize WisdomTree’s business and leading the development and execution of its global distribution strategy. Prior to that, he managed global consulting teams in the asset and wealth management industries at McKinsey & Company. “The board is confident that [Kurt’s] deep industry knowledge, proven leadership, and experience in developing and executing growth-oriented strategic initiatives will ensure that CI remains a leader in a rapidly changing business environment,” said board director David Miller.
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UPFRONT
ETF UPDATE NEWS BRIEFS UK regulator concludes ETFs no threat to financial markets
A recent report from the UK’s Financial Conduct Authority [FCA] has concluded that the growing ETF sector does not represent a threat to financial market stability based on previous instances of liquidity crunches. Looking at three periods of stressed markets from November 2016 to December 2018, the FCA found that market participants such as investment or wholesale banks and proprietary trading firms increased their trading activity to help investors sell their positions when the market came under pressure. “Beyond these reassuring results, the analysis does not detect any initial signs of concern to financial stability,” the FCA concluded.
Vanguard’s ESG ETF error raises indexing questions
Managers overseeing trillions in ETFs are taking a closer look at the quality controls in their funds, particularly with regard to their underlying indexes, after Vanguard mistakenly added shares of 11 companies, including a gun manufacturer, an oil services company and a private prison operator, to two of its socially responsible funds. After quickly correcting the error, the company apologized to investors, citing a mistake in the underlying index provided by FTSE Russell, and said both companies are adding new controls.
Gold ETFs draw impressive $2.6 billion worth of inflows
According to data from the World Gold Council, investors poured approximately US$2.6 billion into gold-backed ETFs in July, raising their collective holdings to 2,600 tons, the
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highest total recorded since March 2013. Massive flows were also observed through August – some US$2 billion flowed into the SPDR Gold Trust in the span of a month, while the iShares Gold Trust took in US$924 million over the same period. Both ETFs gained more than 7.5% during that time, compared to the 7.3% rally in gold.
Potential tax changes prompt Horizons to update 40 ETFs
Horizons ETFs is looking to reorganize more than 40 ETFs in anticipation of proposed changes to the Income Tax Act. The changes, first unveiled by the federal government in March, would limit the ability of ETFs to use derivative transactions to convert fully taxable ordinary income into capital gains. Horizons has recommended that the ETFs in question, which rely primarily on derivatives, be merged into a single multi-class mutual fund corporation, which the company said will result in benefits such as improved operational efficiency and a substantially reduced likelihood of distributions.
Would nontransparent ETFs really benefit active managers?
Active managers hoping to gain from a non-transparent ETF structure might not see much benefit. In a recently published analysis, Ben Johnson, director of global ETF research for Morningstar, acknowledged that removing the need for daily portfolio disclosure appeals to many active managers who are concerned about frontrunners and copycats. “But the fact is that most managers are probably flattering themselves if they think that there are opportunists lurking in the shadows looking to leech off their brilliance,” he said.
Farther afield for healthier yield As global interest rates hover at historic lows, emerging market debt offers advantages for the income-focused investor According to the Canadian ETF Association, the CAD-hedged Mackenzie Emerging Markets Bond ETF (QEBH) pulled in $140 million in net inflows in July, putting it in third place among all Canada-listed ETFs in terms of net creations for the month. It’s a respectable achievement, made more remarkable by the fact that the fund only launched on July 25. Its appeal comes as no surprise to Michael Cooke, senior vice-president and head of ETFs at Mackenzie. “Emerging market debt is kind of the best of both worlds,” he says, noting that its outsized yields make it more akin to an equity investment. QEBH can have a yield to maturity of around 5.5%, a compelling feature in today’s environment. Central banks have kept interest rates at historic lows following the 2008 financial crisis; as inflation remains relatively subdued, a global trend of further reductions is developing, leading to low government bond yields and GIC rates in the neighbourhood of 2% to 3%. EM bonds’ higher premium goes hand in hand with concerns on several fronts, including socio-political unrest, currency risks and economic instability. But Cooke notes that many developing economies have made positive reforms in regard to fiscal prudence, healthier foreign currency
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reserves, reined-in debt levels and freefloating currency regimes, all while maintaining much of their issues’ attractive risk/ return properties. “The risks associated with an emerging market portfolio are becoming a lot more idiosyncratic or country-specific,” he says. As an index-based ETF, QEBH offers broad exposure to several emerging markets, including China, Mexico, Indonesia and Russia. “That broad-based index design,
“The risks associated with an emerging market portfolio are becoming a lot more idiosyncratic or country-specific” and the diversification therein, insulates you from any risk that you might periodically see in one specific EM country that might not necessarily impact the fortunes of another issue,” Cooke says. QEBH also focuses on EM bonds that are government-issued or governmentrelated, making it less risky than the broader EM debt market. “Among other things, it constrains your risk more to the stability or solvency of the issuing government, as opposed to corporate bonds, which can also turn on the issuing companies’ stability,” Cooke says. Canadian investors have also likely been drawn to QEBH’s 0.45% management fee, the lowest among Canada-domiciled emerging market bond ETFs. And because most options for EM fixed-income exposure are listed in the US, the fund represents a way to sidestep any potential withholding tax implications. “It’s cost-effective, i t ’s t a x - e ffi c i e n t compared to USlisted alternatives, and you’re still getting the same underlying exposure at a competitive price point,” Cooke says.
Q&A
Tom Staudt Chief operating officer ARK INVESTMENT MANAGEMENT
Years in the industry 7 Fast fact ARK serves as a subadvisor for five active thematic ETFs recently launched by Emerge Canada on the NEO Exchange, which focus on innovation in genomics, fintech, robotics and AI
Investing in health innovation What’s the investment philosophy behind the Emerge ARK Genomics and Biotech ETF (EAGB)? We really see technology seeping into every sector of the economy, including healthcare, where we see a sharpening divide between old-world pharmaceuticals and new-age treatments. We are very bullish on biotech, immunotherapies, gene sequencing, CRISPR, gene editing and CAR-T therapies. On the other hand, we see tremendous struggles ahead for traditional pharma relating to regulation, generic drugs and price controls. Looking at the first half of 2019, healthcare was the worstperforming sector of the US economy, yet our strategy – which has very little overlap with healthcare and even biotechnology index funds – was one of the leading ETFs of any type in the US. Truthfully, we believe there is a clear divergence, and it might be the most misunderstood part of the economy right now.
How did you construct EAGB’s underlying portfolio? Like our other strategies, we ensure that top-down research meets bottom-up portfolio management. Top-down, we delve into cost curves to understand where values are going to accrue over a five-year period. By looking at factors such as unit economics and elasticity of demand, we can ultimately determine which spaces have potential and which ones we’d want to avoid for the moment. That gives way to our bottom-up work, which focuses on the companies that are best positioned to benefit from disruption. By accruing economic streams and discounting cash flows, we determine a five-year price target and CAGR expectation for a given stock. We then score companies based on those five-year expectations, along with six metrics that we consider to be critical to innovation. That lets us create a concentrated, conviction-based portfolio of winners, rather than a mix of winners and losers one might expect from funds with indiscriminate exposure to the theme.
What risks or considerations should investors be aware of when they buy units of the fund? Some investors with a healthcare thesis only have a sector fund with little to no exposure to genomics and biotech, so our fund works as a completion strategy for that. Others concerned about concentration risks may use this as a satellite growth thesis for their core portfolio. We’d also argue that our focus on disruptors is a good hedge for portfolios that contain value traps – pockets of old-world companies that are vulnerable to disruption. But investors must understand that in many ways, it’s similar to a venture-capital-like exposure made up of publicly traded securities. Though we’re confident in our five-year convictions on leaders, short-term volatility is inherent to innovation. We try to take advantage of that movement, taking profits if a portfolio company’s rate-of-return expectations get eroded by hype and averaging down should a market event hurt a particular company. Investors should consider that the strategy has a long-term time horizon and outlook.
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UPFRONT
ALTERNATIVE INVESTMENT UPDATE
A shining market for gold investment Amid interest rate uncertainty and broader investor concern, the case for gold exposure is gaining strength
performance right now shows that when the rest of the market is uncertain, gold can lower a portfolio’s volatility and overall risk.” World Gold Council figures show that net inflows into gold-backed ETFs and similar products reached US$2.6 billion across all regions in July. Europeans have bought much more gold than their American counterparts over the last three years, but American inflows
“When the rest of the market is uncertain, gold can lower a portfolio’s volatility and overall risk”
Those swimming in the seas of financial markets know that gold has a dual personality. “Gold is a commodity, and you can also think of it as a currency or a store of value,” says David Harquail, CEO of Franco Nevada and chairman of the World Gold Council. From a commodities perspective, Harquail says, the recent rise in the price of gold above US$1,500 an ounce has led to a natural weakening in demand. This is particularly true in India and China, two of the largest markets for physical gold, where weaker local curren-
NEWS BRIEFS
cies make it that much more expensive. But on the investment side, this reflects not just a vindication for gold bugs, but also very strong demand for gold as an insulator. Not long ago, market commentary was thick with concerns about central banks moving to hike rates from their historic lows. That outlook has gotten considerably cloudier in 2019 as yield curve inversions have left fixed-income investors searching for alternative havens. “Gold has been acting as a refuge and as a store of value for investors,” Harquail says. “Its
PE and hedge funds targets of social media sleuthing
In a recent study conducted by Corgentum Consulting, 62% of investor and operational due diligence analysts said they had begun to search social media platforms such as Facebook, LinkedIn, Twitter and Instagram as part of their pre-investment background investigation process. “Investors increasingly want background investigations that dive deeper into the digital profiles of fund managers and their personnel,” said Corgentum Consulting’s Jason Scharfman. “The focus is now on building a complete online and offline picture.”
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have outpaced those from Europe in recent months. “I think Americans are catching up in terms of concerns about the overall market and financial markets,” Harquail says. “We’re getting similar levels of skittishness on both sides of the pond.” While the case for gold exposure in investment portfolios is certainly getting stronger, detractors point to gold’s lack of yield and say it’s less trustworthy than other assets. In defence, Harquail highlights gold’s negative correlation to the rest of the markets, as well as its outperformance over the last year and the last 20 years. “I think as an investor, you shouldn’t always listen to people with a vested interest in the market,” he says. “Just look at what the facts are, and then make your decision on that basis.”
Canadian venture capital roars in first half of 2019
According to CPE Media Analytics’ latest Canadian Venture Capital report, the Canadian venture capital space saw $2.9 billion in capital disbursements across 264 financings in the first half of 2019. Ontario led all provinces in disbursements with $1.48 billion, while Toronto led all cities with $928 million. A total of $3.2 billion was raised by 39 funds, $1.94 billion of which went to 28 private VC funds. In addition to domestic investment, Canadian companies secured funding from 25 countries or overseas territories.
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Q&A
Florence Narine Senior vice-president and head of product
Seeking shelter in the short side
AGF INVESTMENTS
Years in the industry 20 Fast fact AGF Investments recently launched two liquid alternative funds that provide unique longshort exposure to the US equity market
Can you explain how the AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF is designed to limit the effects of general market movements? The fund is going to be investing long in US stocks that have below-average betas and shorting stocks that have above-average betas within the sector. As much as it is US market neutral, based on the correlation of markets globally, this certainly fits in well to any portfolio, regardless of the market exposure they have. In particularly volatile environments, this gives what I would suggest is a better parking spot than cash: As that market goes down, the short side of the strategy would give an actual lift in their performance. When markets go up, there’s a bit of a dampening effect, but it is still going to capture some of that upside. The fact that it’s an ETF also helps more tactical advisors or investors to actively move in and out of the strategies as markets dictate.
How does the strategy for your US Long/ Short Dividend Income CAD-Hedged ETF stand apart from other liquid alternatives? Investors are starved for income, with a clear preference for dividends. US-based income isn’t taxed as advantageously as Canadian dividends, but our dividend strategy competes by not just being long in the highest dividend-paying US stocks based on a
Dynamic Funds enhances liquid alternative lineup
Dynamic Funds has rolled out the Dynamic Credit Absolute Return II Fund, its fourth liquid alternative offering. The fund seeks to maximize absolute returns over a complete market cycle and mitigate risk by maintaining a weighted averaged investment-grade credit rating of BBB- or better. In addition to investing in diversified long and short positions of primarily North American credit securities, the fund will also use leveraged investmentgrade corporate credit and credit arbitrage to achieve its targets.
number of measures, but also by shorting those that pay the lowest dividends. Over the past three years, it has provided a much richer yield – about 5.4%, compared to 1.7% from the US 10-year Treasury – at a much lower risk profile. And with the short exposure, we feel advisors will consider it a natural fit as either a complement or replacement for some dividend-paying strategies in their portfolios.
How big of a role do you see these US-based strategies playing for Canadian investors, given current global tensions? We currently see a continued correlation of markets globally: the European or US markets have a very similar impact to the Canadian market. As much as our strategies are based within the US market, we have certainly tested them within a global portfolio. They fit quite nicely, regardless of your view of a portfolio and how you would construct it, and the US market provides natural liquidity in both the long and the short space. I think it also goes back to a sense of providing protection. A couple of misplaced words from a politician, a declaration from large agencies – as we’ve seen recently, you never know what’s going to rock the markets and when. It’s certainly prudent to adopt strategies with built-in considerations for how markets are going to perform, whether it be up or down.
Waratah Capital Advisors enters liquid alt scene
Waratah Capital Advisors has introduced its first liquid alternative mutual fund. The Waratah Alternative Equity Income Fund maintains a long-biased portfolio of North American equities with a focus on Canada; it also has the ability to use options, short selling and other alternative investment strategies to manage risk. With a focus on capital preservation and a cash-flow orientation, the fund is targeting absolute returns between 6% and 8%, with less volatility than the S&P 500/ TSX Composite.
Do hard times result in better hedge funds?
In a recent paper, researchers from the University of Manchester found that when hedge fund managers are under pressure, the stocks they pick tend to do better than average, especially for funds with higher management fees and looser withdrawal requirements. The researchers theorized that fund managers work harder when faced with the prospect of lower management fees – and lower compensation – resulting from outflows, as well as the reputational damage of being associated with a liquidated fund.
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UPFRONT
OPINION
GOT AN OPINION THAT COUNTS? Email editor@wealthprofessional.ca
The cannabis cash cow Better value in this emerging industry can be found south of the border, writes Nawan Butt CANADA IS the global trailblazer in the cannabis industry. In the past five years, we’ve witnessed the incredible growth of Canadian licensed producers and even their development into US multi-state operators [MSOs]. To say that the cannabis trade has caught the attention of mainstream investors would be an understatement. Potential investors in the cannabis sector often assume that their safest bets are exclusively Canadian companies. It’s a fair assumption, given the rate at which Canadian companies have flourished since the legalization of recreational marijuana. The Canadian market has the infrastructure for service and is building quite the impressive track record. But it’s important for investors to keep in mind that the global cannabis industry is still in its infancy and has a lot of room to grow, which presents even better opportunities beyond our own borders. The massive international market remains underserviced, but participants are quickly finding their feet as regulations are increasingly clarified. To keep pace with the market and industry, investors need to expand their horizons and consider global opportunities, particularly those in the US. Cannabis is still illegal at the federal level in the US, despite its popularity and acceptance in the states where it is legalized. Cannabis is currently legal for medical use in 33 states and for adult recreational use in 10 of those states. However, federal illegality still makes it difficult for MSOs to access most avenues of local funding. It also means US cannabis companies must list in Canada when they go public. And even when they do, the companies are limited to listing on junior exchanges.
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In spite of these restrictions, the US cannabis industry continues to thrive. In the past year, we saw several reverse takeovers and initial public offerings of US companies in the Canadian marketplace, which were significant contributors to our portfolio’s performance in their respective quarters. The lack of traditional financing availability pushes MSOs to aggressively raise cash through secondary equity financings. These companies are racing toward consolidation,
in 20 states. Acreage’s footprint reaches a potential 180 million Americans. It’s among the five largest American cannabis companies based on market value, and Canopy is set to pay the $3.4 billion price tag once the US legalizes cannabis federally. This transaction sets precedence for MSOs to become part of the global push toward wider acceptance of cannabis and to obtain financing to bolster their growth in the US. It also gives proof of better relative value creation opportunities south of the border. Even though focus has shifted to the US and international plays, it’s still important to recognize the leadership value of Canadian producers. As they follow Canopy’s lead, they will further facilitate the proliferation of the cannabis industry globally. However, investors should acknowledge the sector’s infancy and recognize there will be volatility as companies experience growing pains and consolidation. But the prospects for the winning companies remain bright. In the past several
“Investors need to commit to being ahead of the curve, not riding it, if they want to stay ahead in this competitive and dynamic industry” with the speed of the land grab acting as the pricing multiple of choice, and therefore capital available for acquisitions is very valuable. This financial pressure only increases as state regulations open up at a faster pace than many expected. While Canadian producers continue to experience a valuation premium to American companies, investors should expect this to shrink over time as the larger MSOs gain increased regulatory legitimacy and access to capital. A prime example of this is the innovative contingent deal between Canopy Growth Corporation, the Canadian industry leader, and Acreage Holdings. In April, Canopy announced it had secured the right to buy Acreage, a retail distribution and cultivation business with licences to grow or sell cannabis
months, we have focused on investment opportunities in MSOs, as well as Canadian companies with strong operational results and well-defined growth strategies. While it’s easy to get caught up in the excitement of a budding industry, it’s important to remember that due diligence is extremely important. Not every company and investment can be a winner. Investors need to commit to being ahead of the curve, not riding it, if they want to stay ahead in this competitive and dynamic industry. Nawan Butt is an associate portfolio manager at Purpose Investments, where he manages the Marijuana Opportunities Fund. He is a CFA charterholder with a master’s degree in finance from Simon Fraser University.
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WP-Ad
Income for Every Outcome... Wherever the road takes you
Performance of July 31st 2019
Forstrong Global Income Current Yield: 3.11%
YTD
1 Year
3 Year
5 Year
10 Year
Since Inception
4.19%
3.94%
4.52%
7.34%
7.93%
8.63%
Performance statistics for ETF Managed Portfolios are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Past performance is no indication of future results. A rate of return for one year or less is not annualized.
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PEOPLE
INDUSTRY ICON
BECOMING A GLOBAL LEADER TD Asset Management CEO Bruce Cooper’s career has been a constant evolution. Next on his agenda: elevating TDAM’s profile in Canada and worldwide
AFTER ALMOST 30 years in the finan cial industry, TD Asset Management CEO Bruce Cooper knows the importance of career evolution. His roles and skill set have changed over the years, but he regards the challenge of evolving with the industry as a gratifying experience. After obtaining a bachelor of commerce from Queens University, a master’s in polit ical science from McGill and a CFA charter holder certification, Cooper entered the industry as a research analyst at CIBC. From there, he moved on to a small independent firm called Lancaster Financial, where he worked on proprietary trading, investing the firm’s own capital. When Lancaster was acquired by TD in 1995, Cooper was dropped into asset manage ment. “I found my way as an equity analyst and equity portfolio manager,” he says. “I served as head of equities, became CIO in 2014 and became CEO in 2016. My back ground is as an equity portfolio manager. I think of myself as client-oriented and focused on investment excellence.” Transitioning from portfolio manager into a leadership role is something Cooper looks back on as one of the greatest challenges of
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his career – but also one of the most satis fying. “In this industry, you need to constantly learn and challenge yourself,” he says. “Quite a different skill set is needed to lead a busi ness as opposed to being a portfolio manager.
on keeping up with events that might impact the companies the firm follows on the invest ment side. “This industry is competitive,” he says. “It is a challenge because every day, we are trying
“This industry is competitive. It is a challenge because every day, we are trying to win and outperform for the benefit of our clients and the bank. No two days are alike – every day is interesting” Before, I was building financial models; now I lead people and develop strategy.”
Competitive advantage The atmosphere of constant change and nonstop learning was what first attracted Cooper to the financial industry. He has always had a natural fascination with news and learning about how different companies operate, which is something he’s come to embrace in leading TDAM. He’s very focused
to win and outperform for the benefit of our clients and the bank. No two days are alike – every day is interesting.” The days are also much different from when Cooper began in the industry. He started with a dream of managing a global equities fund; achieving that goal is some thing he considers a career highlight. “I did it for many years and loved managing a global equity fund,” he says. “It was a broad canvas to invest in companies
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PROFILE Name: Bruce Cooper Title: CEO Company: TD Asset Management Based in: Toronto Years in the industry: 28 Career highlight: Leading TD’s acquisition of Greystone Capital Management
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PEOPLE
INDUSTRY ICON
everywhere in the world, understand different sectors and industries, and hone an investment philosophy.” Cooper then set out to achieve new heights. In 2009, he helped launch TD’s asset allocation committee, aimed at structuring processes for constructing portfolios. Now, in his role as CEO, he’s focused on looking for new ways to add value and meet the needs of TD’s clients. At the centre of those initiatives is TD’s acquisition of Greystone Capital Management in 2018. “Greystone had capabilities in areas we didn’t in the alternatives or ‘real asset’ space,” Cooper explains. “They are a big investor in real estate and infrastructure, so
“Building our ETF complex is one of the key growth initiatives at TDAM,” Cooper says. “We are looking to build a suite of 30 to 40 ETFs. Our goal is to embed our core investment capabilities in our ETFs. When you think of our core capabilities, one area is credit in fixed income, which we have been known for for decades. The second area we want to build on is dividend growth, as an equity philosophy. Also, quantitative investing is a core capability. These are not new investment capabilities – just embedding our current specialties in an ETF structure for clients to have a broad choice in portfolios.” Moving forward, Cooper says TDAM’s focus will be emphasizing its investment
“Building our ETF complex is one of the key growth initiatives at TDAM … Our goal is to embed our core investment capabilities in our ETFs” we wanted to make sure we had those capabilities. The new capabilities help position us as an asset manager that differentiates from our peers, which is very gratifying.”
Embracing ETFs Today, Cooper’s greatest satisfaction comes from his ability to shape the long-term perspective of TDAM’s business as CEO. “The asset management business is in the midst of significant change,” he says. “There has been a rise of passive investing, ETFs, pricing pressure and more global competitors in Canada. Making sure that we are positioned to compete and take a leadership role is something I find exciting.” In addition to integrating Greystone’s capabilities, TDAM has also put an increased emphasis on enhancing its reach in the ETF space. The company launched a suite of ETFs in November 2018, followed by another in the spring and a plan to launch more this fall.
excellence to clients. Whether it’s the Greystone integration or expanding the firm’s ETF lineup, Cooper says it all comes down to the idea of helping investors meet their goals. “I think sometimes the industry gets too focused on products,” he says. “For our large institutional investors, it could be making sure pensions match liabilities, and for individual investors, the goal may be saving appropriately for retirement. Making sure our solutions align with the goals of our clients is our priority.” In September, Cooper passed his responsibilities as TDAM’s chief investment officer to Rob Vanderhooft, a move that he says will allow him to focus on TDAM’s growth initiatives. Given the wealth of experience he has gained during nearly three decades in the industry, Cooper is well placed to help TDAM take that next step in its growth and enhance its vision of being a global asset management leader.
TDAM AT A GLANCE
FOUNDED 1987
HEADQUARTERS Toronto, ON
TOTAL AUM $391 billion
NUMBER OF MUTUAL FUNDS 154
ASSETS IN MUTUAL FUNDS $146.47 billion
NUMBER OF ETFs 12
ASSETS IN ETFs $211 million Source: TDAM as of June 30, 2019
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SPECIAL REPORT
ETF INNOVATION
NEW FRONTIERS FOR ETFs As the ETF industry continues to grow, so do new ideas for strategies and opportunities. WPC takes a closer look at eight areas where that innovation is playing out in 2019 THE CANADIAN ETF industry reached $183.7 billion in assets, spread across 721 funds and 37 providers, at the end of July. The numbers continue to grow at incredible speeds as more investors look to ETFs as their investment vehicle of choice. As the industry evolves, ETFs are offering more and more options to investors. Products now feature strategies like factor-based
investing, portfolio solutions and strategic beta. ETFs are also becoming more specialized. More thematic and ESG ETFs continue to hit the market, allowing investors to put their money behind certain sectors and values. The past year has seen many developments across the ETF industry. One area of note is alternative funds, which flooded the retail investment space when new regulations were
introduced in January. Fixed income has been another highlight of 2019, carrying ETF flows as investors look to insulate themselves against volatile markets while still generating attractive yield. Given the increased innovation, strategies and options in ETFs, there’s no doubt that this investment vehicle is poised to take on an even bigger role in Canadians’ portfolios.
ABOUT THE SPONSOR BMO Global Asset Management is a global investment manager with offices in more than 20 cities in 14 countries, delivering service excellence to clients across five continents. Our clients have access to the investment expertise and insights of our investment professionals located in Toronto, Chicago, London and Hong Kong, as well as our network of world-class boutique managers strategically located across the globe. We leverage the skills of this global platform to continually innovate our comprehensive suite of exchangetraded funds, actively managed mutual funds, managed solutions and segregated funds. At BMO Global Asset Management, our aim is to help our clients overcome the challenges they face and deliver the long-term investment outcomes they seek. By understanding our clients’ objectives and pain points, our portfolio managers constantly strive to deliver an effective balance between adding value and reducing risk.
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Brought to you by
FIXED-INCOME ETFs SO FAR in 2019, fixed-income ETFs have dominated the story. In July alone, Canadian fixed-income ETFs saw inflows of $1.5 billion, which represented 83% of all flows during the month and one of the highest months for fixed-income inflows in history. Fixedincome ETFs’ current popularity stems from a number of factors, including the fact that they offer more diversification and exposure than single-issue bonds at an attractive price, with the added value of increased liquidity. One person who has observed the changes in the fixed-income ETF space firsthand is Kevin Gopaul, BMO’s global head of ETFs. BMO has been a leader in fixed-income ETFs, recognized in the top 10 globally, and has introduced several innovations to the Canadian marketplace, including Canada’s first high-yield bond ETF and a discount bond ETF that maximizes tax efficiency. Gopaul, who recently wrapped up his term as chair of the CETFA, says fixedincome ETFs have come a long way in a short amount of time. “We always have a lot of inquiries around fixed income,” he says. “Fixed income has always been essential for risk management, portfolio diversification and income generation across all investor types. While fixed-income products are essential portfolio construction tools, there has often been a level of opacity around pricing, bid-offer spread and general accessibility. The emergence of fixed-income ETFs has improved access and efficiency to the asset class.” The outlook hasn’t always been so good for fixed-income ETFs. Gopaul remembers the challenges the product had just a few decades ago, when brokerage houses classified them as equities simply because they were an ETF. “There was also a time where market makers had difficulty with fixed-income ETFs, pricing them and having proper
bid-offer spreads,” he says. “It has come a long way – now there are products that cover all segments of the global fixed-income market. There is smart beta, active management, and with it all coming together, it has improved the market for fixed-income ETFs.” Gopaul points to three reasons why fixed-income ETFs have seen a surge in popularity, especially recently. “I think the first is a general movement from single-issuer exposure to diversified strategies,” he says. “The second is the current market conditions, where the need for yield is as insatiable as ever. Finally, the breadth of offerings – there has been so much innovation in fixed-income ETFs, more than pooled or mutual funds.”
In regard to the movement away from single issuers, Gopaul points out that more and more investors are exchanging a single corporate bond for an ETF in order to gain access to a collection of issuers. In addition, the creation of corporate bond ladders has resulted in better diversification and potentially better outcomes for advisors when building portfolios. As for market conditions, because many experts believe that the current economic cycle is in its later stages, Gopaul feels more money will continue to flow into fixedincome ETFs to lower risk. With more products out there, the choice for satisfying investors’ needs has never been greater.
“While fixed-income products are essential portfolio construction tools, there has often been a level of opacity … The emergence of fixed-income ETFs has improved access and efficiency to the asset class” Kevin Gopaul, BMO Global Asset Management THE MOST POPULAR TYPES OF FIXED INCOME IN 2019 YTD FIXED-INCOME FLOWS BY TYPE
$3.97 billion
Canadian aggregate Canadian government Canadian corporate US/North America
$995 million $463 million $742 million $1.83 billion
Foreign Sub-investment grade
-$1.1 billion
Preferred/convertible Cash
$119 million $525 million Source: National Bank of Canada, Bloomberg
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SPECIAL REPORT
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ETF INNOVATION
“Buying a fixed-income ETF can give you exposure and efficiency at an attractive price … With one purchase, you can have access to hundreds of issuers” Kevin Gopaul, BMO Global Asset Management Gopaul notes that fixed-income ETFs give advisors an opportunity to simplify things for clients, in addition to their other benefits. “Fixed-income trading, pricing and accessibility has always been challenging for the vast majority of the population. Buying a fixedincome ETF can give you the exposure and efficiency at an attractive price – I think that is a key factor. With one purchase, you can have
access to hundreds of issuers.” He also believes the access to professional management appeals to advisors. “There are only so many levers a fixed-income manager can pull to add value: credit, sector, duration, maybe geography. It becomes difficult to show added value. So fixed-income ETFs give you exposure at the price you want. The quality of the manager is becoming key, so large-scale
THE MOST POPULAR FIXED-INCOME MATURITIES YTD FIXED-INCOME FLOWS BY MATURITY Broad/mixed $5.13 million
$954 million
Ultra short-term
$112 million
Short-term Mid-term
$174 million $913 million
Long-term Real return Target maturity
$201 million $63 million
investment managers gain better pricing, insights and access to issues.” Liquidity is another advantage of fixedincome ETFs. “Diversification can lead to better liquidity,” Gopaul explains. “Instead of one to four lines in your fixed-income portfolio, you can have many more. That improves liquidity, as selling a larger number of smaller pieces of bonds is easier than selling the same dollar amount in one bond. Additionally, it lowers risk, improves diversification and improves portfolios.” With so many products available, Gopaul stresses that advisors need to know what they’re purchasing. “Understand what your client’s needs are, whether income, portfolio diversification or other, and find the product that matches,” he says. “It’s an area where there’s a need for more information, so aligning with high-quality managers who can give you the support you need with the offerings you need, and at the right price, is important.” Having a good understanding of products is also one of the greatest challenges with fixed-income ETFs, Gopaul says, as managers continue to launch new products with different outcomes. “As the outcomes become more customized,” he says, “you have to understand what you are getting and make sure it suits you.” Going forward, he adds, “I think fixed income is going to become more precise, with more specific exposures – for example, just AAA or BBB bonds. The more discussions we have, the more we understand people’s needs and how they differ between clients.” Gopaul also predicts an increase in active management in fixed income. “There are good active managers in the marketplace who understand the ETF wrapper opens a new distribution channel,” he says, “so I think we’ll see more active in the near future.” This communication is intended for informational purposes only and is not, and should not be construed as, investment, legal or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. 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 licence.
Source: National Bank of Canada, Bloomberg
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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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ALTERNATIVE ETFs EARLIER THIS year, a regulatory update allowed for the offering of alternative investment products by prospectus to retail investors in Canada, and a deluge of products subsequently flooded the market. Yet alternative ETFs aren’t like those in other asset classes. National Bank Investments was one of the fund providers that jumped on the alternative bandwagon in January. Part of their first suite of ETFs was NALT, an alternative fund that aims to provide non-correlated returns with lower volatility. Terry Dimock, head portfolio manager at National Bank Investments, stresses that the key with any alternative is
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understanding the product. “When you are looking at alternatives, you are looking at diversification,” he says. “It is an asset class that is uncorrelated, can lower your risk and protect capital in difficult markets. I think understanding what role an alternative ETF plays in your portfolio is important. You need to make sure you understand the behaviour and how it will perform in both up and down markets.” Dimock wasn’t surprised to see so many alternative products hit the market at the beginning of this year, as many producers were already using such strategies on the institutional side. Once the rules changed, adapting these strategies for retail investors wasn’t too difficult. Dimock urges advisors and investors to pay attention to the strategies used within an alternative ETF, as they can vary widely.
“There’s a myriad of strategies you can employ,” he says. “It’s more of a question of what kind of expected behaviours you will get from the strategy itself, as well as what type of underlying assets are used to construct the strategy and the role it plays in the portfolio.” Pierre Laroche, a strategist at National Bank Investments, explains that many common hedge fund strategies can be employed in alternative ETFs, including long/short equities, market neutral and global macro. “When you look at global macro strategies, this is where the philosophy may distinguish one product from another,” he says. “Most players position themselves as having good global macro managers who can forecast the market. Then they sell and explain the merits of their strategy. There are different approaches they can take as well, including
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falls outside of their comfort zone. This is where they need help from professional asset managers to package a portfolio with a sound investment strategy that would expose the portfolio to non-equity strategies. Alternative ETFs give access to an asset class they may not be as knowledgeable about.” Both Dimock and Laroche point out the potential risks with alternative ETFs, including underlying strategies that could rely on positions of less liquid assets or potential dissatisfaction with returns in bull markets. To counter both risks, understanding the product and the role it’s intended to play in a portfolio remains paramount. “Advisors need to do their homework,” Dimock says. “Finding the right allocation [to alternatives] is really the heart of their job.
You have to understand the whole view of the portfolio and the needs of every client. You need to understand the role of the alternative, its behaviours and mechanisms. When you do, it will help you build a better portfolio.” Dimock is optimistic that once people become more familiar with alternative funds and their behaviours, their popularity will grow. “I think it can be a part of a welldiversified portfolio,” he says. “I think equities and traditional fixed income will remain the most important parts, but we’ll see alternatives grow. I think they are here to stay. I don’t think you can lump them into one alternative category – they can be quite different. Homework has to go into really understanding alternatives and how they fit into portfolio construction.”
“Alternative ETFs provide simplicity and diversification at a lower cost, which is at the heart of what advisors are trying to help their clients with by providing advice” discretionary, more quantitative, exclusively quantitative and exclusively discretionary. The approaches can also be linked to activities on their institutional desks.” Given the variety of strategies and approaches, putting alternatives in an ETF format allows advisors to easily find the proper strategy for their clients’ portfolio construction needs. “Alternative ETFs provide simplicity and diversification at a lower cost, which is at the heart of what advisors are trying to help their clients with by providing advice,” Dimock says. “Typical Canadian investors will be heavy on equities, say roughly 60% equities, 40% in fixed income,” Laroche adds. “Finding an asset class that is not correlated to both stocks and bonds is a challenge. Most advisors have a basket of stocks they can manage properly, but when it comes to, say, commodities, it
Terry Dimock, National Bank Investments ETF ASSETS UNDER MANAGEMENT BY ASSET CLASS $120bn $100bn
$113.85 billion
$80bn $60bn
$63.45 billion
$40bn $20bn
$4.64 billion $0
Equity
Fixed income
Multi-asset
$956 million
$802 million
Inverse/levered
Commodities
Source: National Bank of Canada, Bloomberg, July 31, 2019
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ETF INNOVATION
FACTORBASED ETFs
“I think factor ETFs can play a pivotal role in the portfolio construction phase because they allow for customization at a more personal level than a passive ETF” Andrew Clee, Fidelity Canada FACTOR-BASED ETFs VERSUS A PASSIVE INDEX FUND GROWTH OF $10,000 INVESTING IN FACTOR PORTFOLIOS VERSUS THE BROADER MARKET Value
Size
Momentum
Quality
Low volatility
Russell 1000
$700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000
Dec 2015
Dec 2013
Dec 2011
Dec 2009
Dec 2007
Dec 2005
Dec 2003
Dec 2001
Dec 1999
Dec 1997
Dec 1995
Dec 1993
Dec 1991
Dec 1989
Dec 1987
$10,000 Dec 1985
THE CONCEPT of factor-based investing isn’t new – the idea of focusing on which factors tend to drive stock performance dates back to the 1960s. Back then, importance was placed on market and company risk, but as the industry evolved and more information became available, more risks started to be identified, and ultimately more factors were created. A number of factors evolved out of this early analysis, including dividends, low volatility, quality, value, momentum and size. Today, factor-based investing has become more common as fund providers aim to offer more customizable approaches to address individual investors’ needs. “In the early 2000s, factor-based investing started taking off,” says Andrew Clee, vice-president of ETFs at Fidelity Canada. “Essentially the thesis is: identify market anomalies that go against the market hypothesis that says we should be able to outperform broad indices, reduce volatility or enhance the yield. If we can capture these risk premiums, the strategies have the opportunity to outperform or offer superior risk-adjusted returns over time.” Factor-based ETFs have become one of the fastest-growing areas in the ETF landscape. Clee believes this is because factor strategies put the focus on the client experience. “Historically, when ETFs launched, 90% to 95% of the market was in market-capweighted ETFs, whether the S&P 500 or TSX,” he says. “Back then, we were essentially saying one size fits all. The conclusion was that every investor should be invested in the S&P 500 or S&P/TSX. We are now getting past ‘one size fits all’ and allowing clients to tailor portfolios to their unique circumstances.” Clee says focusing on certain factors can help different types of investors by allowing advisors to create a customized portfolio to
Source: FactSet, as of March 31, 2016. Returns are cumulative and assume reinvestment of dividends
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address specific circumstances. “A retiree, for example, who lives on their RRSP as source of income has different requirements than an investor who is 30 years old with a 30-year investment horizon,” he says. “If you have a client nearing retirement, income might not be a requirement, but reducing volatility is, so a low-volatility ETF makes sense. Similarly, if you had a retiree who did need income, a dividend ETF would allow them to enhance the yield or income distribution on a monthly basis. If you take high-quality, that allows you to create a higher-quality company profile in your portfolio. With factors, we can address unique needs of each investor.” Given current demographics and market conditions, Clee says dividend and lowvolatility strategies are the most popular, but momentum and quality are starting to see growth. “I think where we are in the market cycle and with demographics, dividend makes sense, given an aging profile, and with interest rates low, we are seeing clients move into dividend-focused products to enhance yield.” He notes that factors can be cyclical, and while there is research to show that they tend to outperform the broad market over the long term, there’s also the potential for periods of underperformance. “You need to understand why you own the ETF,” he says. “If it’s to address income needs, there could be periods where dividends could underperform or overperform, based on moves in the business cycle. I think that cyclicality can be a challenge.” For advisors looking to incorporate factor strategies into their clients’ portfolios, Clee says the most important thing is to know each client’s unique situation. By determining both short- and long-term goals, advisors can create the most customized solution for the client. “I think factor ETFs can play a pivotal role in the portfolio construction phase because they allow for customization at a more personal level than a passive ETF,” he says. Clee adds that factors can be used by advisors for asset allocation to express a
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certain view on the market, or can be used as part of a long-term approach to outperform a passive strategy. He believes factor-based investing will only continue to grow as the industry embraces goals-based solutions. “Looking at trends around the world, the industry is looking at how a client gets to their end goal,” he says. “Factor-based plays a role in that, in how to build a portfolio that meets the risk/return objectives of the client and their unique goals. I think that will lead to more growth in the factor-based investing space.”
THEMATIC ETFs IN 2018, cannabis ETFs were the focal point of the thematic world. Many investors were looking to gain access to the sector but weren’t quite sure how. In stepped ETF producers, who offered broad exposure to
“We try to look at the long-term trends that get adopted – things we feel make a good investment case – and stay away from fads,” he says. “Once we identify something, we ask: What will a product do in portfolios? Will it generate alpha? Will it be a duplicate of something else? When it comes to themes, it has to be something different.” As for cannabis, Lala feels that while sentiment has cooled, the industry still has plenty of value. In addition to its global marijuana ETF (SEED), Evolve launched a US-focused marijuana fund (USMJ) earlier this year. “It has to show that it can perform,” Lala says of the cannabis sector. “The volatility cannabis has seen has deterred people’s desire to invest in it. The industry is entering its second phase, and now it has to be about the numbers, not just future hype. Some companies haven’t had the best reported earnings, which has hurt in the short term, but long term, we still see the growth opportunity.” Thematic producers such as Evolve have started to turn their attention to other oppor-
“The challenge in Canada, compared to the US, is they can get a billion in assets in a thematic ETF. We are smaller … [so] you really need high conviction behind a theme” Raj Lala, Evolve ETFs the industry and allowed investors to sidestep the challenge of attempting to pick a single stock winner. Today, the thematic ETF segment in Canada continues to grow as more innovative products hit the market, promising investors access to a variety of exciting industries. Raj Lala, president and CEO of Evolve ETFs, a leader in thematic ETFs in Canada, stresses the need for fund providers to tread carefully when creating these products.
tunities, such as technology. “Cybersecurity can be an interesting subsector to technology because it is an essential service, so even when there is volatility in the markets, it continues to shine,” Lala says. “Artificial intelligence is another area that we continue to see grow; another we see advancing is robotics. I think it all stems around the technological disruption. That will continue to grow and create future opportunities.” Lala foresees more thematic ETFs coming
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to market that integrate many of these aspects. Evolve broke new ground with its launch of an e-gaming ETF (HERO) earlier this year. “If you would have asked me about it eight months ago, I would have said I don’t understand the thesis behind creating a fund,” Lala says. “With research, and looking at the demographics of gamers and the eyes on big tournaments, I realized all of the ancillary businesses that come out of e-gaming. We wanted to create something that could capitalize on the economy around the game – business lines like in-app purchases, events, prize pools, media rights and sponsorship opportunities.” Another theme that has gained a lot of attention recently is cryptocurrency, but for Lala, the jury is still out. “Some see crypto as a reserve currency; others [see it as] a currency for criminals,” he says. “Some people have moved to it as a protest to their own reserve currency. I think it is easier to accept the blockchain technology behind it. That is a little less controversial because I can see its applications outside of just
cryptocurrency. The challenge is that it is currently so closely tied to crypto. Until the two are separated, it is a tough area to be in, but if they do, it will be an approachable investment opportunity.” He does note that as more big firms get behind cryptocurrency, it’s giving skeptics a little more confidence. “Facebook’s Libra brought it back to life, in addition to the Bitcoin bounce,” he says, but adds that “we still can’t see a clear outcome, and until we do, we can’t be invested in it.” Moving forward, Lala believes there’s a place for thematic ETFs in portfolios, especially those of millennial investors who are looking to express a certain view through their investments. But at the end of the day, producers need to offer something unique that can perform, especially in the Canadian market. “The challenge in Canada, compared to the US, is they can get a billion in assets in a thematic ETF,” he says. “We are smaller and have to assume we’ll only get tens of millions before hundreds of millions. You really need high conviction behind a theme.”
A CLOSER LOOK AT THE EVOLVE E-GAMING INDEX ETF (HERO)
Sector allocation of HERO
82.91% Interactive home entertainment 10.27% Interactive media and services 5.40% Leisure products 1.19% Application software 0.08% Casinos and gaming 0.05% Consumer electronics Source: Evolve ETFs
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ETF FEES IN 2018, the ETF industry saw a race to the bottom on management fees. While fees remain part of the discussion in 2019, Pat Dunwoody, executive director of the Canadian ETF Association, believes the conversation has evolved beyond the fees themselves. “I think the discussion on low fees has morphed into appreciating what fees are,” she says. “Way back when, the whole discussion about ETFs was that they were cheaper than mutual funds, and therefore you should have ETFs in portfolios. I think we are seeing fee compression everywhere, so while I think that saying is still true, we don’t hang our hat on it anymore.” Even as the conversation is changing, Dunwoody notes that both MERs and management fees are now the lowest they’ve been in the last decade. While her data doesn’t distinguish between active and passive funds, the overall numbers point to significant fee compression on passive products. “From 2008 to 2018, MERs went from a 0.4% to a 0.36% average for the Canadian ETF industry,” she says. “It’s not dramatic, but given the number of active ETFs on the market, it says a lot because active fees will be higher. For the overall fees to be lower, the fee compression is definitely showing on the passive side.” Dunwoody believes fees will continue to trend lower or stay at their current level. “I think there will be too much competition for fees to go up,” she says. “If they go up, they will come down again because someone will fill in the gap. I don’t think we will see fees go the other way. The more educated clients get, the more they become part of the portfolio, advisors are going to have to justify an increase, and I don’t know what that justification could be. The only way you would see it going up for the entire industry is if the assets start swaying to a higher percentage on the active side.”
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HOW FUND FEES HAVE EVOLVED AVERAGE ETF FEES IN CANADA
Average MER
0.5%
Average management fee
0.4% 0.3% 0.2% 0.1% 0.0%
Dec. 1, 2008
Dec. 1, 2009
Dec. 1, 2010
Dec. 1, 2011
Dec. 1, 2012
Dec. 1, 2013
Dec. 1, 2014
Dec. 1, 2015
Dec. 1, 2016
Dec. 1, 2017
Dec. 1, 2018 Source: Strategic Insight
Still, the discussion on fees has helped the ETF industry attract new assets. Dunwoody says many investors have been approaching their advisors with questions about low-fee products, but it’s up to the advisor to deter-
mine if such a product is right for the client’s portfolio. That’s especially true as investors continue to shift their focus from a fund’s results to whether they’re on track to meet their goals.
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rec
SPECIAL REPORT
ETF INNOVATION “I think there ETF will be too much competition for PORTFOLIOS ONE OF the challenges many advisors face fees to go up. If they is how to effectively service clients with fewer go up, they will come investable assets – a demographic that’s often the most in need of financial advice. down again because As alternate channels such as robo-advisors continue to draw these investors, it’s more someone will fill in important than ever for advisors to find a way to compete. The answer might lie in the gap” ETF portfolios.
Pat Dunwoody, Canadian ETF Association
“They are just really like any other product,” she says. “Regardless of what it is, advisors have to make sure the fee level is just one component they are looking at for clients. Yes, fees are important, but you have to make sure it is the appropriate product and works in their portfolio. So you don’t want fees to be the only factor, but certainly one of the factors.” Moving forward, Dunwoody doesn’t see the conversation about fees going away, but she does expect it to continue to evolve from focusing on the level of fees to concerns about the transparency behind them. “DSC fees may be disappearing,” she says, “but there are still low sales charge fees that have the same component – they are still part of the MER, so clients need to be aware of them. The charge may be lower, but it is still buried in the MER. Yes, clients have the fee statements, but they still make statements that they aren’t paying anything, so they are clearly not looking at the fee statement. We have to assume that clients don’t understand [fee structures], and therefore there needs to be more information given to them. You can say the top fund has a low or no fee, but I would hope that there’s a clear appreciation and discussion of the overall cost of ownership of a product. You can only hope that is part of the conversation advisors have with clients.”
Essentially an ETF of ETFs, these portfolios provide exposure across a wide range of assets and sectors at a lower cost and can take an investor’s general risk tolerance into account. The idea is similar to balanced mutual funds, which have nearly $750 billion in assets. The ETF industry previously didn’t have the depth of offerings to create these type of funds; however, now that Canada’s ETF space boasts more than 700 funds, these solutions are becoming more readily available. “It makes intuitive sense that ETF investors are looking for these solutions,” says Mark Noble, SVP of ETF strategy at Horizons ETFs. “It was relatively easy to build an ETF portfolio when there were less than 100 ETFs
to choose from. Now even the most seasoned ETF watcher will have trouble keeping up with 700.” Noble sees ETF portfolios as a more
BREAKING DOWN AN ETF OF ETFS 19.68% Horizons CDN Select Universe Bond ETF 16.92% Horizons NASDAQ-100 Index ETF 16.81% Horizons S&P 500 Index ETF
Holdings in the Horizons Balanced TRI ETF Portfolio (HBAL)
14.99% Horizons International Developed Markets Equity Index ETF 10% Horizons S&P/TSX 60 Index ETF 7.57% Horizons US 7-10 Year Treasury Bond ETF 6.16% Horizons S&P 500 CAD-Hedged ETF 4.96% Horizons EURO Stoxx 50 Index ETF 2.5% Horizons US 7-10 Year Treasury Bond ETF Source: Horizons ETFs, as of September 13, 2019
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attractive alternative to balanced mutual funds based on their lower cost and flexibility to buy and sell. “It could be the next major area of disruption for the mutual fund industry as self-directed investors and advisors migrate balanced fund solutions to more cost-effective ETF strategies,” he says. Noble says these solutions target retail investors who are building long-term buy-and-hold strategies and want to outsource the portfolio management component. “We’ve seen many of these ETFs get embraced by self-directed investors,” he says. “Intuitively, that should make sense, since a big focus for investment advisors is asset allocation, so the segment of investors in need of the most guidance on asset allocation are investors without an advisor. We expect that advisors will eventually gravitate towards these funds as well and use them in smaller client accounts or TFSAs and RESPs.” Horizons launched a pair portfolio options,
one conservative (HCON) and one balanced (HBAL), earlier this year and recently expanded the suite with a growth option (HGRO). Noble says the success of strategies
that set asset allocation and are rebalanced on a biannual basis to a strategic asset mix of ETFs. In the case of HBAL and HCON, we don’t charge anything on this asset alloca-
“[ETF portfolios] could be the next major area of disruption for the mutual fund industry as self-directed investors and advisors migrate balanced fund solutions to more cost-effective ETF strategies” Mark Noble, Horizons ETFs like this rely on the asset allocation. “There’s a lot of product and portfolio development in establishing a consistent asset allocation framework,” he says. “From there, it’s pretty straightforward – the ETFs follow
tion – their management fee is 0%. However, investors will pay the management fees of the underlying ETFs in the portfolio, which will be reflected in the MER.” Making investors aware of the costs asso-
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ciated with these strategies is important. In addition, Noble says an understanding of the composition of the fund is key to setting proper expectations for clients. “I think the biggest challenge with marketing balanced mandates is that they are diversified, so you tend to be cutting off the top end of the equity performance range due to the allocation to fixed income,” he says. “These ETFs will invariably lag the returns of 100% equity strategies, which sometimes can be confusing to clients who expect larger returns in bull markets. That diversification certainly helps in market declines.” Noble believes the real value of ETF portfolios is the options they provide for smaller clients. “I don’t think you’re going to see ultrahigh-net-worth advisors putting their clients in balanced ETFs,” he says. “These will be, by and large, used as asset allocation tools to streamline the security selection in smaller client accounts where there isn’t the same amount of compensation to get granular with the asset allocations.”
ESG ETFs AT THE Inside ETFs conference in Florida back in February, one of the big topics was the growth and demand for environmental, social and governance [ESG] investing in ETFs, and how North America was lagging behind the rest of the world in incorporating ESG principles into funds. But Pat Chiefalo, managing director and head of iShares Canada at BlackRock, has noticed that North American investors are starting to close the gap. “We are seeing continued growth in demand, not just about fundamentally incorporating ESG in portfolios holistically, but helping to achieve financial goals,” he says. Chiefalo believes the future of ESG will include a portfolio tilt, not just a product tilt, and will grow dramatically in Canada over the next five to 10 years.
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“ESG today is kind of where factor investing was five to 10 years ago,” he says. “We are in the early stage, with awareness and adoption growing. In the next five to 10 years, flows into ESG-type portfolios and products could rival flows into market-cap-weighted benchmarks.” With this demand will come a need for increased education for investors. “There are different perspectives on how to incorporate or think about ESG,” Chiefalo says. “Discussions with investors are needed to help them understand how they interpret ESG and how they can translate it into an investment vehicle.” In addition to education, Chiefalo also feels the industry needs to focus on awareness. “It’s great that investors want to follow a direction, but what’s out there to help them from an infrastructure and data standpoint? It’s important to show how companies are screened and that there is infrastructure and data to work around sustainability and investing. That can help fuel and assemble products that align with how investors are looking to invest.” Chiefalo says fund managers will need to offer different strategies that help investors
express their views, achieve their goals and manage risk. BlackRock, via its alliance with RBC, recently launched the iShares Sustainable Core ETFs suite, a lineup of six ETFs that gives investors ESG exposure that’s aligned with familiar benchmarks. As ESG ETFs become more prominent, Chiefalo says advisors will need to have conversations with their clients about how they want to incorporate these strategies. “I see more and more clients incorporating more ESG as a requirement in their investment process,” he says. “Conversations will increase around ESG with questions like how much they have, how to get more and how their portfolio reflects it.” One factor that’s likely to continue to drive the growth of ESG is the transfer of wealth from baby boomers to millennials. “We know millennials put a high degree of importance on incorporating sustainability in investing,” Chiefalo says. “From our standpoint, ESG investing will be linked to helping clients achieve financial goals and enhance long-term performance.” Once advisors determine what their clients’
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“In the next five to 10 years, flows into ESG-type portfolios and products could rival flows into market-capweighted benchmarks” Pat Chiefalo, BlackRock
goals are, a partnership with fund providers becomes important. “We can help with the education and awareness of what products we have in market today,” Chiefalo says. “Also important is that dialogue. We want to better understand the conversation with clients and how they want to incorporate ESG. Do the products we have in the market satisfy their needs? Do we need more? Do the strategies need to change, or do we need to add and adopt greater strategies?” Chiefalo expects to see more ESG-focused products, strategies and approaches hit the market in the coming years. “I think, locally and globally, ESG ETF assets will rise dramatically over the next decade,” he says. “The demand will come from retail and institutional investors. I see different types of products in the coming years as we look to refine and align better with what investors are looking to achieve in ESG.” Ultimately, incorporating ESG products makes sense, given that sustainability already surrounds investors in all aspects of their lives. “I think it is an important topic,” Chiefalo says. “If people look around in their day-to-day lives, they will appreciate that sustainability is part of a lot of things they do. We want to make sure, from an investment standpoint, we are prepared to provide the tools and choices they want when they choose to build their portfolios that align with that methodology and strategy.”
STRATEGIC BETA
WHAT DOES ESG COVER?
Environmental
Social
Governance
Climate change
Working conditions
Executive pay
Greenhouse gas emissions
Impact on local communities
Bribery and corruption
Resource depletion
Health and safety
Political lobbying and donations
Waste and pollution
Employee relations and diversity
Board diversity and structure
THERE HAS long been a debate about passive versus active strategies in ETFs. Yet strategic beta, which looks to leverage the goals of both active and passive management, is a concept gaining popularity with investors. It’s no coincidence that more fund managers are looking to enter the strategic beta space to provide their own options to investors. “Strategic beta is a broad term that generally means index-based strategies that aim
Source: RBC iShares
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SPECIAL REPORT
Brought to you by
ETF INNOVATION
design and strategy behind some of the newer types of funds, strategic beta is an area that’s poised to grow. “Mixing thoughtful investment solutions with lower costs is what drives the demand for funds in this space,” Bankay says. “Larger numbers of Canadians are using ETFs as they become more comfortable with newly designed funds and they seek to complement investments in traditional funds.”
to deliver outcomes which are different in some way from a traditional index,” says Mark Bankay, head of ETF and institutional product at Manulife Investment Management. “Sometimes that means reducing volatility or generating higher yields or, in our case, enhancing long-term return potential.” Manulife launched its ETF lineup in 2017; it now has 11 funds, all of which incorporate strategic beta. On the active side, these strategies offer the potential for outperformance by emphasizing specific segments of the market. On the passive side, they offer the benefits of a passive index structure, low cost and transparency.
While strategic beta can be applied to a number of areas, one sticks out for Bankay. “Innovations in product design are happening across virtually all asset classes, but the increase in factor-based equity strategies has been very encouraging,” he says. “In fact, strategic beta ETFs have seen a growth rate of approximately 30% in AUM over the past 10 years.” That growth in assets has gone hand in hand with an increase in product options, Miller notes. “Investors are increasingly looking for ways to balance long-term results with the overall cost of their portfolios, and this investor preference will most likely continue,” he says.
“Mixing thoughtful investment solutions with lower costs is what drives the demand for funds in [the strategic beta] space”
STRATEGIC BETA BY THE NUMBERS
1,493 Number of strategic beta exchange-traded products globally
132 New strategic beta products introduced worldwide in 2018
$797 billion Strategic beta assets under management globally
Mark Bankay, Manulife Investment Management “Generally, strategic beta strategies leverage empirical research, which can be embedded within investment strategies,” says Darnel Miller, director of ETF distribution and capital markets at Manulife Investment Management. “As an example, Manulife ETFs implement a strategic beta approach based on research showing that over time, stocks of smaller companies with lower relative prices and higher levels of profitability have the potential to outperform over the long term.”
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For advisors, Bankay says strategic beta solutions allow them to construct a portfolio that balances costs with results. “For example, many investors hold the majority of their US equity exposure in well-known large-cap companies,” he says. “We’ve found increasingly they’re considering diversifying that exposure into the mid-cap space, and a multifactor strategy is a great way to do that.” As more Canadian investors look to use ETFs and become more comfortable with the
0.5% Growth of assets from the previous year
$87 billion Net new cash flows into strategic beta globally in 2018 Source: Morningstar, as of December 31, 2018
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SPECIAL PROMOTIONAL FEATURE
ETFs
Beyond borders WPC sat down with Michael Cooke of Mackenzie Investments to find out how innovation in the Canadian ETF industry is making it easier to bring international diversification to portfolios
GONE ARE the days of needing to look to the US market to gain international exposure – and with it, potential disadvantages such as currency risk, withholding tax and estate tax. Now, thanks to the ongoing popularity of ETFs, investors can customize their portfolios and gain international investment exposure through the lens of a Canadian-listed ETF. These products offer several benefits for local investors, says Michael Cooke, SVP and
government bonds, corporate bonds or even Canadian equities.” With more product offerings on the market now, Cooke says it’s easier for advisors to customize portfolios to fulfill investors’ unique objectives. “The need to diversify away from Canada is matched by a growing array of international ETF solutions,” he says. “As it relates to diversification, more choice among Canadian-listed ETFs addresses that
“More choice among Canadian-listed ETFs addresses that home-country bias while providing exposure to asset classes and markets that were previously difficult to access” Michael Cooke, Mackenzie Investments head of ETFs at Mackenzie Investments, who adds that “now may be a good time to shed a Canadian investment bias.” “It makes sense to diversify your economic exposure into other markets,” he explains. “It has become especially relevant since the financial crisis, where, in many G10 countries, we have seen a collapse in interest rates. That has made it difficult for Canadian investors to satisfy their income requirements looking exclusively at Canadian
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home-country bias while providing exposure to asset classes and markets that were previously difficult to access.” ETFs are an ideal way to gain international exposure, thanks to their cost-effectiveness, liquidity and transparency, which allow both investors and advisors to make better decisions on exposures, including reducing correlation and overlapping patterns in a portfolio. “You know what is under the hood of the
markets, sectors and securities that you are accessing,” Cooke says. “ETFs provide access to that information in real time to make good decisions as to how and where you can better diversify a portfolio.” While in the past, investors might have sourced international exposure from US-listed ETFs, doing so might subject them to US withholding tax and erode some of the yield advantage, Cooke points out. Investing in a Canadian-listed ETF provides the same exposure but with the potential to avoid US withholding tax. Diversification via international exposure has been an area of focus for Mackenzie in recent years. As a Canadian asset manager with global capabilities, Mackenzie brought international ETFs to the Canadian market. “One of the reasons you don’t see many such products is there aren’t many managers that have the global capability,” Cooke says. “These can be complex products to manage, requiring in-house expertise. We pride ourselves on our global capabilities.” In July, Mackenzie launched its latest offering in this space: the Mackenzie Emerging Markets Bond Index ETF (QEBH), which offers a basket of emerging market government and government-related fixed-income securities. “QEBH entails different types of risks,” Cooke says, “but importantly offers the benefits of diversification, uncorrelated returns and yield enhancement compared to the
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still relatively low yields we find on incomeproducing investments in Canada.” QEBH offers hard currency exposure to emerging market debt. Its government and government-related bonds are denominated in US dollars but issued by low- and middle-income developing economies. Later in 2019, Mackenzie aims to introduce a second emerging market debt ETF, the Mackenzie Emerging Markets Local Currency Bond Index ETF (QEBL), which will consist of bonds issued in local currencies from lowand middle-income developing economies. This will offer investors additional exposure to the currency and interest rate environment of the issuing countries with the potential for enhanced yield. Another global opportunity on the equity side is the Mackenzie China A-Shares CSI 300 Index ETF (QCH). The launch of this ETF was facilitated through Mackenzie’s partnership with China Asset Management Co., a leading Chinese asset manager. There has been much attention on China in recent months, given the geopolitical situation and ongoing trade disputes. But given that China’s stock market has only been gradually opening to international investors since 2002, Cooke says the investment opportunities in the world’s second largest economy can’t be ignored. “China A-shares are listed on both of China’s two mainland stock exchanges and represent a purer play on the economic emergence of China and the domestic economy,” he says. “The Chinese onshore stock market is also underrepresented in most client portfolios. Some might argue that now is not the best time to look at onshore Chinese equities, but if you look long term and can ignore near-term volatility, we have a unique opportunity with QCH because it is a pure play on the 300 largest Chinese equitymarket-listed securities. Only a handful of North American funds offer this exposure, and this is a Canadian product.” Mackenzie’s own offerings are just a snap-
GEOGRAPHIC ALLOCATION OF THE MACKENZIE EMERGING MARKETS BOND INDEX ETF (QEBH) 7.2% China 6.5% Mexico 6.4% Indonesia 6.3% United Arab Emirates 6.2% Argentina 5.4% Turkey 4.6% Brazil 4.0% Saudi Arabia 3.7% Qatar 48.4% Other 1.3% Cash and equivalents Source: Mackenzie Investments, as of July 31, 2019
shot of what’s available in this space; Cooke says a number of Canadian-listed ETF solutions provide international exposure to both equities and fixed income and can help diversify Canadian portfolios. Knowing your clients is key to determining the right level of international exposure in relation to each investor’s risk tolerance and timeframe, he adds. “Every investor is different,” he says. “Advisors are at the centre of asset allocation and investment decision-making for investors, so they are best positioned to make an assessment on an appropriate international investment allocation.” Cooke believes international ETFs will only grow in number and, with domestic bond yields as low as they are, will provide an attractive option for income-oriented investors. While he believes all investors should have some international exposure, the amount should vary depending on individual situations. For those with short-term horizons, for instance, there’s a concern about principal loss, particularly with
exposure to China; however, for long-term investors, exposure to China makes sense. “With prudent allocations, you can enhance the income profile of a portfolio for a tolerable level of increased risk,” Cooke says. “Modest allocations make sense for the majority of investors.” Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This article may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of September 2019. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
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PEOPLE
ADVISOR PROFILE
Understanding ultrahigh-net-worth clients Serena Cheng’s sensitive and all-encompassing approach helps her wealthiest clients and their families deal with complex issues
MORE WEALTH brings more challenges. That’s something Serena Cheng, an investment advisor and director of wealth management at the Cheng Begg Wealth Management Group at Richardson GMP, has seen firsthand. Cheng specializes in ultra-highnet-worth families, divorcés and individuals in the entertainment business and professional sports, which has given her exposure to varying degrees of complex scenarios. Throughout it all, she has found that being a good, nonjudgmental listener allows her to help clients deal with any situation. Cheng found herself in the financial industry purely by chance. As the child of first-generation immigrants, she was expected to follow her family into the medical field. “My whole family are doctors,” she says. “After my first year at university, I had to tell my parents that it wasn’t going to happen.” Instead, Cheng began taking business courses but maintained her fascination with neurology and the way the brain works, which would become key in her career as an advisor. “I love people and understanding how the human mind works,” she says. “I find it so interesting how we have so many thoughts and patterns that are just chemical reactions.” After graduating with a business degree, Cheng moved to Toronto, where she even-
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tually found herself making cold calls at a bank-owned full-service brokerage firm. She excelled in the role and was recommended by her branch manager for entry into the advisor program. “They give you 18 months of training with a mentor; then you graduate and are on your own,” she says. “It was a great experience for me, and I met a lot of people I am still connected with. I learned everything about the industry in that 18-month period.” While her introduction to the role was purely coincidental, Cheng not only succeeded as an advisor, but was also having fun doing it. She instantly began forming connections with clients. “My single biggest passion is helping my clients,” she says. “It makes me feel fulfilled. I
think that I help people avoid conflicts – that is my gift. The financial industry became the vehicle to share my gift.” Early on, Cheng developed a niche helping ultra-high-net-worth individuals and families. She became a specialist in legacy, estate and even family issues. One thing she noticed was that an increase in wealth generally led to more discretionary spending, which could lead some people down negative paths. She set out to make her clients feel comfortable with her so they could talk about anything. That allowed her to help them by connecting them to the many experts and support systems in her network. “Happiness comes from within,” she explains. “It’s hard when you’re dealing with people who are the next generation of a lot
LIGHTS, CAMERA, ACTION Cheng can point to many career highlights during her 25 years in the financial industry, including her charity work in raising cancer awareness, volunteering with Boost (which advocates for children who have been exposed to violence) and helping women in need. However, the one that stands out most to her is her involvement with the Toronto International Film Festival as chair of its philanthropic events. “I had a number of incredible years working in that capacity, raising awareness of what TIFF does beyond the festival,” she says. “I was extremely immersed in connecting their fundraising initiatives with high-net-worth people and involving my own clients.”
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FAST FACTS: SERENA CHENG
“I love people and understanding how the human mind works. I find it so interesting how we have so many thoughts and patterns that are just chemical reactions”
PRACTICE Cheng Begg Wealth Management Group
FIRM Richardson GMP
LOCATION Toronto
YEARS IN THE INDUSTRY 25
of wealth. The successful intergenerational families are able to pass on wealth with their children being fulfilled with their own passions and finding value in themselves. Money does not buy that.” Dealing with such deep issues has been one of Cheng’s greatest challenges now that she has established herself as an advisor. Getting into the industry, she faced headwinds as a young woman without an economics degree. But she’s overcome those obstacles and has now built a 25-year career. After 10 years at her previous firm, Cheng became one of the founding partners of Richardson GMP, a move that was driven by
her desire to bring more to clients. “I knew I would have the tools and autonomy to build my practice, surrounded by a firm with the same voice and vision,” she says. Based on the success she’s found, Cheng now encourages new advisors to find what they’re passionate about in the business and leverage that to help clients. “As an advisor, you can do so many things – there’s no one way to do it,” she says. “Whatever you focus on, surround yourself with people who are better at the things you are not or don’t enjoy. It will create a synergistic situation where you can wrap your arms around every aspect of your clients’ lives.”
CERTIFICATIONS Professional Financial Planner; Partners, Directors & Senior Officers Course
EDUCATION Bachelor’s degree in business from Western University
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SPECIAL PROMOTIONAL FEATURE
THE ECONOMY
Is a recession looming? Despite global indicators such as inverted yield curves, geopolitical disputes and slowing growth, Forstrong Global’s David Kletz believes the world economy may not be heading for a recession
RECENT HEADLINES suggest that a recession is in the cards for the global economy. Looking at areas such as Europe, it could be said a recession has already begun, based on its mathematical definition. Add in escalating trade disputes, inverted yield curves and slowed growth in areas such as manufacturing, and many experts have begun to paint a gloomy picture. Yet David Kletz, vice-president and portfolio manager at Forstrong Global, thinks the strength of the US economy could prove to be an indicator that a global recession is not as close as others believe. “The US is the world’s largest economy
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and at the epicentre of trade tensions, along with China,” Kletz says. “We also had the yield curve invert, which has drawn significant publicity. Evaluating the prospects for the US economy is critical, as its sheer size and the importance of the US consumer market have an outsized impact on global growth.” For this reason, Kletz believes a resilient US economy could help turn the tide for other economies. He sees the US equity market being more defensive in respect to trade disputes than others worldwide. “Europe, Asia and emerging markets are more trade-sensitive,” he says. “The US is a much more domestic, demand-oriented
economy. You could have a deterioration in trade, and arguably, the interpretation from the market would be that the US is somewhat better able to withstand those pressures without weakness seeping into other areas.” One way that Kletz believes the US is positioning itself to avoid economic downturn is through the Federal Reserve’s interest rate policy. The Fed recently pivoted from its strategy of raising rates with cuts in July and September. That change in thinking is important, as Fed decisions impact central banks across the world. “The market has an obsession with analyzing Fed-speak to figure how many and the timing of the cuts,” Kletz says. “That is certainly important, but the bigger message is the switch in thinking. In previous years, they were data-dependent, looking at economic results. Now we are seeing a more proactive Fed. The current rate cuts have been seen as insurance to get in front of deteriorating external pressures.” The other area Kletz has been examining is the inverted yield curve in the US. “The US yield curve has been a trustworthy recession indicator,” he says. “In recent decades, inversions have preceded US recessions by 12 to 24 months.” Yet Kletz doesn’t necessarily believe that holds true this time. “I think there are a few reasons that it might be a false positive,” he says. “For one, we expect inflation will likely be stickier than expected. The bond market has sold off sharply, simultaneous to inflation expectations cratering. We don’t debate that the US economy’s growth will slow, which was always in the cards as the effects of fiscal stimulus wear off. But we expect that the radical moves we have seen in longer-term bond yields are somewhat of an overreaction. In our opinion, if growth can hold up and inflation surprises on the upside, we believe the yield curve will re-steepen without triggering a recession.” The longer the curve remains inverted, the more likely it is that a recession will
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become a self-fulfilling prophecy, Kletz adds. With a detrimental impact on banks’ net interest margins, a prolonged inversion can ultimately act as an impediment to the vital credit creation process. Despite the fact that some areas of the US economy, such as manufacturing, are experiencing a slowdown, and that the effects of the Trump administration’s stimulus package are fading, Kletz still sees some positives. “The service sector, which is considerably larger than the manufacturing sector, has remained strong,” he says. “We are seeing rising wages, low unemployment and, importantly, a rebound in the housing market, which plays a large role in the US economy.” The previous rising rate environment created a deceleration in the US housing market, but now that the trend has been reversed and mortgage rates have come down, prospects are looking better. Kletz also points out that the US consumer has de-leveraged substantially since the financial crisis. “At the consumer level, there aren’t overcapacity issues for taking on more debt,” he says. “Attractive rates and consumers who are not overextended will be supportive of the housing market.” Kletz does note some concerns, specifically around corporate indebtedness. “There has been substantial corporate borrowing in the non-financial sector since 2008,” he says. “Instead of investing that money in productive capacities, a lot has been used to finance buybacks. In the short term, it helps earnings and stock performance, but in the long term, the lack of capital spending doesn’t bode well for future profitability.” Given Forstrong’s view that a recession is not on the horizon, Kletz has been looking for opportunities in the rest of the world. With the Fed changing its position and the knock-on effect Kletz expects this will have on other central banks, he sees upside in Europe, Asia and emerging markets. “In the US, the equity market is still highly priced,” he says. “Europe is perhaps the most
A CLOSER LOOK AT THE US YIELD CURVE 3.0%
2.5%
2.0%
3-month US Treasury yield
1.5%
2-year US Treasury yield 10-year US Treasury yield
1.0%
January 2019
February 2019
March 2019
April 2019
May 2019
June 2019
July 2019
August 2019
September 2019 Source: CNBC.com
“In our opinion, if growth can hold up and inflation surprises on the upside, we believe the yield curve will re-steepen without triggering a recession” David Kletz, Forstrong Global unloved region amongst investors, and equity valuations are quite low. Most Asian and emerging markets also trade on attractive multiples. If the global manufacturing downturn is able to bottom, driven in part by rebounding credit growth in China, we would expect these markets to outperform.” When it comes to navigating the mixed messages in the markets, Kletz urges advisors to consider the short- and long-term outlooks. “In the near term, markets are probably going to remain volatile as geopolitical risks continue to resonate,” he says. “The most prudent approach is one that absorbs shock, which would be to stay balanced on asset mix between cash, stocks and bonds and be globally
diversified. Staying balanced and broadly diversified is a good first line of defence when you have a period of market jitters. “Looking past the current commotion, there are numerous reasons to maintain a constructive outlook,” he adds. “Central banks are pivoting dovish, leading indicators are bottoming, and global financial conditions are turning accommodative, with the Fed ending quantitative tightening, relatively cheap oil prices and sharply lower bond yields. Should geopolitical risks begin to alleviate and markets stabilize, it would make sense to increase risk exposure, and equity markets outside of North America are very attractive from a risk/reward perspective.”
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SPECIAL PROMOTIONAL FEATURE
ETFs
Brand loyalty With its Harvest Brand Leaders Plus Income ETF, Harvest Portfolios offers investors the chance to achieve growth and income by investing in some of the world’s best-known brands
THE WORLD’S most recognizable brands have a historical track record, attract some of the best talent on the globe, distribute their products worldwide and inspire loyalty among consumers. So it’s no surprise that companies that are considered global brands are some of the most sought-after investments. This is something Harvest Portfolios recognized as an opportunity when it created its Harvest Brand Leaders Plus Income ETF (HBF), a fund that strongly aligns with Harvest’s phil-
many of which have been around for a long time, and people want to own them – companies like McDonald’s, Johnson & Johnson, Pepsi and Microsoft.” MacDonald explains that the theory behind the creation of the actively managed fund, which was launched in 2014, was to include companies that can grow and prosper across the business cycle. These types of quality companies are more likely to have robust dividends and be able to withstand
“These are great-quality leading businesses, many of which have been around for a long time, and people want to own them” Paul MacDonald, Harvest Portfolios osophy to invest in quality income-generating companies with long-term growth prospects. “The Harvest Brand Leaders Plus Income ETF is a fund of 20 large-cap, US-listed companies selected from a universe of leading global brands,” explains Paul MacDonald, CIO of Harvest Portfolios. “They are 20 picks from the [Interbrand] World’s Top 100 Brands. These are great-quality leading businesses,
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a potential recession. While positioned for growth, the fund also captures income by using Harvest’s covered call strategy. When it comes to the makeup of the fund, Harvest starts with the World’s Top 100 Brands list, then evaluates companies based on three factors: value, quality and income, all of which have subsets. “For value, we look at price-to-earnings
ratio and cash flow valuation metrics; with quality, return on equity and the volatility of cash flows; for income, not just dividends themselves, but the growth of income and dividends,” MacDonald explains. “All of those factors narrow down the pool of companies. From there, we make sure we have the proper allocation to create a diversified portfolio.” The 20 companies that make the final cut are equally weighted, and the fund is reviewed quarterly. MacDonald notes that the turnover rate is low, but Harvest can make changes if a company’s financial situation deteriorates or shows superior metrics. The 20 holdings themselves are all North American-listed companies. “There are some international companies, but they are listed in the US,” MacDonald says. “We don’t get too concerned with the listing jurisdictions because all of the companies are global businesses and are engaging in global activities, whether that is Johnson & Johnson expanding in Europe and Asia or McDonald’s growing their business in India.” MacDonald adds that the fund is well
diversified over a variety of sectors, with the exception of utilities, REITs and resources, which tend to be more regional. Similar to other Harvest funds, HBF uses
a covered call strategy as way to generate income. “If you write a covered call, you are given a premium for that call option and are required to sell the stock at a predefined
THE DIVIDEND BENEFITS OF MAJOR BRANDS Change in dividend/share $3.54
$3.36
$1.68
$3.59
$4.19
$0.62
$0.67
$0.21
$0.56
$0.22
Dividend growth
2018
2000
price,” MacDonald explains. “What we like to do is put a maximum on any one position, which we can write up to 33%. That means we always have a long bias to the other 66%. So if the stock goes up, we will capture the growth of the company. “At the same time,” he continues, “utilizing the covered call enhances the income in the portfolio. That typically results in less volatility in down markets because you are insulated by the premium. We position it more for those looking for equity exposure and income, but by having a 33% maximum, you still have the opportunity for growth as well.” The combination of Harvest’s selection process and covered call strategy gives the fund multiple benefits. “You can look at the portfolio and, in an up or down market, say, ‘I still own these great companies.’ From that perspective, the strategy has performed well,” MacDonald says. “From an income generation standpoint, we have earned it from our covered calls and paid a high income stream. As an aggregate, if one looks at the overall fund performance, it has performed as expected, if not a little better.” MacDonald attributes the fund’s success to two factors: the foundation of using leading brands and the fund’s portfolio manager, James Learmonth. “He has done a great job at making changes and using the financial metrics to eliminate deteriorating companies and buy better opportunities. When I sum it all up, the fund has performed well. It has great companies and has generated income and good risk-adjusted returns.” Given that, MacDonald believes it is an attractive option for advisors. “I think it all comes back to how it’s positioned from the start,” he says. “When you look at the companies, advisors can go to their investors and say, ‘You own these companies.’ It provides advisors a solution of quality companies in a portfolio that has performed well. It has an income strategy, so we think it can be a core position for advisors looking to get a quality portfolio with a high tax-efficient income.”
Source: Harvest Portfolios, Bloomberg
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SPECIAL PROMOTIONAL FEATURE
CHARITABLE GIVING
An offthe-radar opportunity Donating a life insurance policy to charity has many benefits. Rick Braun-Janzen of Abundance Canada explains what you need to know to help your clients take advantage of this option AS AN INCREASING number of investors explore strategies for charitable giving, advisors have an opportunity to find another area of differentiation. There are various methods of charitable giving available to Canadians – more than many people think – and one that often gets overlooked is the idea of donating a life insurance policy.
receive a charitable donation receipt for the fair market value [FMV] of the policy. In this type of transaction, the charity becomes the legal owner of the policy and is responsible for the ongoing premiums, if applicable. In some situations, the policy’s FMV could be significantly higher than its cash surrender value [CSV], which is the amount
“Life insurance often flies under the radar when considering a client’s charitable gifting strategy. Gifts of publicly traded securities, due to their tax efficiency, are often top of mind” Rick Braun-Janzen, Abundance Canada Everyone’s life circumstances change. Many people take out a life insurance policy when planning for specific life events, only to realize that, as they approach or enter retirement, they won’t need to use the policy in the way they had planned. In such a scenario, the client can donate the policy to a charity and
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you would receive if you asked the insurance company to wind up the policy and give you a cash payment. A common misconception is that the policy’s CSV is the same as its FMV. “Many advisors don’t realize that if they have an older client or a client whose health is declining, the FMV of the life insurance
policy might be significantly higher than the CSV,” says Rick Braun-Janzen, director of gift planning at Abundance Canada. “If they donate the policy to charity, they can receive a donation receipt for the FMV. The donation of the policy would be a non-cash donation – gift in kind – and the resulting donation receipt would generate tax credits that could be used by the donor to accelerate other tax planning initiatives.” Braun-Janzen notes that donating life insurance policies is not a new gift planning strategy; however, advisors and their clients might not be aware of the FMV versus CSV option for valuation of the donation receipt. “Life insurance often flies under the radar when considering a client’s charitable gifting strategy,” he says. “Gifts of publicly traded securities, due to their tax efficiency, are often top of mind.” To use this strategy, advisors and their clients would need to transfer the ownership of the policy to a charity, which then becomes the owner and sole beneficiary. This simply requires the advisor or insurance agent to put the required paperwork in place. As long as there isn’t anything restricting the transfer of ownership (most notably, if the policy is owned by a corporation), then the transfer is fairly straightforward. “In the 20-plus years that I’ve been involved in gift planning, I have yet to run into a policy that could not be donated to charity,” Braun-Janzen says. “It’s just a question of how much paperwork and levels of approval are needed for the transfer to take place.” One area of complexity is determining the FMV of the policy. Insurance companies usually track and report the CSV to the policy owner; however, calculating the FMV often requires the expertise of an actuary. “The actuary looks at many factors, including the person’s age and their health situation, to determine the FMV,” Braun-Janzen says. There are some distinct benefits of donating a life insurance policy, he adds, including better cash flow for the client. “First, the client is not out of pocket cash,
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which is often the case when you make a donation to charity. The tax credit resulting from the donation of life insurance can be used to offset other taxes owing.” To smooth out the process, advisors can work with a charity that has experience in this area. “When an advisor works with Abundance Canada, they know we have experience accepting and holding life insurance policies,” Braun-Janzen says. “We have been in this space for many years, and we continue to build on that experience.” If an individual wanted to donate a policy to support multiple charities, for instance, they could donate the policy to Abundance Canada now and provide recommendations on which charities should benefit from the insurance proceeds after they’ve passed. “One transfer, one charity owner going forward, multiple charitable beneficiaries – we simplify what could be a much more complicated process,” Braun-Janzen says.
Becoming familiar with creative gift planning options like this gives advisors another way to add value for their clients. “Advisors work hard to help people develop a retirement plan in a tax-efficient/ tax-deferred manner,” Braun-Janzen explains. “Individuals get to a point where they have significant assets in an RRSP or RIF, and the potential tax liability can be huge. Donating a FMV insurance policy might generate a significant donation receipt that could be used to offset the tax on larger withdrawals from an RRSP or RIF. For the advisor, it allows them to put something on the table for their clients to show how they can unlock this tax-deferred cash in a taxefficient manner.” To determine which clients might benefit from this strategy, Braun-Janzen says advisors first need to determine which of their clients are interested in making a gift to charity, adding that “if they don’t want to
make a donation, the strategy is a no-go.” The next step is to determine if they have a life insurance policy they no longer require. If the client is older or in declining health, the FMV option might come into play. Assessing whether this strategy is a good fit requires being in tune with a client’s hopes and aims. It could be a good option for people who are retired, who may have had a business or to whom the advisor can say: “You took out this life insurance policy for these reasons, but those reasons probably don’t exist anymore. Do you want to keep the policy or explore something that addresses your charitable goals and helps with your retirement and estate planning?” With regional offices in Abbottsford, Calgary, Winnipeg and Kitchener, Abundance Canada is a public foundation registered with the CRA. Since 1974, the organization has assisted individuals with charitable giving during their lifetime and through their estate. To learn more, visit abundance.ca.
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20/09/2019 3:55:16 AM
SPECIAL PROMOTIONAL FEATURE
PRIVATE INVESTMENTS
Democratizing opportunities for investors WPC talked to Portland Holdings chairman and CEO Michael Lee-Chin about how advisors can differentiate themselves by opening up new avenues of investment for their clients MICHAEL LEE-CHIN, chairman of Portland Holdings and Mandeville Private Client, is one of the most recognized financial advisors in the world and is the only advisor on the Forbes billionaire list. Since getting his start in the financial advisory business, Lee-Chin went on to purchase multiple companies
public and private investment opportunities typically reserved for affluent and institutional investors. Access to quality private and alternative co-investment opportunities, along with a disciplined investment framework, has provided Mandeville advisors with an opportunity to enhance their value, differ-
“All we are doing is using [our] access and giving clients the opportunity to participate in that quality of investment that would previously never have been available to them” Michael Lee-Chin, Portland Holdings and Mandeville Private Client across various sectors globally, including financial services, hospitality, waste management, media and consumer goods. Now, with Mandeville, Lee-Chin is leveraging his global network and experience in creating wealth to help democratize the world of investments. Mandeville’s mission is to provide investors with access to quality
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entiate themselves and create more wealth for their clients. For Lee-Chin, this idea was a natural evolution of his own experiences. He says he owes everything he has today to the clients who supported him in his early days as an advisor. When he looked at the industry and didn’t see the same respect being shown to
clients, he knew he had to do something to bring more value to them. “After I sold Berkshire and AIC Limited and eventually started a new dealership, I knew it needed to be respectful of clients’ needs because there had to be somewhere to start the movement,” he says. “It starts with a position and building a dealership from scratch with a philosophy like Mandeville’s, which is not easy. Very few people can afford the burn rate before you get to critical mass. I am doing it because I am beholden to my roots, my clients, and I want to make sure there is a beacon in our industry that will eventually lead the way to start changing narratives. For us, leading by example means clients can be better served. It is a passion of mine to do what is in the best interest of clients.” At the core of his business model is a drive to change the dynamic of how clients invest. Lee-Chin points to the fact that many retail investors still have 100% of their portfolios in public securities, yet that’s not how pension plans and large institutional investors create wealth. Mandeville has set itself apart by delivering different options for client portfolios. In addition to diversifying portfolios, one of Lee-Chin’s main aims is to educate investors on private investments, which he feels have gotten a bad rap over the years. “There is a perception that investing in private securities is more risky,” he says. “When I buy a publicly traded security, I am basing my decision on the information given to me by an investor relations department. I don’t have the opportunity to go into the company and diligence emails, lawsuits, budgets or interview management as freely as I do when purchasing a private business. When I purchase a private business, the entire data room is open to me. If we make better decisions by having more information, we get more information when we diligence a private business than what is fed to us through an IR department of public company.” As for risks, Lee-Chin says they exist with both public and private companies. “In both cases, whether regulated or unregulated, you have risky investments,” he says. “At the end
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MANDEVILLE PRIVATE CLIENT AT A GLANCE
HEADQUARTERS Burlington, ON
FOUNDED 2012
PARENT COMPANY Portland Holdings of the day, you’ll make a better decision if you have more information.” Lee-Chin explains that since the Portland Group has its own assets, it has buying power that can be translated into investment opportunities for clients. “We have access when there is a fundraise by a large institution,” he says. “They are going to call us because of our reputation, so we have buying power. All we are doing is using that access and giving clients the opportunity to participate in that quality of investment that would previously never have been available to them.” Giving clients that access is all part of Mandeville’s independent mindset, which, Lee-Chin says, “starts with the advisor, who should have an independent mind and work back from that in an environment that is supportive of it. That is what we do at Mandeville. At the end of the day, it’s our clients who pay our bills, no matter who our sponsor or company is. So if we take the approach that we are working on behalf of our clients, that will keep us on the right path. If we are being influenced by
virtue of or corralled into a small universe of available financial products, then we have to ask ourselves, in whose best interest are we working?” Moving forward, Lee-Chin says that as the industry continues to change, it will be critical for advisors to differentiate themselves. Otherwise, they risk becoming irrelevant. “As advisors, we need to focus on what clients need, which is the ability to create wealth,” he says. “Commoditization of the industry is a big problem, and we are trying to deliver an antidote. Second, we operate in a regulatory environment that is very prescription-based, and the prescription is general. I think what is needed is more education from advisors to clients because we are very formulaic right now. Third, the products the industry is selling to clients invariably are not wealth-creating. Fourth, there is an allergic reaction to clients owning private companies in their portfolio. So there are many factors afoot. There are a lot of issues we need to face and start conversations to come to a solution, or we will go the way of the dodo.”
SISTER COMPANIES Portland Investment Council, Mandeville Insurance Services
AWARDS Advisor Network/Brokerage of the Year at the 2017 and 2018 Wealth Professional Awards
MISSION Provide access to investment opportunities within both the public and private realm that are typically reserved for the affluent and institutional investor
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SPECIAL PROMOTIONAL FEATURE
REAL ESTATE
A track record of success Middlefield’s accomplishments in real estate and infrastructure investing have made it a leader in the field. Now, the company is looking to educate more investors about the sector’s opportunities
SINCE ITS founding in 1979, Middlefield has had a strong presence in the real estate sector. The company has been involved in all areas of the industry, including land acquisition, project design, construction, financing, property management and leasing of real estate projects. It also manages infrastructure funds, including the Global Infrastructure Dividend Fund, which raised $125 million in 2014, and has managed partnerships that directly own infrastructure assets, primarily in the energy sector. With its decades of experience, a full understanding of the industry, numerous awards and strong fund performance, Middlefield
MIDDLEFIELD AT A GLANCE Year founded: 1979 Assets under administration: $4 billion Offices: Calgary, Toronto, San Francisco and London (UK) Investment products: ETFs, mutual funds, closed-end funds, private and public resource funds, hedge funds, real estate funds, and a venture capital fund Real estate projects: Land acquisition, project design, construction, financing and leasing
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has become a real estate and infrastructure investing leader and is now helping to educate investors on the space. “Real estate and infrastructure are considered real assets due to their physical nature,” explains Rob Lauzon, managing director and deputy CIO at Middlefield. “Real assets provide investors access to difficult-toreplicate or unique underlying holdings, which
projects. Currently, the company manages about 900 residential units and several limited partnerships. This experience gives Middlefield an advantage when constructing funds. “Managing projects allows us to see the value that owning a real asset can provide to investors and to understand how to value a real asset from an operator’s perspective,” says Middlefield president and CEO Dean Orrico. “This experience gives us a key competitive advantage over many other investment managers that are involved in this space.” Now more than ever, the demand for products that include real assets is on the rise as more investors look to alternatives to offset market volatility. “Aside from providing unique diversification opportunities and enhancing yield, real assets reduce overall portfolio volatility,” Lauzon says. “More specifically, the value of a real asset is nowhere near as volatile as public securities since they are not market-to-market as frequently as public securities. These are long-term assets and hence provide a significant level of stability to investor portfolios.” Institutional investors have been allocating more to real assets, and Orrico believes retail
“Managing projects allows us to see the value that owning a real asset can provide to investors and to understand how to value a real asset from an operator’s perspective” Dean Orrico, Middlefield may include office towers, toll roads, airports, network towers and data centres. Investment strategies in this asset class provide access to different combinations of growth potential, value creation and reliable income streams. Pension funds have been investing in real assets for decades due to their long duration, which aligns with the long-term nature of their liabilities. Recently, retail investors have also become more interested in real assets.” Middlefield’s properties include nearly 1,500 residential units, as well as commercial
investors will begin to follow suit. “We see retail investors in the early stages of appreciating the benefits of real assets, and they are becoming a growing part of retail portfolios,” he says. “In addition, since we are in the later stages of the current economic cycle and expect interest rates to remain lower for longer, and stock market volatility has significantly increased over the past few months, the income and stability provided by real assets has become even more important to generating better risk-adjusted returns.”
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PEOPLE
CAREER PATH
BEST INTEREST
Chris Rawles has always been driven by a desire to put his clients’ interests first Rawles learned an important lesson about diversification early on when he put his earnings from bartending and the funds he’d saved as a teen into tech just before the dot-com bubble burst. “I remember sitting in a high school class, and the teacher started talking about RSPs, and it seemed like easy money. I made the conscious decision to start saving then. When that mutual fund blew up, that drew me to finance – I wanted to understand what happened.”
1998
GETS AN EARLY START
2009 DEVELOPS A PLAN Prior to launching his own firm, Rawles put in a considerable amount of time earning designations and outlining what his client-first fiduciary business model would look like. “We wanted to come up with what investments would most closely align with each client’s interest. Each client has a portfolio that’s unique to them; that’s the key to our business – everyone gets a comprehensive financial plan.”
2016 GIVES BACK Once his business was more established, Rawles set about giving back by volunteering with Junior Achievement, participating in the organization’s Investment Strategies Program, which gives Grade 8 students the chance to explore ways to save and invest. “A few students really took an interest; I told them to invest in things you love – like Facebook or Apple – and I could see a light go on in their heads. It was a good experience.”
2019 WINS RECOGNITION Rawles was nominated for Portfolio/Discretionary Manager of the Year at the 2019 Wealth Professional Awards, but it was RT Mosaic’s nomination as Multi-Service Advisor Firm of the Year that holds a special place in his heart. “The award was testament to the service level that we give clients. The most important thing is good service. There are always going to be bad markets; if you don’t give good service, you’re going to get fired.”
2003
REALIZES WHAT HE WANTS In his first job out of university, Rawles spent five years at CIBC Wood Gundy in a variety of different roles, but the contact with clients was his favourite part. “I wanted to teach people how to save their money – that’s what got me thinking about getting away from the big bank, because it didn’t feel like the place to do that.”
2010
GOES OUT ON HIS OWN The following year, Rawles joined forces with an old friend who was working as a fee-only advisor to launch RT Mosaic, bringing the flat-fee model to the Calgary market.
“We wanted to eliminate all conflicts of interest. We wanted to be unbiased and align our interests with the clients; we didn’t want to have to push proprietorial products. We started with zero assets under management and zero clients” 2017
EMBRACES A GROWTH MINDSET RT Mosaic’s head count grew beyond the founding partners for the first time, and the practice made a significant investment in technology in order to drive efficiency. “We wanted to bring our model to more people through growth; we also invested in making sure we had the best new tech and better processes in place. This industry constantly changes – you adapt or you become a dinosaur.”
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PEOPLE
OTHER LIFE
TELL US ABOUT YOUR OTHER LIFE Email editor@wealthprofessional.ca
In 1985, Wilhelm’s girlfriend, Cindy, bought him a black guitar; both the guitar a nd Cindy (now his wife of 31 years) are still arou nd
PART-TIME ROCK STAR Advisor Matt Wilhelm first picked up a guitar as a teenager. Decades later, he still finds time to rock out MATT WILHELM began playing guitar when he was 18, drawn by the powerful nature of the electric guitar. He soon bought his first instrument from a high school friend. “I wanted to blast music as loud as I could; I was making something powerful,” he recalls. “I was a big fan of music and wanted to be able to play the songs I was fond of – and guitar was cool!” Wilhelm, a Kitchener-based advisor with Century Group Financial Solutions at Sun Life Financial, still plays today, most often with the Hillbrook Connection, the band he formed in 1992 with his childhood friends. “Music is an outlet,” he says. “My work is very regimented and structured; music allows me to let things flow. A lot of my clients have seen me play and can’t believe I can play like that when they’ve mostly seen me in a suit and tie in the office.”
$100
Amount Wilhelm spent on his first electric guitar in 1984
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5
Guitars Wilhelm owns, four of which were bought by his wife, Cindy
$600
The Hillbrook Connection’s gig fee, often partially donated to a community cause
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