Wealth Professional 5.03

ENERGY’S COMEBACK As the energy recovery gathers pace, what are the best plays in the sector?

MUTUAL FUND GUIDE WWW.WEALTHPROFESSIONAL.CA ISSUE 5.03 | $12.95

Experts discuss what’s in store for Canada’s reigning investment vehicle in 2017

THE GLOBAL VIEW How to use emerging market debt in your clients’ portfolios

AN ALTERNATIVE

APPROACH Which alternative investment strategies are best for your clients?

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2017-02-09 1:51 10/03/2017 6:58:55 AMPM

1:51 PM

ISSUE 5.03

CONNECT WITH US Got a story or suggestion, or just want to find out some more information?

CONTENTS

22

twitter.com/wealth_proca plus.google.com/+WealthprofessionalCa facebook.com/WealthProfessional Canada

UPFRONT 02 Editorial

The newest places to diversify

04 Head to head

18

Has the oil & gas rebound pulled more advisors back into the energy fray?

INDUSTRY ICON

08 News analysis

PEOPLE

Amundi Asset Management’s Sergeï Strigo reveals how political uncertainty has shaped his investment strategy for 2017

06 Statistics

A comeback for commodities spells good news for Canadian investors BMO says investment in Canada’s oil patch will be up in 2017, but recent industry moves tell a different story

10 Intelligence

This month’s big movers, shakers and new products

12 Alternative update

When it comes to energy exposure, the oil sands are just one option COVER STORY

TAKING AN ALTERNATIVE APPROACH

Alternative investments are available to a wider number of investors today than ever before. So where should advisors start when adding them to client portfolios?

34

FEATURES

THE ALTERNATIVE EXPERTS Executives from Sprott Asset Management discuss where to find the best returns among non-traditional investments

14 ETF update

All signs point to the ETF market continuing to grow

16 Opinion

Why gender is an important consideration for financial planners

PEOPLE 46 Advisor profile

Ottawa-based advisor Graeme D. Baird has built a loyal client base by offering a multitude of services

48 Career path LIFE | HEALTH PROFESSIONAL

SPECIAL SECTION

LIFE HEALTH PROFESSIONAL The latest news and analysis for advisors in Canada’s life and health insurance industry

50

50 Health insurance update 52 Life insurance update 54 The evolution of health benefits in Canada

38

A fateful cup of coffee put Chad Larson on the road to success in the wealth management industry

49 Other life

Heating things up with advisor and yoga teacher Albert Chou

FEATURES

MUTUAL FUND OUTLOOK

Canadian mutual funds have taken a beating over the past few years.

Where do they go from here?

WEALTHPROFESSIONAL.CA CHECK IT OUT ONLINE www.wealthprofessional.ca

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10/03/2017 6:59:14 AM

UPFRONT

EDITORIAL

Diversity is key for the long term

T

he recently released TSX Venture 50 list is always a useful guide to gauge where the Canadian economy is headed. After all, the small and mid-cap companies of today are the large-cap players of tomorrow, at least in theory. The list ranks the TSX-V’s top-performing companies of 2016 across five sectors: clean technology and life sciences, diversified industries, mining, oil & gas, and technology. Performance, in this case, means market cap growth, share price appreciation and trading volume.

Standing proudly on top of the pile this year is clean energy company dynaCERT. The firm specializes in carbon emission reduction technologies and had a 558% increase in its share price in 2016 and a 677% increase in market capitalization. Impressive for sure, as is the fact dynaCERT is located in a sector with huge growth potential.

Companies like dynaCERT could help fill the gap between Canada’s reliance on its energy industry and its shift toward more eco-friendly alternatives More and more Canadians are looking to invest in companies that put an emphasis on protecting the environment. The country is and will remain a major oil producer, but companies like dynaCERT will help fill the gap between the nation’s reliance on its energy industry and its shift toward more eco-friendly alternatives.

On the venture exchange’s bigger brother, stocks have continued their strong performance from last year, with energy, materials and financials leading the way. The S&P/TSX Composite Index reached record levels at the beginning of February, but current health is no guarantee of future prosperity.

According to a recent paper released by Credit Suisse and the London Business School, a steadfast commitment to innovation is key. Analyzing 117 years worth of data, the study showed the commodity-rich countries of Canada, South Africa, Australia and the US have offered the best returns since the beginning of the 20th century. But while their natural resources meant they could weather turbulent markets, their ability to innovate is what has kept them ahead in modern times – a valuable lesson for clients looking to diversify their portfolios by investing in up-and-coming industries.

The team at Wealth Professional

wealthprofessional.ca ISSUE 5.03 EDITORIAL

SALES & MARKETING

News Editor David Keelaghan

National Accounts Manager Dane Taylor

Writers Joe Rosengarten Libby Macdonald Leo Almazora

Associate Publisher Trevor Biggs

Executive Editor – Special Features Ryan Smith

Project Coordinator Jessica Duce

Copy Editor Clare Alexander

CONTRIBUTORS Franco Caligiuri Marissa Elliott

ART & PRODUCTION Design Manager Daniel Williams Designers Randy Pagatpatan Joenel Salvador Production Manager Alicia Chin Advertising Coordinator Kay Valdez

General Manager, Sales John Mackenzie

CORPORATE President & CEO Tim Duce Office/Traffic Manager Marni Parker Events and Conference Manager Chris Davis Chief Information Officer Colin Chan Human Resources Manager Julia Bookallil Global COO George Walmsley Global CEO Mike Shipley

EDITORIAL INQUIRIES

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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

2

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10/03/2017 6:15:07 AM

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10/03/2017 6:15:20 AM

UPFRONT

HEAD TO HEAD

How has your exposure to energy stocks changed?

Now that the energy sector is prospering again, are advisors increasing clients’ exposure?

David Martin

Steve Nielsen

In risk • C Curr risk • In Cred Int Cr Inflation r

Ian Hardacre

Principal and portfolio manager Stonegate Private Counsel

Portfolio manager Milestone Asset Management Canaccord Genuity Wealth Management

Senior vice-president and chief investment officer Empire Life Investments

“When the price of oil was declining in Q4 2015 and into Q1 2016, we assessed our clients’ portfolio exposure to the oil and oil services sector. We also had a few conversations with management people at large Canadian oil companies.

We felt, based on those conver­ sations, certain economic factors and sector fundamental valuations, that there was some value in the Canadian oil sector, so we increased our clients’ weighting in the sector from underweight to closer to market weight in Q1/Q2 2016. We still have some macroeconomic concerns, which lead us to remain slightly below market weight at this time.”

“Although based in energy-centric Calgary, our Milestone team employs a highly tactical approach to investing clients’ money in energy stocks. With many of our clients exposed to the sector directly through work, or indirectly via the local economy, we frequently carry far lower exposure relative to the TSX. As global allocators of capital, we seek other avenues to generate income and risk-managed returns for our clients. In the past year, we have actively increased our energy exposure due to some welcome stabilization after two difficult years for the sector. This tactical rotation has helped to provide a strong tailwind to our client portfolios.”

“Last year I had a bias towards midcaps; this year I prefer large caps and a few mid-caps. We believe that energy stocks will have a good year, although they have had a slow start. We think that oil prices will tend to go higher over the year. We have a reasonable weighting of both oil and natural gas – about 21% of the fund.

The stocks within our funds are well diversified over the energy sector: exploration and production companies, a small amount of service companies, and about 6% pipelines or transportation energy-related stocks.

We’re reasonably positive in energy for 2017.”

AN END TO THE ENERGY ROLLER-COASTER? Oil prices in early 2017 remain up after crude’s wild ride last year. In early 2016, rising shale production dovetailed with increased OPEC output to drive the price per barrel as low as $26 in February, but prices were able to claw back ground as a result of a historic OPEC agreement to cut production. By December, crude had crested above $52 a barrel – a heartening period of resurgence in what has been a brutal multi-year bear market for the commodity. Natural gas, however, slid to the $2.60 mark in February from the highs of $3.90 witnessed at the end of 2016.

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10/03/2017 6:34:43 AM

Inflation risk • Credit risk • Interest rate risk • Currency risk • Interest rate risk • Currency risk • Inflation risk • Credit risk • Interest rate risk • Currency risk • Inflation risk • Credit risk Currency risk • Inflation risk • Credit risk • Interest rate risk • Currency risk • Inflation risk Currency risk • Inflation risk • Credit risk • Interest rate risk • Interest rate risk • Currency ris risk • Currency risk • Inflation risk • Credit risk • Interest rate risk • Currency risk • Inflation r Interest rate risk • Currency risk • Inflation risk • Credit risk • Inflation risk • Credit risk • Credit risk • Interest rate risk • Currency risk • Inflation risk • Credit risk • Interest rate risk • Interest rate risk • Currency risk • Inflation risk • Credit risk • Interest rate risk • Currency Credit risk • Interest rate risk • Currency risk • Inflation risk • Currency risk • Inflation risk flation risk • Credit risk • Interest rate risk • Currency risk • Inflation risk • Credit risk • Interest r

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The information provided herein does not constitute financial advice. Always consult with a qualified advisor prior to making any investment decision. The opinions expressed herein are those of iA Clarington. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo are trademarks of Industrial lliance Insurance and Financial Services Inc. and are used under license.

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10/03/2017 6:34:51 AM

UPFRONT

STATISTICS

Commodities’ comeback

ENERGY ON THE UP Nowhere is the oil recovery more evident than when looking at the top 10 constituents of the S&P/TSX Capped Energy Index, where the majority of companies have posted solid gains over the past year.

Despite a slight dip in recent months, the index has risen more than 22% over the past 12 months.

After a rough few years, resources and energy are on the upswing – and that’s welcome news for Canadian investors THE YEAR just gone saw commodities trending upwards, heading into a bull market by mid-year; in particular, metals and coal covered themselves in glory, rising to multi-year highs.

Gold enjoyed a promising start to 2017, albeit one that mostly gained back ground lost in the wake of President Trump’s shock victory. Other mining stocks spent last year arresting a long slide that stretches back to 2012. Energy stocks

also enjoyed a new invigoration as oil prices rose on the back of OPEC cuts.

Given that domestic stocks tend to be heavily weighted in commodities and mining, the turning point couldn’t come soon enough for Canadian investors. Those who held firm on the TSX are now reaping the rewards – driven largely by these commodity gains, the exchange has posted an uptick of 23% since January 2016.

TOP 10 CONSTITUENTS 1. Suncor Energy 2. Canadian Natural Resources 3. Encana Corporation 4. Cenovus Energy 5. Imperial Oil 6. Crescent Point Energy Corp.

7. Tourmaline Oil Corp.

55.7%

Rise in crude futures over the past 12 months

65.1%

Rise in natural gas futures over the past 12 months

0.5%

Rise in gold futures over the past 12 months

8. ARC Resources

22.2%

9. Seven Generations Energy

Rise in silver futures over the past 12 months

10. PrairieSky Royalty

Source: Tmxmoney.com, March 1, 2017

DOMINATING THE TSX-V

MAJOR MINING MARKET

Reflecting Canada’s biggest industries, commodities lead the way on the TSX-V. Materials and energy account for more than half of the venture exchange.

The Canadian markets have long been the natural home of mining – 57% of the world’s mining companies are listed on the TSX and TSX-V, and the S&P/TSX Global Mining Index’s top 10 constituents account for a combined market cap of more than $385 billion.

120

S&P/TSX GLOBAL MINING INDEX MARKET CAPS

100 80 $ billions

Materials 47.31% Energy 15.24% Information technology 7.59% Healthcare 7.49% Financials 6.50% Industrials 5.84% Consumer staples 1.46% Consumer discretionary 0.79% Utilities 0.05%

60 40 20 10 0

Source: Tmxmoney.com, March 1, 2017

6

$102.2 billion

$73.9 billion

$87.8 billion

$27.6 billion

$18.5 billion

$17.5 billion

$16.9 billion

$14.9 billion

$14.6 billion

$12 billion

BHP Billiton Limited

Rio Tinto

BHP Barrick Freeport- Newmont Goldcorp Teck Franco- Agnico Billiton Gold McMoRan Mining Resources Nevada Eagle plc Corporation Corporation Corporation Mines Source: Finance.yahoo.com, March 1, 2017; TSX.com, Jan 31, 2017

www.wealthprofessional.ca

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$45

$40

$35

SHARE PRICE

$30

$25

$20

$15

$10

$5 Note: All figures listed are the closing price from the nearest trading date to the first of the month

$0

Mar 1 2016

April 1 2016

May 1 2016

Jun 1 2016

July 1 2016

Aug 1 2016

Sep 1 2016

Oct 1 2016

Nov 1 2016

Dec 1 2016

Jan 1 2017

Feb 1 2017

Mar 1 2017

Tmxmoney.com, March 1, 2017; Finance.yahoo.com, March 1, 2017

WORTH ITS WEIGHT IN GOLD

TSX-V TOP PERFORMERS

Like the price of bullion itself, the S&P/TSX Global Gold Index had a up-and-down 2016, peaking in August before sliding significantly during the remainder of the year. The index’s top 10 companies have a combined market cap of $117 billion, with Barrick head and shoulders above the rest.

The top five mining and oil & gas companies on the TSX-V Top 50 all saw share prices soar in 2016.

32

Lithium X Energy

28

Goldmining Wealth Minerals

24

Pure Gold Mining

20 $ billions

SHARE PRICE INCREASE, MINING TOP 5

Golden Predator Mining 0%

16

300%

400%

500%

600%

700%

Blackbird Energy

8

0

200%

SHARE PRICE INCREASE, OIL & GAS TOP 5

12

4

100%

Leucrotta Exploration $28.1 billion

$17.8 billion

$17.3 billion

$14.8 billion

Barrick Newmont Goldcorp FrancoGold Mining Nevada Corporation Corporation Corporation

$12.3 billion

$8.4 billion

Agnico Eagle Mines

Randgold Resources

$5.6 billion

$4.3 billion

$4.3 billion

Kinross AngloGold Royal Gold Gold Ashanti Corporation Limited

$3.9 billion

B2Gold Corp.

Africa Energy Jadestone Energy Front Range Resources

0% Source: Tmxmoney.com

100%

200%

300% Source: Tmxmoney.com

www.wealthprofessional.ca

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10/03/2017 8:11:08 AM

UPFRONT

NEWS ANALYSIS

An oil sands conundrum A new report by BMO forecasts increased investment in the oil patch, but that’s contrary to recent moves by some industry giants

THERE ARE some mixed messages in investment circles right now regarding Canada’s oil patch. In early February, Exxon Mobil removed the $16 billion, 3.5-billionbarrel Kearl oil sands project in Alberta from its books. As crude hovers around the $50 mark, US producers are deciding to redirect their resources back home.

This goes against a recent report from BMO Capital Markets stating that the oil sands “may be on the cusp of a new investment cycle.” The reason for that, aside from the higher price, is the ability of Canadian producers to extract oil using new technologies at a much lower cost.

It’s a development that Tim Pickering, president and CIO of Calgary-based fund manager Auspice, has kept a close eye on.

His firm introduced the first-ever ETFs

been in everyone’s mind for decades is that oil sands production was not economical below $50. The reality is very different.”

The narrative that oil sands production is much more expensive and harmful to the environment will be difficult to shift, but according to Pickering, the industry has come a long way in recent years. The bleak recessionary period since 2014 wasn’t accompanied by a sacrifice in innovation, and Pickering is pretty optimistic about where things are headed.

“For an investor, the Canadian oil sands are the most optimistic, long-term energy plays in the world,” he says. “These operations are so technology-driven and have improved so much in terms of their efficiency, it means the economics are far better. It puts Canada in a great position.”

“What has been in everyone’s mind is that oil sands production was not economical below $50. The reality is very different” Tim Pickering, Auspice based on Canadian crude and natural gas benchmarks, so it’s fair to say he has plenty of skin in this particular game.

“When BMO did the analysis of what is the economically viable level for oil sands production, it was a lot lower than most people anticipated,” he says. “What has

8

While technology has no doubt made oil sands production leaner and more efficient, a major obstacle still remains for Canada’s energy sector – access to the rest of the world without relying on the US to refine and ship the finished product.

“We don’t have pipelines out to the

East and West Coast, only south,” says Rob McFarlane, founder of fund manager Rayne Capital, which operates the Capital Energy Fund. “We only have one buyer – the US. Trump is pro-oil in the sense that he wants to get production from 10 million up to 14 million barrels. You could have a scenario in the next seven to 10 years where they are close to being energy independent.”

The new administration in Washington has made no secret of its America-first prerogative, and that will apply to its energy industry, too. Currently, Canadian crude trades at a discount to oil produced south of the border. Given the currency disparity, exporting is still a profitable enterprise for Canadian producers – but just how profitable it will remain heading forward is the question.

www.wealthprofessional.ca

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OIL PATCH PROSPECTS The Bank of Montreal has released a new report analyzing the viability of oil sands production, taking into account exchange rates, light-heavy spreads, and quality/location differentials.

The report found that the break-even cost is roughly US$23 per barrel on a WTI-equivalent basis for in-situ oil sands projects.

For projects not already underway, the break-even cost was estimated at US$34 per barrel.

The report recommended that investors focus on oil sands operations with high-quality assets, strong balance sheets and the greatest potential for cash flow when the price of oil remains flat.

BMO highlighted Canadian Natural Resources and Suncor Energy as solid investments.

“If the US continues to increase production year-over-year, what that means is they will set the price,” McFarlane says. “That will continue until we get leadership that says we need pipelines going to the East and

Fund has not fared so well since then.

The primary reason for that is potentially damaging policies that have emanated from the Oval Office – even though they have yet to be enacted.

“There are a lot of opportunities within the subsectors of energy. The key investments right now are the service names” Rob McFarlane, Rayne Capital West Coast. Right now the US is buying our oil at a discount and shipping it out to Asia.”

While the OPEC agreement signed in December has been a positive for the energy industry, the Rayne Capital Energy

“It has been challenging because of Trump and border tax risk,” McFarlane says.

“The oil price has gone up since that OPEC announcement, but the fund is down 9% in the first two months. US shale production is

increasing, but the bigger thing is a potential border tax. That would be punitive to Canadian energy.”

With exact details on a border tax hard to come by, McFarlane is looking toward other areas of the energy sector in search of returns. Getting beyond the negative effects of weather and uncompromising neighbours involves delving deeper to find the right investments.

“There are a lot of opportunities within the subsectors of energy,” he says. “Gas names we are cautious on because there is too much supply. We didn’t have a cold enough winter. I think the key investments right now are the service names.

The backlog right now in the energy space is with the pumpers like Calfrac, Trican and Canyon.”

www.wealthprofessional.ca

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10/03/2017 6:35:57 AM

UPFRONT

INTELLIGENCE CORPORATE ACQUIRER

TARGET

PRODUCTS COMMENTS

Intercontinental Exchange

TMX Atrium

TMX Group has sold its wireless and extranet infrastructure services to ICE as part of a streamlining initiative

PayPal

TIO Networks

The $304 million acquisition will give PayPal access to customers who pay bills at TIO’s retail kiosks

Trimont Financial

Western Financial Group, Western Life Assurance

Trimont will acquire the entities from Desjardins Group for a reported $775 million

PARTNER ONE

PARTNER TWO

COMMENTS

Desjardins

The Norbec Group

Desjardins has invested substantially in Norbec, allowing the firm to keep its operations within Quebec

Edgefront REIT

Nobel REIT

Pending approval, the merger is expected to result in a new company named Nexus REIT, which will have a gross book value of around $300 million

QTrade enters the digital advice arena

QTrade has made moves to roll out a new virtual advice service, VirtualWealth, which will allow its partner network of more than 150 financial institutions across Canada to enter the digital advice market. VirtualWealth leverages QTrade’s renowned fintech capabilities, along with the asset management expertise of OceanRock Investments. Through the service, investors can access professionally managed, low-cost ETF portfolios tailored to a variety of investor profiles and goals. The portfolios are also automatically rebalanced based on the investor’s target asset allocation.

PayPal buys unsung Canadian fintech success story

In a deal worth approximately $304 million, PayPal has acquired Vancouverbased consumer payments processing firm TIO Networks. The Silicon Valley giant will pay $3.35 in cash per share for TIO, according to the Globe and Mail. The deal is expected to close in the second half of 2017; co-founder Hamed Shahbazi, who owns a $10 million stake in TIO, will take on an executive role at PayPal. TIO started in 1997 as Touch Technologies, an Internet kiosk provider catering to retailers. It went public in 1999 and expanded to service payday loan providers and convenience stores as well. The company eventually migrated its services to a cloud-based platform. Three acquisitions brought its revenue from $8 million in 2005 to $74.1 million in 2016. It has also become a leading digital billing and receivables processor, handling more than US$7 billion in transactions last year.

10

BMO Investments announces fund changes

BMO Investments is reducing fees on its ETF and mutual fund lineups, and launching two new fund series. BMO has cut management fees on 26 funds by up to 25 basis points. Administration fees for the BMO Canadian Equity Class and BMO Dividend Class funds have been lowered to 16 basis points and 13 basis points, respectively, and service fees and trailing commissions were reduced for certain series of selected funds. The firm also expects to qualify for distribution of series F2 securities for the BMO Balanced ETF Portfolio and BMO Balanced ETF Portfolio Class, as well as series F (hedged) securities for the BMO Tactical Global Bond ETF.

www.wealthprofessional.ca

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PEOPLE Mawer releases first emerging markets fund Mawer Investment Management has launched its first stand-alone emerging markets fund. The Mawer Emerging Markets Equity Fund will be managed by Peter Lampert, who also co-manages the Mawer International Equity Fund.

“We focus on large- and small-cap companies with strong business models, excellent management teams and attractive stock valuations,” Lampert said in a company statement.

Lampert told the Globe and Mail that compared to the MSCI emerging markets index, the fund is less weighted toward China but overweight on South Africa and India.

New Provisus funds chase higher returns at ETF prices

Provisus Wealth Management has released a new web-based fund series, Transcend, which is designed to offer lower fees and a tighter focus on performance. Each fund charges a base management fee of 0.25% per year and collects 20% of the amount by which it beats a specified benchmark every quarter. According to Provisus president and CEO Chris Ambridge, ETFs and robo-advisors never quite match market returns after fees. “We want to match the risk characteristics of the underlying benchmark, not take undue risks, and add value through security selection,” he said.

Superstar stock picker to manage new mutual fund

Will Danoff, who manages the US-based Fidelity Contrafund, has been announced as the manager of the Fidelity Insights Class fund. The estimated MER for the B-series vehicle is about 2.4%. Danoff is initially targeting around 75 picks for the US-stock-heavy global fund, vetting them based on his style of reaching out to management in order to acquire a deeper-than-average understanding of companies’ growth prospects. Since Danoff took the Contrafund reins in 1990, it has achieved an average annual return of 12.7% net of fees, allowing its assets to grow from $300 million to $103 billion over the past 27 years.

NAME

LEAVING

JOINING

NEW POSITION

William Anderson

N/A

Sun Life Financial

Chairman, board of directors

Patrick Blais

N/A

Manulife Investments

Co-head, Manulife Asset Management Canadian Fundamental Equity team

Gabriel Dechaine

Canaccord Genuity

National Bank Financial

Banking analyst

Michael Shuh

CIBC World Markets

Canaccord Genuity

Managing director of investment banking and head of financial institutions in Canada

Scott Treadwell

TD Securities

Calfrac Well Services

Vice-president of capital markets and strategy

Canaccord appoints new managing director Vancouver-based Canaccord Genuity Wealth Management has announced the appointment of Michael Shuh as managing director of investment banking and head of financial institutions in Canada. In his new role, based in Canaccord’s Toronto office, Shuh will work with investment banking and advisory teams across all regions to advise asset managers, alternative lenders, investment funds and special-purpose acquisition companies.

Shuh will report to Pat Burke, president of Canaccord Genuity’s capital markets arm.

Prior to joining Canaccord, Shuh spent nearly eight years at CIBC. He also worked for 10 years at National Bank of Canada’s investment banking division, serving as its managing director for the last four.

TD analyst announces return to energy industry TD Securities oil field services analyst Scott Treadwell is set to revisit his roots in the energy industry. In a letter to colleagues sent out in mid-February, the veteran analyst announced he is leaving TD to join energy services provider Calfrac Well Services as vice-president of capital markets and strategy. Treadwell transitioned into his new role in late February; the move comes at a time when the Canadian energy sector is entering the early stages of recovery, following its crash in 2014.

Treadwell has been in equity research for the past seven years, six of which he spent at TD. During his time there, he served as vice-president and equity research analyst for energy services, as well as director of equity research for energy services.

www.wealthprofessional.ca

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10/03/2017 6:37:09 AM

UPFRONT

ALTERNATIVE INVESTMENT UPDATE

Looking beyond the oil sands Those looking to increase their energy exposure in 2017 will find a variety of domestic options

WCSB’s potential oil & gas reserves lay within its political borders,” he said.

In addition to a broad range of source rocks to tap, Alberta also benefits from the widest diversity of hydrocarbon types among the provinces that cover the WCSB. Therefore, it has the flexibility to choose a particular source based on market factors.

The other two provinces still bring some-

“BC has mostly natural gas. Saskatchewan has mostly oil. Alberta has a smorgasbord of everything”

Given the decline in the Alberta economy brought about by the ailing oil & gas industry, one might think the oil sands are the province’s one and only selling proposition for energy investors. However, the province actually has several arrows in its energy resource quiver.

“BC has mostly natural gas. Saskatchewan has mostly oil. Sandwiched in between, Alberta has a smorgasbord of everything,” ARC Financial chief energy economist and managing director Peter Tertzakian told the Financial Post, noting that the Canadian energy industry is starting to lean away from the oil sands after

NEWS BRIEFS

a 10-year trend. Only a third of the Canadian energy industry’s $42 billion in expected capital spending in 2017 will go to Fort McMurray.

New investments favour natural gas, liquids and light oils in the Western Canadian Sedimentary Basin [WCSB].

The epicentre for new oil & gas activity is in places like Fort St. John in BC, Grande Prairie in Alberta and Estevan in Saskatchewan. According to Tertzakian, Alberta has experienced a 200% uptick in drilling activity, the lion’s share of new developments. “Even after excluding the oil sands, over 44% of the

Data centres highlighted as dark horse of REITs

Data centre REITs posted returns of 28.36% in 2015 and 26.41% in 2016, according to REITCafe. “Last year, the data centre market saw big deals from major players, new economic and regulatory policy, and the wild card that is strategic cloud adoption,” said Jones Lang Lasalle in its 2017 Data Centre Outlook report. Soaring internet use and data consumption have benefited the sector; however, data centre REITs face possible speed bumps ahead, including the requirement for Canadian companies to store their data within the country.

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thing to the table, however. Saskatchewan has easily accessible light-oil reserves, and has the lightest royalty burden among the three jurisdictions. While it can’t absorb as much investment as Alberta, the percentage of rigs working there during the first quarter of 2017 has risen compared to the same period last year.

As for BC, certain areas around Fort St. John have garnered attention from highproductivity light oils. Northeast BC is also rich in natural gas; productivity numbers suggest that some of the rocks in the region have better yields than others in North America.

“Yes, Canada’s oil & gas industry is rebounding,” Tertzakian said. “But it’s not just a business-as-usual rebound. This one rebound has many positive aspects for all three provinces.”

Slate launches opportunistic real estate fund

Toronto-based real estate investment firm Slate Asset Management, which oversees $3.5 billion in real estate investments, is starting a new fund called the Slate Real Estate Opportunities fund.

The opportunistic fund targets properties that need work, fixes them, then gets back its investment by selling or refinancing. The fund’s first acquisition is a $200 million portfolio of 12 Calgary office buildings from Dream Office REIT. Slate is looking to fill vacancies left in the Alberta portfolio, which is currently only 82% occupied.

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10/03/2017 6:37:53 AM

Q&A

Jozef Barta

Bringing transparency to art investment

CEO ARTSTAQ

Years in the industry 26 in the private business sector; one year as a government consultant in Slovakia Fast fact Based in London and Prague, ARTSTAQ is represented in Calgary

by Kristyna Rempel, as well as in other markets worldwide

What inspired your team to set up ARTSTAQ? We see the market limited to a relatively small number of collectors. There is huge untapped potential from investors who want to diversify their portfolios with art, but don’t understand the market because data is hidden and prices are often manipulated by the gallerists or auction houses. We want to provide investors with free access to market data, independent rating of artists, market valuation of artworks, as well as trading in shares of artworks by July. We also want to give artists, gallerists and collectors a global platform to sell, buy or exchange artworks in real time, in a transparent environment.

What kinds of art can be traded?

At the moment, we are testing the platform with emerging artists. In two months, we will launch the collectors’ section, where investors can get artworks of established and blue-chip artists independently valued and sold. At the same time, we are also going to launch a glass section.

Who can invest in pieces on the exchange?

The platform can be used by anybody who wants to invest in or sell art. The cheapest artworks can be bought for as little as a few hundred dollars.

The exchange features a Moody’s-like art rating system and an independent art valuation system.

Can you explain how these systems work?

Does private equity need new benchmarks?

A study from global investment firm Cambridge Associates has highlighted the need for new private equity benchmarks.

As deals evolve into more sophisticated co-investment and direct investment strategies, with increased variability in fee and carry options, along with new strategies and geographies, the study’s authors say investment-level performance benchmarks will allow investors to measure performance of direct and co-investments, and better understand performance by sector, strategy or geography.

The ARTSTAQ rating system has three levels. In the first level, art partners such as galleries or art dealers use their own appraisals to select the best artists in their portfolio, inputting standardized data on their picks into the ARTSTAQ database. In the second stage, global art rating experts evaluate the artist’s work and give their independent rating/appraisal, along with a rating of the work’s artistic quality.

Artists who pass a certain threshold are finally assessed through the AQ (art quotient) rating algorithm.

It takes thousands of artistic and investment parameters for specific artists; data for similar artists is compared to determine real-time parameters such as art quotient, artistic rating, investment rating and market value. The algorithm also analyzes artists’ sales data and real-time trading data. To prevent market bubbles, auction data from the most successful living artists is used to calculate maximum price growth thresholds.

An artist with a low rating would usually have a low valuation, but he or she can still have a high potential that can affect his or her artwork’s prices.

Could you name some artists whose work is already listed on ARTSTAQ? We are currently trading emerging artists only. However, collectors can pre-register artworks by established or blue-chip artists. From the famous names that have been pre-registered, let me mention Gerhard Richter.

His artworks will be available for trading by investors/ collectors on ARTSTAQ on April 15.

Foreign capital flees from Vancouver to the GTA

Foreign capital leaving Vancouver’s housing market may be stoking an overheated Toronto market. A recent poll by the Toronto Real Estate Board [TREB] indicates that 4.9% of transactions in the 12 months leading to November involved foreigners. BMO economist Sal Guatieri has said that purchases made by less discriminating foreign investors could “put undue upward pressure on [GTA home] prices.” Warning against another foreignbuyer tax, TREB recommended the problem be addressed through supply-side policies.

AIMCo enters into partnership with energy firm

Institutional investment firm Alberta Investment Management Corporation [AIMCo] has committed to enter a strategic financing relationship with Perpetual Energy that will see AIMCo purchase around 2.5 million units of Perpetual at $1.75 per unit. The deal also provides for $45 million worth of debtwith-warrants financing, consisting of a second-lien loan to Perpetual, repayable in four years at 8.1% interest per annum; 120 warrants will be issued for every $1,000 committed under the loan.

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10/03/2017 6:38:01 AM

UPFRONT

ETF UPDATE NEWS BRIEFS First roboadvisor joins the Canadian ETF Association

Vancouver-based online portfolio management platform WealthBar has become the first robo-advisor firm to join the Canadian ETF Association [CETFA]. “We are pleased to welcome WealthBar to the CETFA as our first financial technology member,” said CETFA chair Atul Tiwari. “We are excited to work with a broader roster of innovative providers to raise awareness and accessibility of ETFs in Canada.” Tiwari added that WealthBar’s membership makes for a “very strong voice” that can help investors gain “information, education and access to resources on the benefits of ETF investing.”

Vanguard releases new Canadian fixedincome ETFs

Vanguard has listed four new lowcost Canadian fixed-income ETFs on the TSX: the Vanguard Canadian Government Bond Index ETF (VGV), the Vanguard Canadian Corporate Bond Index ETF (VCB), the Vanguard Canadian Short-Term Government Bond Index ETF (VSG) and the Vanguard Canadian Long-Term Bond Index ETF (VLB). According to Vanguard, the four new ETFs, each designed to track a unique Bloomberg Barclays Global Aggregate Canadian bond index, have among the lowest fees in their respective categories, ranging from 0.17% to 0.25%.

BMO’s new suite of ETFs provides income options

BMO Asset Management has expanded its already formidable ETF lineup with new income solutions. The new offerings include the BMO Canadian High Dividend Covered-Call ETF (ZWC), the BMO US Put Write Hedged

14

to Canada ETF (ZPH), the BMO US Preferred Share Index ETF (ZUP/ ZUP.U) and the BMO US Preferred Share Hedged to CAD Index ETF (ZHP).

BMO also introduced accumulating units on several ETFs, which will provide annual reinvested and consolidated distributions. With this latest launch, the firm aims to extend its seven-year streak of capturing the most inflows in the Canadian ETF industry.

Morgan Stanley admits to negligence in inverse ETF sales In a settlement with the US Securities and Exchange Commission, Morgan Stanley has paid US$8 million for failing to properly supervise the sales of inverse ETFs. Financial Advisor IQ reported that Morgan Stanley failed to secure hundreds of signed disclosure documents saying that such ETFs are typically unsuitable for long-term investing. The firm sold the products to retirement account holders, who held the funds long-term and suffered losses.

The SEC also found that supervisors neglected to review the ETFs’ suitability for each client, and some advisors never got training on them.

Manulife Investments to launch ETFs in Canada Manulife Investments has announced plans to launch a series of multifactor ETFs in April in partnership with Dimensional Fund Advisors Canada [DFAC]. The ETFs will seek to track indexes designed by DFAC, which has seven-year exclusive access to subadvisory services for the ETFs per its agreement with Manulife. The four multi-factor equity ETF strategies (Canadian Large Cap, Developed International, US Large Cap and US Mid Cap) are a “best-in-class product,” said Manulife Investments president Bernard Letendre.

Is ETF growth here to stay?

Think the ETF market can’t keep soaring?

Think again, says one expert in the space In 2016, inflows into exchange-traded funds smashed all records, and it seems like every week, another asset management giant either enters the space or launches a new suite of funds. In January, Canadian ETFs had net inflows of $1.7 billion, spread across most asset classes and categories, and the top three providers – iShares, BMO and Vanguard – all had high flows.

On top of that, Toronto-based AGF Investments introduced seven new ETFs under its new QuantShares brand, Dynamic Funds partnered with iShares to enter the ETF space, and most recently, Manulife Investments announced plans to launch a series of multi-factor ETFs in April. It’s fair to say that Canada’s ETF market is booming, but can that level of growth continue?

According to Pat Chiefalo, managing director and head of iShares Canadian product at BlackRock, it absolutely can.

Chiefalo believes the underlying trends point to increased growth.

“In other international markets, which are ahead of us in regulatory and retail terms, we’ve seen an acceleration of adoption in ETFs,” he says. “In Canada, with CRM2 coming into play, the potential for trailer fees being impacted and a wealth market where scale is important, the signs also point to increased ETF adoption.”

On the retail side of the industry, ETFs are playing an ever more important role for advisors and individual investors. Even on

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Q&A

the institutional side, more investors are shifting capital into ETFs as fees steadily come down.

“As ETFs have become large, liquid products with low transaction costs and

“In other international markets, which are ahead of us in regulatory and retail terms, we’ve seen an acceleration of adoption in ETFs” management costs, we are seeing a pickup in adoption from institutions,” Chiefalo says. “ETFs are getting increasingly more cost-competitive relative to other vehicles like futures and swaps, which lends itself to further institutional adoption.”

Chiefalo advises Canadian advisors to consider a few factors before placing a client’s money into a specific ETF. If you’re looking for an inexpensive way to access a specific exposure via a plain vanilla market-cap-weighted fund, is that exposure delivering exactly what you need? If a client needs exposure to emerging markets or US stocks, should an advisor seek out an ETF that captures the complete market or just a portion of it?

“There is a good, fertile secondary market and ecosystem around some of these larger liquid ETFs that translates into lower transaction costs for advisors when they’re looking to buy and sell these underlying exposures,” Chiefalo says. “We don’t believe investors should be nitpicky on basis points, but there is a within-reason price for exposure that advisors should consider for every ETF.”

Mark Raes Head of product, ETFs and mutual funds BMO GLOBAL ASSET MANAGEMENT

Years in the industry 20 Fast fact BMO Global Asset Management has a worldwide AUM of $402 billion

BMO makes major ETF moves With BMO Global Asset Management’s new suite of ETFs on the TSX, the company now has more than 80 listings. Do you foresee more additions coming up, or will it be time to scale down the menu soon?

While we do have a full shelf, there’s still a sense that the ETF industry is in its emerging state, and we want to support that by adding more products. A typical large mutual fund shelf would have well in excess of 100 funds, so I don’t see a reason why you couldn’t have a similar number of ETFs.

What inspired you to launch your new income ETF solutions on the TSX? Based on long-term economic and demographic trends, products that enhance income and are done in a tax-efficient manner are going to stay in demand. In terms of the covered calls and the income solutions, we have different geographic exposures, and we have some specialty here in Canada – namely a bank ETF and a utility ETF. We actually didn’t have a broad Canada solution, so this was an opportunity to have a more diversified Canadian approach to the market, which we’ve been asked by clients and advisors to launch for quite some time.

Why did you decide to launch your new series of US Treasury Bond ETFs on the NEO Exchange?

The NEO Exchange is a new player in the capital markets landscape, and we want to support a deep and diverse infrastructure around listings. It’s first and foremost a business diversification consideration. And I think as in all things, competition encourages innovation.

When we looked at the NEO Exchange, we know they’re working on a few different initiatives that I think will bring exciting new options for Canadian investors.

Your new Treasury Bond ETFs have been described as a way to access assets that are under-serviced in the Canadian market. What do you think has caused that gap?

I think when Canadian investors and fund manufacturers think about fixed income, they think domestically. Typically, most would look to a Canadian fixed-income exposure, whether it be government, corporate or a full market that includes both.

US Treasuries, to us, are very interesting because they really are diversified away from equity markets, and you get US dollar currency exposure. So whenever there’s a disruption to equity markets, you see an offsetting increase in interest in US Treasuries.

By segmenting it by term – short, mid and long – we’re allowing clients to select where they want to be on the interest-rate curve.

So it’s under-serviced at this point because demand has been more domestically focused, but we think there’s going to be a lot more interest in diversifying geographically under fixed income.

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10/03/2017 6:39:17 AM

UPFRONT

OPINION

GOT AN OPINION THAT COUNTS? Email wealthprofessional@kmimedia.ca

Battle of the sexes Men and women have vastly different approaches to managing their finances that all advisors should be aware of, write Franco Caligiuri and Marissa Elliott THE NEEDS and behaviours of men and women differ significantly in so many ways, it should come as no surprise that these differences also affect their attitudes toward financial planning. A 2014 survey in Money magazine turned up the stunning statistic that 70% of couples argue about money – more than they do about household chores, togetherness, sex, snoring or the eternal bugbear of what’s for dinner. The genders perceive and approach finances differently – and these differences in money-related perceptions create challenges when it comes to making financial decisions together.

Our empirical observations over the last 16 years as financial planners have left us with the impression that women have a stronger inherent need for stability and security in their lives. They do, after all, carry the responsibility of bearing children and being the primary caregiver to their offspring. This need for security becomes evident when assessing the risk tolerances of our clients during the financial planning process. Our female clients tend to be more conservative and are less willing to take risks than their male counterparts. Women often value the security of less risky investments over the potential for a higher return that could come from more aggressive investment vehicles.

It is appropriate to note, however, that while women may be more conservative in their investment strategies, this is not always the case when it comes to their spending habits. Neither gender is immune to impulsive spending; indeed, the inherent desire to

16

feel security can often be temporarily satisfied by acquiring ‘things.’ Material possessions provide a temporary sense of abundance and security, which may explain why women are less conservative than men when it comes to spending.

In contrast, men have historically filled the role of the primary earner and provider of food and security to the family unit. Prior to the rise of ordered societies, duties such as

ment or the death of a spouse. Paradoxically, these perceptions can be reinforced by a highpaying job, a strong marriage, a smart investment or an inheritance.

We have found that an effect of the dynamic of men being the primary earner and provider is that it disconnects women from the value of money and the energy required to acquire it. This creates problematic mindsets for women, such as a sense of entitlement when it comes to a certain standard of living based on their partner’s ability to earn, or a ‘things will always work themselves out’ type of attitude when it comes to finances.

It’s no wonder that men and women operate differently when it comes to making their financial plans. One is driven by the need for security and protection, while the other desires excitement and conquest.

These differences not only play a role in financial planning, but also in making day-to-day business decisions.

On a more personal level, as long-time business partners, our road to success has seen many challenges along the way. Hours

“It’s no wonder that men and women operate differently when making financial plans. One is driven by the need for security and protection, while the other desires excitement and conquest” hunting and fighting off threats were often the priority of the male. We believe these duties created an inherent need for conquest in men that is still present today, although no longer satisfied by hunting game or warding off competitors. It is now channelled through the acquisition of not only wealth, but also assets such as fancy cars, shoes, watches and other expensive toys.

With regard to managing finances, a man’s desire for conquest translates into a higher risk tolerance and more aggressive investment decisions than women.

Despite this, when we put it all into context, our respective perceptions of security, protection and conquest are often nothing but illusions. Our ‘realities’ can be shattered with the loss of a job, a divorce, a poor invest-

of self-development courses and working with a diverse range of clients, along with an understanding of the differences between genders, have helped broaden our awareness of what drives people when they make decisions. Not only that, but we have also learned to work effectively together by familiarizing and adapting ourselves to each other’s needs, desires and fears – not just as individuals, but within the context of our respective genders.

Franco Caligiuri and Marissa Elliott are the co-founders of Capital Core Financial, a Vancouver-based financial planning and lifestyle management firm.

www.wealthprofessional.ca

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10/03/2017 6:39:49 AM

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1 Environics Category Awareness and Perception Study, independent research conducted by Environics Research, March 2016. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts and prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated. TD Mutual Funds and the TD Managed Assets Program portfolios (collectively, the “Funds”) are managed by TD Asset Management Inc., a wholly-owned subsidiary of The Toronto-Dominion Bank and are available through authorized dealers. ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

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10/03/2017 6:39:57 AM

PEOPLE

INDUSTRY ICON

FROM A GLOBAL PERSPECTIVE Amundi Asset Management portfolio manager Sergeï Strigo discusses his investment strategy for emerging market debt and how to mitigate risk amid the tempestuous political climate of 2017

FOR SERGEÏ STRIGO, head of emerging debt and currency at Amundi Asset Management, monitoring the globe’s central banks is a key part of the job. Presently, there is a real divergence on monetary policy between the United States and the other developed nations. As Strigo explains, however, there are powerful forces in the US that appear to be pulling in opposite directions on this issue.

“The market expectation at the moment is that there will be two rate hikes this year, but there are significant uncertainties with regard to the policies of the US administration,” he says. “On one side we have fiscal stimulus, which is pro-growth, and on the other side you have a tightening of interest rates, which is negative for growth.”

Despite lots of fiery rhetoric, it remains to be seen just how protectionist the policies of Donald Trump will ultimately be. This could influence the Fed’s direction, too, Strigo says.

“There is uncertainty for trade relationships and agreements like NAFTA. It is difficult to know what impact that will have on the US economy. If it is not managed properly, the impact will be quite negative. That will put into question the whole idea of tightening monetary policy.”

In much of the rest of the developed world, interest rates remain at record lows,

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a phenomenon Strigo believes will continue for some time yet. “The US is really the only market in the developed world that has somewhat adjusted,” he says. “The other countries in the Eurozone or Japan are still in an environment of historically low rates. That’s unlikely to change in 2017.”

The European Central Bank in particular seems reluctant to raise rates, given the economic and political turmoil on the continent – first Brexit, and now upcoming

Emerging markets to watch Strigo is a Russian national who began his financial career in Canada, and now works for a French asset manager at its UK headquarters. As such, he has racked up more air miles than most, developing a keen sense for geopolitics in the process. That’s vital for his current role with Amundi, as well as with Mississauga-based Excel Funds, where he serves as portfolio manager for the firm’s High Income Fund.

“There is uncertainty for trade relationships and agreements like NAFTA. It is difficult to know what impact that will have on the US economy. If it is not managed properly, the impact will be quite negative” elections in France and Italy.

“There has been a decrease in purchases by the European Central Bank, and there is a lot of talk about potential tapering,” Strigo says.

“You have to take this in context of all the risk in Europe currently. Brexit is a risk we don’t have a lot of clarity about – how and when it is going to happen. A form of hard Brexit points to a negative economic impact.”

The fund is made up of sovereign and corporate bonds in emerging markets, as well as a diverse mix of currencies. In terms of his investment strategy for 2017, Strigo takes very seriously the prospect of Washington sparking a series of trade wars – but he acknowledges that not all countries would be equally affected.

“Overall we are more cautious on countries that are major exporters to the US, especially

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PROFILE Name: Sergei Strigo Title: Head of emerging market debt and currency Company: Amundi Asset Management Years in the industry: 17 Fast fact: Strigo holds a bachelor’s degree in administrative and commercial studies from the University of Western Ontario and a master’s degree in international accounting and finance from the London School of Economics and Political Science.

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10/03/2017 6:41:09 AM

PEOPLE

INDUSTRY ICON

in manufactured goods,” he says. “On the other side are countries that are commodity exporters – Brazil and Russia, for example – they should do significantly better. In both those countries, direct trade with the US is actually quite small.”

When it comes to fixed income, political uncertainty made 2016 a particularly volatile year for bonds. That climate has continued into 2017, so Strigo highlights a safer place to

countries that experienced plenty of domestic turmoil last year, but offered decent returns on their government bonds.

“Brazil’s central bank has already cut interest rates by 100 basis points over the past few months, and we see them cutting even more,” he says. “Brazilian bonds are still double-digit yields, close to 11%; we think that will go into the single digits this year. Russian bond yields are just above 8%.”

“We are more cautious on the currency side because there is significant uncertainty regarding the path of the US dollar. The market is starting to question whether this strong dollar environment will persist” for bond exposure in emerging markets.

“US-dollar-denominated government bonds are the most defensive asset class,” he says. “There is no currency risk, per se, and volatility is significantly lower. The credit spreads are tighter compared to pre-Trump election, so this is recognized as a safer asset class in the emerging market debt space.”

In the EM private space, the majority of corporate bonds issued are for governmentowned companies, offering greater security. As Strigo explains, however, it is becoming more commonplace for these businesses to seek funding closer to home.

“Corporate bonds are a similar asset class to US-denominated sovereign debt,” he says.

“One thing to watch out for is the overall level of corporate debt, which has been increasing for several years. In general, the issuance of corporate bonds in hard currencies is decreasing over the last year as more corporates are borrowing domestically in local currencies.”

Although finding yield in the bond space has become increasingly difficult, it is still achievable with the right research and an ability to think globally. Strigo highlights two

20

The shifting sands of currency Currency is another area of expertise for Strigo, but it’s an area where investors need to tread carefully. Again, the potential impact of a capricious US government means taking a strong position on currency is a risk.

“We are more cautious on the currency side because there is significant uncertainty regarding the path of the US dollar,” he says.

“What we are seeing now is that the market is starting to question whether this strong dollar environment will persist. This is helped partly by remarks we have seen from Trump and his treasury officials, saying they don’t want a strong dollar.”

In terms of emerging markets, Strigo looks at a specific set of criteria before taking a position on a local currency.

“What we like are countries where inflation is coming down and central banks are cutting interest rates,” he says. “Last year this trend was much more pronounced across the board in emerging markets. In 2017, it is less so. The two countries we like the most in this space are Brazil and Russia. You can also talk about Indonesia and India in the same context.”

AMUNDI ASSET MANAGEMENT BY THE NUMBERS

$1.54 trillion

Amount of in assets under management worldwide, which makes Amundi the largest asset manager in Europe

$709 billion

Amount of that total in fixed-income assets

$88.2 billion Net inflows during 2016

1,000+

Number of institutional clients worldwide

100 million+ Number of global retail investors who use Amundi’s products

30

Countries where Amundi has investment centres

4,000+

Total number of employees worldwide

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10/03/2017 6:41:18 AM

PowerShares Senior Loan Index ETF Performance as at February 28, 2017.

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Commissions, management fees and expenses may all be associated with investments in exchange-traded funds (ETFs). Unless otherwise indicated, rates of return for periods greater than one year are historical annual compound total returns, including changes in unit value and reinvestment of all distributions, and do not take into account any brokerage commissions or income taxes payable by any unitholder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at powershares.ca.

S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and has been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by Invesco Canada Ltd. LSTA® is a registered trademark of Loan Syndications and Trading Association and has been licensed for use by S&P Dow Jones Indices LLC and Invesco Canada Ltd. The S&P/LSTA U.S. Leveraged Loan 100 Index (CAD Hedged) is a product of S&P Dow Jones Indices LLC, and has been licensed for use by Invesco Canada Ltd. Invesco Canada Ltd.’s PowerShares Senior Loan Index ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or its affiliates or LSTA and none of S&P Dow Jones Indices LLC or its affiliates or LSTA make any representation regarding the advisability of investing in such product.

There are risks involved with investing in ETFs. Please read the prospectus for a complete description of risks relevant to the ETF. Ordinary brokerage commissions apply to purchases and sales of ETF units. Most PowerShares ETFs seek to replicate, before fees and expenses, the performance of the applicable index, and are not actively managed. This means that the sub-advisor will not attempt to take defensive positions in declining markets and the ETF will continue to provide exposure to each of the securities in the index regardless of whether the financial condition of one or more issuers of securities in the index deteriorates. In contrast, if a PowerShares ETF is actively managed, then the sub-advisor has discretion to adjust that PowerShares ETF’s holdings in accordance with the ETF’s investment objectives and strategies. †

Inception date is January 10, 2012.

PowerShares Canada is a registered business name of Invesco Canada Ltd. Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence.

PowerShares® and all associated trademarks are trademarks of Invesco PowerShares Capital Management LLC (Invesco PowerShares), used under licence. © Invesco Canada Ltd., 2017

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10/03/2017 6:41:29 AM

FEATURES

COVER STORY: ALTERNATIVE INVESTMENTS

TAKING AN

ALTERNATIVE

APPROACH

Now that traditional investment portfolios are no longer providing the returns they once did, Canadians are warming to alternative strategies in greater numbers. So what are the best options for 2017?

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THERE’S NO SUCH thing as a ‘typical’ investment strategy in the wealth management industry. Different advisors use different strategies – strategies that are entirely dependent on the needs and wants of a particular client. But were you to draw a Venn diagram for this process, the overlapping section would consistently show one component: diversification.

It is highly unlikely that any trained financial planner would ever advise a client to put all their eggs in one basket, regardless of what their risk tolerance may be. Rather, a healthy mix of different asset classes is usually the best option, and that applies to the retail investor and the multi-billiondollar institutional fund alike.

In 2017, there has never been more choice when it comes to different investment vehicles, although this can create its own problems. While the layman may find himself ready to invest in stocks on the TSX after a few quick Google searches, hedge funds and futures trading are different beasts entirely.

Complex and difficult to read, they are nonetheless a valuable addition to a portfolio when managed by a professional. According

to the Alternative Investment Management Association [AIMA], hedge funds out-performed equities and bonds on a risk-adjusted basis in 2016, producing net gains of around $120 billion.

In the not-too-distant past, alternatives were a tool used only by the ultra-wealthy and institutional bodies. While those two segments still dominate the space, a slow democratization of investing is starting to take hold in Canada. Faced with an ultralow-interest-rate environment, advisors are turning to alternatives in greater numbers to generate returns for their clients, and regulators have been responding in kind with measures to improve access.

Alternatives, then and now In his position as chief investment officer at the Mandeville Group, Ray Sawicki oversees private and alternative investing for the firm. It’s a role he is well equipped for, having spent a great deal of his career in the private capital and institutional space, including stints as chief investment officer for Macquarie Private Wealth and senior portfolio manager for RBC GAM’s institu-

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tional asset management business. During that time, Sawicki has closely observed how alternative investing has evolved since the financial crisis.

“The alternative private space is exceedingly broad – you’re looking at everything from infrastructure to real estate investments to long-term private equity, venture capital companies, private debt and private income strategies,” he says. “It is very difficult to characterize this group with a specific risk profile or set of qualities.”

Buying assets in infrastructure or large real estate developments isn’t an option for the average investor – because of the huge numbers involved, those types of investments are the preserve of the institutional space, an area Sawicki knows well.

“When I started, the only players were the pension funds and the insurance companies, but in a very limited scope,” he says. “I worked for an insurance company for many years, and they try to match asset streams with their liabilities. They look at different investment instruments like private debt securities, but that was always a smaller proportion to traditional, prospectusbased assets like stocks and bonds.”

The events of 2008 changed that approach – strategies that worked well in the past were no longer performing. For huge institutional bodies with long-term obligations, it meant a significant change in direction.

“Since 2008 you have seen a shift to include private investments – infrastructure,

In the not-too-distant past, alternatives were a tool used only by the ultra-wealthy and institutional bodies. While those two segments still dominate the space, a slow democratization of investing is starting to take hold in Canada real estate, private equity, hedge funds,” Sawicki says. “It’s rethinking the risk paradigm that these instruments offer. Today if you look at [major pension plans like] CPP, OMERS, Teachers – 50% to 60% of the asset mix is in alternatives.”

That statistic is a testament to the need to mitigate risk through diversification, whether a portfolio has $10,000 in assets or $100 million.

“It’s a dramatic change, but it’s not a case of assuming more risk – it’s complementing a traditional public portfolio with greater diversification,” Sawicki says. “This change has come from greater education about private investing. On the retail side, the adoption rate has been much slower.

The regulatory environment has acted as a brake on the ability of the average person to participate.”

There has been progress in that respect in the form of the offering memorandum exemption introduced last year. The rule change opened the door for greater invest-

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ment by ordinary Canadians in private capital, although limits remain as to just how much they can commit. At Mandeville, Sawicki says advisors strive to make alternatives a central plank of every client’s strategy, be they institutional or retail investors.

“When we look at investments, there are significant benefits to including these private products as part of a diversified portfolio,” he says. “Those benefits should not just be available to pension plans or the uber-wealthy.

Our whole raison d’etre is to democratize private investment.”

Public education Part of the reason investors have been slow to embrace alternatives is undoubtedly an information gap. Another factor is some deeply ingrained investment characteristics that many Canadians hold.

“We are a more conservative culture by nature, so there is a natural adversity to change and embracing something that potentially has a higher degree of risk,” Sawicki says. “The 2008 financial crisis created a need for institutions in Canada to rethink their strategies because it was not sustainable to look at purely public investments. Now that is translating across the retail demographic.”

While there is more knowledge and a greater acceptance of alternative investing among the general public, the sector remains off many investors’ radar. Sawicki believes part of the difficulty in changing hearts and minds is an investment landscape where the

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FEATURES

COVER STORY: ALTERNATIVE INVESTMENTS

banks are dominant.

“The wealth management industry in Canada is highly concentrated with the Big Five, which own 80% of the private client wealth industry,” he says. “Their attitudes toward risk are not necessarily any different from independent firms like ourselves, but their motivations are very different.”

that’s not sufficient these days,” Sawicki says. “It creates an opportunity for firms like Mandeville to say that there are other options. What is being done by sophisticated institutional investors is something that should not be exclusive to them, but can also apply to the average person.”

“The 2008 crisis created a need for institutions in Canada to rethink their strategies because it was not sustainable to look at purely public investments. Now that is translating across the retail demographic” Ray Sawicki, Mandeville Group The difference in this case is the fact that the banks have lineage dating back to the 19th century. Such longevity has allowed them amass significant power, but in Sawicki’s opinion, this isn’t in the best interest of Canadian investors.

“When you look at what drives an organization like RBC, their core competency, infrastructure and capabilities have been built over the last century on the origination, syndication and trading of public securities,” he says. “To change that dynamic is foreign to them. The interest of this oligopolistic group is to suppress change in favour of an environment they control.”

One of the silver linings of the 2008 crash has been that people are much more clued in about their finances. Anyone can research different investment strategies and asset classes online. It means advisors must be able to answer a lot more questions than in the past, and in 2017, that undoubtedly includes queries on how best to use alternatives.

“Older Canadians relied on fixed income for their income stream for retirement –

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Loosening the reins Mandeville hopes to not only change the opinions of investors, but also those of the regulators – Canada’s various bodies have been wary of allowing access to private products that do not offer the same protection as a prospectus.

“We sit down with IIROC all the time and have conversations on risk levels and security attitudes in the private space,” Sawicki says. “It was a general consensus among the regulators that all private market investments would be considered high-risk.

It’s a very broad category, ranging from low-risk private mortgage lending to higher-risk venture capital at the other end of the spectrum.”

Convincing regulators otherwise is a work in progress, although the OM exemption suggests the tide is slowly turning.

“We had IIROC agree that it is not necessarily true that all private alternative securities need to be classified as highrisk,” Sawicki says. “That, in my mind, was an evolution of thinking and represented a paradigm shift we are seeing in Canada.”

HEDGE FUNDS

LOOKING FOR LEVERAGE When an investor decides to diversify a portfolio using an alternative strategy, hedge funds are a regular first point of call. According to the Scotiabank Canadian Hedge Fund Index, which includes both open and closed funds with a minimum AUM of $15 million and at least a 12-month track record of returns, those who made that move toward the end of 2016 would have generated solid returns.

“The recent Scotia numbers showed returns of 6% to 7% in Canada during December,” says James Burron, chief operating officer for the Alternative Investment Management Association [AIMA] in Canada. “Globally, flows were around US$2 trillion in 2016, with an increase of returns of about US$120 billion. On a risk-adjusted basis, hedge funds globally beat stocks and bonds.”

Last year will be remembered for the seismic political shocks of Brexit and Donald Trump’s election victory in the US. These events created plenty of turmoil in the equity and bond markets, but in the hedge sphere, managers were able to generate risk-adjusted returns of 1.45% for the year, beating the S&P 500 (1.1%), MSCI World (0.68%) and Barclays Global Aggregate (0.20%) indices, according to data from the AIMA. “For a lot of hedge strategies, the political stuff doesn’t touch them that much,” Burron says. “I did hear that Trump might be getting rid of the Volcker Rule, but I have spoken to credit managers at the banks, and they say they are not that interested in bringing people back onto the desks. They have found revenue is higher than when they had traders taking prop positions. It bodes well for hedge funds.”

Regulatory change is also on the

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agenda on this side of the 49th parallel.

The CSA’s Modernization Project seeks to create a regulatory framework for mutual funds that want to invest in asset classes or use investment strategies that are not currently permitted. This would have obvious implications for the alternative space, and it’s a move AIMA is fully behind.

“The alternative funds proposal would allow mutual funds to have three times leverage and be able to short 50%,” Burron says. “Right now there is no leverage and you can only short 20%, but you have to have extra cash – for every dollar you short, you have to have an extra 50 cents.”

Should the CSA’s proposal come to pass, Canadian investors will have more access to hedge fund strategies. It’s why the consultation process has been so drawn-out – the national regulator is seeking consensus on what could represent a major development for Canada’s investment industry.

“You are doing something new, so you

“Once banks started selling mutual funds, it legitimized the whole industry. Before, a lot of people hadn’t heard about mutual funds – kind of like where hedge funds are now” James Burron, Alternative Investment Management Association want to make sure everything makes sense from a policy and principles standpoint,” Burron says. “The numberone policy for the commission is investor protection. Next is fair and efficient capital markets. I think this change is great all round. Investors can get access to the strategies, and managers can get another channel.”

Hedge strategies are complex, so their appeal among average investors will likely still be limited, but it’s clear that Canadians want more options when

it comes to their assets. Hedge funds will be part of that shift, but it remains to be seen to what extent.

“When I started in the mid-’90s, mutual funds were at $40 billion – now they are over $1 trillion,” Burron says. “The reason it has gotten so large is that once the banks started selling mutual funds, it legitimized the whole industry. Before, a lot of people hadn’t heard about mutual funds – kind of like where hedge funds are now.”

HEDGE FUNDS VERSUS STOCKS AND BONDS HISTORICAL MONTHLY PERFORMANCE

130% HEDGE FUNDS

SCHFI Asset Weighted SCHFI Equal Weighted STOCKS

S&P 500 S&P TSX BONDS

DEX 91 Day Treasury Bill Index DEX Universe Bond Index

110% 90% 70% 50% 30% 10% -10% -30% -50% Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Source: CPPIB 2016 annual report

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COVER STORY: ALTERNATIVE INVESTMENTS

EXEMPT MARKETS

GAINING ACCESS Last year’s prospectus exemption, which allows issuers to distribute securities by delivering an offering memorandum, was a positive step for Canadians seeking access to the private markets. Ontario, Alberta, Saskatchewan, Quebec, New Brunswick and Nova Scotia harmonized their laws so that non-accredited investors can now invest in private enterprise, although how much they can invest is dictated by their existing income or assets.

For Cora Pettipas, president of the National Exempt Market Association [NEMA], the OM exemption was a welcome development, although she admits its effect has been pretty muted so far among the average investor.

“It is the democratization of the investment market,” she says. “It allows more people access to private equity and investments. In Ontario, some people speculated we would see a gold rush, and there has been an increase of activity, but it is still with the high-net-

PRIVATE INVESTING LIMITS TYPE OF INVESTOR

INVESTMENT RESTRICTIONS

Non-eligible investor Total net worth of less than $400,000 or individual income of less than $75,000 (or $125,000 combined spousal income)

Using an exempt dealer or investing directly, a non-eligible investor can invest up to $10,000 through an offering memorandum in a 12-month period

Eligible investor Total net worth of $400,000 or individual income of $75,000 (or $125,000 combined spousal income)

»» Using an exempt dealer, an eligible investor can invest up to $100,000 through an offering memorandum in a 12-month period »» Without an exempt dealer, eligible investors can invest up to $30,000 directly in any 12-month period with an OM

Accredited investor Total net worth of $5 million, financial assets of $1 million or individual income greater than $200,000 in the past two years (or combined spousal income greater than $300,000)

No offering memorandum required

Source: National Exempt Market Association

“Traditionally in Ontario you needed $1 million in investable assets to be an accredited investor,” Pettipas explains.

“That’s a high benchmark – only 1% to 2% of the population. The OM changes meant that an eligible investor is someone with a $400,000 net worth.

“In Ontario, some people speculated we would see a gold rush, and there has been an increase of activity, but it is still with the high-net-worth accredited investor” Cora Pettipas, National Exempt Market Association worth accredited investor.”

When it comes to buying private assets in Canada, money clearly talks.

While the general public can now invest in the private markets, limits apply – a sliding scale determines whether an investor is considered ‘accredited,’ and therefore not subject to such limits, or merely ‘eligible.’

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That’s about 10% to 15% of Canadians who can access private investments, and they can only do $100,000 per year per person. If you are not an eligible investor, you can invest $10,000 per year.”

The changes by the regulators sought to bring Canada’s provinces in line on this issue, thus allowing private companies to seek alternative sources of funding. Firms

that provide an offering memorandum for potential investors must do so only after ensuring that they fit certain criteria, as Pettipas explains.

“There are two aspects to putting an investment out to market – one is that it has got to have a good risk-adjusted return,” she says. “The second aspect is whether there will be an investor appetite out there. We are in a low-yield environment, so investors are hungry for yield.”

The ultra-low interest-rate environment has meant that many traditional fixed-income strategies have little use in 2017, so people are looking elsewhere. Private equities are one such place, but Pettipas points out that certain industries provide better value than others.

“Some sectors with good value in Canada include the hospitality industry, resort communities, housing accommodations and care facilities, commercial real estate, and equipment leases too,” she says.

“Tech plays are considered too highrisk, and investors are also cautious on resources.”

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PRIVATE STRATEGIES

INVESTING LIKE A PENSION FUND Launched in November 2016, the Alignvest Strategic Partners Fund targets high-networth investors and smaller institutions that want similar exposure to what you would normally see with a pension fund. A mutual fund trust with quarterly liquidity, it sells itself on offering global diversification and an alternative investment strategy. In developing the product, Alignvest knew it was in safe hands with its chief investment officer, Don Raymond, who had served as chief strategist and head of public markets at the Canada Pension Plan Investment Board as it increased its assets from $11 billion to $220 billion.

“We are marketing primarily to high-net-worth Canadians and also defined-contribution pension plans,” Raymond says. “What we have built complements or can replace a traditional 60/40 portfolio. Our long-term strategic allocation would be 45% global equities, 10% in investment-grade bonds, 20% in alternative assets or real assets, and 25% in alternative strategies.”

Investing like a huge institutional player PENSION PLAN INVESTMENT MIX Canadian public equity 4.3%

Alternative strategies 4.3% Alternative assets 20.8%

International public equity 23%

Canada Pension Plan Investment Board EM public equity 23% Fixed income 22.6%

Private equity 23% Financing -4.3%

requires a comprehensive approach that provides exposure to many different asset classes. Such diversification is not easily obtained and requires expertise to ensure risk is minimized.

“We start with a long-term, absolute return objective – so global equities, global fixed income, global real estate and infrastructure,” Raymond says. “We start from a passive perspective, then add active components to the portfolio

national infrastructure plans – but who exactly is going to foot the bill for the new roads, bridges, rail and airports? That important point hasn’t been resolved yet, and as Raymond outlines, political will doesn’t always convert to cold, hard cash.

“Infrastructure [projects] – roads, rail, bridges – are long-term investments, so invariably you will have multiple changes in governments,” he says. “Unless you have a stable regulatory environment, it is

“We start from a passive perspective, then add active components to the portfolio – insurance, commodity trading, trade finance – much as you would find at a large pension fund” Don Raymond, Alignvest – insurance, commodity trading, trade finance – much as you would find at a large pension fund.”

In terms of infrastructure, that could mean investing in the typical roads, bridges and airports. It could also mean finding investments that other funds may have overlooked. In that regard, Alignvest proves its value as an asset manager that is willing to go the extra mile.

“We are looking at a water investment in Australia, which I believe is the only jurisdiction where you can buy the actual physical water source,” Raymond says. “In most cases, you buy the delivery source – the pipes – but in Australia, you purchase the water rights themselves. The regulator decides how much water can be drained from the river system, so you are buying at various access points along the river.”

Closer to home, both Justin Trudeau and Donald Trump have committed to

very hard to draw investors in.”

In Canada, the Liberal government will launch its Infrastructure Bank later this year, using $35 billion in public funding to attract private investors. The long-term goal is to bring in between $4 to $5 in private money for every dollar of public funds to be used on new projects. Ottawa wants the country’s largest pension funds and overseas sovereign wealth funds to come on board, but this will require certain safeguards, Raymond says.

“If they can get the governance right on an infrastructure bank, it’s a terrific idea,” he says. “They need to create an environment for investors with more certainty on what the regulatory regime will be. It would be nice if governments were aggregating the assets in such a way as it isn’t a whole bunch of small projects.

It’s much better to have some larger projects that could change the market.”

Source: CPPIB 2016 annual report

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FEATURES

COVER STORY: ALTERNATIVE INVESTMENTS

CURRENCY

FINDING RETURNS IN FOREIGN EXCHANGE For investors with a greater appetite for risk, currency trading offers the chance to win big, but the inverse is equally true. Similar to the other alternative strategies featured here, trading on the FX market was once the preserve of institutional investors and hedge funds. The internet changed all that by allowing investors to swap yen for greenbacks in milliseconds.

Forex is the world’s most traded market, posting an average daily turnover in excess of US$5.3 trillion, according to City Index. The ability of technology to open up this market was what inspired computer scientist Dr. Michael Stumm and economist Dr. Richard Olsen to start their own firm,

Alfonso Esparza, senior market strategist at OANDA, identifies the factors that contributed to this movement.

“In 2016, political risk overtook market fundamentals, and we pretty much see that continuing in 2017,” he says. “We forecasted a strong finish for the US dollar last year, then Brexit and the US election gave even more strength. The strong dollar trade has lost some momentum since then – it is all dependent on Donald Trump and his policies.”

As the world’s currency, the greenback’s performance has farreaching implications for the FX markets. In the aftermath of Trump’s election victory, the dollar performed well, only to fall in January. With a

“We forecasted a strong finish for the US dollar last year, then Brexit and the US election gave even more strength. The strong dollar trade has lost some momentum since then – it is all dependent on Donald Trump and his policies” Alfonso Esparza, OANDA OANDA, in 1996. OANDA was the first company to make currency exchange information available over the internet, and the duo helped pioneer the develop­ ment of currency trading over the net in 2001.

Since then, the business has grown to become an industry leader with offices in eight major financial centres and clients in more than 196 countries. Last year, currency moves were the highest since 2008, as returns in FX outpaced equities.

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further interest rate hike expected by the Fed in the coming months, another rally could be on the way. Keeping up to date with all the political machinations in Washington is a key part of Esparza’s job, which is quite the task given the current administration.

“We definitely see the peso going positive or negative depending on the political risk that Trump brings to the table,” he says. “We saw a deprecation after his election of 12% to 13%, and

now it has appreciated as he has focused less on strengthening the dollar and more on immigration, which hasn’t really boosted the dollar at all.”

In contrast to his hard-line position on Mexico, the new US president’s approach to Canada has been conciliatory so far. The first Trudeau-Trump meeting at the White House in February was pretty amiable, although lacking in specifics regarding a renegotiated NAFTA deal. The fortunes of the Canadian dollar, and indeed the wider economy, are inextricably linked to the United States, so maintaining a healthy relationship with Trump will be paramount for the mandarins in Ottawa.

“The Canadian government has smartly stayed out of Trump’s sights, and that has helped the loonie,” Esparza says. “When it comes to Trump and trade, if everyone comes to the table to negotiate, then there could be some big wins for the three countries, despite the Americafirst rhetoric. Political risk could be a significant driver for the loonie in 2017.”

The other major driver for the Canadian dollar is the price of oil – one need only look at the loonie’s performance in 2015 to realize that.

Being tied to a commodity as volatile as crude means the currency can also swing widely, something Esparza hasn’t ruled out for the coming year.

“The price of oil is being maintained by the OPEC production agreement, but that is giving an opportunity for US and Canadian shale producers to ramp up production,” he says. “That could mean a reduction in prices, and the same goes for OPEC not extending its six-month agreement.”

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COMMODITIES

BACK TO THE FUTURES The buying and selling of commodities dates back over six thousand years – futures trading is believed to have originated in ancient China, part of society’s response to the realization that certain crops could not be produced yearround. Today, it’s oil and gold rather than rice that dominate the marketplace, but the concept of setting a future price for a product with different production variables remains the same.

Christopher Foster is the founder of Blackheath Fund Management, which offers clients access to the Blackheath Tactical FI Strategy for bond market exposure, as well as a more traditional commodity futures product, the Blackheath NewTrend Strategy. According to Foster, finding returns using these types of funds has been challenging lately.

“Blackheath New Trend Strategy, COMMODITIES: THE TRUMP EFFECT CHANGE IN PRICE SINCE NOVEMBER 8, 2016

-5%

0%

5%

10%

15% 20% 25%

Steel*

Oil

Aluminum Corn

Gold *US hot-rolled coil steel

like all trend-following strategies in the commodity space, has been sucking wind,” he says. “That space has done nothing but lose money for years now.”

In Foster’s opinion, the industry has suffered from too much of a herd mentality, which is stifling the ability to generate returns.

“There is too much money chasing the same signal,” he says. “There is trendiness in markets that people have assumed is immutable fact. The broad, trend-

climbing back above US$60.

“I think crude oil will come down again,” he says. “These are great prices for shale products – the regulatory yoke has been taken off; they presumably will get tax cuts and start drilling like crazy. So that will have downward pressure on the oil price.”

Gold had a tempestuous 2016, and Foster expects that central bank policy and potential inflation in the US will drag on the bullion price this year, although it retains its safe-haven qualities.

“I believe there is too much money in this space – $400 billion chasing the same signal, with more piling in” Christopher Foster, Blackheath Fund Management following indices in the commodity space are basically at the same place they were three or four years ago.”

This inertia is nothing new in this space, but the length of this particular stretch is rather concerning for traders like Foster.

“There have been periods like this before,” he says. “The late ’80s was very difficult for trend followers, but this is a long time to not make money. I believe there is too much money in this space – $400 billion chasing the same signal, with more piling in. Assets under management in the trend-following space hit a new high last year.”

One factor that may work in the favour of the futures markets is the new administration in Washington.

Donald Trump’s proposed US$1 trillion infrastructure plan has precipitated a rally in steel since the election. Oil has also made significant recent gains, buttressed by the OPEC agreement signed in December. Regardless, Foster advises against any speculative trades on oil

“It will be more of the same for gold this year,” Foster says. ”The US dollar is quite strong and real interest rates are improving, but we have political instability, so it will continue to go up and down. The bull market for it really ended in 2011.”

Outside of oil and gold, investors could put their money into agricultural commodities, although political uncertainty is a factor here too, particularly if the US enacts protectionist policies and provokes a trade war with other nations.

Domestic turmoil in producer nations is another consideration to take on board, as well as variables such as the weather.

“The soft commodities are well positioned,” Foster says. “Coffee, sugar, cocoa really haven’t done much yet, but they do profit from instability. Two-thirds of the world’s cocoa production is in West Africa, which is always capable of going off the rails. In an environment when we have good economic growth and political instability, there will be opportunities for commodity trading.”

Source: Thomson Reuters Datastream, February 14, 2017

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FEATURES

COVER STORY: ALTERNATIVE INVESTMENTS

WINE

A VINTAGE YEAR For those searching for an investment even more alternative than currency, gold or private assets, how about wine?

Vintage wines are an asset class with a lot of history, which is what makes them valuable in the first place. In the past, generating wealth using wine as an investment would have meant purchasing an extremely rare bottle and then watching it appreciate in value over the years. It’s a different marketplace today, with a range of vehicles available for investors interested in the wine trade.

Chris Smith is the investment manager for the Wine Investment Fund, which was launched in the UK in 2003. The product was the first of its kind and has attracted a certain type of investor since its inception 14 years ago.

“There have always been ways to invest in wine, but we were the first properly constituted wine fund,” Smith says. “The typical investor is relatively high-net-worth, as we have a minimum investment of £10,000. People might put 15% of their overall investable assets in alternatives, of

which a third may go into this fund.”

While the underlying product certainly is much more pleasing to the palate than in a normal mutual fund, the fact that it is wine is not the most important factor.

The value of the product and whether it will appreciate dictates the makeup of the fund, which is why the managers avoid

“Wine is 4% correlated to the equity markets, so it is a good diversifier. It generally outperforms the equity markets quite significantly” Chris Smith, The Wine Investment Fund wines with high price volatility – such as en-primeur (wine futures) – that are difficult to forecast.

“One of the major risks in this market, ironically enough, is liquidity risk,” Smith says. “Some of the investmentgrade wines out there have really small

WINE VERSUS TRADITIONAL INVESTMENTS SHARPE RATIOS (RETURN PER UNIT OF RISK), MARCH 2004 – OCTOBER 2016

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

The Wine Investment Fund

Gold

production levels, so they don’t trade much on the secondary markets. When we build our universe, we try to reduce liquidity risk and only pick wines that trade frequently and that we know we can get an accurate price on.”

For the Wine Investment Fund, that tends to be Bordeaux that is at least

Oil

FTSE

Hang Seng

four years old and has established a reputation as a strong vintage. There also needs to be a steady supply, which will boost its potential to increase in value.

Wine differs from other niche asset classes like fine art and vintage cars in that it has its own stock exchange – the London International Vintners Exchange, or Liv-ex. The industry has recovered well from a terrible three-year spell between 2011 and 2014 where the market lost 36% of its value. The Wine Investment Fund had returns of 16% last year, and Smith predicts further growth in 2017 as investors seek greater diversification in their portfolios.

“Wine is 4% correlated to the equity markets, so it is a good diversifier,” he says. “It generally outperforms the equity markets quite significantly.

Since 1988, the average long-term wine index return is about 11% per annum; the FTSE is about 4.9% in the same period. Last year on the main index, the return was 24%.”

Source: The Wine Investment Fund

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REAL ESTATE

THEY’RE NOT MAKING IT ANYMORE One of the more widely known asset classes in the alternative space is real estate. Such investments don’t come cheap, however, so buying shares in a real estate investment trust is a more affordable option – and it’s a vehicle that is currently providing solid returns.

In a recent study by Timbercreek Asset Management, global real estate securities were forecast to deliver 8.5% to 10.5% returns in 2017. This includes a 4% dividend yield and 5% to 6% growth in earnings driven by occupancy gains, higher rental revenues, acquisition of new properties and the completion of existing development projects. In Canada, the retail and multi-family sectors are expected to perform strongly; multi-family in particular should benefit from tighter mortgage rules for homeownership.

GLOBAL REIT RETURNS 2016 TOTAL RETURN BY MARKET

-10% -5% 0% 5% 10% 15% 20% Canada Australia US Hong Kong Global Cont. Europe Singapore Japan UK

“People are searching for yield,” says Kelly C. Hanczyk, president and CEO of Edgefront Real Estate Investment Trust.

“Interest rates will be down for quite a while in Canada, so REITs are still quite attractive. Even if the rates go up a slight tick, fundamentally the real estate

entered the province in 2013. The office sector has been hit hard, but industrials are still performing pretty well.”

While property prices have come down in Alberta, elsewhere in Canada it’s a decidedly different story – Vancouver and Toronto are among the world’s most

“Interest rates will be down for quite a while in Canada, so REITs are still quite attractive. Even if the rates go up a slight tick, fundamentally the real estate market is quite sound” Kelly C. Hanczyk, Edgefront Real Estate Investment Trust market is quite sound. The industrial market is good, and multi-family is very strong. There is weakness in office in certain areas like Calgary, so you have to do your homework.”

Alberta-based Edgefront recently merged with Quebec’s Nobel Real Estate Investment Trust to create a new entity known as Nexus Real Estate Investment Trust. The new REIT will have broader portfolio diversification geographically, by asset class and by tenant base, and will be broken down into 78% industrial, 16% office, 3% retail and 3% mixed-use.

Quebec will maintain the lion’s share of the merged portfolio (42%), while 26% of the assets will be located in Alberta. While Alberta’s real estate market hasn’t escaped the province’s economic downturn, Edgefront’s position as an industrial REIT has kept business strong.

“We are 100% occupied and have been that way for the last 15 quarters,” Hanczyk says. “We haven’t had any slowdown in our tenements – we really took a hard look at covenants when we

expensive cities for real estate. For an investment trust, finding properties that will generate enough yield to justify their sky-high price can be challenging.

“For Vancouver, it is very expensive; the cap rates are extremely low to purchase anything there,” Hanczyk says.

“In Toronto, you have to go out into the smaller tier of the GTA to get a cap rate that is more attractive.”

While the signs point to a strong real estate market in 2017, investors should keep in mind the risk involved. Nobody can forget 2008, but there are more recent examples of dips in the REIT market.

“The REIT market is up and down,” Hanczyk says. “In 2013 it was relatively strong and then collapsed when money managers and the institutional side made a lot of redemptions. Any time there is interest-rate fear, this type of investment takes it on the chin. From our perspective this year, nothing has changed fundamentally, and the cash flow behind the REITs is still very strong, making them a viable investment.”

Source: Bloomberg; Timbercreek Asset Management

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SPECIAL PROMOTIONAL FEATURE

ALTERNATIVES

Breaking from tradition Sprott Asset Management has reinvented itself in recent years as a major player in the alternative space. WP talked to executives from the firm to find out how they’re generating returns outside of traditional asset classes WHILE THE Sprott name will always be synonymous with the firm’s precious metals roots, its focus is much more diverse these days. Sprott Asset Management’s products run the gamut in the alternative space from real estate and infrastructure to private credit and alternative income funds.

Earning consistent returns does not come easy in the post-financial crisis era; rather, it requires a commitment to staying ahead of the curve. Sprott recalibrated its business on that belief and is now reaping the benefits – its AUM at the end of 2016 was $9.3 billion, compared to $7.4 billion the previous year.

After joining Sprott Asset Management in 2015 and launching four new funds, Dennis Mitchell assumed the lead management duties for the Sprott Global Infrastructure Fund and the Sprott Global Real Estate Fund. Upon taking control of the funds, consolidation, then

diversification, were the immediate goals.

“We immediately reduced the number of positions in the Sprott Global Infrastructure Fund from 60 to about 30,” Mitchell says. “We materially reduced the energy weighting from about 50% of the portfolio down to about 17%. We also reduced the utilities weight and diversified by taking on some financials, a lot of industrials, some IT, some real estate, as well as some consumer discretionary.”

Infrastructure investments The investment strategy for the fund is easy to explain, yet difficult to carry out. Saying you want to select high-quality companies that provide long-term income is one thing, but actually finding those firms is quite another.

“We don’t invest in infrastructure projects; we invest in infrastructure companies – Transurban in Australia and

“In the US, our real estate exposure is mainly tower and data centre REITs. The reason for that is simple – they are levered towards a number of global macro trends, whether it be social media, e-commerce or increased digitization” Dennis Mitchell, Sprott Asset Management 34

VINCI in France are examples,” Mitchell says. “Toll roads are a common investment for these types of companies to own. Also pipeline, utilities, railways – and in our case, we have expanded the definition of infrastructure to include things like credit card payment networks and data centres.”

Infrastructure is a hot-button topic in general these days. Ottawa is in the process of forming an Infrastructure Bank to combine public and private money for infrastructure funding, while the US president has committed to investing $1 trillion in major projects. Figures like that are certainly eyebrow-raising, but they’re not something Mitchell and his team at Sprott pay much heed to when managing their own infrastructure fund.

“Most of the early wins from a program like that will accrue to engineering and construction firms,” he says. “Just because governments are funding infrastructure spending doesn’t mean you buy infrastructure companies.

It means you might buy one infrastructure company if they win a contract to build and

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manage a valuable concession.”

More impactful will be the policies of various central banks – the Fed looming largest of all. Insiders expect three interest rate hikes in the US in 2017; should that happen, then investing in infrastructure has clear benefits.

“Now that the Fed has started to raise rates, we will allocate more capital to industrials, financials and energy in order to insulate our fund against the impact of rising interest rates,” Mitchell says. “The Sprott Global Infrastructure Fund has exposure to eight of the 11 Global Industry Classification sectors, making it a concentrated global

equity fund. We believe this strategy will do well going forward.”

A global view on real estate Another area where Mitchell lends his expertise is the Sprott Global Real Estate Fund. For this product, global means a division between property in the US and the rest of the world.

The geographical makeup of the fund is 46% US and 15% Canada; various European and Asian countries make up the remainder.

Consistent with Mitchell’s belief that less is more, the Sprott Global Real Estate Fund is currently invested in 26 companies, 20 of

“Private credit is a defensive asset class in a complex and uncertain global environment, usually only available to institutional investors. What Sprott has done is bring that to the retail investor” Ramesh Kashyap, Sprott Asset Management

which “have increased their distribution in the last year, with a median increase of over 11%,” he says. In only including 26 firms in the portfolio, Mitchell has value firmly in mind, focusing on certain companies with material growth potential.

“We have some deep-value US names that we own – Simon Property and GGP,” he says.

“These are large regional mall REITs that are trading at or below net asset value – that rarely happens. Both of them are growing their net asset value, so we are able to accumulate large positions at a discount.”

The approach to real estate also differs depending on the country in question, Mitchell adds. “The counter to rising interest rates is growth,” he says. “In the US, our real estate exposure is mainly tower and data centre REITs. The reason for that is simple – they are levered toward a number of global macro trends, whether it be social media, e-commerce or increased digitization.”

Outside of North America, he adopts a more typical approach to real estate investing that is proving successful in the current economic climate. “The rest of the world is more of a traditional REIT portfolio. We are taking advantage of specific sectors where there has been a dearth of new supply for a long time, and demand and occupancies are rising.”

Europe has been on rocky ground since Brexit threw the future of the EU into serious doubt. That said, shoots of optimism are starting to spring up on the continent, particularly in a couple of nations that suffered most during the Great Recession.

“When unemployment is 25%, as it was in Spain, you don’t build any new malls because there are fewer people with jobs willing to spend money,” Mitchell says. “Similarly, there is no new demand for office space. For the last seven to eight years in Spain and Ireland, there has been little new supply in the office and retail sectors. Those economies have since stabilized and recovered, and Spain and Ireland have real GDP growth rates of 3% to 4%, two to three times the rate of the Eurozone as a whole. So vacancy rates have started to decline and occupancy has gone up.

The REITs we have exposure to in Spain and Ireland are seeing their net asset values climb and their free cash flows grow.”

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SPECIAL PROMOTIONAL FEATURE

ALTERNATIVES Strategies for the average investor Similar to the access it offers for infrastructure and real estate, Sprott also allows retail investors the chance to buy into a diverse mix of alternative income strategies through the Sprott Alternative Income Fund and its four underlying funds: the Sprott Bridging Income Fund LP, Sprott Private Credit Trust II, Sprott Credit Income Opportunities Fund and Sprott Diversified Bond Fund. Ramesh Kashyap oversees the fund and its stated aim of providing income while preserving capital in what has been a low-yield environment.

“Private credit is a defensive asset class in a complex and uncertain global environment, usually only available to institutional investors,” he says. “What Sprott has done is bring that to the retail investor. Including all of our alternative income products, we are close to $1 billion in AUM.” When investing in private equity, a lack of liquidity is usually the trade-off for gaining access to products outside the public domain, but that isn’t the case with the Alternative Income Fund. “One of the things that attracts the retail investor to the Sprott Alterna-

tive Income Fund is the liquidity,” Kashyap says. “With 30 days’ notice, you can redeem, whereas with traditional private debt funds, it is six months’ notice or more.”

The Alternative Income Fund also offers investors different levels of liquidity, depending on which underlying fund they select.

“To get exposure to private credit, you have the option of investing directly into Sprott’s Alternative Income Fund or any of the underlying funds,” Kashyap says. “The Sprott Private Credit Trust is a senior debt fund that provides asset-based loans to companies across the

FUND DETAILS: SPROTT GLOBAL REAL ESTATE FUND

FUND DETAILS: SPROTT GLOBAL INFRASTRUCTURE FUND

Fund type

Real estate equity

Fund type

Global equity

Inception date

August 4, 2015

Inception date

September 1, 2011

Unit price

$10.60

Unit price

$9.75

Registered tax plan status

Eligible

Registered tax plan status

Eligible

Minimum initial statement

$1, 000

Minimum initial statement

$1, 000

Minimum subsequent

$25

Minimum subsequent

$25

Valuations

Daily

Valuations

Daily

2.00% (Series A) Management fee

2.00% (Series A) Management fee

1.00% (Series F)

1.00% (Series F)

Performance fee

None

Performance fee

None

Minimum investment term

20 days (1.5 % penalty)

Minimum investment term

20 days (1.5 % penalty)

Risk tolerance

Medium

Risk tolerance

Low-Medium

Number of issues

25

Number of issues

29

Average market cap

$30.1 billion

Average market cap

$78.0 billion

Market cap breakdown

Market cap breakdown

Large (> $5 billion)

62.8%

Large (> $5 billion)

98.3%

Medium ($1 billion–$5 billion)

16.7%

Medium ($1 billion–$5 billion)

3.3%

Small (<$1 billion)

6.5%

Distributions

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November 2016

$0.0317 per unit

December 2016

$0.0317 per unit

January 2017

$0.0401 per unit

Distributions December 2016

$1.1450 per unit

January 2017

$0.0369 per unit

Assets under management

$14.6 million

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US and Canada. The Bridging Income Fund also provides asset-based loans, except the duration of the loans is shorter, the average loan size is smaller, and they typically are less complex. The Sprott Bridging Income Fund also provides account receivable factoring – factoring accounts, on average, are small in size and can be liquidated or collected in less than 45 days. Loans are provided on a collateralized basis and not cash-flow-based. If things don’t work out tomorrow, you have the option to liquidate the collateral to pay down the loan.”

A CLOSER LOOK AT PRIVATE DEBT Relative size and growth of private investment markets Leveraged loans

Private equity

Private debt

2006

2006

2006

$554 billion

$1.3 trillion

US institutional investors’ intentions for private debt, 2015

8%

$150 billion

40%

Looking ahead for growth Sprott’s assets are approaching $1 billion, and the alternatives team has every intention of growing that number in the months ahead.

This will come through an enhanced private credit product suite, where investors can buy into the debt markets using precise strategies that offer lower volatility and non-correlated portfolio diversification strategies.

“We have plans to launch another Canadian-focused senior debt fund in April,” Kashyap says. “We are also looking at a USdollar-denominated senior debt fund that will provide exposure to mid-market companies in the US. Other products in our pipeline include a Canadian subordinated debt product, a US/ Canada real estate product and a marketplace fund focused on consumer lending. Our goal is to bring niche opportunities and access to bestin-class private credit managers to Canadian investors. We hope to double our AUM in the alternative space to over $2 billion in 18 to 24 months.”

It’s a lofty ambition, but entirely achievable with the will and the right people. Sprott has amassed quite an array of talent in recent years, which clearly indicates plans for expansion, particularly in the alternative arena.

“It is a huge and growing asset class,” Kashyap says. “The size of the private credit market, excluding institutional investments, is approximately $5 billion in Canada. Our private credit product offering currently focuses on senior loans. But there is mezzanine, distressed, venture capital, speciality finance and structured equity – we want to offer access to diverse array of strategies and returns to our investors.”

1.5x growth 2016

1.8x growth

52%

3.7x growth 2016

2016 Increase allocation

$561 billion

$835 billion

Maintain allocation

$2.4 trillion

Decrease allocation

THE SPROTT ALTERNATIVE INCOME FUND’S FLEXIBLE STRATEGY

SPROTT PRIVATE DEBT SOLUTION Pure-play

Multi-strategy

SPROTT PRIVATE SPROTT BRIDGING SPROTT ALTERNATIVE INCOME FUND CREDIT TRUST INCOME FUND

LOWER

LIQUIDITY

HIGHER

HIGHER

RETURN POTENTIAL

LOWER

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FEATURES

MUTUAL FUND GUIDE

MUTUAL FUND OUTLOOK Itâ&#x20AC;&#x2122;s been a tough few years for active managers in the mutual fund space, but according to a number of experts in the field, that could be about to change

A CENTRAL pillar of the Canadian investment space, the mutual fund actually dates back to the 18th century and the height of European colonial expansionism. Its genesis came about when the British East India Company sought a bailout by the British treasury in 1772, sparking a financial crisis.

In response, a Dutch merchant named Adriaan van Ketwich pooled money from a number of subscribers to form an invest-

38

ment trust in 1774. To put the longevity of the mutual fund into context, it predates the United Statesâ&#x20AC;&#x2122; Declaration of Independence, which came two years later.

The mutual fund as we know it today arrived in 1924 with the Massachusetts Investors Trust, and Canada followed suit in 1932 with the Canadian Investment Fund. (That fund still exists today as the CI Canadian Investment Fund, holding assets of

$2.1 billion.) In 2017, the global mutual fund industry has US$27.6 trillion AUM; Canada accounts for $1.3 trillion of that amount.

Net sales in Canada were $30.7 billion after redemptions in 2016, in what was a difficult year for active managers. Strong performance in the equity markets made beating benchmarks a tough task for many fund managers, and more and more investors elected to put their money into passive ETFs.

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MUTUAL FUNDS’ POSITION IN CANADA

86% $1.34

Amount of assets held in Canadian mutual funds as of January 31, 2017

4.9

Number of Canadian households that held mutual funds as of 2015

31%

Proportion of Canadians’ financial wealth held in mutual funds

trillion

million

192,600

The introduction of CRM2 also means a greater spotlight on fees, and naysayers claim that Canadian fund managers are not providing value for money. Regardless, mutual funds still enjoy a dominant position in Canada, accounting for 31% of total financial wealth in this country, according to the Investment Funds Institute of Canada.

The industry is facing many challenges, however, and the investment landscape

today is very different than it was in the 1990s, when this vehicle experienced its great rise. There are a lot more options available to Canadian investors – not just from passive funds like ETFs, but also from a host of other alternative products that have increased access for retail investors. With a lot more competition nipping at their heels, mutual fund managers have a mandate to demonstrate their value.

Percentage of Canadians who have confidence in mutual funds, compared to 59% for GICs, 51% for bonds and 64% for stocks

$17 billion

$7

billion

Total number of jobs supported by Canada’s mutual fund industry

Total economic footprint of the mutual fund industry in 2012 (1% of total GDP)

Amount the Canadian mutual fund industry contributes to total tax revenues in Canada Source: Investment Funds Institute of Canada

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FEATURES

MUTUAL FUND GUIDE

INDUSTRY VOICE In 2016, mutual fund growth was about half of what it was a year previously, while ETFs had a record year, both in terms of sales and asset growth. As president and CEO of the Investment Funds Institute of Canada [IFIC], Paul Bourque represents both ETFs and mutual funds, and believes the two products should be seen as complementary, rather than outright rivals.

“I don’t know the exact relationship between increased redemptions in mutual funds and ETFs, but most ETF and mutual fund issuers are in the same business,” Bourque says. “Six IFIC fund manager members currently issue ETFs and have $88 billion in assets under management, which represents 79% of all ETF assets under management in Canada.”

The trend of major fund managers entering the ETF space will accelerate further this year as Desjardins, Franklin Templeton and Manulife all join the fray. Given the growing popularity of ETFs, it’s an obvious step to take, Bourque says.

“They are both retail funds under the same securities rule 81-102,” he says. “They both require the delivery of a prospectus, or in ETFs’ case, fund facts. It’s a similar business with similar products that are complementary.”

In building a portfolio, diversification is central to every advisor’s investment strategy, and increasingly, ETFs are being used to provide exposure to different areas of the market. In Bourque’s opinion, it’s not really a case of either/or when it comes to mutual funds and ETFs. “There is a place for both – they are complementary, and depending on market conditions, both are important for any investment portfolio,” he says. “In a strongly advancing market, passive investing is a very successful strategy, as we see today. In less active markets, active management can be very successful.”

Another major issue for the mutual fund industry is the subject of fees and whether

40

“It is an often-repeated canard that Canada has the highest mutual fund fees in the world – that is incorrect,” he says. “That statement first appeared in 2011 in a Morningstar report. In

Canada should ban commissions. Recently, Bourque responded to a consultation paper from the CSA, stating his opposition to an outright ban. He pointed to the UK, which

“We need to be careful before banning a payment option that is used by about 80% of Canadians when they buy mutual funds” Paul Bourque, Investment Funds Institute of Canada 2015, Morningstar acknowledged that a more accurate comparison would place Canada in the top half of the lower-fee markets out of 25 countries studied.”

Such geographical comparisons often neglect the fact that Canada differs from other nations when it comes to what costs are included in a fund’s MER, Bourque points out.

“Expense ratios in Canada generally include the advisory cost; in the US and many other countries, investors pay that cost separately,” he says. “On that basis, the cost to investors on both sides of the border is almost identical.

We like to repeat that message as much as we can and put that myth to rest.”

banned commissions in 2013, as an example.

“We don’t want to repeat the same mistakes here,” he says. “We need to be careful before banning a payment option that is used by about 80% of Canadians when they buy mutual funds. It is the client preference. If you are going to ban that, then it could cut a lot of those people off from financial advice.

That’s our primary concern.”

On the subject of fees, it is a common criticism of the mutual fund industry in Canada that funds here are a poor value in relation to other nations, particularly the US, but Bourque feels Canada’s reputation in this regard is largely unwarranted.

MUTUAL FUND PERFORMANCE NET ASSETS $893.9 billion $819.9 billion

Stand-alone funds Fund-of-funds Equity funds

$447.5 billion $388.3 billion $431.3 billion $380.6 billion $698.6 billion $624.8 billion

Balanced funds Bond funds Specialty funds

$175.2 billion $152.6 billion $12.3 billion $24.6 billion

Jan 2017

Jan 2016

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RATING FUNDS When advisors select mutual funds to add to a portfolio, Morningstar is an invaluable resource. The research firm’s rating system is world renowned and used by wealth professionals from New York to New Delhi.

Christopher Davis, director of Morningstar Research in Canada, explains just what separates a five-star, gold medal fund from its peers.

“The star rating is a purely quantitative, backward-looking measure, based on riskadjusted return,” he says. “If you have at least three years of performance, you can be ranked. What is more labour-intensive is our analysts’ rating, which is forwardlooking, qualitative analysis. The funds we think are likely to outperform their peer group and benchmark are then rated gold, silver or bronze. We also have neutral and negative ratings.”

A strong Morningstar rating is an important factor that can dictate the success of a mutual fund. For advisors wondering why they should have faith in these ratings, Davis explains the criteria that his team sets for judging products.

“We base our conviction on our analysis and the five Ps of our research: people running the fund, process, parent company’s quality, performance and price,” he says. “In each of those pillars, we are looking for areas

of competitive advantage.”

To earn a gold medal, the fund must display strong performance in all the five Ps. However, as this analysis takes a longer view, a gold medal is no guarantee of short-term success, as the industry witnessed in 2016.

“The biggest impact on mutual fund fees is not coming from ETFs, but changing dynamics in the Canadian distribution structure” Christopher Davis, Morningstar “Many of our highest-rated equity funds lagged or have middle-of-the-path results over the past year, but on the fixed-income side, the medalists have looked stronger,” Davis says. “I think that’s a reflection of the fact that we tend to award our medals to funds that are differentiated from their benchmark.”

Working for a research firm with global reach means Davis has a wealth of information on a host of funds around the world – and he believes Canada comes up short in one of the five Ps: price.

“Globally speaking, Canada does have the highest mutual fund fees in the world – that

NET SALES $2.4 $2.5 billion billion

$1.6 billion

$471 million

$822 million $277 million

Jan 2016

$124 $52 million million

-$1.3 billion

-$2.6 billion

Stand-alone funds

Jan 2017

$2.4 billion

$1.1 billion

Fund-of-funds

Equity funds

is a fact,” he says. “IFIC is correct in pointing out that Canada is unique in bundling in all of the distribution and advice costs into the expense ratio. Including the sales tax is not unique, but it does have an impact that is not globally apparent.”

Balanced funds

Bond funds

Specialty funds Source: Investment Funds Institute of Canada

When looking for lower-priced funds, Canadian investors need only glance south of the border, he says. The US is the runaway world leader in the mutual fund space with US$15.1 trillion in assets, and according to Davis, part of that growth can be attributed to providing better value for money.

“If you look at the funds in Canada and the US, the exact same fund is orders of magnitude cheaper there,” he says. “Canada’s market isn’t offering investors a particularly good deal, at least in comparison to its neighbours.

The bundling doesn’t explain everything.”

One positive Davis sees for Canadian investors is the introduction of CRM2 and the greater focus on fees that has come along with it. Last year, a number of major providers lowered fees on their mutual fund products, and that’s a trend Davis expects will continue.

“The biggest impact on mutual fund fees is not coming from ETFs, but changing dynamics in the Canadian distribution structure,” he says. “There is a move toward fee-based advisory services rather than commission-based, so lo and behold, when fund companies are not paying advisors to sell their funds, expenses come down.”

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FEATURES

MUTUAL FUND GUIDE

BRINGING FUNDS TO MARKET While many of its competitors have decided to enter the ETF space over the past number of years, iA Clarington, the investment arm of iA Financial Group, is noticeable by its absence.

Instead, the firm has dedicated itself fully to mutual funds, evidenced by a number of new products last year.

“The trifecta of product development is trying to marry three different elements,” explains Eric Frape, senior vice-president of products and investments at iA Clarington.

“What are the customer’s needs you are trying to solve? Is there a demand for it? And lastly, do you have the ability to put together something based on your expertise?”

Another factor iA Clarington has to consider is the sheer amount of mutual funds already out there, which makes it challenging to come up with something fresh.

“On product development, our approach is on two different tracks,” Frape says. “One is more unique, differentiated products – that could include things like alternative type strategies such as infrastructure or alternative income. Our top-selling fund right now is a floating-rate income fund that invests in a very unique asset class in floating loans.

“The second track would be more in broad asset allocation products for investors,” he continues. “Another key product we launched

last year was a managed portfolio product overseen by our chief economist, Clément Gignac; that has resonated well. People want a diversified portfolio, but they also want someone managing it based on how the macro environment changes.”

As for iA Clarington's decision to pursue actively managed mutual funds instead of jumping on the ETF bandwagon, Frape is confident that mutual funds are still of great merit for investors.

“Mutual funds can offer some structural benefits versus other products like ETFs,” he says. “They offer monthly distributions and payouts that are easier in a lot of ways for clients. The big thing that will keep mutual funds relevant is offering differentiated products. The fund structure can offer access to a unique investment strategy or a unique asset class – those can be more effective in a fund than an ETF.” One such fund is the iA Clarington Focused Canadian Equity Class, which had a return of 35.5% in 2016. Given its domestic weighting of 75%, Frape wasn’t surprised to see it perform so well.

“If you remember where the markets were a year ago, oil was at $25 a barrel, and that was causing huge problems for the domestic market because of the energy bias – even the

“Although there are active ETFs that are working well, our view is that the fund structure provides a very effective way to access those more differentiated investment strategies” Eric Frape, iA Clarington

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banks’ stocks were impacted by that because there was a concern about defaults on lending to energy companies,” he says.

Such lows present opportunity, especially for portfolio managers searching for undervalued stocks – and there were plenty on offer at the beginning of 2016.

“When you have active portfolio managers,” Frape says, “these are the moments that create the greatest opportunities if the manager can see through shorter-term issues and have the conviction to take positions that will benefit when things normalize.”

Having experts overseeing a fund might not look so valuable in a bull market such as 2016, but Frape maintains that their worth will become apparent when the bear returns.

“All the development in ETFs nowadays is focused on more unique ETF product offerings – so you are seeing everything from smart beta right into full-blown active ETFs,” Frape says. “To us that’s important, because it shows that there is demand for more than just the passive parts of the market. People need more than just exposure to the S&P 500.”

A major reason iA has elected to not throw its hat into the ETF ring is the issue of costs.

While ETFs are widely considered to be a low-cost alternative to mutual funds, Frape believes this is a simplistic view.

“If an ETF lacks scale or trading volume, or the underlying portfolio is less liquid and difficult to transact, you can see large frictional costs develop in the pricing in terms of its bid-ask spread or discount to premium or NAV,” he says. “Those frictional costs can be quite substantial – people focus on five or 10 basis points on fees, but the frictional cost you may pay on an ETF that is not efficient could be many times that. Although there are active ETFs that are working well, our view is that the fund structure provides a very effective way to access those more differentiated investment strategies.”

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AWARD WINNER While 2016 was a tough time for the mutual fund industry and active managers, plenty of managers were still able to deliver solid returns for investors. Stephen Arpin and William Otton of Beutel Goodman, named Morningstar’s Equity Fund Manager of the Year for their Beutel Goodman Small Cap D Fund, are two such examples.

Similar to most active managers, the pair failed to match the returns of their benchmark last year, but given the S&P/TSX Small Cap Index’s gain of 38%, that was always going to be a tough proposition. The fund’s return of 20.7% is still impressive in its own right, and Arpin and Otton distinguished themselves by outperforming their peers in both 2015 and 2016. Even during the dark days of the oil shock in 2015, the Beutel Goodman fund preserved capital, allowing it to record healthy gains when its energy and mining holdings picked up again last year.

To achieve such results, Arpin and Otton put a priority on the selection process for their fund’s underlying securities. “We are very

then construct a discounted cash-flow model, which is crucial to unearthing what a business is actually worth.

“The key is to have realistic assumptions about what the business can actually do,” Arpin says. “We will cross-check our work, particularly in the small-cap area, by looking at transactions that have occurred. We like those transactions to be on a cash basis, so when you see business managers buying and selling businesses for cash, it is a very strong indication of what they are really worth.”

For Beutel Goodman’s funds, there are a number of differences between dealing with smaller companies versus industry giants.

“In large-cap, basically you are dealing with higher-quality businesses, so we are looking for 50% total return over a two- to three- year period – that’s inclusive of dividends,” Arpin says. When it comes to the small-cap space, risk control is a prerogative for Beutel Goodman, so its fund managers look for a 100% return over a three- to four- year period.

In selecting stocks, Arpin and Otton look to

“We are very focused on valuing businesses in a certain way. What we are looking for is sustainable free cash flow and buying businesses at a significant discount to what they are worth” Stephen Arpin, Beutel Goodman focused on valuing businesses in a certain way,” Arpin says. “What we are looking for is sustainable free cash flow and buying businesses at a significant discount to what they are worth.”

Arpin and his team look closely at the different characteristics of an operation, and

Canada’s main exchange, with risk mitigation firmly in mind. “It is all Canadian, but it is only businesses listed on the TSX – we don’t invest in venture names,” he says. “For capitalization, we invest in the bottom 15% of the TSX. Today that would be sub-$3.5 million.

“On the materials side, we eliminate a lot of companies because of their jurisdiction, so then we are looking for low-cost assets,” Arpin continues. “When you add up the difficulty in finding businesses in good jurisdictions with low-cost positions, it leads us to be cautious in this area. If you don’t have those characteristics, then it’s hard for them to generate free cash flow and pay dividends that are sustainable over time.”

Part of the Beutel Goodman Small Cap D Fund’s success has been its continuity. “When you look at the fund, you will notice that the turnover is quite low,” Arpin says. “It’s probably in the range of 20% in the last number of years. You will also notice that we run a relatively concentrated number of names – 37 in the fund right now. We have a holding position on companies for an average of five years, with some in there a decade or longer.”

This discipline has served Beutel Goodman well in both good times and bad.

“If you look at how these funds, large- and small-cap, perform in down markets, you are going to see very similar characteristics,” Arpin says. “In 2008, Beutel Goodman was among the best managers in terms of preserving capital, and that was a big part in developing our reputation.”

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FEATURES

MUTUAL FUND GUIDE

THE ADVISOR’S APPROACH Leading her own team at Richardson GMP, Alexandra Horwood uses mutual funds for around 50% of her business, but under strict criteria.

“I feel like mutual funds get such a bad rap,” she says. “A lot of them do have high MERs and their performance is mediocre, so I do understand why some people feel the way they do. I use them as part of my strategy, but like any investment, they have to meet our requirements.”

Number one on that list is a long track record – specifically, before the financial crisis. “I want to see how the fund did in 2008,” she says. “Did it protect capital, or is it so volatile that I would have problems if we had another serious recession in the future? Clients want to see that – they want to see how to protect the downside and how investments perform when things get really rocky.”

Another requirement is a 10% annualized rate of return after costs, which would usually set a fund apart from its peers and the benchmark. Last year, beating the benchmark was somewhat difficult, as soaring equity markets meant most fund managers came up short versus the various indices.

Despite this, Horwood still believes in the long-term appeal of mutual funds.

“There are a lot of benefits to using a mutual fund versus an alternative like a hedge fund,” she says. “Most of them have

daily liquidity, so if a client needs quick access to cash, it is a great option. They also have lower entry points, so you can buy mutual funds for as low as $500. The minimum for most hedge funds is about $25,000. I also like their transparency – they have to report all their holdings. Most, if not all, mutual funds are also eligible for investment inside TFSAs and RSPs. There are a lot of benefits there.”

Mutual funds also offer clients the chance to invest in sectors or jurisdictions they otherwise wouldn’t have access to. “We do a lot of investing in investments that are quite global,” Horwood says. “A lot of Canadians have their investments tied up in Canada, so we like to be as global as possible. One of our favourites is the Edgepoint Global Portfolio, and that did really well last year. It’s a global equity fund that destroyed its benchmark.”

“I want to see how a fund did in 2008. Did it protect capital, or is it so volatile that I would have problems if we had another serious recession in the future?”

Alexandra Horwood, Richardson GMP 44

For investors who want global exposure with their portfolio, active management is even more important. It’s not that difficult to decide if buying stock in a Canadian bank is a good move, but choosing between an Indian or Brazilian institution is a different story entirely.

“Emerging markets and sectors like energy can be really volatile, so what is important is that long track record of an investment manager who knows how to protect capital in the down times,” Horwood says. “It is easy to make money when the market is at your back, but very difficult to protect capital when it is going against you. That’s why we use active managers for emerging markets and commodities.”

Then there are the bond markets, which had a tumultuous 2016, to say the least. Horwood decided to use two funds in particular for her clients’ fixed-income exposure – and again, track record was paramount.

“For fixed income, our main holdings are with Canso and RP,” she says. “Canso has a 16-year track record and has made money every year with an average rate of return of 9% to 10%. RP has a 10% annualized return as well. Both of those have hedge funds and a mutual fund equivalent. It gives us flexibility if we need to buy for non-accredited clients who need more liquidity.”

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TRYING TIMES FOR ACTIVE MANAGEMENT Active versus passive management is a key consideration for any financial advisor. In 2016, index-tracking products came out on top, and it’s been a rough few years for active managers in general. Myles Zyblock, chief investment strategist at Dynamic Funds, believes active management reached a nadir during this period, which means the only way it can go now is up.

“These last three years have been the toughest three years for the active management industry since at least the early 1960s,” he says. “When you think about the rewards of an active manager, it really is a function of a few things. It is a function of the skill of that active manager and the opportunity they have to earn alpha. If there is no opportunity, it doesn’t matter how skilled you are – you are not going to be able to add value above and beyond the market.”

In Zyblock’s view, opportunity for a fund manager can be broken down into two main factors: correlation and performance dispersion, neither of which have been working in favour of portfolio managers recently.

“The most conventional way to measure opportunity would be to look at performance correlation in the market, or if stocks are moving together regardless of earnings,” he says. “It is very hard for an active manager in that type of environment to differentiate between good and bad investments.

“The second component of opportunity would be what we call performance disper-

sion, so that’s the size of a reward available to an active manager,” he continues. “It is captured by looking at the spread between the best-performing group of stocks and the worst. If there is no spread, then it doesn’t matter what you pick because you are not adding value.”

Adding those two factors together, Zyblock explains, has made a perfect storm for active management underperformance.

“The last three years we have experienced the highest correlation in the market since the Great Depression,” he says. “Stocks are moving up and down together; at the same time, performance dispersion was the narrowest we have seen in 40 or 50 years.”

As far as the reasons why correlation and performance dispersion have moved in this way, Zyblock points to both macro and micro factors.

“I think a lot of it has to do with monetary policies around the world, so people are buying stocks,” he says. “I think the correlations are very high because I think all of us are suffering from post-traumatic stress from the last financial crisis. The risk-on, risk-off behaviour has really impacted market behaviour. That is why the active management industry has struggled so much.”

With a new interest-rate environment in the US at least, the factors that have conspired against active management appear to be changing. Looking at the data, Zyblock is confident the mutual fund industry has

“Most active managers earn their keep in tough markets. We will get into another tough market – we always do” Myles Zyblock, Dynamic Funds

turned a corner into more prosperous times.

“Over the last four to five months, we have seen these correlations drop back to levels that were pretty much the average from 1940 to the early 2000s,” he says. “That gives us some hope that stocks will see more divergence in behaviour. Dispersion is also widening, with some stocks doing better and some doing worse, so if you have that skilled active manager in place, there is bigger reward now than there has been in a long time.

“Both the dispersion and correlation are reasons to say the worst for the active management industry is now in the rear-view mirror,” he adds. “In 2016, we saw the biggest net outflows in active management in the history of the industry, so I think everyone sold right at the point they should have been thinking about buying.”

Dynamic Funds joined the ETF space last year in collaboration with the industry’s number-one provider, BlackRock – and it’s telling that the five funds Dynamic introduced are all active ETFs. “You can buy an active fund, whether it is smart beta, quantitatively driven or a money manager’s fund – that is just in an ETF wrapper now,” he says. “I think our company has been a leader in taking an active strategy and putting it in an ETF wrapper and allowing that to be traded freely on exchanges.”

So far in 2017, the equity markets have largely carried on their momentum from last year. But when the inevitable dip occurs, active mutual fund managers will inevitably prove their worth.

“It’s not just about the good times, so active managers will take positions, options strategies or cash strategies that will mitigate volatility with the overall fund,” Zyblock says. “The markets right now are going up, generally speaking, but ultimately most active managers earn their keep in tough markets. We will get into another tough market – we always do.”

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10/03/2017 6:33:42 AM

PEOPLE

ADVISOR PROFILE

Capital thinking Ottawa-based advisor Graeme D. Baird reflects on how his business has evolved to meet the changing needs of Canadians

AS A FINANCIAL advisor, it’s always preferable to have many strings to your bow.

Graeme D. Baird realized that soon after making his start in the business as a sales rep for Standard Life Assurance Company.

“When I started with Standard Life in 1992, there was a focus towards life insurance,” he says. “I was lucky because a lot of the senior advisors there had started doing seminars on pensions, so I was exposed to the money business at a younger age.”

Those years of learning served him well – by 1999, he had incorporated his own practice, G.R. Baird Financial Group. Nearly two decades later, the Ottawa-based business has grown to reflect the changes in the wealth management industry, stretching from investment advice and estate planning into group benefits and retirement plans.

“In essence, we have two companies here,” Baird says. “G.R. Baird Financial Group is individual wealth management, life insurance and estate planning. Then we have the group pension business called Baird’s Benefits Plus. That helped us to have a very diverse practice. We do quite a bit of health and dental plans for companies and group retirement pension plans.”

The multi-purpose practice Baird oversees today is the result of the conversations he had back in those early days at Standard Life. Having proved his mettle selling insurance plans, his clients would invariably ask about other financial products. The fact that he could answer those questions laid the foundations for what would become

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G.R. Baird Financial Group.

“It unfolded that people started to ask me more questions about lines of credit or mortgages or saving for their kids’ education,” Baird says. “That meant that although I may have been referred to a person for a specific product, by the second or third meeting, I was doing a full financial plan and was in charge of all of their financial affairs.”

A significant part of Baird’s business today is estate planning, which is a skill with plenty of value, given the demographic shift currently underway in Canada. It’s a complex process with far-reaching implications, and clients who walk through the doors at G.R. Baird can expect a high level of attention to detail.

“People will look at what tax liabilities they have,” Baird says. “If they own a company, we need to get into the weeds a little bit and look at who the shareholders are; is there a holding company? Through that, it allows for an easy estate transfer with an efficient tax position. That may involve life insurance, or it may involve setting up

a holding company, so we do bring in other professionals like accountants and lawyers.”

When it comes to the wealth creation side of his business, Baird’s approach to investing has changed over the years. The quantitative easing period that has lasted almost a decade now has led him to move away from fixed income and toward safer equities that can generate some yield.

“Traditional assets have let people down – not because they are poor investments, but because the interest-rate environment has been so low,” he says. “Because of that, you have to take on a little more risk with exposure to equities. We try to explain to people that when looking at dividend-paying stocks as an alternative to traditional bondtype investments, you almost have no choice.”

Equities do carry an element of risk, but Baird tends to direct his clients toward stocks with a long track record of solid performance. In Canada, that invariably means financials. It’s not a tough sell for clients, especially considering the alternatives available in the bond markets.

BAIRD ON INVESTING IN PROPERTY Many Canadians who are approaching retirement age are banking on the equity in their home to finance their golden years. While some residents in Toronto and Vancouver have been able to cash in on homes that have massively appreciated in value, it’s not a retirement strategy Baird subscribes to. “I’m not sure the increase in the value of homes will do over the next 15 years what it has done over the last 15 years,” he says. “My concern is the value will not increase as much as it has.

If they are under the impression they can buy a house, pay it off, then sell it and downsize for their retirement, they are living in dreamland.”

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ARE CANADIANS READY FOR RETIREMENT?

50%

of Canadian couples aged 55 to 64 have no employer pension between them

50%

of those Canadian couples without pensions have only enough savings to last for one year

20%+

“We try to explain to people that when looking at dividend-paying stocks as an alternative to traditional bond-type investments, you almost have no choice” “Equities are easily understood by most clients – they understand that if they own part of RBC or TD Bank, they will be somewhat comfortable,” Baird says. “If you had a GIC at the Royal Bank of Canada, technically the money is sitting in the bank’s account, and they pay you 1%. If you owned stock instead, the dividend yield will be close to 4%. It is better to own stock in these companies today.”

In terms of how clients pay for his services, Baird has resisted any urge to

move to a fee-based business. While many of his peers are doing exactly that, he’s of the opinion that if a practice isn’t broken, it doesn’t need to be fixed.

“We normally do embedded commissions like 1% trailers, and that is fully disclosed upfront,” he says. “Over the past 18 months, we have explained to every client how we are paid. So far it has made more work for us, but that has paid off because we are taking in more assets.”

of the Canadian population will be older than 65 within the next 10 years

$640

is the average monthly amount paid out by the Canada Pension Plan

$1,114

is the maximum benefit someone can hope to receive from the CPP in 2017 Source: The Broadbent Institute

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10/03/2017 6:50:22 AM

PEOPLE

CAREER PATH

PARTNERING FOR SUCCESS Despite plenty of personal recognition, Chad Larson says the most important thing he’s done is choose the right people to work with

His father’s career demands led Larson and his family to relocate from Calgary to Buenos Aires, where Larson pursued his education at a four-year international baccalaureate high school among the children of diplomats and global leaders. The experience set him on the path toward the financial industry “It was my first foray into seeing globalization; it set me up with a passion for business. I was lucky to be able to take collegiate-level economics courses”

GETS A GLOBAL EDUCATION

2004

HAS A LIFE-CHANGING CUP OF COFFEE After “harassing” Acumen Capital Partners founder Curtis Mayert for several weeks with requests to meet for a coffee, Larson got an offer he couldn’t refuse “Finally he met me for a coffee. I told him I was looking for a mentor and trying to decide what to do – he interrupted me, shook my hand and asked me to be his partner. He said I reminded him of himself when he started out: young, energetic and hard-working”

2009

NAVIGATES THE FINANCIAL CRISIS As an advisor, Larson managed to grow his business quickly and aggressively – until history intervened “We grew the business to $100 million in the first year, $200 million in the second and third year – and then the financial crash happened. We were fortunate that we didn’t blow up – we protected clients largely, but we saw clients consolidating portfolios at larger dealers out of fear. I felt we needed to be with a larger dealer”

2016

CONTINUES TO GIVES BACK Of the many awards Larson and his team have won over the years (including Team of the Year, Practice of the Year and, most recently, the number-three position on WP’s Top 50 Advisors list), he has a special fondness for an internal award from National Bank Financial, recognizing his team’s ongoing commitment to social engagement. In particular, Larson is proud of a Star Wars-themed event the team organized, which saw theatres littered with Stormtroopers and ultimately raised more than $30,000 for children with cancer

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2003

1993

IS HUMBLED AND CLARIFIED With an economics degree from the University of Calgary in hand, Larson got a job as a “smiler and dialler” – cold-calling for RBC Dominion Securities out of a mall, armed with only a phone book. It was a clarifying experience

“I came out of school mildly educated and grossly inexperienced. Hammering out calls for seven hours a day – I thought to myself, this is not who I want to be” 2008

SEIZES THE DAY Alongside his thriving financial career, Larson also leapt at the chance to invest in a private energy services company “I saw an opportunity, mortgaged my house to the hilt, and was part of a small group that bought out a partner. It was a bold move – my wife and I had just had our first child – but the timing and people were right. I’m the guy who puts the right people in the right place at the right time”

2010

MAKES A FATEFUL MOVE Hankering for a nationwide presence, Larson met Charlie Spiring, the founder of Wellington West, at the EY Entrepreneur of the Year Awards, which Spiring had just won “We moved 120% of our book in two months – we grew through the transition, and kept growing and growing; within months, we were taken over by National Bank Financial. The time at Wellington West was brief but fantastic – and now we’re with a large bank that feels like a boutique”

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PEOPLE

OTHER LIFE

TELL US ABOUT YOUR OTHER LIFE Email wealthprofessional@kmimedia.ca

Photo credit: Athena Fung

BY ANY STRETCH

Advisor Albert Chou spends his days guiding clients through retirement planning and his nights leading hot yoga classes

WHEN TORONTO-BASED financial planner Albert Chou tried yoga for the first time, it was during a period when he was reevaluating his path.

“I was doing soul-searching,” says the RBC employee, “looking for the value of my life.” However, he decided yoga wasn’t for him.

A decade later, Chou – who gave yoga a second try in the name of fitness – is now a fervent devotee of hot yoga, a form of the discipline that is practiced in a heated room, mimicking the

73

Age of Chou’s oldest student

weather of India, where yoga originated. This version of yoga increases flexibility by enabling the muscles to be stretched further. Chou is now so dedicated that he’s been teaching yoga for five years, motivated by his passion for the practice and the desire to share it with more people.

As a bonus, Chou says, his dedication to yoga benefits him in his professional life by lending him focus. “It grounds me, makes my mind calmer and helps me concentrate.”

40

Degrees a hot yoga room is heated to

3

Number of shirts Chou sweats through when doing his own practice

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10/03/2017 6:52:23 AM

HEALTH INSURANCE UPDATE

Insurance plan must cover pot prescription The Nova Scotia human rights board’s ruling could have implications for medical marijuana across Canada

applications for coverage via provincial human rights commissions. “If [people] can start to use this avenue to try to get their employers or insurance providers to start covering it, I think that’s going to be significant and we are going to see more of that,” he said.

Also significant, according to Anand, is the board’s reasoning that Skinner’s medical marijuana prescription constitutes “prima facie support for its medical necessity.”

“The inquiry board is finally recognizing that the prescription has some value”

In what could turn out to be a landmark decision, a Nova Scotia human rights board has ruled that a local man’s medical marijuana prescription should be covered by his employee insurance plan.

According to CBC News, Gordon “Wayne” Skinner had been suffering from chronic pain since an on-the-job motor vehicle accident in 2010. He applied for his marijuana prescription to be covered under his employee insurance plan but was denied three times. Arguing his own case last October, Skinner called the denials an act of discrimination.

NEWS BRIEFS

Inquiry board chair Benjamin Perryman ruled in favour of Skinner, concluding that since medical marijuana requires a prescription by law, it cannot be excluded under the insurance plan. Determining that the Canadian Elevator Industry Welfare Trust Plan under which Skinner was covered violated the province’s Human Rights Act, Perryman said it must cover his medical marijuana expenses “up to and including the full amount of his most recent prescription.”

Deepak Anand, executive director of the Canadian National Medical Marijuana Association, said the ruling could set a trend for more

Prescriptions beyond many older Canadians’ budgets

A new study reveals that one out of every 12 older Canadians skips prescription medications because they can’t afford them. The trend is linked with the lack of universal drug coverage, and is most pronounced among Canadians between 55 and 64 who are not old enough for public drug benefits for seniors. According to an analysis published in the Globe and Mail, based a 2014 survey by the Commonwealth Fund, Canada had the second-highest rates of cost-related prescription drug nonadherence among 11 countries studied.

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“[The inquiry board] is finally recognizing that the prescription has some value, which so far the Canadian Medical Association and others have decided not to look at,” he said.

Finding that Skinner’s chronic pain had been under-managed due to the denial of coverage, Perryman said the plan’s justification was inadequate. “There was no evidence presented to suggest that premiums would have to be increased or that the financial viability of the plan would be threatened,” he concluded.

Skinner is optimistic that his case will set a precedent for others. “Hopefully this will help other people in similar situations and eliminate the fight that [my family and I] have had to endure and the hardship that this has resulted in,” he said.

Ottawa faces court action over denied dental claim

A First Nations family is waging a legal battle against the government after their application to get critical dental work covered under a non-insured health benefits program was repeatedly denied. Stacey Shiner applied for $6,000 to cover the cost of the braces for her daughter, Josey, under a benefits program offered by Health Canada to indigenous people. However, implementers only refer to four criteria to approve claims; an affidavit filed by Shiner said the government determined that her daughter had none of those symptoms.

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MARKET WRAP

Q&A

Brigitte Parent Senior vice-president, group benefits SUN LIFE FINANCIAL

Years in the industry 22 Fast fact In 2015, Parent was recognized as one of Canada’s Top 100 Most Powerful Women by The Women’s Executive Network

Health benefits a priority for Canadian workers The recently released Sun Life Canadian Health Index revealed that 77% of Canadians feel all employees are entitled to receive a health benefits plan sponsored by their employer. Do you feel that most firms are receptive to this?

The majority of mid-sized and large employers offer benefits, but we are seeing more small businesses offering coverage too. Employees, especially millennials, look at benefits when they are considering employment.

The Sun Life Canadian Health Index showed that millennials would look at a benefits program and that would influence where they decided to work.

What were the key findings of the index?

It really highlighted the value of benefit programs offered by the employer. There is still room for improvement in terms of enhancing these programs. Employees want flexibility and greater support when it comes to their financial health.

How does financial health factor into a worker’s health benefits?

If you look at benefit programs, there is more and more connection between physical, mental and financial health. More employers are looking to enhance their programs to make sure all of those health aspects are incorporated. A lot of companies offer workshops on financial planning that provide basic financial tools on how to budget and use credit wisely. That enhances financial literacy in the workplace.

In the survey, almost a third [of respondents] said they had felt distracted at work due to their financial

Millennials want more flexible benefit plans

Just as jobs for life are now largely a relic of a bygone age, traditional employee benefit plans could be headed that way, too. Millennials are increasingly expecting employers to provide more flexible coverage and offer options such as health-tracking programs. “Millennials still do value core benefit plans – but want a different delivery and more flexibility,” Sarah Beech, president of Toronto-based benefits firm Accompass, told the Globe and Mail.

“They’re also more assertive and more candid about asking for that.”

health. That obviously has an impact on productivity, absenteeism and benefit costs, so employers are often quite interested in helping their employees improve their financial literacy.

While employees feel a good benefits package is a key consideration in deciding whether to take a job, it’s also a considerable investment for employers.

What are the major costs for benefit programs?

Health benefits cover anything from drugs, vision care and dental to the various paramedical coverages like physiotherapy or psychology. Those have different impacts on the system, but drug coverage tends to be a big part of the total cost.

A tax on health benefits was rumoured for months until the government ruled it out in January. What was Sun Life’s position on the proposed tax?

We really believe this would have impacted lowerincome and middle-class Canadians significantly. When you take into consideration that 24 million Canadians rely on benefits to sustain their health, we feel that taxing those benefits would impact their ability to maintain their coverage.

Did the government contact you about the tax?

We didn’t get any specific details, but we were concerned enough that we raised the topic with various audiences to make sure the true implications were really understood.

The implications are on 24 million Canadians, so we needed to make sure they were informed and that our view as a company was articulated.

MP says Canada should discuss drug legalization

After meeting with pundits, volunteers and victims who want to stem the ongoing opioid crisis, NDP MP and opposition health critic Don Davies said it’s time for Canada to discuss legal distribution of drugs. “What I heard was a lot of people talking about the need to discuss finding safe, cheap ways to distribute drugs in a legal form,” he said, adding that a dialogue is necessary to avoid the “unnecessary death, destruction and crime that are so clearly associated with the current model [of prohibition].”

Does the Canada Health Act need clarity?

The Canada Health Act stipulates that no user fees should be charged for ‘medically necessary’ health services – but, argues Globe and Mail public health reporter Andre Picard, ‘medically necessary’ needs to be more clearly defined, as provinces have been pushing the limits on which services are subject to fees. A law passed in Quebec last year explicitly allowed user fees for certain services, while Saskatchewan announced a scheme that gives private clinics a way to charge for MRI scans.

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10/03/2017 6:53:45 AM

LIFE INSURANCE UPDATE

NEWS BRIEFS Pension fund goes global with life insurance investments

With its $US1 billion purchase of a 21% stake in Allied World Assurance Company Holdings, the Ontario Municipal Employees Retirement System is extending its commitment to the insurance industry. According to Sharon Ludlow, the group’s head of insurance investment, the insurance space has a lot of potential right now.

“We have significant investments in physical assets, real estate, infrastructure, private equity and the public markets,” she says. “We have specifically looked at the insurance sector as a sizable opportunity globally where we can put our capital to work.”

iA Financial reaffirms commitment to life insurance

iA Financial Group made its name as a Quebec-based life insurance company, but has since morphed into a financial institution with nationwide reach, providing a range of insurance products, mutual and segregated funds, savings and retirement plans, and a host of other financial services. As the firm celebrates its 125th anniversary, president and CEO Yvon Charest confirms it’s still a major player in life insurance. “In terms of new insurance policies that are being sold in Canada, our market share is 15%, which is second in the industry,” he said.

“We are extremely present in the family market. Our average policy might not be as high as elsewhere in the market, but the number of policies we have is huge.”

Life insurers cut genetic testing from underwriting process

In an effort to reach a greater number of consumers, life insurance companies are working to streamline underwriting for new applications. As part of this evolution, providers will no longer request

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or use genetic testing information for new applications for policies with a value up to $250,000, which, according to Frank Swedlove, president of the Canadian Life and Health Insurance Association, will cover 85% of the policies in Canada. The change will go into effect on January 1, 2018, although Swedlove said some insurers may choose to implement it sooner.

LIMRA says life insurers are going mobile in greater numbers

A new study by LIMRA reveals that life insurers across North America have shown significant growth in mobile initiatives over the past five years.

LIMRA surveyed 44 companies in the US and eight companies in Canada, finding that 25% had mobile options for consumers, policyholders and financial professionals. “In 2011 when we did this study, only a handful of companies had made the move to include mobile access options,” said LIMRA research director Mary Art. “Now almost all companies have something already in place or planned.”

Canadian investors in the dark on segregated funds

A recent study by RBC Insurance reveals that Canadians are unsure of all their investment options. In particular, using segregated funds in a portfolio is a strategy many investors are oblivious to, but their built-in security makes them an attractive proposition – something the life insurance industry is keen to stress. “You can get 100% protection on your investment should you pass away,” says Jean Salvadore, director of wealth insurance at RBC Insurance. “If you deposited $100,000 in a segregated fund, should you pass away and the market value is less than that, your beneficiaries will still get the $100,000.

It gives people peace of mind when they are planning their estate.”

Social media, AI drive tech trends A new study reveals that life insurance is moving into the digital world at a rapid pace LIMRA has released its Financial Services Evolution Predictions Report for 2017, and one of the study’s authors believes the speed of change is set to ramp up as life insurance moves fully into the digital era. Scott Kallenbach, director of strategic research at LIMRA, identified some of the key developments life insurance advisors should watch out for.

“If you look at technology, the advanced use of data analytics is going to help companies identify consumer purchase behaviour,” he says.

“We will see strategy that goes beyond just the demographics – it will look at what we call non-traditional sources of information. For example, a recent study at the University of Pennsylvania found that Twitter can predict heart disease rates within communities.”

That study showed how Twitter is indicative of a community’s psychological well-being and thus a predictor of heart disease rates. Expressions of negative emotions such as anger, stress and fatigue in an area’s tweets were associated with higher heart disease risk, while positive emotions like excitement and optimism were associated with lower risk.

Such research suggests that the majority of businesses have barely scratched the surface of what social media can offer – that’s certainly the case in the life insurance space. While this creates opportunities, it also means those in the industry must be able to adapt to change.

“Consumers are going online and doing their own research before they make a purchase,”

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“AI is coming for knowledge-based, whitecollar workers. AI will either replace people or supplement or assist them in their work” Kallenbach says. “After they collect the information, they talk to a sales professional, and often they are looking for validation. The sales professional really has to focus now on adding value.”

While the internet means those selling insurance are no longer the first point of call for product information, it does allow them to market to a younger audience. With penetration rates for life insurance on the decline, Kallenbach believes this will be an invaluable tool heading forward.

Also worth considering is the fact that technology is advancing at such a rapid rate that

platforms like Twitter and Facebook are already feeling like yesterday’s news. In their place are developments that until relatively recently would have been considered science fiction.

“Artificial intelligence is starting to creep in,” Kallenbach says. “In January, we saw a life insurance company in Japan, Fukoku Mutual Life Insurance, replace 34 claim workers with IBM Watson. AI is coming for knowledge-based, white collar workers. AI will either replace people or supplement or assist them in their work.”

As computer programs start to fill in for humans, flesh-and-blood life insurance special-

ists need to upskill. The LIMRA study stresses the need to hire people skilled in the language of this brave new world: analytics.

“We hear a lot about Big Data right now, but in order to be able to do anything with it, you need people with the analytical skills to pull out the insight of what it all means,” Kallenbach says. “So we need to find digital specialists and data scientists who can craft business strategy.”

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FEATURE

The evolution of health benefits in Canada A changing work environment and spiralling drug costs have made administering health and dental benefits much more complex. LHP talked to industry stalwart Dave Patriarche to find out how brokers can best navigate this rapidly evolving space IT’S BEEN an interesting start to the year in the health benefits space. The industry doesn’t usually make national headlines, but that’s exactly what happened in early February when the federal government revealed that, contrary to a great deal of speculation that emerged at the end of 2016, it would not be introducing a tax on health benefits in its 2017 budget.

Speaking at Parliament, Prime Minister Justin Trudeau said a levy was never under consideration, which certainly raised an eyebrow or two among the Don’t Tax My Health Benefits! group. Organizers of that campaign called on citizens to contact their local MP to voice their opposition to the proposed tax, and it appears their efforts had the desired effect.

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A noted supporter of the campaign was Dave Patriarche, founder of Canadian Group Insurance Brokers. He believes the proposed tax on health and dental benefits was regressive and would have burdened lower-income and middle-class Canadians the most.

That said, the fact that there currently isn’t a tax on benefits means that certain workers are receiving what is effectively tax-free income. Benefits are provided largely at the discretion of the employer, so this creates a disparity between workers under a generous plan and those who don’t have any benefits at all.

The rise of the contract worker Another major factor to consider is the changing Canadian workplace – more and

more people are becoming self-employed or working in contract or part-time positions.

This can cause issues for employers when it comes to determining who qualifies for group benefits.

“Companies usually go either way,” Patriarche says. “Some offer no benefits at all to contract workers; others can offer benefits for that one year, but on a limited scale – something like an 80% plan for regular employees and 60% for contract workers. As brokers, we are seeing a lot more of that.”

Because contract workers’ employment has a set end point, the employer is not obligated to pay severance when that term ends.

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When it comes to health and dental benefits, however, it is largely at the company’s discretion as to who gets what – but Patriarche strongly urges employers to think twice about extending coverage to contract employees.

“I’m totally against adding self-employed workers who are not full-time to a company plan,” he says. “Over the years, we have worked to educate brokers that they are putting a lot of people at risk by putting non-employees on plans.”

Another issue brokers must contend with is the fact that globalization means employees are relocating across international borders much more frequently than in the past. This

“Canada is one of the only countries in the world that has a social healthcare system that doesn’t have a social drug program as well” can complicate things when it comes to health benefits, both public and private.

“My clients have a lot more overseas workers on work permits, so that is a challenge,” Patriarche says. “People coming into the country don’t have provincial health coverage, so they have to get a replacement plan for that. The same goes for a Canadian

who has been working in the US for three years and returns home.”

To that end, Patriarche foresees the development of flexible plans that will cater to short-term residents of this country. “I see people becoming more global in how they work – that’s just how work is now,” he says.

“So we need to see more innovation in

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FEATURES

the industry to deal with unique working arrangements.”

Controlling drug costs When it comes to health benefits in Canada, spiralling drug costs mean anyone without coverage is leaving themselves vulnerable.

Thanks to a mixed system of public and private care, with the provinces offering different levels of coverage, benefit plans can diverge widely. Patriarche says he would like to see greater consensus, especially when it comes to drugs.

“Canada is one of the only countries in the world that has a social healthcare system that doesn’t have a social drug program as well,” he says. “Britain, Spain and France all tie in drugs and healthcare together. What has been talked about for years is a national pharmacare strategy that would provide basic drug coverage for all Canadians.”

Implementing such a system, similar to the UK’s National Health Service, would mean greater collective bargaining power with the drug companies. That, in turn, would mean lower prices in a country that currently has the second most expensive drug costs in the world. As a broker, Patriarche says the current system is profitable for both himself and his colleagues, but he still believes reform is in order.

“The cost of drugs would drop dramatically because we would have national buying power,” he says. “There would be an incentive to lower prices, whereas right now, insurance companies have a disincentive to do it. The more they pay on higher-cost drugs, the more money they make. As claims go up, premiums go up, and the more premiums go up, the higher the profits for insurers, and the higher the commissions for brokers.”

National pharmacare has been debated for years now, but with powerful vested interests at play, it’s unlikely that such a program will come to pass anytime soon. In terms of health benefits, however, Patriarche has observed significant changes already in

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“I see people becoming more global in how they work – that’s just how work is now. So we need to see more innovation in the industry to deal with unique working arrangements” motion. How plans are administered and paid for is evolving, although whether the government will eventually decide to tax benefits is still a matter of conjecture.

“As we go forward, we will see a shift from defined benefit plans to defined contribution-style plans,” Patriarche says. “Those types of plans give flexibility, but also limit the exposure of the employer. My caveat to that

is, if benefits become taxable, then health spending accounts are not the best way to go.”

Patriarche believes the provision of healthcare in Canada will eventually come to mirror the United States, particularly in its delivery.

“For healthcare, I think we will see less and less delivery of services from insurance companies and more from third-party administrators – much more like the American model.”

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