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December 11, 2017

Case For Gold Polarizes

The investment case for gold will continue to polarize and it is difficult to make sweeping generalizations about the types of investors for whom a strategic allocation might make sense, says Phil Edwards, global director of strategic research within Mercer’s wealth business. In a ‘Research Perspective,’ he says, however, it is possible to suggest some of the characteristics of investors who are more likely to be open to the merits of gold. They are investors who are highly sensitive to inflationary scenarios, while not being able to access other forms of inflation hedge (such as inflation swaps). As well, they have a willingness to accept a potentially significant drag on returns in normal scenarios in order to access some protection against extreme scenarios (for example, one in which investors lose faith in the fiat money system). A willingness to view gold as a risk management tool in a portfolio context, as opposed to an isolated exposure that is expected to deliver a consistent contribution to the total return, is another trait. Ultimately, consideration of gold will necessarily be an investor-specific decision, he says. However, some investors will find the diversifying characteristics of gold attractive in mitigating the impact of certain extreme scenarios.

QE Not Over Yet

The era of quantitative easing (QE) is not over yet, says Scott DiMaggio, AB’s director of global and Canada fixed income. Speaking on ‘#Fake News in Fixed Income’ at its ‘2017 Canada Institutional Investment Symposium,’ he said while the U.S. fed is selling securities, Japan and Europe continue to buy as they are still really in expansion modes. This matters because QE has depressed interest rates. Supply explains yields of 2½ per cent so bond yields should be higher by 150 basis points (bps) from where they are today. But QE has driven yield down by 200 bps in the U.S. and about 60 bps in Canada. QE is still going to be in effect in a big way next year and will keep bond yields contained over the next 12 months. Then, the first signs of imbalance will appear as central banks issue more debt than they are buying since the beginning of QE.

Canadian Net Worth On The Rise

The median net worth of Canadian families was $295,100 in 2016, up 14.7 per cent from 2012 ($257,200), says Statistics Canada. The 2016 median was more than double that of 1999 ($144,500). Housing was both the largest asset and the largest debt for Canadians. In 2016, 61.7 per cent of Canadian families reported a principal residence as an asset and 57.3 per cent of these families reported holding a mortgage on their principal residence. Overall, 29.6 per cent of Canadian families were debt-free. The share was highest among senior-led families, where 58 per cent were debt-free. However, this was down from 1999 when 72.6 per cent of senior-led families were debt-free. British Columbia reported the highest median net worth at $429,400. Families in Ontario reported the second-highest net worth at $365,700. New Brunswick reported the lowest median net worth among the provinces at $158,400. Manitoba (+35.2 per cent) had the largest growth in median net worth from 2012 to 2016, followed by Ontario (+30.5 per cent) and Prince Edward Island (+28.6 per cent). Differences in the value of homes determines, in part, provincial differences in net worth. The median value of principal residences in British Columbia was $550,000 in 2016, the highest value in the country and $105,000 more than the next highest, Ontario. The total value of assets held by Canadians in 2016 was $12 trillion. The median value of total assets owned by families rose 12.4 per cent from $391,700 in 2012 to $440,200 in 2016. Private pensions was the second-largest asset category at 29.2 per cent of assets, rising 17.7 per cent from 2012 to $3.5 trillion. The majority of this growth came from employer-sponsored registered pension plans, which increased 17.4 per cent to $2.3 trillion in 2016.

What To Look For In A Collection Manager

The online environment offers easy and efficient ways to research and acquire objects related to a particular topic for today’s collector. In ‘What To Look For In A Collection Manager?,’ the second of a three-part series on the Private Wealth Canada website, Spencer W. Stuart, who formerly worked for Bonhams Auctioneers in both Toronto and New York, explains how managing a collection allows collectors to view their collections from a distance.

Japan Requires Prudent Approach

While the overall outlook for Japanese equities remains positive, investors should consider a more prudent investment approach, says a research paper from Unigestion. Written by Gael Combes, a fundamental analyst for equities, and Maria Musiela, an investment specialist, equities, at Unigestion, it says despite a relatively positive story for Japan’s economy post-election, risks still lurk and could potentially disturb the bullish trend for equities. One risk to consider is a slowdown in China’s economy, Japan’s closest export economy; any weakness in the Chinese economy could have a significant impact on Japan’s exporters and the global economy at large. In addition, the geo-political turmoil with North Korea remains a significant tail risk as Japan’s geographic proximity and political allegiance puts it at risk. A broader risk is public debt. Abenomics has generated high government debt, as well as a large primary deficit.

Investor Confidence Drops

An index of global investor confidence dropped one point in November to 97.1, says the State Street ‘Investor Confidence Index. The minor decline in was attributed to a 12-point drop in the European investor confidence index to 81. By contrast, the North American index rose 3.7 points to 102.6 and the Asian index increased by one point to 97.5. “While tax reform prospects likely helped boost investor confidence in the U.S., rising political uncertainty and worries over tighter monetary conditions likely drove down sentiment in Europe,” says Rajeev Bhargava, managing director and head of investor behaviour research at State Street Associates.

Hedge Fund Assets Hit Record Level

Assets under management (AUM) of the global hedge fund industry hit a new record of $3.253 trillion in October, says eVestment. Its ‘October 2017 Hedge Fund Asset Flows Report’ shows net flows for the industry year-to-date in 2017 are positive, with AUM up $33.26 billion in the 10 months to October. It also found that fixed income/credit funds saw AUM rise $2.59 billion in October and $10.99 billion year-to-date, bringing AUM for these funds to $984.1 billion. Equity funds were down nearly $3 billion in AUM in October, but are still up $15.16 billion in year-to-date AUM.

Alpine Macro Launched

Macroeconomic and financial market research veterans Chen Zhao, Tony Boeckh, and David Abramson have partnered to launch Alpine Macro – an independent research firm dedicated to providing unique analysis, insights, forecasts, and actionable investment strategy recommendations. Chen is a former chief global strategist with BCA Research Group and, more recently, co-director of global macro research with Brandywine Global Investment Management. Boeckh is former chairman and editor-in-chief and Abramson is a former chief U.S. strategist with BCA. They will focus on providing differentiated market insights, contrarian views, and profitable investment strategy recommendations that help investors manage risk and make better informed investment and asset allocation decisions.

iA Financial Launches Global Funds

iA Financial Group, in partnership with Forstrong Global Asset Management and Fidelity Investments, has launched four global funds and a family of five global index portfolios. The four global segregated funds are Global Diversified Fixed Income (Forstrong), Global Diversified Equity (Forstrong), Fidelity Global Monthly Income, and Fidelity Global Concentrated Equity Forstrong funds. The funds encourage global exposure, thereby making it possible to manage risks overall. There is strategic portfolio diversification by analyzing growth and income opportunities within a wide range of asset classes, sectors, countries and currencies. Indexia funds, a family of five low-cost global index portfolios, are also available. These funds are comprised of recognized stock indexes and are for all types of investors: prudent, moderate, balanced, growth, and aggressive.

Mackenzie Launches Gender Diversity ETF

Mackenzie Financial Corporation has launched an exchange traded fund (ETF) providing investors with an opportunity to impact social and governance change with a focus on promoting the benefits of women in leadership. The Global Leadership Impact ETF will invest primarily in companies that promote gender diversity and women's leadership, anywhere in the world. Its portfolio managers assess potential investments using a number of criteria, such as whether there is proportional representation of women on boards of directors and in leadership positions in the companies, including as chief executive officers and chief financial officers.

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December 4, 2017

Top Income-earners Paying More Taxes

Despite common misperceptions that top earners pay little tax, Canada's top income-earners pay a disproportionate ‒ and growing ‒ share of all taxes collected by government, finds a study by the Fraser Institute. ‘Measuring the Distribution of Taxes in Canada: Do the Rich Pay Their Fair Share’ finds that this year, the top 20 per cent of income earners in Canada (families with an annual income greater than $186,875) will earn 49.1 per cent of all income in Canada but pay 55.9 per cent of all taxes including not just income taxes, but payroll taxes, sales taxes, and property taxes, among others. The discrepancy is even more pronounced for the top one per cent of earners. While this group will pay 14.7 per cent of all taxes in 2017 (up from 11.3 per cent in 1997), it will earn a smaller percentage (10.7 per cent) of all income. By comparison, the bottom 50 per cent of income-earning families in Canada earn 20 per cent of all income, but pay just 14.6 per cent of all taxes. When looking at income taxes alone, the top one per cent will pay 17.9 per cent of all federal and provincial income taxes, while the bottom 50 per cent will pay nine per cent of all income taxes this year.

Global Economy Likely To Grow

There is a 60 per cent likelihood that the global economy will continue to grow at a steady pace with modest inflation, says BMO Global Asset Management’s annual ‘Five-Year Outlook’report. This is the base-case scenario which sees the gradual withdrawal of monetary accommodation in the form of higher interest rates and reduced quantitative easing. This is likely to be tempered by muted inflation pressures and flexible markets, reducing these headwinds to a gentle breeze rather than a disruptive gale. The second scenario, which is given a 30 per cent chance of happening, suggests that a global recession is a threat. Past monetary policy may have over-stimulated the markets; subsequently this could fuel further inflation, which might then coincide with the quantitative tapering and exaggerate the impact. This could lead the U.S. first into a recession, followed by the rest of the world. The third scenario ‒ ‘Perfect Policy Prevails’ –has a 10 per cent likelihood. Here, central banks are successful at bringing economies back to full employment smoothly, without pushing up inflation. It also suggests that central bank balance sheets and interest rates are normalized in a smooth manner, which ensures consistent market and investor behaviour. In this ‘perfect world,’ risk assets perform strongly, bonds come under only limited pressure, and volatility remains low, it says.

Ritz-Carlton Top Rated Luxury Hotel

The Ritz-Carlton earned the highest overall rating in the ‘2018 Global Hotels Luxury Brand Status Index.’ Conducted by the Luxury Institute, the index ranks 40 global luxury hotel brands around the world. Respondents rate each brand on quality, exclusivity, social status, and the ability to make guests feel special. In addition, affluent travelers weigh in on whether they were willing to recommend specific brands to friends and family, whether a hotel brand is worth the premium pricing, and which hotels they are most likely to choose for upcoming travel. The Ritz-Carlton had an overall luxury brand status index (LBSI) score of 7.95 (out of 10), the highest rating. The index also found that affluent consumers from the seven countries surveyed spend an average of 17 nights per year in hotels, with 76 per cent reporting at least one luxury hotel stay during the past 12 months. Those who stay at luxury hotels stay an average of 11 nights per year. Affluent travelers from China (88 per cent), Italy (83 per cent), and the United Kingdom (81 per cent) are most likely to report staying at a luxury hotel in the past year. A vast majority (82 per cent) of guests cite leisure as the reason for their stay, while one-third (33 per cent) report having some business purpose for their luxury hotel visit. Two-thirds (66 per cent) report traveling with a spouse or partner, while only nine per cent report traveling with business colleagues. Solo travelers comprise 14 per cent of luxury hotel guests.

Online Makes Collecting Easier

The online environment offers easy and efficient ways to research and acquire objects related to a particular topic for today’s collector. In ‘Why Manage Your Collection,’ the first of a three-part series on the Private Wealth Canada website, Spencer W. Stuart, who formerly worked for Bonhams Auctioneers in both Toronto and New York, explains how managing a collection allows collectors to view their collections from a distance.

Caymans Continue As Domicile Of Choice

The Cayman Islands continue to be the domicile of choice for the global hedge fund industry, accounting for more than half (53 per cent) of the global total, as measured by NAV, says a report by the International Organization of Securities Commissions (IOSCO). The U.S. ranks second at 29 per cent. This distribution is largely unchanged from previous years. Total assets under management (AUM) of hedge funds surveyed rose 24 per cent to US$3.2 trillion. However, the report cannot determine how much of this rise is due to investment performance and net flows, and how much is the result of improved reporting. Long/short equity is the most widely used investment strategy by hedge funds, followed by global macro strategies and fixed income arbitrage. Hedge fund liquidity is strong enough to meet investor redemption demands under normal market conditions and gross leverage of the hedge funds in the survey was seven times their net asset value (NAV), including the notional values of interest rate and foreign exchange derivative contracts.

Fiera Launches Core Mortgage Fund

Fiera Capital Corporation has launched a core mortgage fund. The open-ended fund is available to accredited individual and institutional investors and will invest in mortgages secured by high quality commercial real estate across Canada. It seeks to provide income to investors while preserving capital over the long term.

Manulife Halts Initial Offering Of Multifactor ETFs

Manulife Investments, a division of Toronto-based Manulife Asset Management Ltd., has closed the initial offering of the units of two multifactor ETFs and has begun trading them on the Toronto Stock Exchange. The ETFs, the Manulife Multifactor Canadian SMID Cap Index ETF and Multifactor U.S. Small Cap Index ETF, are sub-advised by Dimensional Fund Advisors Canada ULC. They are both available in unhedged and hedged versions and they join a suite of multifactor ETFs announced by Manulife earlier this year. Management fees range between 0.5 per cent and 0.6 per cent. The indices that these ETFs are designed to track were developed by Dimensional using its proprietary index memory technique.

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November 27, 2017

Steady Growth Forecast For Luxury Furniture Market

The global luxury furniture market is expected to rise from $22.9 billion in 2017 to $29.5 billion by 2022, growing at a compound annual growth rate (CAGR) of 5.2 per cent over the forecast period, says a report by Transparency Market Research. Wood is expected to emerge as the leading material segment, expanding at a CAGR of 5.8 per cent from 2017 to 2022. Europe will be the most lucrative market during the period, with sales forecast at $8.8 billion. The report shows that one of the key factors driving growth in the luxury furniture market is the emergence of various distribution channels. The convenience of online shopping as well as increasing visibility of luxury furniture through displays in malls and furniture shops are together bolstering growth. These channels are aided by powerful branding and marketing strategies adopted by key players. In addition to this, manufacturers are continuously adding new products to their existing line of furniture items which will drive more customers towards purchasing luxury furniture items. Growing disposable income also supports growth across the globe. This has led to a shift in the preference of consumers from ordinary furniture to luxury furniture items. Consumers show a growing desire to own furniture that is rare, exclusive, and unique.

Investors Blind To Bias

Prior to the 1970s, very little research was directed to how investors made decisions because early researchers like Harry Markowitz, from the University of Chicago, believed that when putting money at risk, investors would always act rationally. However, there has been a change in view from investors as rational decision-makers to imperfect participants, say Marshall McAlister, a private wealth counsellor and principal, and Cary Williams, an associate private wealth counsellor at Pavilion Investment House. In the article ‘When Bias Clouds Investment Thinking’ at the Private Wealth Canada website, they say almost all investors are affected by a blind spot towards their own bias. In addition, this blind spot has no relation to aspects of personality, such as intellect or self-esteem, and individuals tended to underweight the magnitude of their own bias

Impact Returns Can Reach Market Rate

Impact investors that target market rate returns can achieve them, says the Global Impact Investing Network (GIIN). It has found that across private market strategies – private equity, fixed income, and real assets – the distribution of impact investing fund returns is similar to analogous conventional markets. The impact themes pursued by fund managers in its survey included financial inclusion, access to clean energy, sustainable timber, and low-income housing. It also found that, as in conventional markets, performance varies from one fund to the next, indicating that fund manager selection is key to achieving strong returns.

India Injects Funds Into PSBs

Indian public sector banks (PSBs) have been under stress as the total amount of non-performing assets had risen to US$150 billion, says Excel Funds Management Inc. These non-performing loans have severely restricted the ability of PSBs to extend further loans and limited access to credit impacting the ability of businesses to make fresh investments. However, the government says will inject US$32 billion into the PSBs to provide them relief. Investors see this move as a positive since it could help remove a significant overhang on credit availability, which, with time, might allow for higher loan growth to further encourage investment. As well, competition between banks will likely reduce the cost of lending for businesses and as credit becomes more readily available, a virtuous cycle of investment can be expected to kick start in the upcoming months. One of the key issues with this is the question of moral hazard. Banks are being bailed out even though they were at fault and were expected to exercise better judgment regarding loan lending practices. However, the government is attempting to address this issue by adopting a differential approach towards allocation of recapitalization funds. Stronger banks with better track record are likely to get a preference in the allocation of funds.

State Street Expands Diversity Guidance

State Street Global Advisors will expand its guidance on corporate board diversity to the public companies in which it invests in Japan and Canada. In March 2017, in conjunction with the installation of its ‘Fearless Girl’ statue on Wall Street, it sent letters to 600 companies in the United States, United Kingdom, and Australia informing them that it would vote against the chair of their nominating committees if there were no female directors or candidates. Of those companies, it ultimately voted against 400 that had not initiated any efforts to increase board diversity since receiving the letter. As a result of these efforts, 42 companies to date have committed to increasing the diversity of their boards and seven have already added women. “The data shows that all other things being equal, companies with gender-diverse boards also have stronger long-term financial performance,” says Ron O’Hanley, president and chief operating officer of State Street. “… this expansion to Canada and Japan will further these efforts to drive better long-term performance and returns for investors.” Fifty-five per cent of companies in Japan’s Topix 500 and 40 per cent of the 700 companies in the Toronto Stock Exchange do not have any woman on their boards.

Paris Accord Impacts Investors

Global efforts to meet targets set out in the Paris Climate Accord are going to impact investors and the sectors in which they invest, says a report from the FERI Cognitive Finance Institute. The impacts will be driven by a number of developments, it says, including the discrepancy between decarbonization commitments and action to meet these goals; reliance on new technologies; and the continued use of subsidies for fossil fuels in many markets. Investors can take steps to manage their exposure to this ongoing risk by evaluating the progress towards a low carbon economy by different sectors and countries; monitoring the exposure of their investments to technology that’s being developed to aid the transition; and assessing the preparations of companies to manage their risks and to seize on opportunities to take advantage of the transition. Sectors that are responsible for a high share of emissions include electricity and energy, agriculture, industrials, transportation, and buildings, says the report.

Smart Beta Allocations Set To Increase

Faced with an increasingly difficult investment environment, a growing number of investors are looking to significantly increase allocations to smart beta strategies, says a survey by Invesco PowerShares. It found that allocation to smart beta strategies was expected to rise to 23 per cent (from the current 13 per cent) over the next three years. The rise was linked to investors dealing with the challenges posed by low yields, scarce value, and shorter investment horizons, it says. Mike Paul, head of Invesco PowerShares in Europe, the Middle East, and Africa, says, “Smart beta is no panacea, but it does have the potential to help with [these] major and emerging challenges.”

ETF/ETP Assets Increase

Assets invested in leveraged/inverse ETFs/ETPs listed globally have increased 14.1 per cent in the first nine months of the year to reach a new record of US$77.14 billion, says ETFGI. The leveraged/inverse ETF/ETP industry had 834 ETFs/ETPs, with 1,287 listings, assets of US$77.14 billion, from 59 providers on 19 exchanges in 16 countries. Leveraged/inverse ETFs and ETPs gathered US$4.69 billion in year-to-date net inflows with leveraged products suffering US$1.01 billion in year-to-date net outflows.

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November 20, 2017

Canadians Don’t Expect Impactful Inheritances

Many Canadians do not expect to receive an inheritance that will have a significant impact on their future, says a study from Edward Jones. However, the firm says it is crucial to have an appropriate strategy in place whether you expect an inheritance. Almost half of Canadians believe that an inheritance is not part of their long-term financial future (49 per cent). Canadians 18 to 54 are the most optimistic when it comes to expecting a financial windfall from a family member. Interestingly, a person's income doesn't appear to make a major difference when it comes to inheritance expectations; 50 per cent of those whose income is less than $40,000 say they expect an inheritance, while a similar number (39 per cent) of those earning a salary of over $100,000 say the same. Even some older Canadians are looking forward to an inheritance, with 36 per cent of those 55 to 64 and one-third of those over 65 expecting to come into inherited financial assets in the future. Edward Jones says that whether you’re counting on receiving an inheritance or planning on leaving one, there are a number of factors to consider, including the tax implications for both parties. There are different strategies for completing the wealth transfer, but it's important to start the conversation early. The survey also shows that of those planning to leave an inheritance, 60 per cent say that it "will provide a significant contribution to their loved one's long-term financial future." Canadians closest to retirement appear optimistic about their ability to bequeath a financial gift. Sixty-one per cent of those 55 to 64, and 57 per cent of those over 65, say they plan on leaving a ‘significant contribution’ to a loved one.

Executive Compensation Strategy Should Start Now

Executive compensation professionals should start preparing now for the coming year to secure an even stronger and more responsive executive compensation program, says Mercer. The firm says key factors to consider include building an appropriate strategy to evaluate and improve upon the performance and engagement of executives and the organization. As well, the strategy should gauge shareholder participation and the effectiveness of incentive programs, pay for performance, and benchmarking. Strategies can change over time, so compensation professionals must make sure it aligns with the current approach. Compensation professionals, executives, and boards have all felt the recent intensifying spotlight on executive compensation, which makes it even more vital to have the right, thoughtful conversations before entering a new season. Companies need to carefully balance public scrutiny, competition, pay for compensation, and talent management. And, in an effort to identify the right strategy, it can be tempting to follow the best practices of peer organizations. Common practice, however, isn’t always the best practice. Each firm is unique and its executive compensation program should be one of a kind, too.

Share Of Top Filers Rises

The top one per cent of individual tax filers saw their share of total income rise by almost one percentage point from 2014 to 2015, the result of a sharp increase in the dividend income from Canadian corporations, says Statistics Canada. This was the first increase in the share of total income going to the top one per cent since 2006. The top one per cent held 11.2 per cent of the nation's total income in 2015, up from 10.3 per cent in 2014, but 0.9 percentage points below the peak of 12.1 per cent in 2006. The average total income for the top one per cent rose 12.2 per cent from 2014 to $529,600 in 2015. They paid, on average, $183,000 in income taxes to the federal, provincial, and territorial governments in 2015, up 13.5 per cent over 2014. They accounted for 22.2 per cent of total income taxes paid by all tax filers, up from 20.5 per cent in 2014, but below the peak of 23.3 per cent in 2007.

Elder Investor Abuse Rising

With Canada's rapidly aging population, issues of elder abuse and mental incapacity are on the rise in Canada and the investment industry needs to do more to prepare for and respond to the needs of vulnerable investors, many of whom are seniors, says a joint report from FAIR Canada and the Canadian Centre for Elder Law (CCEL). They are calling on securities regulators and the investment industry to really engage on these issues. “Older Canadians, advocates, and the investment industry have told us they all support having a conduct protocol in place which balances investors’ right to make their own choices, with the reality that investment firms are in a unique position to prevent or stop financial exploitation of vulnerable investors or respond to help those who show signs of diminished mental capacity," says Marian Passmore, COO and director of policy at FAIR Canada and a co-author of the report. Its recommendations to Canadian securities regulators include requirements for investment firms to make reasonable efforts to obtain the name and contact information of a trusted contact person for each client who can be contacted in case of suspicion of abuse or diminished mental capacity, so long as they themselves are not suspected of financial abuse or exploitation of the client. Authorized individuals within an investment firm should be authorized to place a temporary hold on trades and disbursements of funds or securities when there is a reasonable suspicion of financial abuse – that has occurred, is occurring, or will be attempted – or where the client has lost the capacity to provide instructions. Investment firms and financial service providers who reach out to appropriately report suspicions of financial abuse or mental incapacity should be protected under a legal safe harbour as well, it says.

Impact Investing Needs Size

The ‘a-ha’ moment for James Sorenson came when he realized that business could provide life changing skills for people while being financially viable. The chairman of the Sorenson Impact Foundation told a keynote session at the ‘Social Finance Forum’ that the goal is to do well while doing good. However, the combined efforts of government and philanthropists is not enough to deal with the immense social problems facing the globe. Impact funds provide an opportunity to bring in additional capital. However, it faces constraints. The current profile of impact investors is that they are small niche investors like family offices and high net worth individuals. Enough size needs to be built so that pension funds and institutional investors get interested. And part of the problem there is that there is a shortage of products of a size and quality to attract pension funds.

Connor Named CEO Of Year

Dean A. Connor, president and chief executive officer of Sun Life Financial, is Canada’s Outstanding CEO of the Year for 2017. The award program’s advisory board cited Sun Life Financial’s successful global business strategy under his leadership and vision, including its accelerated growth in seven Asian markets, launch of new wealth and asset management businesses, and number of acquisitions. Its total shareholder return has averaged 28 per cent per year over the past five years ending in 2016 and employee engagement is above benchmarks for global financial services companies.

Value Investing Brings Pain

It is painful to be a value investor, says Martin Cobb, executive vice-president, portfolio manager, research analyst, at Templeton Global Equity Group. In the ‘Where’s the Opportunity in Value Investing?’ session at the Franklin Templeton Investments ‘Retirement Innovation Summit: Advancing Retirement Readiness,’ he said value has underperformed growth for more than 100 months so it has been “painful for an awful long time.” Since the down periods are so painful, many investors throw in the towel during those times. However, over the long term, value will outperform 85 per cent of the time and normalization of interest rates and the economic cycle have a strong correlation with the performance of value so any normalization will see it start to recover. Even so, in this environment with growth stocks over-valued, there are opportunities for value investors to find stocks offering good returns at a much cheaper price.

China Real Problem For U.S.

The Northern American Free Trade Agreement (NAFTA) has been very positive to all three of its participants, says Charles Nadim, a portfolio manager, Canadian equities, at Jarislowsky Fraser Global Investment Management. Unfortunately, U.S. President Donald Trump doesn’t understand the real problem is not Canada, it is China when it comes to trade deficits, he told its ‘A Quality Approach to Higher Growth & Higher Yield Investing’ session. He said the sticking points in the current discussion over the agreement are that the U.S. wants more U.S. content in auto manufacturing. As well, it wants preferential treatment for U.S. companies bidding on government contracts and it wants to take trade disputes to U.S. courts instead of the current practice of using a third party. And while the tone of the negotiations has become more negative, it doesn’t look like the talks will wind up this year as intended. If NAFTA were cancelled, the old WTO rules would likely be applied once more, he said. However, the Canadian dollar would likely weaken offsetting an impact of increased tariffs. Another option, an all-out trade war, would hurt the U.S., he said, although it would likely send Canada into a recession.

Regulators Worry About Downturn Risk

Global securities regulators are worried about the risks of a market downturn and spillover into the global economy. In a letter to the industry, Ian Russell, president and CEO of Investment Industry Association of Canada (IIAC), says “that the risks of a steep downward adjustment in asset prices, and the feed-back effects on the global economy, are more acute than ever before, reflecting changes in investor behaviour and the vulnerabilities of the underlying global economy.” Weak economic conditions, highlighted by continued high unemployment and a lack of inflation, “increase the risk of triggering a major shock to global markets,” he says. Moreover, global markets remain vulnerable to the effects of economic and geopolitical events. “External shocks could trigger steep declines in asset prices,” he says. “Banks and dealers have limited scope as market-makers to absorb panic selling, particularly by asset managers faced with massive exposure to falling asset prices, accelerating withdrawals of client funds as values plummet, and limited liquidity to avoid major asset sales.” The accelerating collapse in equity values and steep rise in interest rates (as bond prices fall) would quickly reverberate in the real economy, “pole-axing the incipient recovery, with potential for much worse,” he says.

Confidence In Responsible Investment Drops

There has been “a dramatic drop” in the number of institutional investors who are confident that responsible investment provides better financial returns, says Hermes Investment Management. It has found that fewer than half of the investors surveyed believed companies that focus on ESG produced better long-term returns, falling from 56 per cent in its annual ‘Responsible Capitalism Survey’ last year to 46 per cent this year. Another 33 per cent of respondents felt significant ESG risks with financial implications were not a reason to reject an otherwise attractive investment. However, 86 per cent believed fund managers should price in corporate governance risks as a core part of their investment analysis.

Appetite For Risk Reduced

Canadian investors showed reduced risk appetite over the previous month and quarter, while maintaining an average level of investment risk for the year, says Vanguard’s ‘Canadian Risk Speedometer.’ The one-month risk speedometer reading fell significantly to below average for September compared to August, with slightly below average investor risk appetite for the third quarter of the year. The risk speedometer for the year is just moderately above average although the recent trend is moving to investor preference for less risk in their investment portfolios. Fran Kinniry, a principal in Vanguard’s investment strategy group, says, “With risk appetite at average or lower levels, we appear to be seeing a trend towards broad-based asset allocators rather than fund selectors in the Canadian market. If true, we see this as a very positive development for investor outcomes and advisory practices.”

PE And VC Returns Positive

Private equity (PE) and venture capital (VC) managers in developed markets outside the U.S. returned 4.2 per cent in first quarter of 2017, while PE and VC managers in emerging markets posted four per cent returns in the same quarter, says Cambridge Associates. Its Global ex US Developed Markets PE/VC Index underperformed comparable public market indexes in the first quarter of the year. The MSCI EAFE index, which measures public equity performance in developed markets outside the U.S., returned 7.2 per cent for the quarter, 300 basis points (bps) higher than the Cambridge benchmark. “Distributions to private equity and venture capital investors in developed markets outside the U.S. in the first quarter of 2017 outpaced capital calls by over 2.5 times,” says Andrea Auerbach, head of global private investments at Cambridge. Its Emerging Markets PE/VC Index also produced lower returns than the comparable public market index, the MSCI Emerging Markets Index, which returned 11.5 per cent in the quarter, over 700 bps higher than private investment managers in the region. Over longer timeframes, both private investment benchmarks outperformed the public indexes. “Private investment managers in emerging markets underperformed comparable public markets in Q1 of 2017, but over longer time periods, emerging market private equity and venture capital have far outperformed public markets in the region,” says Vish Ramaswami, managing director at Cambridge.

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November 13, 2017

Financial Retention Keeps Talent

The effectiveness of financial retention agreements to ensure that acquired talent remains with the new company during a merger or acquisition has improved over the past three years, saysWillis Towers Watson. Its ‘2017 Global M&A Retention Study’ found that 79 per cent of acquirers are successful in retaining at least 80 per cent of their employees with agreements through the end of the retention period. In its prior survey (2014) on global M&A retention, 68 per cent met this threshold. However, it’s a different story one year after the retention period ends. After that one year, only about one-half of these companies retain at least 80 per cent of employees who signed agreements. “It’s a tale of two results. Acquirers have made good strides at keeping key talent for an initial period, but there’s room for improvement one year later,” says Mary Cianni, global M&A practice lead at Willis Towers Watson. “Companies are not using the retention period to capture hearts and minds to keep talent on board for the long term ‒ and help ensure success of the merger over a longer period.” Cash bonuses, most commonly expressed as a percentage of base salary, remain the primary financial award in retention agreements for senior leaders (77 per cent) and other key employees (80 per cent).

Global Commerce Transformation Offers Opportunity

Global commerce has been transformed over the past two decades offering new opportunities for investors. Rapid advancement in technology, free trade agreements, and the rise of multinationals in emerging markets has transformed the structure of the economic world today, changing the ways of thinking about global investing, not only in terms of opportunities but also portfolio allocations decisions. In the article ‘Shifting Global Trade Patterns Bring New Opportunities’ at the Private Wealth Canadawebsite, the Capital Group’s Robert Lovelace, vice-chairman and portfolio manager; and David Polak, an equity investment specialist, examine some of these opportunities.

Exotic Car Club Celebrates One Year

The Twenty7 Social Club has celebrated its first birthday. One year ago, the club opened its doors, providing members a place in the Greater Toronto, ON, Area to network with like-minded individuals, lovers of exotic vehicles and motorsports. It is a place where members are surrounded by a fleet of Twenty7 cars including a Ferrari F430, a Porsche Cayman S, Audi R8, Mercedes-AMG GTS, and a Maserati MC Stradale. Alternatively, if a member owns an exotic vehicle, the club offers them a climate controlled, secure garage, that is accessible 24/7 with a personal fob system. The 26,000-square-foot facility is located near Toronto Pearson Airport and features a clubhouse bar and lounge, two private boardrooms, a VIP premium lounge with a boardroom, a main event space with a full-functioning kitchen, and a garage which can be used for car storage.

Hedge Funds Get Opportunity To Outperform

Hedge funds and private equity managers will get more opportunities to outperform now that central banks around the world have started to normalize their monetary policies, says J.P. Morgan Asset Management. Its ‘2018 Long-Term Capital Market Assumptions’ notes that with central banks buying bonds and other securities for years to keep interest rates low, global assets have been rising in lockstep and hedge funds and others have had fewer opportunities to distinguish themselves with winning picks. Now that central banks are starting to pull back from that strategy, securities and sectors will theoretically rise and fall based on fundamental characteristics. However, manager selection is particularly important when it comes to alternative investments and can add a significant amount of outperformance. For example, the median private equity manager is expected to return 7.25 per cent, whereas those in the top quartile will return in the mid-teen range.

Fund Indices Increase In October

All but one of the 44 Morningstar Research Inc. fund indices increased during October, with a majority of the indices increasing between two per cent and four per cent. Nine indices increased by more than four per cent. The best-performing fund index for the month was the one that tracks the Asia Pacific Equity category, which increased 7.7 per cent. Along with the currency effect, funds in this category benefited from strong gains by Japanese stocks, with the Nikkei 225 Index gaining 8.1 per cent for the month when measured in local currency. South Korean stocks, which on average account for 10.7 per cent of fund assets in this category, were also a major contributor, with the KOSPI Composite Index gaining 5.4 per cent and the South Korean currency appreciating by 5.9 per cent against the loonie. The fund index that tracks the Asia Pacific ex-Japan Equity category was the second-best performer in October with a 7.1 per cent increase. Funds in this category typically hold a majority of their assets in stocks from South Korea and Greater China. Canadian stocks had a solid month in October, as the S&P/TSX Composite Index broke through the 16,000 mark for the first time and ended the month with a 2.7 per cent total return. However, without the benefit of currency effects, funds that invest in domestic equities underperformed their foreign peers.

ESG Continues To Grow

More than a quarter of the $88 trillion assets under management globally are now invested according to environmental, social, and governance (ESG) principles, says a McKinsey & Co. study. It says sustainable investing with ESG integration into portfolios is growing at a rate of 17 per cent a year. ESG accounted for $22.89 trillion, or 26 per cent, of professionally managed assets in Asia, Australia, New Zealand, Canada, Europe, and the U.S. at the start of 2016. That compares with 21.5 per cent in 2012. European investors lead in sustainable investing, with 52.6 per cent of the region’s assets invested according to ESG factors at the beginning of 2016. Just over half of assets in Australia and New Zealand were invested in sustainable strategies, while 37.8 per cent of Canadian investments followed ESG principles. In the U.S., 21.6 per cent of assets were allocated to sustainable investments at the start of last year, while Asia was much farther behind on the trend. Only 3.4 per cent of Japanese assets were in sustainable investments, while Asian countries outside Japan had less than one per cent of assets tied to ESG.

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