Wealth Professional 8.08

THE SEARCH FOR YIELD

New options to consider, from mortgages to emerging markets

BEST BETS IN HEALTHCARE

Which sub-sectors will be helped – and harmed – by COVID-19?

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Where to find the hidden gems in real estate right now

ETF EVOLUTION How have ETFs weathered the COVID-19 crisis – and what’s next for the investment vehicle?

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ISSUE 8.08

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

CONTENTS

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38

UPFRONT 02 Editorial

Evolution, not innovation, is the watchword for 2020

04 Statistics

Key data that should be on your radar

06 News analysis FEATURES

FIXED INCOME IN A RATE-ZERO WORLD

20 SPECIAL REPORT

ETF EVOLUTION

Wealth Professional takes a closer look at how the COVID-19 pandemic has reshaped eight areas of Canada’s ETF industry

Three ways to bolster disappointing government bond yields

INDUSTRY ICON Doug Coulter has relied on the power of collaboration to take RBC Global Asset Management to new heights

16

08 Intelligence

This month’s big movers, shakers and new products

10 ETF update

Three ETF themes that reached new heights during the depths of COVID-19

12 Alternative investment update

Venture capital continues to flow into the fintech space

42

14 Opinion

GROWING STRONG

36 Are MICs the answer to the yield question?

PEOPLE

PEOPLE

Publicly traded REITs have been hit hard by COVID-19, but opportunities remain in real estate

Nicola Wealth president David Sung reflects on his role in the firm’s incredible growth

Why Canada’s economic recovery hinges on women

FEATURES What mortgage investment corporations can offer yield-hungry investors

40 The healthcare outlook

Where the sector is headed in the remainder of this year and beyond

46 Prepared for anything

One fund is ready to capitalize on whatever comes next in the pandemic

44 FEATURES

THE EVOLUTION OF PLANNED GIVING

How COVID-19 has changed the way investors approach charitable giving

PEOPLE 48 Other life

Behind the lens with advisor and professional photographer David Little

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

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18/09/2020 4:18:14 AM

UPFRONT

EDITORIAL wealthprofessional.ca

Forced to evolve

N

ormally at this time of year, Wealth Professional runs a feature on ETF innovation – a look at the new and exciting advances and trends within the fast-growing ETF landscape. However, 2020 has been anything but normal, and while there have been strides made in innovation, it seemed more timely to focus on the ways the ETF industry has had to evolve – not only to survive the COVID-19 crisis, but also to continue attracting assets.

The year began much as 2019 ended, with more momentum and inflows into Canadian ETFs. According to National Bank Financial Capital Markets, ETFs saw $4.1 billion in inflows in January, $2.1 billion of which went to fixed income products. As COVID-19 began to take its toll on the markets, ETFs were not immune. March inflows dropped to $2.9 billion, and fixed income, the darling of 2019, saw its first outflows of $1.3 billion. National Bank reported that “several bond ETFs also traded to apparent NAV discounts as the underlying bond markets went no bid. ETF market makers who hedge their positions by selling bonds in the primary market suddenly saw very low or disappearing bids, which caused spread-widening and price declines.”

The pandemic has pushed all vehicles, including ETFs, to find new ways to attract investors Yet the ETF market rebounded, and the July numbers showed things getting back on track. Net inflows rose to $6.2 billion, including $3.6 billion into fixed income, and the only sectors on the equity side not reporting positive inflows were financials and real estate.

The pandemic has pushed all vehicles, including ETFs, to find new ways to attract investors. In this month’s feature, which starts on page 20, WP looks at some of the asset classes that have been able to help the ETF market rebound and what changes asset managers have made to their products in those sectors. While this is largely a sign of the times, it might also offer a glimpse into where ETFs are headed. This has been an unprecedented year – we may never get back to the normal we once knew, but the world will eventually find a new equilibrium. The same is true for ETFs. The team at Wealth Professional

ISSUE 8.08 EDITORIAL

SALES & MARKETING

Editor Darren Matte

Vice President, Media and Client Strategy Dane Taylor

Writers Leo Almazora James Burton David Kitai Executive Editor Ryan Smith Copy Editor Clare Alexander

CONTRIBUTORS Jennifer Reynolds

ART & PRODUCTION Designer Marla Morelos Production Coordinator Kim Kandravy Traffic Manager Ella Dayandante

National Account Manager Alan Stewart National Account Manager Blase Wasser Vice President, Sales John Mackenzie Project Coordinator Jessica Duce

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

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ADVERTISING INQUIRIES dane.taylor@keymedia.com

KMI Publishing and Events 20 Duncan Street, Suite 300 Toronto, ON M5H 3G8 tel: +1 416 644 8740 www.keymedia.com Offices in Toronto, London, Sydney, Denver, Auckland, Manila

Wealth Professional is part of an international family of B2B publications, websites and events for the finance and insurance industries LIFE HEALTH PROFESSIONAL darren.matte@keymedia.com T +1 416 644 874O

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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

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UPFRONT

STATISTICS CONSUMER CONFIDENCE HOLDS STEADY

ETFs GET BACK ON TRACK

$250bn

At the beginning of 2020, the Canadian ETF industry looked set to continue building on the momentum it enjoyed in 2019. While COVID-19 dealt the ETF space a heavy blow in March and April, the drop was short-lived, and ETFs had once again hit new highs for total AUM and number of funds by the end of summer.

52.7

$200bn

$211.1 billion

$210.3 billion

$190 $150bn

January

February

M

$10bn $8bn

Level of the Bloomberg Nanos Canadian Confidence Index on September 1, virtually unchanged from the previous week

$9.1 billion

$6bn $4bn $2bn $0

$3.9 billion

$2.

January

February

M

900

37.1

800 700

Low point of the Canadian Confidence Index in 2020 (on April 24)

776

766 600

January

47.4%

Percentage of Canadians who think the economy will be weaker in the next six months

February

OIL PRICE DIFFERENTIAL BEGINS TO NORMALIZE It’s been a volatile year in the oil market, especially where Canadian oil is concerned – the Western Canada Select discount to West Texas Intermediate surpassed $23 earlier this year. However, the discount has begun to return to normal levels; it was just under $10 at the beginning of September.

West Texas Intermediate

Western Canada Select

$70 $61.06

$60 $46.75

$50 $40

42.8%

Percentage of Canadians who believe their jobs are secure Source: Bloomberg Nanos Canadian Confidence Index, September 1, 2020

$50.11

$39.82

$38.01

$41.01

$35.44

$34.00

$33.36

$34.71

$30

$42.76

$20.31

$22.78

$31.82 $27.44

$29.06

$20 $10

$16.81

January 1

February 3

March 2

April 1

$18.83

May 4

June 1

July 1

August 3

September 1 Sources: Oilprice.com

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M

TOTAL CANADIAN ETF AUM $230.6 billion

llion

ary

$204.3 billion

$237.1 billion

$217.8 billion

$211.3 billion

$190.5 billion

March

April

May

June

July

ary

Both outgoing and incoming direct investment in Canada rose in the second quarter of 2020, putting net investment income in positive territory for the third straight quarter, despite a drop in net foreign direct investment.

August

NET INVESTMENT IN CANADA $2bn

NET CREATIONS

$1.85 billion

lion

ary

NET INVESTMENT IN CANADA STAYS POSITIVE

$1.5bn

$6.1 billion $4.0 billion

$2.7 billion

$900 million

$2.6 billion

March

April

May

$1bn

$2.8 billion

June

July

August

$726 million

$500m $196 million

TOTAL NUMBER OF FUNDS $0

780

781

792

808

825

811

-$500m

-$555 million

-$558 million

Q2 2019

Q3 2019

-$991 million

March

April

May

June

July

August

-$1bn Q1 2019

News broke in September that Zoom founder and CEO Eric Yuan had broken into the top 100 of the Bloomberg Billionaires Index. Tech industry leaders likewise continue to dominate the top 10.

1. Jeff Bezos Total net worth: $182 billion YTD change: $67.2 billion 2. Bill Gates Total net worth: $123 billion YTD change: $10.1 billion 3. Elon Musk Total net worth: $107 billion YTD change: $79.1 billion 4. Mark Zuckerberg Total net worth: $99.9 billion YTD change: $21.5 billion 5. Bernard Arnault Total net worth: $91.4 billion YTD change: $13.8 billion

6. Mukesh Ambani Total net worth: $89.1 billion YTD change: $30.5 billion 7. Warren Buffett Total net worth: $83.1 billion YTD change: $6.2 billion 8. Steve Ballmer Total net worth: $74.0 billion YTD change: $15.9 billion 9. Larry Page Total net worth: $72.5 billion YTD change: $7.9 billion 10. Larry Ellison Total net worth: $71.3 billion YTD change: $12.5 billion Source: Bloomberg.com, as of September 16, 2020; all figures in US$

Q1 2020

Q2 2020

Sources: Scotia Economics, Statistics Canada

Source: CETFA, National Bank of Canada Financial Markets

TECH COMPANY HEADS REIGN ON THE BILLIONAIRES INDEX

Q4 2019

THE S&P 500 RECOVERS In late August, the S&P 500 officially surpassed its previous high for the year, which it hit on February 19. By the last week of August, the index was up a whopping 57% from the nadir reached on March 23.

4,000

S&P 500 YTD PERFORMANCE

3,500 3,000 2,500 2,000 1,500 1,000 500 0

1/2 1/15 2/3 2/19 3/2 3/23 4/1 4/15 5/1 5/15 6/1 6/15 7/1 7/15 8/3 8/17 9/1 Sources: Bloomberg.com, MarketWatch

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18/09/2020 4:18:39 AM

UPFRONT

NEWS ANALYSIS

The right approach to real estate Only three of 41 publicly listed Canadian REITs have seen positive year-to-date returns – so what’s the best way to invest in real estate right now?

AS CERTAIN sectors of the market begin to recover, many are still struggling with the effects of COVID-19 – perhaps none more so than real estate. According to REITReport. ca, out of 41 publicly listed Canadian REITs, only three have had positive year-to-date returns, and the majority have seen returns plunge into the negative double digits.

What makes these negative returns even more interesting is the recent positive trends in the Canadian housing market.

Late August figures from the Canadian Real Estate Association show that national home sales were up 26% month-over-month, and

“I think an important thing to look at is that there is a difference between real estate assets and real estate funds,” says Cliff Fraser, chief business development officer at Equiton. “Sometimes real estate is looked at as one big blob, regardless of the type of fund or what the asset is actually is.”

That grouping of real estate under one big umbrella might explain some of the negative headlines surrounding the space. However, Frank Lonardelli, CEO of Arlington Street Investments, says that while many sectors of real estate have taken a beating, others have flourished.

“There is a difference between real estate assets and real estate funds. Sometimes real estate is looked at as one big blob” Cliff Fraser, Equiton July sales were the highest of any month in history. That likely has many investors wondering how they can best capture returns in the sector. Even though public REITs have struggled, opportunities can still be found, but it’s crucial for advisors and investors to understand the different areas of real estate.

6

“I would argue that multi-family [rentals] are worth more on any valuation point postCOVID than they were pre-COVID,” he says.

“It is one of the only areas that hasn’t been affected as much. The market will be more challenging moving forward – people will have less disposable income to make their

first home purchase, so they will have to rent longer.”

Fraser has noticed this trend as well.

“Broadly speaking, apartments have done well in the last two quarters; industrial has also done well and certain parts of commercial, whereas hotels, congregate care, office and retail haven’t,” he says. “There are a few reasons for that, but it really comes down to understanding the sector. Companies that couldn’t figure out their e-commerce have figured out their back office and are drop shipping. Data centres and data providers, with everyone living one Zoom call at a time and working from home, are more important now, too. These, plus the Amazon fulfilment centres in suburban areas, will create opportunity on the industrial side.”

While Lonardelli also sees potential in industrial real estate, he believes it should be approached cautiously. “I think the Amazons and distribution hubs across North America

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10 WORST-PERFORMING CANADIAN REITs

will continue to do well,” he says. “The only caveat is that no one really knows how detrimental the effects will be from COVID. As the consumer goes, so do buying trends, and with them go distribution centres.”

Another area that appears poised to attract

markets have become, adding that it’s something investors should take note of for future prospects in those areas.

In terms of other risks in real estate investing, Fraser says it comes back to the old adage of ‘location, location, location.’

1

American Hotel Income Properties (HOT.UN) YTD return: -65.48%

2

Morguard REIT (MRT.UN) YTD return: -59.71%

3

H&R REIT (HR.UN) YTD return: -52.42%

4

Melcor REIT (MR.UN) YTD return: -51.72%

5

Cominar REIT (CUF.UN) YTD return: -50.49%

6

RioCan REIT (REI.UN) YTD return: -42.38%

7

BTB REIT (BTB.UN) YTD return: -39.07%

8

Dream Office REIT (D.UN) YTD return: -36.24%

9

Slate Office REIT (SOT.UN) YTD return: -35.04%

10

SmartCentres REIT (SRU.UN) YTD return: -34.67% Source: REITReport.ca, as of August 24, 2020

“The good thing about funds today is they have been beaten down, and you can get some good value in them” Frank Lonardelli, Arlington Street Investments attention is residential real estate. Areas like the GTA and Vancouver have seen spikes in demand for single-family houses, which Fraser attributes to the lack of a spring market. Lonardelli adds that low mortgage rates are also having an impact; however, he says he’s concerned about how inflated some

“Know what you have and the location,” he advises. “Even with specific real estate types, you need to know that some are riskier than others and some locations are riskier than others. When you are looking to get exposure to real estate, you want to understand what the return strategy is. That needs to align

with what you as an advisor want to give your clients exposure to, and make sure the asset matches their risk tolerance.”

“It is always easy to follow the trends, and trends show up with momentum,” Lonardelli adds. “The question I ask is, ‘Are you at the end of that cycle or close to the beginning?’

I am a value purchaser, not a momentum guy. The good thing about funds today is they have been beaten down, and you can get some good value in them. I would be cognizant of what you are buying, but now is a good time to buy some, relatively speaking, value-priced publicly traded real estate companies – just be careful of the market.”

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18/09/2020 3:41:49 AM

UPFRONT

INTELLIGENCE CORPORATE ACQUIRER

TARGET

PRODUCTS COMMENTS

Bridgeway National

Input Capital Corp.

Input, an agricultural commodity streaming company, has agreed to sell all of its shares to Bridgeway for $1.75 per share

Cboe Global Markets

MATCHNow

MATCHNow’s alternative trading system accounts for 65% of total Canadian dark trading

CI Financial

Aligned Capital

CI’s majority stake in the Canadian advisory firm, which has approximately $10 billion in AUM, boosts its North American assets to $74 billion

Guardian Capital Group

Agincourt Capital Management

Guardian has expanded its US footprint with a 70% ownership interest in the Richmond, Virginia-based firm

Mackenzie Investments

GLC Asset Management Group

The $175 million deal brings Canada Life subsidiary GLC into the Mackenzie fold; meanwhile, Canada Life has acquired Quadrus Group’s fund management contracts from Mackenzie for $30 million

BMO adds new mutual fund and US dollar options

BMO Investments has added three US dollardenominated ETF portfolios and three mutual funds to its product lineup. The new USD portfolios – the BMO USD Income ETF Portfolio, BMO USD Conservative ETF Portfolio and BMO USD Balanced ETF Portfolio – are targeted to Canadian investors seeking different US investment options. The new mutual funds include the BMO Sustainable Opportunities Canadian Equity Fund, which focuses on high-growth Canadian companies committed to sustainability; a low-volatility option, the BMO Low Volatility US Equity ETF Fund; and an education savings fund, the BMO Target Education 2040 Portfolio.

CI continues its aggressive growth strategy

CI Financial has made a deal to acquire a majority interest in Aligned Capital, a full-service investment advisory firm with approximately $10 billion in assets.

Based in Burlington, Ontario, Aligned Capital supports more than 200 financial advisors across Canada and had a revenue growth rate of 1,237% between 2013 and 2018.

Once the transaction is finalized, CI will have approximately $59 billion in assets in Canadian wealth management and 1,100 advisor teams. Combined with its US registered investment advisory business, CI will have a total of around $74 billion in wealth management assets – a 57% increase over the past 12 months.

“Aligned Capital, with its rapid growth, is an excellent partner for CI as we expand our wealth management platform,” said CI Financial CEO Kurt MacAlpine. “There is a strong fit between our firms, given our shared focus on providing comprehensive wealth management services to clients.”

8

Franklin Templeton makes changes to growth funds

Franklin Templeton Canada is making key changes to two of its global growth funds, lowering fees across three series of the funds and closing three other series. Effective October 1, Franklin Templeton will reduce the fees for Series A, F and T of its Franklin Global Growth Fund and Franklin Global Growth Corporate Class to 1.95%, 0.95% and 1.95%, respectively. The company is also closing Series PA, PF and PT of the Franklin Global Growth Fund to new investors after September 30; the units will also be closed to new investments after the close of business on December 3.

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PEOPLE CI Investments opens top-performing fund to retail investors

CI Investments has launched three new series of its CI Munro Global Growth Equity Fund for retail investors. The concentrated global equity fund aims to identify and benefit from sustainable global growth trends, investing in a portfolio of 20 to 40 global companies expected to benefit from structural global change. The fund had been available only to institutional investors since its January 2019 inception. Over that time, it has achieved an average annual return of 30.6% as of July 31, handily beating the 12.6% return of its benchmark MSCI ACWI index.

NAME

LEAVING

JOINING

NEW POSITION

Jean-Paul Bureaud

World Bank

Foundation for the Advancement of Investor Rights

Executive director

Michael Garofalo

KPMG Canada

Bridging Finance

CFO

David Linke

KPMG Australia

KPMG International

Global head of tax and legal services

John McKenzie

N/A

TMX Group

CEO

Brad Sturges

iA Securities

Raymond James

Managing director and equity research analyst for Canadian REIT/REOC sector

Sarah Miller Wright

Shaw Communications

Manulife Canada

Head of operations

AGF updates sustainable investing strategy

TMX Group names new CEO

Canada Life relaunches Quadrus mutual funds

Manulife welcomes new head of operations

AGF Investments has revamped its sustainable investing strategy with the launch of a new ETF and reduced fees for the corresponding mutual fund. The AGF Global Sustainable Growth Equity ETF seeks long-term capital appreciation through equity securities that are consistent with its concept of sustainable investment. The mutual fund series of the AGF Global Sustainable Growth Equity Fund, meanwhile, will undergo a management fee reduction from 2% to 1.65%; fees for Series F are being cut back from 0.90% to 0.65%. AGF is also terminating Series Q and W of the fund, which offered preferred pricing to qualified investors.

Canada Life and Mackenzie Investments have relaunched the Quadrus mutual fund shelf under the new name Canada Life Mutual Funds. The product lineup includes 18 mutual funds that encompass a curated selection of investment strategies across a range of managers, asset classes and styles, including Canadian, US and global equity; fixed income and balanced funds; and sophisticated asset allocation strategies. Canada Life Mutual Funds are managed

by Mackenzie Investments and will be exclusively available through Quadrus Investment Services, which is a subsidiary of Canada Life.

TMX Group has officially made interim CEO John McKenzie its permanent chief executive. McKenzie, who first took the reins in January after the retirement of former CEO Lou Eccleston, will also join TMX Group’s board of directors. McKenzie’s career includes more than 25 years of leadership experience, 20 of which have been spent in increasingly senior executive positions at TMX Group.

In 2016, he was named CFO; two years later, his duties were expanded to include oversight of TMX’s trust and capital formation businesses, including the TSX and the TSX Venture Exchange.

“John’s impressive combination of business savvy, leadership acumen and vision make him the best fit for TMX and the right choice to lead the company into the next exciting chapter in our history,” said TMX board chair Charles Winograd.

Manulife has appointed Sarah Miller Wright as its new head of operations to help steer its ongoing shift toward a more digital and agile business model. She will be part of both the global operations and Canada leadership teams.

Wright’s career includes leadership roles in client services and customer care at companies such as Virgin Mobile Canada and BCE. Most recently, she served as senior vice-president of digital, product and service delivery at Shaw Communications, where she helped drive the company’s transition to an agile framework. On top of her responsibilities as SVP, she also co-founded an employee resource group at Shaw to support women with mentorship, development and networking opportunities.

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18/09/2020 3:42:20 AM

UPFRONT

ETF UPDATE NEWS BRIEFS NCM takes its first steps into the Canadian ETF space

NCM Asset Management has made its debut in the Canadian ETF space with the launch of the NCM Core Global Fund (NCG) as an ETF on the TSX. The strategy, which invests primarily in global equities, has been available as a mutual fund since February 2016.

According to NCM CEO Alex Sasso, the NCM Core Global strategy, which is managed by “a deep and experienced team of investment professionals,” offers investors exposure to some of the best businesses in the world.

TD Asset Management adds three asset allocation ETFs

TD Asset Management has expanded its ETF shelf with three new asset allocation products. The new TD One-Click ETF Portfolios each invest in a strategic blend of broad-market index ETFs and active ETFs managed by TD. The new suite includes the TD One-Click Conservative ETF Portfolio (TOCC), a mix of 70% fixed income and 30% equities; the TD One-Click Moderate ETF Portfolio (TOCM), a mix of 60% equities and 40% fixed income; and the TD One-Click Aggressive ETF Portfolio (TOCA), a mix of 90% equities and 10% fixed income.

Guardian Capital launches its first suite of active ETFs

Guardian Capital rolled out its first suite of actively managed ETFs on the TSX in mid-August. The group of five ETFs includes two Guardian Directed Outcomes products (the Guardian Directed Equity Path ETF and the Guardian Directed Premium Yield ETF) that combine high-conviction ideas with derivative overlays to seek high income

10

and risk mitigation. The remaining three ETFs fall under the Guardian Capital i3 Investments banner (the Guardian i3 Global Quality Growth ETF, Guardian i3 US Quality Growth ETF and Guardian i3 Global REIT ETF) and promise to add value by fusing artificial intelligence with human intelligence and innovation.

RBC iShares puts an ESG twist on asset allocation

RBC iShares has bolstered its asset allocation ETF lineup with the launch of four new ESG-oriented ETF portfolios on the TSX. In addition to offering multiasset exposure, the portfolios accommodate four different investor risk profiles, making them the broadest suite of ESG asset allocation ETFs in Canada. The new products include the iShares ESG Conservative Balanced ETF Portfolio (GCNS), iShares ESG Balanced ETF Portfolio (GBAL), iShares ESG Growth ETF Portfolio (GGRO) and iShares ESG Equity ETF Portfolio (GEQT). Each portfolio has an annual management fee of 0.22%.

Horizons targets emerging markets for latest TRI ETF Horizons ETFs has launched its newest Total Return Index (TRI) ETF, the Horizons Emerging Markets Equity Index ETF (HXEM). The new ETF seeks to replicate the performance of the Horizons Emerging Markets Futures Roll Index, which is designed to measure the performance large- and mid-cap securities across 26 emerging markets.

The underlying index reflects the returns generated over time through long notional investments in a series of MSCI Emerging Markets Index Futures that are based on the performance of the MSCI Emerging Markets Index, one of the leading benchmarks for emerging market equities.

Thematic ETF winners Healthcare, cyber and video games helped Evolve ETFs reach a new milestone, despite the pandemic When the market bottomed out in March, it had a drastic effect on all investments, including ETFs. During the month, only five ETFs posted positive performance – and three of them belonged to Evolve ETFs. The performance of its healthcare, cybersecurity and video game ETFs helped Evolve exceeded $1 billion in assets under management earlier this summer – a significant milestone for a company that launched its first ETF just under three years ago.

“When we were starting to put these products together, we didn’t contemplate this environment,” says Raj Lala, Evolve ETFs’ president and CEO. “However, when we do put products together, we talk about how this sector will perform in a challenged market and, more importantly, in a challenged economy.”

Evolve’s healthcare ETF (LIFE.B) was the best-performing equity ETF on the TSX in March, according to Bloomberg, with a return of 2.99%. Lala points to healthcare as a recession-proof industry in the long run, saying there won’t be much of a dip in demand for drugs, despite the pandemic. In the short term, he foresees an influx of cash into pharmaceutical research as companies look for effective therapies and a vaccine against COVID-19.

As for Evolve’s cybersecurity ETF (CYBR), Lala views the sector as a non-discretionary spend for modern corporations. In the short

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term, too, it’s something many businesses have had to invest in to protect their digital infrastructure, especially after teams went remote.

Lala has noticed that many companies are making more use of cybersecurity tools they’d invested in before the pandemic, too.

“You’re never going to hear a CEO of a major company say, ‘Last quarter was really terrible, so we’ve decided to decrease our budget spending on cybersecurity,’” he says.

“The pandemic has helped uncover and reinforce a few longterm investment sectors” Finally, Evolve’s video game fund (HERO) had a 1.26% return in March, benefiting from people spending an abundance of time at home. Lala notes that e-sports, which the fund invests in, kept running when traditional sports leagues closed. He expects sports fans to start paying more attention to e-sports and advertisers to follow those eyeballs.

Heading into the fall, Evolve is confident that the three ETFs that shone through the depths of the pandemic can continue to succeed. “The pandemic has helped uncover and reinforce a few long-term investment sectors,” Lala says. “With cybersecurity, data has become a precious resource, and the need to protect this resource is becoming a top priority for businesses. In e-gaming and e-sports, increased leisure time and a new platform to socialize/entertain has lead to record revenue in the video game industry.

Finally, in healthcare, companies in the second largest sector of the S&P 500 are incentivized to develop a vaccine, which is essential in helping restart economies.”

Q&A

Robert Wessel Managing partner and co-founder HAMILTON ETFs

Years in the industry 25 Fast fact Hamilton ETFs specializes in financials, offering five ETFs that provide exposure to the sector in Canada, Australia and the US

Approaching the financial sector Flows into financial ETFs have been up and down during the pandemic. What has caused the bouncing around?

The financials and banks are economically sensitive, so as investor confidence of an economic recovery changes, it drives inflows and outflows. However, in the next two years, we would anticipate an economic recovery will be highly correlated with inflows, although the timing will definitely be influenced by the pandemic.

Your financial funds cover many areas in the world. Are there any markets that are more attractive right now?

Australia remains one of the undiscovered markets. It has arguably the world’s best banking sector – and very similar to Canada – which operates in one of the world’s most successful countries. Importantly, the Australian banks have a long history of outperformance versus Canadian banks, but limited correlations, making them a natural complement for investors seeking diversification without sacrificing quality or yield.

How are you treating the US market right now, given its difficulties with COVID-19 and the upcoming election?

Does it affect how you view the country’s financial sector?

The US is a huge market with over 500 financials. We focus on highquality, mid-cap financials with superior growth prospects, a history of outperformance and operating in the most attractive regions. The US financials are trading at significant discounts to historic levels, despite maintaining their earnings power. Eventually, the extreme emphasis of growth over value will moderate, and this will benefit the traditional financials.

Has the pandemic resulted in any risks to financials that investors need to be aware of?

On the risk side, credit and interest rate risk have increased. The former will recede in the next two years, supporting a large recovery in bank earnings, while the latter will persist for years. The increase in these two large risks will influence investors’ allocations towards less exposed financial technology firms like exchanges, payments and market data, among others. Investors are likely to reduce exposures to more challenged sectors, especially life insurance. Banks should benefit in the next two years from a full recovery in loan losses.

How should Canadians approach exposure to this space?

Is there opportunity to diversify globally?

Absolutely. There is no question that Canadian investors are heavily exposed to the domestic sector, especially the banks, which, it should be emphasized, are very highly correlated with limited diversification and very exposed to credit and interest rates. In our view, there is a powerful case for domestic investors to complement their core Canadian bank holdings with high-quality financials globally, benefiting from different trends – whether by country or by sub-sector – to add returns and reduce overall portfolio volatility.

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18/09/2020 3:43:21 AM

UPFRONT

ALTERNATIVE INVESTMENT UPDATE

Will fintech investment get a boost?

Global fintech funding has slowed, but COVID-19driven digital acceleration could provide a tailwind

M&A activity, meanwhile, decelerated across all regions of the world. Global M&A deals accounted for US$4 billion during the first half of 2020, representing a significant drop-off from 2019’s record US$85.7 billion.

KPMG predicted that over the second half of the year, COVID-19 will continue to be a key driver of change for fintech investment in the face of persistent trends such as the use of contactless payments and demand for

“We will likely see investors continuing to focus on late-stage deals and safe bets, given the current uncertainty”

While the first half of 2020 brought an overall slowdown in fintech investment around the world, the venture capital corner of the space has remained encouragingly robust. During the first six months of 2020, global fintech investment amounted to US$25.6 billion, far behind 2019’s total investment of US$150.4 billion, according to KPMG’s latest Pulse of Fintech report.

Yet US$20 billion worth of the H1 2020 investment total came from venture capital, putting it on pace to set a new annual record.

KPMG reported that “late-stage deals

NEWS BRIEFS

accounted for a significant proportion of VC investment as mature fintechs continued to attract large funding rounds.”

Many of the deals observed in the first six months of 2020 stemmed from deal-making processes that began in late 2019; the onset of COVID-19 has caused new deal activity to slow dramatically, except in high-priority sectors such as payments. Platform businesses also continued to enjoy strong interest in the first half of 2020 from both investors and large tech firms, especially in markets where fintech isn’t as mature.

Cboe Global Markets buys alternative trading system

Cboe Global Markets has completed its acquisition of MATCHNow, the largest equities alternative trading system in Canada. The MATCHNow marketplace offers execution for institutional, proprietary and retail orders by combining frequent call matches and continuous execution opportunities in a fully confidential trading book. Founded in 2007, MATCHNow accounts for nearly 65% of the market share in Canadian dark trading and approximately 7% of total Canadian equities volume.

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digital service models. Those forces are also expected to continue powering investment in related activities such as cybersecurity, fraud prevention and digital identity management.

Notably, global investment in cybersecurity has shot past the US$592.3 million record set in 2019, amounting to US$870.8 million in the first half of this year alone.

“Over the remainder of 2020, we will likely see investors continuing to focus on late-stage deals and safe bets, given the current uncertainty,” said Anton Ruddenklau, KPMG’s global fintech co-leader. “This will likely create challenges for less mature fintechs, who could find themselves running out of cash and struggling to raise additional funding.”

Imperial Equities suspends Q3 and Q4 dividends

Imperial Equities, a publicly traded company anchored by industrial, agricultural and commercial real estate in Western Canada, has suspended dividends for the third and fourth quarters of 2020 after reinstating them in Q1. “As we manage through the impacts of COVID-19 in particular and we consider our risk strategies in the face of future uncertainty, it is prudent to ensure we have sufficient cash flows to meet all of our corporate obligations and to retain some reserve, given ongoing uncertainties,” said CEO Sine Chadi.

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18/09/2020 3:43:41 AM

Q&A

Chris Cullen

The importance of alternative income

SVP and head of ETFs BROMPTON FUNDS

Years in the industry 19 Fast fact Since its inception in 2018, the Brompton Flaherty & Crumrine Investment Grade Preferred ETF (BPRF) has had a return of 5.9%

In light of low interest rates, how important are other sources of income in portfolios?

The pandemic response from North American central banks was to cut overnight funding rates to stated lower bounds, 0% to 0.25%, and other government bond maturities have followed. Investors may start to stretch for yield by extending into traditional corporate bonds, which, unlike US or Canada government bonds, carry some level of credit risk. Safer corporate credits in North America – investment-grade bonds – are yielding approximately 2%, which is not much of an improvement over similar-term government bonds.

Riskier high-yield bonds, excluding financially distressed companies, are now yielding a little less than 5%, which seems reasonable, except when you consider that we are in the middle of the biggest high-yield bond default period since the global financial crisis.

So yes, it’s very important for income investors to consider other sources of income, rather than automatically stretching for yield by taking on higher levels of credit or interest rate risk. Investors can find better risk/reward options in income alternatives.

Are there any areas that stand out to you?

We are suggesting US preferreds – they’ve traded much more sensibly and stably than their Canadian counterparts, and the US market is 10 times the size of Canada’s and offers good liquidity, high credit quality and yield. Almost all US preferred issuers are rated investment-grade, meaning the probability of default is low, comparable to the US investment-grade corporate bond market. Yet the average yield is around 5% for

Therapeutic treatment provider joins DealSquare

Doctor’s Ketamine and Wellness, a Calgary-based company that promises a revolutionary treatment for pain and mental health issues, has launched a $7 million private placement offering on the DealSquare platform. The company is aiming to become “the premier global provider of outpatient ketamine and vitamin hydration infusions”; CEO Michael Hale said he hopes the DealSquare offering will provide Doctor’s Ketamine and Wellness the exposure it needs to scale up operations and expand its services.

high-quality US preferreds, about the same level as non-distressed US high-yield bonds. High quality and high income can still be found if you look outside of traditional bonds.

What risks are there with these investments?

US preferreds, and preferreds in general, are subordinated securities of high-quality issuers.

Subordination risk means that in the event of default, US preferred holders have a lesser claim on corporate assets than do bond holders. The upside for US preferreds is that the issuers of preferreds are typically high-quality, investment-grade-rated companies.

Securities can carry credit risk, equity risk, liquidity risk and subordination risk. All of these risks, theoretically, should attract commensurately higher returns than ‘riskless’ government bonds. However, in the current low-yield environment, the reward for certain of these risks from mainstream bonds has been compressed to a level that we believe does not compensate investors properly. That’s not the case for US preferreds – we believe investors are still being fairly compensated for subordination risk, and they compare very well to other classes of fixed income investments.

What are the benefits of alternative income?

Alternative income investments provide investors with many benefits, including diversification. When assembling a portfolio, it’s prudent to consider the correlation between holdings. US preferreds have relatively low correlation with Canadian preferreds, Canadian and US equities, and bonds.

Waratah launches second liquid alt mutual fund

Waratah Capital Advisors has unveiled its second liquid alternative mutual fund, the Waratah Alternative ESG Fund.

The new offering aims to provide highnet-worth investors with direct access to a diversified portfolio of long and short equity positions with integrated ESG factors. The fund integrates ESG considerations into its fundamental investment analysis to reduce inadvertent and direct ESG-related risks and to identify new ESG-related investment opportunities such as water technology, battery materials and plastics innovation.

Ninepoint Partners announces new limited partnership

Ninepoint Partners has filed a preliminary prospectus for the Ninepoint 2020 Short Duration FlowThrough Limited Partnership, which aims to achieve capital appreciation and significant tax benefits by investing in a diversified portfolio of flow-through shares and other securities of resource issuers.

Units are being offered at $25 per unit with a minimum subscription of 100 units. The partnership intends to provide liquidity to partners through a rollover to the Ninepoint Resource Class in early 2022.

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18/09/2020 3:43:46 AM

UPFRONT

OPINION

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

Addressing the ‘she-cession’ The success of Canada’s economic recovery rests on women to regaining their pre-pandemic presence in the labour force, writes Jennifer Reynolds IN RECENT years, there has been a growing recognition that women are critical growth generators for the global economy. According to The Economist, the increase in female employment in the advanced world has “contributed more to global [GDP] growth than have either new technologies or the new giants, China and India.” McKinsey Global Institute estimates that advancing gender equality would add $12 trillion to global growth. In Canada, the estimated impact is an additional $150 billion in incremental GDP – a 6% increase on traditional GDP growth forecasts over the next decade.

These statistics were compelling arguments for advancing women’s participation and equality in the economy pre-pandemic.

However, in the face of the COVID-driven ‘she-cession,’ as it has been called, it is clear that robust economic recovery must include a plan to address the significant erosion of women’s labour force participation gains.

Citi recently predicted that the loss of jobs globally (excluding China) as a result of COVID-19 could be as high as 44 million, with women accounting for 31 million of the layoffs. This loss of women in the workforce equates to a $1 trillion decline in global GDP. The disproportionate impact on women’s employment has been equally felt in Canada.

The female labour force participation rate has been knocked down to its lowest level in 30 years. While women accounted for 51% of job losses in March and April, they account for only 45% of the job gains in May and June.

Similarly, women account for 45% of the decline in hours worked over the downturn,

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yet will only account for 35% of the recovery.

The difference has to do with women’s over-representation in sectors that are most vulnerable to layoffs and are expected to recover more slowly. RBC recently predicted that employment would be 2.5% below pre-COVID-19 levels by the end of the year.

However, employment in accommodation and food services, where women dominate, is expected to be 19% below pre-COVID levels, whereas employment in the male-dominated

we do not ensure that Canada’s recovery plan includes a strong focus on increasing women’s participation in the economy.

Without doubt, policies to address childcare will be critical to returning women to the workforce. The safe return of children to school and the development of an effective childcare strategy should be at the top of the agenda for Canada’s recovery plan.

Policymakers also need to focus on longerterm initiatives that lead women toward the jobs of the future. To narrow the gender equality gap and drive GDP growth, moving more women into higher-productivity sectors, such as technology, is just as important as increasing labour participation rates. The fact that women have made up more than 50% of university graduates for 30 years should have resulted in much better gender diversity across sectors. The reality is that the talent pipeline for many jobs of the future is not reflective of the demographics of our post-graduates, and this is a fundamental inefficiency in our economy.

Finally, women need to be at the table as these critical policies are developed and

“The fact that women are expected to end the year at much lower labour participation rates is more than a setback to women’s equality – it is a setback for every Canadian” professional, scientific and technical services field is forecast to be close to February levels by the end of the year. Women’s labour participation rates will also be impacted by uncertainties around school and childcare.

The fact that women are expected to end the year at much lower labour participation rates is more than a setback to women’s equality – it is a setback for every Canadian and equates to real GDP loss. Without women in the economy at pre-pandemic rates, at minimum, the Canadian economy will struggle to drive economic output and growth. Prior to the pandemic, women accounted for 42% of household income.

This ‘she-cession’ will continue to drag on families and the economy long past 2020 if

executed. This ‘she-cession’ has been in the making for decades and will require innovative, long-term thinking to achieve a significantly different economic demographic picture in Canada.

Restoring the erosion of women’s labour force participation gains and driving greater economic equality is not just critical to the post-pandemic recovery – it is a valuable lever Canada can empower to drive the future growth and success of our economy.

Jennifer Reynolds is the president and CEO of Toronto Finance International, a publicprivate partnership between Canada’s three levels of government, the financial services sector and academia.

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18/09/2020 3:44:07 AM

Income for Every Outcome...

Wherever the road takes you

Forstrong Global Income Performance of July 31st 2020

YTD

1 Year

3 Year

5 Year

10 Year

Since Inception

2.18%

5.00%

5.11%

4.94%

7.73%

8.32%

Performance statistics for ETF Managed Portfolios are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/ outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Past performance is no indication of future results. A rate of return for one year or less is not annualized.

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18/09/2020 3:44:10 AM

PEOPLE

INDUSTRY ICON

TEAM SPIRIT RBC GAM president Doug Coulter has long held leadership positions – but he recognizes that a collaborative environment has been key to his success

WHEREVER DOUG COULTER has gone, he has held positions where he’s been able to make an impact. Now, in his current role as president of RBC Global Asset Management, Coulter is looking to help the company continue being a leader in delivering an exceptional investment experience for advisors and their clients.

Coulter knows the advisor side well. After earning a bachelor’s degree in economics from Concordia University, he began his career as an investment advisor with Dominion Securities in Montreal, attracted by the dynamic nature of the business, which continues to challenge him.

“It can change by the second or day and is very plugged into geopolitical events around the world,” he says. “I liked the fact that it was so dynamic and quick-paced. I related it to playing sports – you must react to what’s unfolding right in front of you. In this role, over the last 10 years, the changes that have happened – whether product development, technology, consumer demand, regulatory – never end.”

Coulter briefly moved to TD Bank but returned to Dominion Securities in Toronto in 1993. He worked in a front-office role, developing the firm’s fee-based programs.

“I was involved in establishing them, which was a great experience because they didn’t exist,” he says. “Building from the ground up, I had to set the strategy and then build the programs. This included operations, legal, compliance, technology and marketing. I was

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able to get the full spectrum of experience.”

That turned out to be a stepping stone for Coulter, who went on to manage RBC US Wealth Services’ fee-based platforms after its purchase of Dain Rauscher. When he came back to Canada, he ran RBC Direct Investing, which he considers a career highlight.

“I really enjoyed having exposure to that part of the business,” he says. “It was something that wasn’t natural for me – I am

Building something bigger Since he moved from RBC Direct Investing to become president of RBC GAM, Coulter has been part of many major projects. One of the biggest was the working relationship RBC established with BlackRock, which helped it become the largest ETF provider in Canada through RBC iShares.

“From a strategy point of view, we didn’t see a future where ETFs weren’t part of

“Creating environments that are based on people collaborating, working together, challenging each other, wanting a sense of achievement, but also enjoying going to work is something I enjoy” not that tech-savvy. Delivering investment experiences through technology platforms, rather than people, I found rewarding and a great learning.”

While he didn’t know it at the time, the experience would end up paying off, especially in the current environment. “Getting exposure to a direct environment where you are interacting with your clients through technology and a digital experience was a key learning for me,” Coulter says. “Right now, in COVID, the importance can’t be underscored enough.”

our lineup,” Coulter says. “We concluded that some sort of partnership with a global leader would be an interesting option, and BlackRock, as the global leader, was our first choice. They had a Canadian operation, so we contacted them and asked if they would be interested in some discussions. They came back said they would – Canada was a business they needed to grow more rapidly. What was interesting to me was getting the group, the Canadian team and the senior team from New York together to figure out how we could do it and what would it look like.”

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18/09/2020 3:44:32 AM

PROFILE Name: Doug Coulter Title: President Company: RBC Global Asset Management Based in: Toronto Years in the industry: 33 Career highlight: Creating successful, collaborative work environments

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18/09/2020 3:44:37 AM

PEOPLE

INDUSTRY ICON

Coulter says that after those initial discussions, things happened quickly. “[It was] probably a six- or seven-month process from our initial conversation to come together to create the new entity,” he says. “The first year, we spent a lot of time setting up processes to lay the track for growth. Since then, business has really taken off, and we are having some strong success.”

While that project was a key milestone in Coulter’s career, he says his greatest highlight has been the culture he’s been able to create on various teams.

“The big thing for me is creating work environments where you can enable success,” he says. “I am very much a team player, so

digital footprint also can’t be underscored enough. We want to deliver rich client experiences with technology embedded as part of the solution. Even though advisors have strong relationships with clients, we want them to augment that with a solid digital footprint.”

Finally, Coulter believes RBC GAM needs to further expand its solution set by examining the global pension market, including private markets, real estate and infrastructure, and to continue to evolve its focus on responsible investment.

“Our success in our global public markets platform and our leadership position in responsible investment have been huge

“We want to deliver rich client experiences with technology embedded as part of the solution. Even though advisors have strong relationships with clients, we want them to augment that with a solid digital footprint” creating environments that are based on people collaborating, working together, challenging each other, wanting a sense of achievement, but also enjoying going to work is something I enjoy. I have been fortunate to have been in leadership roles and created cultures that gave us the best chance to succeed.”

What’s next?

Looking ahead to the future of RBC GAM, Coulter says that while the asset manager been recognized as a leader for individual investors and in the mutual fund space, it has room to expand as an ETF provider and to enhance its digital experience.

“I think the combination of iShares, BlackRock and RBC GAM has all kinds of opportunities to create better client experiences,” he says. “Continuing to expand our

growth drivers for GAM,” he says. “The next phase to explore is private markets and continuing to evolve our already strong capabilities in ESG integration.”

Coulter’s impact at RBC, the company where he has spent most of his 33-year career, is evident. Looking back, he says it has given him quite a sense of accomplishment.

“What has been most satisfying for me is creating a place where people want to go to work and have the drive to make an impact and be successful,” he says. “I have never been disappointed. What originally attracted me to RBC and Dominion Securities, and what I think is still true today, is they are market leaders in the country. Having the opportunity to work alongside some of the best in the industry is something I have really enjoyed.”

RBC GLOBAL ASSET MANAGEMENT AT A GLANCE

HEADQUARTERS Toronto, ON

NUMBER OF EMPLOYEES 301

TOTAL AUM $254.9 billion (including RBC ETFs and mutual funds only)

ETF AUM $73.3 billion (in the RBC iShares strategic alliance)

NUMBER OF MUTUAL FUNDS AND ETFs 250

*Co

Com its v

TOP FUND BY AUM RBC Select Balanced Portfolio ($39.4 billion) Source: RBC GAM

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18/09/2020 3:44:40 AM

The Any

If HS or d of H susp to se Inve

The lowest-cost* high-interest savings etf in canada

HSAV

maximize your cash-savings potential

*Compared to other Canadian ETFs in the “Canadian Money Market” Morningstar category. HSAV has the lowest management fee among a totalof 5 ETFs when accounting for its rebate, as at June 30, 2020.

Commissions, management fees and applicable sales taxes all may be associated with an investment in the Horizons Cash Maximizer ETF managed by Horizons ETFs Management (Canada) Inc. (“the ETF”). The ETF is not guaranteed, its value changes frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing.

The Horizons Cash Maximizer ETF (“HSAV”) uses cash accounts and does not track a traditional benchmark but rather a compounding rate of interest paid on the cash deposits that can change over time.

Any distributions which are received by HSAV are reflected automatically in the net asset value (NAV) of HSAV. As a result, the shareholders of HSAV are not expected to receive any taxable distributions.

If HSAV experiences a significant increase in total NAV, the Manager may, at its sole discretion and if determined to be in the best interests of shareholders, decide to suspend subscriptions for new ETF shares if considered necessary or desirable in order to manage potential tax implications and/or to permit HSAV to achieve, or continue to achieve, its investment objectives. During a period of suspended subscriptions, if any, investors should note that ETF shares of HSAV would be expected to trade at a premium or substantial premium to the NAV per ETF Share of HSAV. During such periods, investors are strongly discouraged from purchasing ETF shares of HSAV on a stock exchange. Any suspension of subscriptions or resumption of subscriptions will be announced by press release and announced on the Manager’s website. A suspension of subscriptions, if any, will not affect the ability of existing Shareholders to sell their ETF Shares in the secondary market at a price reflective of the NAV per ETF Share. The information contained herein reflects general tax rules only and does not constitute, and should not be construed as, tax advice.

Investors situations may differ from those illustrated. Investors should consult with their tax advisors before making any investment decisions.

16-19_Industry Icon-SUBBED.indd 19

18/09/2020 3:44:42 AM

SPECIAL REPORT

ETF EVOLUTION

ETF EVOLUTION The COVID-19 pandemic has forced the ETF industry to adapt, and the lessons learned will shape the future of the investment vehicle WHILE NO industry was spared from the effects of COVID-19, many have taken advantage of the pandemic to make considerable changes – and the ETF industry is no exception. For an area of the investment industry that was riding as high as it ever had at the start of 2020, the shutdown significantly slowed its momentum. In 2019, ETFs outsold mutual funds for the second straight year, and

by November, AUM in the vehicle had topped $200 billion. Inflows kept coming in January

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and February, but by April, net inflows had fallen to just $655 million. By summer, though, ETFs had regained their momentum; the $6.2 billion in inflows recorded in July made it the second biggest month for net ETF inflows in 2020.

While some were critical of ETFs during the low point, experts maintain that the vehicle did exactly what it was supposed to do: ETFs continued to trade, providing investors with liquidity and even, in the case

of fixed income, created price points that investors could rely on to make decisions.

Many areas of the ETF industry faced their own unique challenges. Fixed income, which led the way in flows in 2019, suddenly saw that trend reversed. Meanwhile, oil prices bottomed out, gold surged, and different thematic products took centre stage. On the following pages, Wealth Professional looks at eight areas of the ETF industry, exploring how they’ve changed and what their future might hold.

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18/09/2020 4:15:48 AM

THEMATIC ETFs IT SEEMS like every year, thematic ETFs take another step forward in innovation. But in 2020, thematic ETFs have been forced to pivot to survive the COVID-19 crisis. This was something Lisa Langley, founder and CEO of Emerge Canada, noticed as her firm’s tech-focused thematic ETFs worked through the crisis.

“Our ARK ETFs didn’t need to pivot – they handled the first quarter well and received a big push out of March,” Langley says. “Others were forced to change, which was a challenge in the environment.”

For Langley, two trends stood out during the crisis. The first was active management – not just in technology ETFs like Emerge’s, but in all sectors.

“Things move so quickly to be looking at past options,” she says. “We had a real advantage that we are set up to do our own research in the areas, something that I think more thematic funds will need to have. When you think of an index, it is created as a means to measure and close the research gap. I think that will be a trend in the growth of thematic ETFs moving forward: closing the research gap. You need to understand the theme and be able to move quickly.”

The other trend that stood out to Langley was technology, but not in its simplest form.

Rather, Langley is focused on technology that has permeated multiple industries and sectors, and she believes those disruptive options will be crucial moving forward.

“All sectors will recover and improve, postcrisis, because of technology,” she says. “You look at something like blockchain, which gets associated with cryptocurrency, but it has the framework to help in multiple areas. For our funds, ARK looks to identify technologies with that cross-sector ramification that will have an impact in multiple sectors.”

In addition to active management and cross-sector technologies, another crisisdriven trend that Langley has noticed among

TECH-THEMED ETFs FIND SUCCESS While many areas are still struggling to recover from the market drop earlier in the year, Emerge Canada’s tech-focused ETFs have enjoyed healthy returns.

SIX-MONTH PERFORMANCE OF EMERGE ETFs 60%

55.71%

50%

40%

45.17%

42.85%

42.18%

30%

27.35%

20%

10%

0%

Emerge ARK Global Disruptive Innovation ETF (EARK)

Emerge ARK Genomics & Biotech ETF (EAGB)

Emerge Ark Autonomous Tech & Robotics ETF (EAUT)

Emerge ARK AI & Big Data ETF (EAAI)

Emerge ARK Fintech Innovation ETF (EAFT) Source: Emerge Canada

“The ability to be concentrated on fewer names within a niche is a big shift that I think we could see more of ” Lisa Langley, Emerge Canada thematic ETFs is specialization.

“Our research has helped us find niche areas – deep diving into the subject matter to find the those cross-sector technologies to include in our funds,” she explains. “When you think of thematic ETFs, many funds have many other holdings, but the ability to be concentrated on fewer names within a niche is a big shift that I think we could see more of.”

Beyond her own technology-focused ETFs, Langley has noticed other areas that sparked interest during the crisis, including commodity ETFs such as gold and natural gas. She also believes there could be more solutions that will come to market, especially ones that provide income, once the

post-crisis world takes shape. As for which ETF theme will be the darling of the postCOVID-19 world, Langley believes that honour could go to artificial intelligence.

“I think we are seeing it with AI fuelling so many things: robots, autonomous vehicles, computer programs, home security, websites, e-commerce, payment systems,” she says. “It is definitely a space to watch because it is fuelling everything.”

Moving forward, the biggest challenge in the thematic space will be research, Langley says. “I think it is difficult to be in an area and not have subject-matter expertise. You really need to know the subject, have original research and know how to treat it so you can move quickly. I don’t think indexes will go

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SPECIAL REPORT

ETF EVOLUTION

away – they create less tracking error and, depending on design, can reduce risk and volatility. I think we will continue to see new products, which is exciting, and there is a lot of potential.”

Langley believes advisors should still consider thematic ETFs as satellites to help diversify core holdings in a portfolio. She says it all comes back to knowing what the client is looking for and their specific situation, but it’s a way to gain exposure clients don’t have elsewhere.

“When I look at our Emerge ARK ETFs, they are a complement to a core portfolio and an opportunity for advisors to apply diversification,” she says. “Disruptive innovation used to be viewed negatively, but now it is a necessity for companies that want to move forward. Including that disruptive innovation and allocating to it is important for advisors.”

EMERGING MARKET ETFs While no corner of the globe has been untouched by COVID-19, different areas of the world have had different challenges and

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timeframes when dealing with the pandemic.

That global variance could end up attracting more investors to the emerging market space.

“If you look at the extended outperformance of US equities and now a return to record low interest rates, which are likely to stay low, it gives rise to the need to diversify and to look to other markets for growth and yield potential,” says Michael Cooke, SVP and head of ETFs at Mackenzie Investments.

“Amongst that backdrop, I think EMs are compelling. EM debt, for example, compared to bond yields in developed countries, is a compelling value proposition. Even though you are assuming more and different risk, the tradeoffs are acceptable. I would expect you will see more interest from investors and asset managers looking at opportunities beyond North America.”

Mackenzie is highly invested in the emerging market space. In addition to an equity ETF, the Mackenzie Maximum Diversification Emerging Markets Index ETF (MEE), the asset manager also offers two debt funds: the Mackenzie Emerging Markets Local Currency Bond Index ETF (QEBL) and the Mackenzie Emerging Markets Bond Index ETF (CAD-Hedged) (QEBH). Within the

space, Cooke says 2020 has been a tale of two markets.

“COVID had a particularly damaging effect on EMs because it created a risk-off mindset, where many investors sold off in the space,” he explains. “Investors who were scared and sold out of positions to avoid the downside, most of which occurred before they could react, then watched markets bottom and bounce unpredictably. As sentiment improved in Q2, a lot of investors missed the rally, particularly in EMs.” That’s why Cooke stresses the importance of taking a long-term view of the space.

Those who did would have been rewarded, but the rebound also created pockets of value in emerging markets.

“For investors contemplating EMs, I would suggest a strategic allocation because it is still a good entry point,” he says. “We have discount valuations in equity and debt markets. It’s compelling for investors who take a long-term view and think about the appropriate weightings based on risk and timeline.”

There are many reasons why those pockets exist, and even though emerging markets have been accessible for some time now, ETFs have made it easier for both institutional and retail investors to get in. One thing EMs have had going for them during COVID-19 is that many were able to reopen before developed economies, and Cooke believes their ability to do so effectively will bring some confidence back to investors.

“Certain countries, such as China and South Korea, were among the earliest to reopen and demonstrated the economic and social resilience of reopening,” he says. “There is always the risk we will see a second surge, but it does look like many countries that were earliest to succumb to the virus have demonstrated they can open economies in a measured way. I think that has given investors confidence that this is controllable and we are not confronting a depression-like meltdown, given the uncertainty back in March.”

Another major factor Cooke points to is the decline in interest rates in developed markets, which he believes opens an oppor-

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18/09/2020 4:15:52 AM

SPECIAL REPORT

ETF EVOLUTION

EMERGING MARKET BONDS MAKE A COMEBACK YTD PERFORMANCE OF THE SOLACTIVE USD EMERGING MARKET BOND – INTEREST RATE HEDGED INDEX 1,200

1,000

800

Jan 2

Jan 15

Feb 3

Feb 18

Mar 2

Mar 23

Apr 1

Apr 15

May 1

May 15

Jun 1

Jun 15

Jul 1

Jul 15

Aug 1

Aug 15 Source: Solactive.com

“The benefits of diversifying in other geographies, currencies and emerging markets has never been stronger. You will be rewarded for taking the risk if it is done in a measured fashion” Michael Cooke, Mackenzie Investments tunity for fixed income exposure in EMs. “You have seen investors migrate towards the corporate space and high yield to achieve better and higher yields,” he says. “Looking at EMs, you have the benefit of different types of risk. With risk comes the potential for return.

Looking at yields, our EM local currency bond ETF’s current yield to maturity is 4.1%, and the hard currency version is yielding north of 8% – those are attractive yields compared to developed countries and the corporate and high-yield segments.”

The different risks inherent in EMs also play a role in diversification, Cooke notes,

24

as it involves diversifying not only a portfolio’s assets, but also its risks. Those risks can include sovereign, debt and currency, but Cooke says if investors take a long-term approach, the risks are worth the potential rewards. However, he does caution investors in the space about unpredictable factors, such as the US election or a renewal of trade tensions, which could impact the short term.

Still, Cooke feels the lessons learned from the COVID-19 pandemic will ultimately change the way investors view emerging markets. If rates remain low, he believes it will push investors to look at EM debt exposure

for their fixed income. And, given the outperformance seen in the US market, the growth opportunities might be greater in EMs. “The benefits of diversifying in other geographies, currencies and, in this example, emerging markets has never been stronger,” he says. “You will be rewarded for taking the risk if it is done in a measured fashion.”

PRIVATE EQUITY ETFs At the beginning of 2020, National Bank Investments launched the NBI Global Private Equity ETF (NGPE), which tracks an index of the world’s biggest large-cap, publicly listed private equity managers. When COVID-19 hit, it affected many areas of the economy, yet NGPE was able to perform well.

Terry Dimock, head portfolio manager at National Bank Investments, points to the increased importance of diversification and active management when it comes to private equity ETFs. He believes that, despite the

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pandemic, private equity remains a valuable tool for investors.

“Private equity has a role to play in the long-term financing of many different industries and innovations,” he says. “It can be an interesting alternative or diversifier in portfolios. We are happy with the performance of our fund, but I think the longer-term perspective is important.”

That perspective revolves around the managers of the companies within the fund, as well-informed active management is crucial in the private equity space. Gaining access to private equity investments has historically been difficult for investors; however, private equity ETFs have helped to remove that barrier. With more large companies choosing not to go public, access to private equity is even more important

“Private equity has a role to play in the long-term financing of many different industries and innovations. It can be an interesting alternative or diversifier in portfolios” Terry Dimock, National Bank Investments when building a diversified portfolio.

“These large private companies are deciding not to go public and want to stay private longer, given the regulations and time consumed by being public,” Dimock explains. “You see technology companies with valuations over a billion still private. So, investing in private equity gives you exposure to other areas of the economy – areas that

have different characteristics. Investing with managers with long-term track records, access to these investments and experience is important, because not every business model succeeds over the long term.”

The pandemic has only heightened the importance of good managers in private equity – those who have built their portfolios with quality businesses have found success

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SPECIAL REPORT

ETF EVOLUTION

during COVID-19, Dimock explains.

“Managers have to make sure they have looked at the balance sheets [and] debt structures and companies have business models that will be able to survive the pandemic and recover and flourish,” he says. “I believe having the right managers who are doing their due diligence, looking at the companies they are investing in with the right characteristics, is a good way to invest and manage money over the long run.”

Evaluating risks is a critical aspect, Dimock adds. He says the pandemic has shown that even low-probability risks can happen, and investors will now be looking more closely at managers, who will need to ensure they’re offering downside protection.

While private equity was already gaining traction among investors before the pandemic, it could be poised to take off now.

While it does diversify a portfolio, Dimock stresses that it is still equity and has risks associated with the asset class.

“If you go back to basics, diversification is your first area to look at when building your portfolio,” he says. “Diversify your risks and have a portfolio that answers your goals and risk tolerance. With yields being low, when you look at different avenues of where you can get yield, even in equities, you take additional risk. It is important for investors to look at their own goals and tolerance to make sure it matches the investment. Yes, private equity did perform well in the pandemic, but it is equity – there is a correlation. If there was a broader selloff over time, it would be impacted. It is one component that could be interesting, but it has to be part of a diversified portfolio.

“I think the pandemic has shown the importance of diversification,” Dimock adds.

“Some parts of your portfolio may not always act the way you want, but others will. You want some to work when others don’t, but always have steady long-term returns with low volatility. It shows that looking at alternatives to diversify can help diversify risk. It’s one component that can add to an individual’s portfolio.”

26

TOP 10 HOLDINGS IN THE NBI GLOBAL PRIVATE EQUITY ETF

1 2 3 4 5 6 7 8 9

KKR & Co. Weighting: 8.14% Partners Group Holding Weighting: 7.73% 3i Group Weighting: 6.77% Blackstone Group Weighting: 6.44% Investment Kinnevik Weighting: 6.19% Apollo Global Management Weighting: 6.17% EQT Weighting: 5.98% Intermediate Capital Group Weighting: 4.03% SBI Holdings Weighting: 3.79%

10 Weighting: 3.09% Onex Corp.

Source: National Bank Investments, as of July 31, 2020

OIL ETFs One of the hardest-hit sectors during the COVID-19 pandemic was oil. As the world came to a stop, so did the need to travel.

Airplanes were parked on runways, cars were off the roads, and oil prices plummeted.

For ETF providers invested in the sector in both Canada and the US, it was a devastating blow, forcing many to close or revamp their products.

“Nobody in their right minds, here or in the US, could have predicted negative oil prices and the impact COVID would have on the need for oil or basically the energy sector itself,” says Steve Hawkins, president and CEO of Horizons ETFs. “The unexpected volatility created mass havoc with respect to

the oil sector and any ETFs linked to it.”

Hawkins, who also serves as chair of the board for the Canadian ETF Association, says there were more than 100 ETFs, mostly in the US, that closed or completely restructured.

His firm offers three products in the sector: the Horizons Crude Oil ETF (HUC), Horizons BetaPro Crude Oil Leveraged Daily Bull ETF (HOU) and Horizons BetaPro Crude Oil Inverse Leveraged Daily Bear ETF (HOD).

The increased volatility forced Horizons to revamp HOU (formerly the BetaPro Crude Oil 2x Daily Bull ETF) and HOD (formerly the BetaPro Crude Oil -2x Daily Bear ETF) to be more flexible on the underlying exposure to oil contracts and the leverage offered.

“Those two products, HOU and HOD, were some of the best-selling ETFs in Canada in the first four months of 2020, with oil prices dropping precipitously,” Hawkins says. “There were a lot of investors piling into levered oil up [HOU], trying to pick a bottom on oil.

Then COVID happened, and the bottom fell out. With oil [front- or first-month contracts] dropping so dramatically and people betting on a short-term basis on double oil up, those investors lost a substantial amount of money in Canada and the US.” Horizons, which uses derivatives contracts, could no longer manage the ETFs the same way on a day-to-day basis because of the dramatic drop. The team was forced to halt the ETFs to creations and revamp how the products operated.

“We could no longer keep them exposed to the front-month contract because it was too volatile,” Hawkins says. “We moved out to the fifth-month contract, and a big change to the structure of HOU and HOD we had to make was to remove the 2x leverage ratio.”

Hawkins explains that because these are highly speculative trading tools for those who want to make short-term bets, there is a lot of risk involved. For example, if the contract is down 44%, as seen during the crisis, someone invested in a double up ETF has essentially seen 88% of the investment wiped out.

“We had to change the ETFs, so we went to unitholders, got approval and changed

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SPECIAL REPORT

ETF EVOLUTION

OIL PRICES STABILIZE BRENT CRUDE PRICE PER BARREL (USD) $70

$60

$50

$40

$30

$20

$10

Jan 2

Jan 15

Feb 3

Feb 14 Mar 2 Mar 16 Apr 1

Apr 14 Apr 22 May 1 May 15 Jun 1

Jun 15

Jul 1

Jul 16

Aug 1 Aug 14 Sep 1 Source: Oilprice.com

“The unexpected volatility created mass havoc with respect to the oil sector and any ETFs linked to it” Steve Hawkins, Horizons ETFs the names/underlying operations so we were no longer linked to a fixed index,” Hawkins says. “It is more subjective now, and we get to choose the exposure and the levered ratio more discretionary.”

Hawkins says this shift wasn’t something Horizons took lightly, but after seeing so many 3x and 2x levered oil products in the US shut down, it was necessary. And the evolution of the funds seems to be working.

Hawkins says Horizons has now seen more than $100 million reinvested into HOD and HOU under the new structure.

While dealing with the crisis was stressful, he says, it also proved to be learning opportunity. “What we have taken away is that you can’t believe something like this won’t ever

28

happen again, and we have taken measures to ensure that we have more flexibility on how we operate these ETFs going forward.”

Horizons is the only Canadian provider in the levered oil space, and Hawkins believes it will hold that distinction for some time.

“I don’t think there are any big ETF players in Canada that will enter the space,” he says. “We may have some US players come to Canada at some point, as while we have a monopoly in the space, there are a number of them in the US. These products do serve a purpose, and if Canadian investors can’t get it here, they will go to the US to find it.

That’s why we think it’s imperative they exist in Canada and why we offer them.

“We have learned lessons from the

pandemic on how to operate in the future in the context of unprecedented volatility. It was an eye-opening experience in Canada and the US for capital markets and the ETF industry.

I think people will approach an area like this more cautiously.”

FIXED INCOME ETFs Fixed income ETFs had a record year in 2019 – with $15.3 billion in net inflows, the asset class led the Canadian ETF industry as it surpassed the $200 billion AUM mark.

Things were humming along in 2020; a combined $5.4 billion flowed into fixed income in January and February. Then COVID-19 hit, and the flows began to go the other way; March saw $1.3 billion exit. By summer, flows had returned to fixed income ETFs, even surpassing the assets gathered in January and February. Now, as even more investors begin to see the benefits of ETFs, this could once again be the vehicle they use

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“We just need people to be content with modest, but positive, yields off high-quality investments” Mark Webster, BMO Global Asset Management

for their fixed income exposure.

Mark Webster, director of ETF distribution for BMO Global Asset Management, says “2020 has been a litmus test for fixed income ETFs. With strain in the underlying market, you actually test how the ETF operates. People’s first reaction would be that fixed income ETFs had a hard time, but that is taking entirely the wrong perspective.

ETFs passed with flying colours because at a time when the underlying bonds didn’t trade, ETFs did.”

Those ETFs also provided crucial information on the value of fixed income securities. “The value ETFs brought was they gave data points, price discovery,” Webster says.

“At a time when 60% of provincial bonds and 70% of corporate bonds ceased to trade, how do you calculate the worth of the pool of assets? ETF market makers continued to post bid-ask on ETFs – they gave information where there was none, and you could use that data point to make decisions. That was not possible in the underlying asset.”

One thing Webster believes the pandemic will bring about in this space is a better understanding of the representation of NAV. “NAV is a hybrid number that takes into

account the spread on the underlying bonds – people are paying spread on the bond funds but don’t know it,” he explains. “The ETF trades on an exchange; because of that and the transparent pricing, people see the spread and say the ETF is broken. If you were given NAV, true NAV, in a bond fund, you would have been compensated – if you took money out or rebalanced in the fund – by all the other unitholders in the fund.”

Now that investors understand the information provided by fixed income ETFs, how they trade and how they offered liquidity when the underlying assets didn’t, Webster believes flows should return to a path similar to before COVID-19, especially as investors look for more insurance in their portfolios.

Still, he has been noticing other trends as investors look to make up for the decline in interest rates, which has drastically impacted fixed income returns.

“Rates this low are distressing for investors, particularly conservative or older investors who rely on yield,” Webster says. “There really isn’t much people can do to adapt. One area that may be artificially propped up is noninvestment-grade, high-yield bonds, because people are willing to take the risks. There is a

cloud that hangs over them, as they have seen disruptions in their cash flows, and the strain will be enormous. We have already seen a rise in default levels, but the prices haven’t seemed to drop – they are still high on hope.”

Another area Webster has his eye on is emerging market debt. He says a lot depends on the index a provider is using because it can affect credit quality. The risk he sees is that high US currency will put more strain on emerging markets to pay off their debt and could change credit ratings.

Domestically, one trend he has noticed is further segmentation in quality bonds and BBB investment-grade bonds.

“We have seen a lot of institutional investors interested in this degree of segmentation because it allows them to segment bond allocation to manage liquidity as much as credit quality, duration and yield,” he says.

“It allows management of bond liquidity because federal bonds were very liquid and traded effectively. In provincials, there was dislocation, but you are able to overcome it by trading a pure government bond ETF and complement with a corporate bond ETF rather than buying an aggregate bond ETF.” In terms of what’s next for fixed income ETFs, Webster doesn’t foresee anything groundbreaking. He says it’s difficult to innovate at a time like this because you’re never sure how a fund will react after an unprecedented event. Still, he believes flows will continue to return to fixed income ETFs as people recognize their place in portfolios.

“If you are looking for innovation,

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SPECIAL REPORT

ETF EVOLUTION

FIXED INCOME ETF FLOWS REBOUND MONTHLY FIXED INCOME ETF FLOWS $4bn $3.5bn

$3.65 billion

$3bn

$3.31 billion

$2.5bn $2bn $1.5bn $1bn

$2.13 billion

$500m $0

-$322 million January

February

-$500m -$1bn -$1.5bn

$189 million May

-$1.3 billion

$1.26 billion June

July

April

March Source: NBCFM ETF Research

Canadian mortgage-backed securities may be appropriate,” he says. “They are AAA-rated government agency bonds, guaranteed by the CMHC, providing slightly higher yield and slightly lower duration than similar-term federal bonds. They are a form of insurance – they will always pay you; it might not be much, but in what world does insurance pay you? We just need people to be content with modest, but positive, yields off highquality investments.”

30

ESG ETFs In 2019, momentum surged behind environmental, social and governance (ESG) mandates. That momentum carried into 2020, and although COVID-19 could have derailed things, the crisis might have actually helped ESG, says Som Seif, founder and CEO of Purpose Investments, which incorporated ESG mandates into the core of all its funds in 2019.

Seif explains that COVID-19 gave investors a reason to allocate to ESG. “The ESG space was going through a tippy-toe set of acceleration towards a comfortableness,” he explains.

“When you try to do something different, you need to get people off their complacency. Market events actually caused people to rethink their portfolio strategy. They were looking for a catalyst to make those shifts.

What we saw, through the resurgence of the market after the decline in March, was money to flowing into ESG mandates and ESG capitalizing on those new flows, so it has been an accelerator for the space.”

While ESG ETFs weren’t immune to the declines in the market, Purpose observed that, even in the short term, ESG funds tended to support quality companies and performed slightly better than similar funds without an ESG mandate.

“We have seen, on a slightly relative basis, ESG funds outperform the market betas,” Seif says. “That said, these funds are designed to win over the long term because they are choosing companies that generally do good things versus bad. Yet, even on a short-term basis, the evidence has been relatively tilted towards ESG funds.”

Another factor that has emerged in 2020 has been the push for greater social equality, which Seif believes could be another catalyst to bringing ESG funds and mandates into the mainstream.

“I think, given the backdrop of what we are

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ESG ISN’T LAGGING The myth that ESG mandates require sacrificing returns is gradually being debunked. The latest evidence: The YTD return for the S&P 500 ESG Index is 6.84% as of August 18, compared to 4.68% for the broader S&P 500 Index.

YTD PERFORMANCE OF THE S&P 500 ESG INDEX 300

250

200

150

Jan 2

Jan 15

Feb 3

Feb 18

Mar 2

Mar 23

Apr 1

Apr 15

May 1

May 15

Jun 1

Jun 15

Jul 1

Jul 15

Aug 1

Aug 14 Source: SPglobal.com

“Market events actually caused people to rethink their portfolio strategy. They were looking for a catalyst to make those shifts [to ESG]” Som Seif, Purpose Investments seeing from a social perspective, the protests and diversity discussions, these are important moments to catalyze people to focus on social factors – how companies run themselves and treat their communities – but also on governance factors,” he explains. “Market factors are supported by supply and demand – if more people are attuned to companies that don’t treat diversity or their communities as an important factors or don’t have proper social structures, then you will see demand for those companies’ stocks go down.”

Seif notes that the environmental element tends to get a lot of attention in the ESG space, but the other two factors tend to have greater long-term impacts. He explains that environmental already had its catalyst, and now it’s

time for social and governance to become the factors pushing investors toward ESG. “If you go back to environmental, one of the big catalysts was the BP Deepwater oil spill – it created a demand and focus around environmental standards,” he says. “What we are seeing now could be the catalyst for social factors.”

Purpose has embedded ESG as a core in all of its funds, a move Seif says his team did the research on and believed in, and they’re proud of the results so far. It’s also something he hopes to see more fund companies do as ESG mandates become more common.

“I think it will just take time – we said it in 2019, and it is still going to take time, but these things shift, and over the next few

years, you will see a shift as data becomes more prevalent and see the evidence of [ESG performance],” he says. “I am proud of what we did, and the performance has been in the funds. The decision we made has paid off because ESG factors are having a positive influence on our returns.”

Seif hopes advisors will pay attention to those positive returns and adopt ESG exposure across their portfolios.

“This is a trend being driven by investors – they are much more attuned to it and seek out these exposures in their portfolios,” he says. “I haven’t seen the adoption broadly by advisors as a core component of their business practices. Institutions have been building it as a core for some time. I think if the right questions are asked, clients would prefer an ESG portfolio, especially if they understood that the returns would be net neutral or even net positive.

“Five years ago, you had to make a decision on sacrificing returns to invest in your values, but not anymore. I think once it is understood that the returns will be neutral or even positive, the conversation will be easier to have.”

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SPECIAL REPORT

ETF EVOLUTION

GOLD ETFs The price of gold has largely been on a steady incline throughout 2020, both before and during the COVID-19 pandemic. In July, the price of gold surpassed its previous historical high, topping US$2,000 an ounce by the following month. While it did lose some ground later in August, the fact that gold is trading as high as it is has investors looking for access. That has been difficult in the past, but ETFs that invest in the commodity, in gold-producing companies and in synthetic exposure like futures and derivative swap contracts have made gaining access to gold much easier – and they’ve been getting considerable attention from investors.

“We have seen significant interest in gold in 2020,” says Steven Leong, director and head of iShares Canada product at BlackRock. “There are a number of factors to explain it. The first is the view of gold as a diversifier, as an uncorrelated asset to traditional stocks and bonds. It has shown value in 2020 because of the volatility in equity markets and a shift in the interest

32

“One thing ETFs have done is act as a democratizing vehicle in the sense that the ability to add an asset like gold is more smooth and has less friction than there used to be” Steven Leong, BlackRock Canada rate environment. The second is, historically, gold tends to rise when real interest rates are really low, and that relationship has held up once again. The third is when something tends to go up, it attracts others. There has been a bit of momentum in the asset class, so more people are investing in it.”

BlackRock Canada has seen these trends play out in its iShares Gold Bullion ETF (CGL), which invests directly in gold bullion.

Leong says YTD flows have been close to $500 million, making this one of CGL’s best years in recent memory.

As the price of gold continues to climb, investors and advisors might be wondering if it’s too late to add gold to portfolios, whether

for diversification or to take advantage of further price increases. Leong believes ETFs have eliminated many of the barriers to entry for this asset.

“One thing ETFs have done, especially with precious metals markets being the way they are, is act as a democratizing vehicle in the sense that the ability to add an asset like gold is more smooth and has less friction than there used to be,” he says. “You can trade in real time, and the costs are transparent, so you can buy a gold ETF for a low management fee, plus brokerage commission, and easily compare how it is trading or is priced relative to the physical metal.

“I think that is an improvement over the

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18/09/2020 4:16:26 AM

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SPECIAL REPORT

ETF EVOLUTION

GOLD REACHES NEW HIGHS GOLD PRICE PER OUNCE (USD) $2,500

$2,000

$1,500

$1,000

Jan 2

Jan 15

Feb 3

Feb 17 Mar 2 Mar 20

Apr 1

Apr 15

May 1 May 15

Jun 1

Jun 15

Jul 1

Jul 23

Aug 4

Aug 17

Sep 1 Source: Goldprice.org

tools in the past – either physical ownership, which is complicated, or holding certificates, where the price you received if you want to sell is not as reliable. ETFs have made it simple, easy, reliable and inexpensive to include gold in a portfolio.”

However, Leong adds that it’s difficult to predict the value or price of gold. Historically, he says, it tends to rise when interest rates are low. Given the widely held opinion that rates will remain low for some time, that points to gold’s price continuing to climb.

“Those who want to include it in portfolios have viewed it as a source of diversification, and gold has a proven value historically,” Leong says. “Gold is an ancient asset, a store of value, and works in a scenario like we are in as safety because enough investors believe in it. That confidence has been enough for the investment to work.”

The COVID-19 crisis has shown that

34

investors still view gold as a safe-haven investment. “Once again, gold has shown itself as an asset that provides that uncorrelated return,” Leong says. “It can go up in scenarios where other risk assets, like equities, are decreasing. Gold has been understood as an asset that does this. It is not a new idea, but it is an additional proof point, just like in the financial crisis and other smaller selloff events. There is a school of thinking that gold is antiquated and something like crypto will do a better job of providing this kind of uncorrelated alternative asset, but it would seem that day has not been reached, and gold has lived up to that portfolio role.”

In terms of what’s next for gold ETFs, Leong says he’s not aware of plans for any new products, adding that it can be tough to introduce new product during an uncertain time, especially given the short-term trends.

However, he does believe gold ETFs will

continue to attract investors who want to tap into an asset that can play an uncorrelated, diversifying role in portfolios.

FACTOR ETFs On the surface, factor-based ETFs appear to have underperformed during the pandemic.

The S&P Quality, Value & Momentum Multi-Factor Index, for example, has a year-to-date return of just 0.55%. Yet Jay Aizanman, director of business development asset management at Desjardins Global Asset Management, believes those who are drawing that conclusion are focused on the wrong things: the short term and performance over risk.

Desjardins has specialized in factors for many years, so it was no surprise that factors were the foundation for the asset manager’s initial foray into the ETF landscape in the

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spring of 2017. While other companies have looked to single out certain factors, Desjardins has taken the opposite approach, incorporating all of the six academically accepted factors – value, size, momentum, low volatility, quality and dividend – into its ETFs. “We worked to understand the factors, research and mechanics,” Aizanman explains.

“What we decided was because each factor is volatile in itself, we decided to work and bring them all together. We only have multi-factor approaches. All of our ETFs have a multifactor approach, and we invest equally in each of the six factors. If you use that as a basis

outperform. What we do know is that over longer periods of time, they do perform. How we are doing in the pandemic isn’t an afterthought because performance is important, but we are more concerned with the logic and methodology making sense.”

When it comes to factors, Aizanman says it’s difficult to evaluate the impact of the pandemic because it’s been an unusual test case. “No matter what comes out if it, it has to be taken with the understanding this is not an average decline to rebound,” he says. “I have a hard time coming up with a conclusion and saying any ensuing corrections will cause

FACTOR ETFs’ LONG-TERM APPEAL An example of factors’ short-term versus long-term performance can been seen by looking at the S&P Quality, Value & Momentum MultiFactor Index and its returns over time.

PERFORMANCE OF THE S&P QUALITY, VALUE & MOMENTUM MULTI-FACTOR INDEX 11.99%

11.95%

12%

10%

9.22%

“We never state over the short term, like the pandemic, that the factors will outperform. What we do know is that over longer periods of time, they do perform” Jay Aizanman, Desjardins Global Asset Management

7.87%

8%

6%

4%

2%

of construction, you can then do a variety of techniques to limit the volatility in portfolios.”

The impact of the pandemic hasn’t changed Desjardins’ approach, Aizanman adds. “Short-term activity doesn’t really affect the way we approach factors,” he says.

“Over the last few years, the factors have not, in and of themselves, outperformed. The US market, for example, has been driven by small, idiosyncratic risks – if you weren’t in the FAANGs, you weren’t doing well relative to the benchmark.

“Factor investing diversifies. When you look at it from an advisor’s responsibility to their client, you have an allure of great returns, but you also have risk. Depending on what you are trying to achieve, you can go after the returns, but on the flip side is the risk. Or you can diversify and spread risk factors and construct a portfolio that gives you a targeted return of risk. It is a slower road and why we never state over the short term, like the pandemic, that the factors will

this strategy to perform in the same way.”

Aizanman adds that one factor – value – has been under attack for years with the rise of the FAANG stocks, which are inherently classified as growth and momentum. Yet even the poor short-term performance hasn’t dissuaded investors who prioritize that factor, emphasizing that factors are a long-term play. “Warren Buffet is one,” Aizanman says.

“Berkshire hasn’t done as well as the benchmark, but that doesn’t mean he will change the approach.”

The big question for factor-based products is how they retain investors, especially in the current environment. “I think the number-one thing we can do is work with our intermediaries – full-service brokers or financial advisors,” says Aizanman. “We need to make sure the advisors understand the products and methodology so they can deal with their clients and make sure everything lines up and they associate the right product with the client’s needs. We ensure the infor-

0.55% 0%

YTD

1 year

3 years 5 years 10 years Source: SPglobal.com

mation to support the methodology is shared, updated and available.”

As for whether their recent performance might scare off investors or other fund providers, Aizanman says factors have been under attack for the wrong reasons – not because they don’t work the way they’re supposed to, but rather because of shortsighted views on performance.

“If the money doesn’t go into the product, companies tend to close it,” he says. “That isn’t a starling conclusion; it is part and parcel with what we do. It isn’t primarily a factor issue because some factors are doing well. I think, if anything, the pandemic has made us realize there is risk, and when you take that risk, you have to be prepared to understand what could happen in pursuit of returns.”

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SPECIAL PROMOTIONAL FEATURE

MORTGAGE INVESTMENTS

Are MICs the answer to the yield question?

Julian Clas outlines the case for mortgage investment corporations in a market where investors need yield and private asset exposure

WHERE CAN an investor find yield? That’s become an almost omnipresent question as we drag into the fourth quarter of 2020.

Government bond yields are around zero, and

mortgage investment corporations (MICs) as a tool to deliver yield to their clients.

Julian Clas, vice-president, capital markets and funds, at Canadian Mortgages Inc. (CMI),

“The traditional corporate or government bond spaces now offer extremely low yields. It’s getting more difficult year after year to find yield in that space, and COVID has only exacerbated that” Julian Clas, Canadian Mortgages Inc. corporate bonds carry worrying levels of risk in a recessionary environment that could be the worst since the Great Depression. In this environment, advisors might want to consider

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explains that while mortgages and the underlying real estate sector have not been immune to shocks from the COVID-19 pandemic, a well-chosen and -managed MIC can deliver

on yield, backed up by the underlying value of the asset. He says his team members at CMI have tooled up their own MICs to meet the current challenging circumstances.

“In the conversations I’m having with advi­ sors, they’re asking me where they can go for yield,” Clas says. “The traditional corporate or government bond spaces now offer extremely low yields. It’s getting more difficult year after year to find yield in that space, and COVID has only exacerbated that. MICs, on the other hand, are an asset-backed alternative that can deliver for those specifically looking for yield.”

The trick to finding that yield is in understanding MICs’ underlying assets. Clas says advisors should be wary of MICs holding retail or commercial mortgages, as those sectors remain hard-hit due to COVID-19.

Also, just because some Canadian residential real estate markets have seen strength, that doesn’t mean every residential MIC is a slam dunk. Clas says advisors need to look at how residential MICs are qualifying borrowers and whether they’re putting up any credit bureau restrictions to buttress the MIC against potential defaults.

CMI, Clas says, has been building risk mitigation tools into its MICs since February, when the pandemic looked set to shock the globe. By preparing early, he says CMI has been able to build up cash reserves and reduce its overall loan-to-value, meaning the MICs maintained their yield through the incredible volatility in March and April.

Because these MICs pull from CMI’s role in the alternative lending space, they also don’t carry the ‘deferral cliff ’ risk, as most mortgage deferral programs early in the pandemic were put in place by the banks and other major lenders. While that doesn’t make CMI’s MICs immune to mortgage holders losing income, the risk mitigation tools the company has instated will serve to bolster performance and continue to drive yield.

“There are two key reasons advisors should be looking at MICs for their clients,” Clas says.

“One is yield, because every portfolio needs some exposure to yield. The other is diversification away from public markets. With MICs, you get an asset-backed investment that can consistently deliver.”

CONGRATULATIONS TO THE WINNERS Despite an unprecedented year, wealth professionals have continued to raise the bar in terms of service, innovation, professionalism and leadership. Nowhere is this more evident than in the winners of the Wealth Professional Awards.

Wealth Professional warmly congratulates all winners and finalists on their achievements. We would also like to thank our readers and our esteemed event partners for supporting excellence in the industry.

Winners will be profiled in Wealth Professional magazine Issue 8.10 (November), which will take an in-depth look at their achievements.

For the full list of winners and finalists, visit:

www.wpawards.ca SPECIAL THANKS TO OUR SPONSORS

SOCIAL MEDIA SPONSOR

SUPPORTING ORGANIZATION

OFFICIAL BALLOT

ACCOUNTANTS

PRESENTED BY

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SPECIAL PROMOTIONAL FEATURE

FIXED INCOME

Looking for fixed income in a rate-zero world David Kletz of Forstrong Global outlines three areas of fixed income that can still deliver for clients as yields collapse

IN MANY areas, the COVID-19 pandemic hasn’t so much changed the course of the forces shaping our lives as it has accelerated them. That’s true for remote work, the reach of online retail and fixed income investing.

Since the 2008–09 financial crisis and the quantitative easing that it prompted, low bond yields from developed countries have been the norm. Now, though, with rates cut to the bone, investors approaching retirement aren’t able to bank on an income from

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government bonds alone. A new strategy has to be pursued – one that might involve taking on additional risk to deliver the income a retiring client needs.

David Kletz, vice-president and portfolio manager at Forstrong Global, says such a strategy should buttress traditional fixed income while moderating the addition of new risk. By adding three key pieces to the core strategy, he says, advisors can deliver income to their clients in this zero-rate

reality. He says advisors need to move now, though, before their clients retire without the income they need.

“When adjusting for inflation, the vast majority of developed market government bonds carry negative real yields,” Kletz says.

“In order to generate income, investors are essentially forced to march up the risk curve, but one must be cognizant of the types of risks being taken and the potential for capital losses under different scenarios. So I

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don’t think there’s just a blind move up the risk curve – you really need to know what type of exposures you’re getting into and use scenario analysis to be comfortable with the risks that you’re taking under a variety of different outcomes.”

Kletz says one such strategy is at work in Forstrong’s Global Income mandate, which adds emerging market government bonds, US corporate bonds and large-cap dividend-paying companies from developed markets to a traditional fixed income portfolio. That asset mix, Kletz says, can deliver income without unduly exacerbating risk.

Forstrong isn’t just picking up emerging market bonds willy-nilly. The company focuses on East Asian markets that have

Forstrong’s third strategy – the developed market dividend-payer strategy – is most attractive in Europe, Kletz says. Even though the continent has seen widespread dividend cuts recently, he sees Europe as a good source of yield, as dividend yield in European markets is higher than in the US. Kletz also sees these EU-based dividend payers as a way to offer some exposure to a deepening of European integration. While Kletz and the Forstrong team have been constructive on EU integration for a while, the lack of a fiscal union backing up the monetary union was seen as a roadblock. In light of recent landmark deals such as the EU-wide stimulus package, the Forstrong team is more confident that such a huge

“In order to generate income, investors are essentially forced to march up the risk curve, but one must be cognizant of the types of risks being taken” David Kletz, Forstrong Global

ALLOCATION OF FORSTRONG’S GLOBAL INCOME STRATEGY

EM fixed income: 21.4% EAFE fixed income: 16.2% US fixed income: 19.7% Canadian fixed income: 1.2% EM equity: 12.3% EAFE equity: 9.9% US equity: 13.2%

shown solid management of the COVID-19 pandemic, both epidemiologically and fiscally. Many of these nations have managed to restart their economies and control viral spread without taking on any significant new debt. High yields, backed up by strong balance sheets, make Forstrong’s approach to emerging market bonds a far less risky endeavour than it might seem.

The US high-yield corporate bond market, too, is looking more attractive and lowerrisk in the current environment, Kletz says.

These corporates are paying out high yields, backed up by the same broad-based quantitative easing policies that are driving down US Treasury yields. By adding high-yield bonds to its asset purchase program, the Federal Reserve is effectively taking on the largest underwriting of corporate risk in history.

hurdle to investor confidence in the EU can be overcome.

None of these strategies is risk-free.

Exposure to EM bonds backed up by the best balance sheets still carries currency risk, Kletz points out, but it’s a risk he sees as largely manageable. US corporate bonds, though now underwritten by the Fed, offer exposure to a US economy that’s suffering. In addition, almost all fixed income investors will likely be exposed to the next big existential risk: paying the bill for all of this pandemic stimulus.

Nevertheless, Kletz says such a strategy can work when integrated with a traditional suite of developed country bonds that offer security and ballast to a portfolio. The next step, he says, is for advisors to communicate this expansion of the strategy and gradual move up the risk curve to their clients.

Canadian equity: 0.5% Cash equivalents: 5.6% Source: Forstrong Global

“Advisors arguably have the most impor­ tant job to do as the behavioural coaches, communicators and expectations managers for their clients,” Kletz says. “In communicating this strategy, transparency is key, especially for clients with ingrained expectations of what fixed income will deliver. The conversation needs to reset their expectations on what the financial market realities are today.

It needs to be communicated to those clients approaching retirement that they will not be able to simply coast off the income stream provided by a portfolio of high-quality bonds.

That’s just reality.”

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SPECIAL PROMOTIONAL FEATURE

HEALTHCARE

The outlook for healthcare Paul MacDonald of Harvest Portfolios outlines what the future could hold for the healthcare sector for the rest of 2020 and beyond – and the best positioning in the face of both positivity and uncertainty

THE TEMPO of healthcare investment over the past two quarters seems to have been set by a single loud, booming drum: COVID-19.

One portfolio manager, however, is listening for beats beyond the headlines, government policies and capital flows into possible vaccine producers. Paul MacDonald, CIO and portfolio manager at Harvest Portfolios, says that while the pandemic remains a crucial force in the sector, as the end of 2020 approaches, other forces could start driving healthcare investment.

MacDonald sees several other major drivers that are poised to shift the healthcare landscape in the coming months. As the US election heats up, the shape of American politics will become a more dominant factor.

In addition, the consistent superiority of healthcare as a good has only been made more apparent by the pandemic. In an environment of broad positivity tempered by some uncertainty for certain sub-sectors, MacDonald says diversity is key.

“While there have been a number of shorter-term positive catalysts for the sector, we should take a step back and see that the three main drivers of aging populations,

40

technological innovation and developing markets have not gone away,” he says. “These are permanent, non-cyclical drivers over the medium term to longer term.”

In the shorter term, MacDonald believes politics will play a bigger role. With the US election about to unfold, concerns around a rise in political rhetoric have been among the key inbound questions his team is currently fielding from advisors.

“We cannot find a link between performance of the broader healthcare sector compared to the markets around election cycles,” MacDonald says, but he acknowledges that coming into 2020, expectations were for more volatility.

While Democrats flirted with a possible total overhaul of US healthcare via runner-up Bernie Sanders’ flagship ‘Medicare for all’ policy, MacDonald says the nomination of Joe Biden means neither of the major candidates is set to derail the deeply complex and financialized system. At the same time, many companies in the sector have proven their ability to pivot and direct massive resources, both scientific and financial, toward the COVID-19 crisis.

In light of reduced concerns of extreme policy proposals, coupled with the improved sentiment surrounding COVID-19 treatments and vaccines, MacDonald points out that “there is no question, given the macro backdrop, that the political rhetoric surrounding healthcare policies is indeed much more subdued this election.” There’s a new outlook for these companies, he says, more informed by their potential than the risks of political backlash over issues like drug pricing.

In a recessionary environment, healthcare is once again proving itself to be a superior good, MacDonald says. Broadly speaking, healthcare cash flows haven’t abated as other industries have seen revenues plummet, simply because it’s an area where few will choose to cut their spending.

That said, MacDonald acknowledges that medical technology has suffered some setbacks as people have forgone elective procedures for fear of exposure to the virus.

Fewer hip and knee replacements in the short term, however, means there’s pent-up demand for the sub-sector as jurisdictions reopen. While MacDonald says the shortterm downturn in medtech highlights the need for a diverse allocation across healthcare sub-sectors, the simple fact that someone is more likely to get their hip replaced than buy a new car when the pandemic ends points to a strong recovery in this space as elective procedures resume.

Harvest’s Healthcare Leaders Income ETF (HHL) carries large-cap medtech firms within a broader asset mix that represents a diverse range of major healthcare companies.

HHL includes firms like Stryker and Boston Scientific, leaders in orthopaedic and cardiovascular technologies, respectively. At the same time, the fund also holds companies like AstraZeneca, Johnson & Johnson and Pfizer, offering direct exposure to the quest for a COVID-19 vaccine. Backed up by Harvest’s signature covered call strategy,

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HOW HEALTHCARE PERFORMS IN US ELECTION YEARS MSCI WORLD HEALTHCARE INDEX RETURNS July to October of election year November to December of election year

June to December of previous year January to June of election year

25% 20% 15% 10% 5% 0% -5% -10% -15% -20%

1996

2000

2004

2008

2012

2016

2020

Source: Bloomberg, based on total return; 2020 election cycle data through August 26, 2020

the fund is designed to deliver hard-to-find income through an equity sector that has seen so many positive tailwinds this year.

MacDonald is cognizant, though, that the broad-based positivity much of the healthcare sector has seen so far in 2020 is beginning to turn to more stock-specific catalysts.

He says those companies posting stronger financial results and delivering successful late-stage drug trials are beginning to outperform the rest of the sector.

Looking to the future, MacDonald and his team see opportunities across several sub-sectors. Pent-up demand for elective surgeries will drive several of the medical device companies. Although lesser known in Canada, the managed care sub-sector also has several positive drivers with relatively clear visibility into near-term business outlooks.

The Harvest team has also been analyzing the likely impacts of a vaccine on the market.

They’re going beyond just the trials and looking

“While there have been a number of shorter-term positive catalysts for the sector, the three main drivers of aging populations, technological innovation and developing markets have not gone away” Paul MacDonald, Harvest Portfolios for further safety profiling data through the end of the year, as well as how the soon the infrastructure can be implemented to manufacture 2 billion doses of a vaccine. The scale of that endeavour, MacDonald says, points back to the broad positivity for the sector.

“Diversity means we want to have exposure to all of the areas within the sector and hold various underlying exposures,” he says. “So whether it’s drug manufacturers,

medical devices, managed care companies or even facilities, we want to have exposure to those areas. Advisors should look at this strategy and ask themselves if they want to have a suite of 20 large-cap, diversified healthcare companies for their clients. They should ask, too, if their clients need high distributions and monthly cash flows. If they check both boxes, that’s where our fund can come into play.”

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18/09/2020 3:46:13 AM

PEOPLE

ADVISOR PROFILE

Growing strong After starting his own firm and then merging it with Nicola Wealth, David Sung is helping to fuel Nicola’s growth across the country

DAVID SUNG entered the financial industry on the insurance side after witnessing the success his mother had in the field. While that gave him a healthy foundation, Sung hasn’t stopped there. After 26 years in the industry, he has run his own firm, merged it with Nicola Wealth and, as Nicola’s current president, is helping lead its ambitious expansion across the country.

After graduating from the University of British Columbia, Sung took a job at an insurance company and earned his CFP designation. He left insurance to partner with another advisor and focus on financial planning. “During that time, I met with John Nicola to discuss working together,” Sung recalls, “but the timing wasn’t right.”

By 2000, Sung had launched his own firm, Waterstreet Wealth Management. “At the same time, my father, a CPA, had entered the business and, after a year, was ready to leave his business partner, so I invited him to join me as I built the new business,” Sung says. “By late 2003, my business had grown significantly, and John Nicola and I entered discussions about merging my business with his, which we did in January of 2004.”

Since then, Sung has been an advocate of Nicola Wealth’s detailed and process-oriented approach. The firm has built an infrastructure to deliver a breadth of product that’s similar to large institutional pension funds.

“Our clients tend to be professionals and entrepreneurs, perhaps family business

42

owners – those who have divested of a large business or have built a business over many years and want to preserve capital,” Sung says.

“Many clients are also attracted to our real estate investments – unlike many firms, we have a large internal real estate acquisition, development and management team.”

Looking back, Sung sees the decision to start his own firm as one of the biggest challenges of his career, but also one of the best decisions he ever made.

“Starting my own firm in 2000 and making the decision to go forward with my father – which luckily worked out very well, but which I approached with an abundance of caution – was my biggest challenge,” he says. “Many years prior, in my youth, my dad also worked with family but experienced the downside of when a multi-generational family business does not plan well. My dad was able to bring his invaluable life and business lessons to the table, and I will be forever grateful to him for what he taught me.”

Since merging with Nicola Wealth in 2004, Sung has had many highlights. The main one has been the firm’s growth from $280 million in AUM when he first came on board to $7.2 billion today. Nicola has also grown from one office with 20 employees to four offices and more than 200 employees spread across Ontario and BC. “Being a part of growing and building a company that has spawned so many jobs and careers is extremely rewarding,” Sung says.

Other highlights of his time at Nicola Wealth include the firm’s development of its asset management group, including the in-house real estate group, along with an internal technology and enterprise solutions team that has designed and continues to evolve proprietary client reporting systems and interactive, client-facing financial analysis tools. Sung is also proud of Nicola’s team of 80-plus advisors, all of whom hold or are working toward CFP and CIM designations; many have CFA or CPA designations as well.

SUNG’S ADVICE FOR NEW ADVISORS David Sung says the best piece of advice he’s received as an advisor is to always look at things from the client’s perspective. “It’s difficult when you’re steeped in this industry, but it’s important to constantly put yourself in the shoes of the person across the table,” he says. “One of the biggest mistakes I see advisors make is talking too much and not asking the right questions or listening enough. The other mistake is not offering clear and direct advice. Clients come to us for advice – if we ask the right questions and listen enough, we should be able to guide our clients.”

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FAST FACTS: DAVID SUNG

FIRM Nicola Wealth

LOCATION Vancouver, BC

YEARS IN THE INDUSTRY 26

EDUCATION Bachelor’s degree in political science from UBC

“Being a part of growing and building a company that has spawned so many jobs and careers is extremely rewarding” Growth is a crucial part of Sung’s DNA, so it’s no surprise that continued expansion is his focus for Nicola Wealth moving forward.

“We have ambitious growth goals and are looking to more than double our AUM in the next few years,” he says. “We are very much focused on growing across the country, particularly in Toronto. I am focused on

building out and recruiting advisors not just for our Toronto office, but across the country.

Whether it’s an up-and-coming advisor with strong technical planning skills or an established, seasoned advisor with a number of high-net-worth clients, we are an ideal organization for those who have an entrepreneurial drive.”

CERTIFICATIONS CFP, CLU, CHS, CIM

TARGET CLIENTS Professionals, entrepreneurs and business owners

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18/09/2020 3:46:37 AM

SPECIAL PROMOTIONAL FEATURE

PLANNED GIVING

The evolution of planned giving Planned giving has evolved over the years, but the lessons of COVID-19 have accelerated the transformation in 2020 WHILE ALL industries are forced to evolve, COVID-19 has sped up the process. For the charity sector, it has offered lessons that may impact how the industry operates in the future. Yet as the experts from Abundance Canada explain, this is merely the latest in a series of ongoing evolutions.

“There have been a couple of trends that have become pronounced, and the data would bear it out,” says Darren Pries-Klassen, CEO of Abundance Canada. “The average age of

conversations about giving from their asset base and not just their income, and financial advisors can play a huge part in framing that conversation.

Rick Braun-Janzen, director of gift planning at Abundance Canada, agrees. “In the charitable space, we want to work with multigenerational givers, and I think wealth advisors see the same opportunity with the transfer of wealth between generations,” he says. “The question both wealth advisors and gift plan-

“The donor climate is changing – my parents and grandparents were committed to institutions; the younger generations are more committed to causes” Darren Pries-Klassen, Abundance Canada donors is getting older, and there are fewer people making charitable gifts, but the size of those gifts is bigger.”

Pries-Klassen says that a flat line in charitable giving, combined with an aging donor population, begs the question of where charitable giving will come from in the future in order to meet the growing social deficit in this country. On the gift planning side, Pries-Klassen says more people are having

44

ners are asking is how to engage that next generation. Millennials are asking different questions, so gift planners need to be nimble and be prepared to change. I suspect wealth advisors are facing those same challenges.”

While these trends have emerged over the years, one of the biggest impacts that both Pries-Klassen and Braun-Janzen have noticed has been the elimination of capital gains taxes for donations of publicly traded secur-

ities (stocks, bonds and mutual funds) from a non-registered account to charity.

“It was a significant change that people have capitalized on,” Pries-Klassen says. “It is a tax incentive to donate, but the tax incentive hasn’t been the primary reason; it has been a bonus. These are people who want to be generous, and donating publicly traded securities just happened to be a tax-efficient way to do it.”

A more recent trend has been the rise of donor-advised funds, a flexible tool that might shape the industry moving forward. It’s something that has been a longstanding pillar in Abundance Canada’s philosophy with its ‘donate now, distribute later’ option.

“I think it comes down to flexibility,” PriesKlassen says. “The donor climate is changing – my parents and grandparents were committed to institutions; the younger generations are more committed to causes. The allegiance to one charity versus another is evolving, and the ability to donate now and distribute both earnings and capital later allows for that level of flexibility.”

That flexibility is also important for individuals who want to initiate their planned giving during their lifetime, especially when it’s triggered by certain life events.

“Individuals may sell their business or be part of a private company that goes public and they receive shares or stock options, so they can fast-track the giving element of their estate plan,” Braun-Janzen says. “With the ‘donate now, distribute later’ option, they can match their donation receipt with the taxable event.”

For individuals who have a taxable event, by using the ‘donate now, distribute later’ option, they can receive their donation receipt in the year of the taxable event but don’t have to make a decision about which charities ultimately will benefit from their gift.

Deferring the charitable distribution decision to a later date allows the individuals to move forward with the critical pieces of the taxable event that require their immediate attention.

‘Donate now, distribute later’ is a great option for this scenario.

Flexibility is not only important on the individual side, but also for the charities, which have encountered their own challenges because of the pandemic.

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“If charitable gift planning is not part of the conversation, you are missing an opportunity. Advisors are on the front lines to ask the question, so start the conversation as early as possible” Rick Braun-Janzen, Abundance Canada “There has been a movement from charities that are in desperate need of funds right now, especially given COVID, if they are missing out on revenue that would come from services and programs,” Pries-Klassen explains. “They would love to access more than what has been donated in a given year. If you have an endowment, where capital has been donated over a period of years and locked up, you can’t have access to it – you can’t arbitrarily change the terms of the endowment agreement to allow money to flow to the charity, even though the charity needs it. The terms of that endowment agreement are locked in, and unless you have a judge say you can make changes, you can’t do anything about it. With a non-endowed, donor-advised fund, both earnings and capital are accessible, and both can be distributed to charity, which allows for greater flexibility as

needs increase or decrease, especially during a time like COVID.” Braun-Janzen adds that the reason endowments have locked in capital has historical significance for charities and foundations.

“The Income Tax Act has a disbursement quota rule that requires a charity to distribute 3.5% of its asset base every year,” he explains.

“Historically, donations received by a charity or foundation that were not designated for an endowment were included in this disbursement quota calculation; 80¢ of every dollar received during a fiscal year needed to be used for charitable purposes in the next fiscal year. So, foundations in particular needed to endow funds to remove those donations from the 80% disbursement requirement.

About 10 years ago, the disbursement quota rules changed – charities and foundations no

longer had to distribute 80% of donations received in the next year, so that removed the disbursement quota pressure for foundations to endow money.”

Now, thanks to the impact of COVID-19, both Pries-Klassen and Braun-Janzen wonder if donors’ thinking will change and charities will be able to use more flexible options to create a reserve to weather a storm like a pandemic.

“Endowments have their place – we are not opposed to them; they have done well and will continue to do well,” Pries-Klassen says. “But when donors want to create some degree of flexibility, I think having the option to disburse the capital as well as the earnings is a good idea.”

“It will be interesting to see if donors’ attitudes change towards charities,” BraunJanzen adds. “Donors look at a charity’s balance sheet, and if there is excess capital, they might say, ‘You aren’t putting it towards your mission.’ I think that is one of the biggest takeaways from COVID, because it shows the challenges charities face if they want to accumulate reserve funds for a rainy day.

COVID has shown that some charities don’t have adequate reserves, and their balance sheets weren’t strong enough. They need to have funds in reserve to weather unexpected events, the same way a corporation needs retained earnings.”

While the gift planning space has seen many changes over the last several years, one thing that both Pries-Klassen and BraunJanzen believe needs to continue is advisors having conversations with their clients about planned giving.

“When advisors are actively having the conversation with their clients, it deepens relationships and is ultimately better for business,” Pries-Klassen says. “It is a great opportunity to connect with the next generation.

Charitable gift planning conversations open the door to the next generation and create loyalty with clients.”

“If charitable gift planning is not part of the conversation, you are missing an opportunity,” Braun-Janzen adds. “It historically hasn’t been part of the lexicon in the industry, but advisors are on the front lines to ask the question, so start the conversation as early as possible.”

www.wealthprofessional.ca

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SPECIAL PROMOTIONAL FEATURE

HEALTH AND INNOVATION

Prepared for anything Whether a second wave of COVID-19 or a vaccine is ahead, the asset mix in Middlefield Group’s fund is designed to grow either way IN AN economy, society and market shaped by the COVID-19 pandemic, two major possibilities loom large: a second wave or a vaccine.

These two events could catalyze more change to the current reality than any other major force. Each eventuality will likely have deep market impacts, but according Shane Obata, portfolio manager at Middlefield Group, there’s a particular asset mix that could allow investors to win in either eventuality.

The firm’s Sustainable Innovation & Health Dividend Fund (SIH.UN) offers exposure to four key sectors set to perform in the face of either a second wave or a vaccine. Obata says that while the headlines might point to these as conflicting forces with different market impacts, a combination of exposure to workfrom-home infrastructure, e-commerce, life sciences and digital health will position portfolios to grow in the face of either major event.

“When we look for investment themes here, we’re looking for trends that were already in place and are accelerating because of COVID,” he says. “That plays to the potential for a second wave, where investors are going to continue to favour stocks in those areas that have already shown resilience and outperformance … and even if there is a vaccine and people pare back on e-commerce or work from home, that won’t change the long-term trajectory.”

Obata says the pandemic has exposed consumers to e-commerce options like grocery delivery that they hadn’t used before. It’s also shown management teams just how much of their business can run efficiently in a workfrom-home reality. Even if a vaccine renews investment in sectors that have been decimated by the pandemic, Obata says the tailwinds

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THEMATIC BREAKDOWN OF SIH.UN E-COMMERCE • Mobile adoption • Grocery and food delivery • Ridesharing • Payments • Industrial real estate

WORK FROM HOME • Cloud services • Videoconferencing • 5G • Digital advertising • Suburban real estate • Security

DIGITAL HEALTH • Telehealth • Online pharmacy • Behavioural health • Wearables

LIFE SCIENCES • DNA sequencing • Gene therapy • COVID-19 vaccines and treatments • Diagnostic testing

“We’re looking for trends that were already in place and are accelerating because of COVID” Shane Obata, Middlefield Group driving e-commerce, telehealth and workfrom-home infrastructure will continue to blow strong.

The life sciences stocks in Middlefield’s fund offer exposure to vaccine development.

Obata expects to see multiple vaccines from multiple companies rather than one ‘winner.’

Taking a diverse stake in the life sciences sector allows the fund to benefit from ongoing research investment and enjoy successive bumps as vaccines are rolled out.

Obata says a vaccine shouldn’t be seen by investors as an instantaneous game-changer, as the process of widespread vaccination will

take months or longer. In the meantime, the forces shaping our socially distanced reality will keep working, possibly accelerated by a second wave. He says advisors need to take a proactive, long-term approach informed by the experience of the past six months.

“Regardless of what happens next, it’s clear that things have changed and will continue to change,” Obata says. “I think advisors need to tell their clients that they need to get ahead of these secular trends. They can do that by taking a long-term perspective and making sure their clients’ holdings are supported by secular growth themes.”

www.wealthprofessional.ca

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WPC

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17/06/2020 3:47:19 3:57:36 AM pm 18/09/2020

PEOPLE

OTHER LIFE

10

Shots per film roll Little used to get on his Mamiya RB67 camera

2017

Year Little was the official photographer for the Headstones

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

3

Terms Little has taken in a digital photography course at Sheridan College

While in university, Little ran a photography business and shot weddings, conferences, portraits, hockey tea ms and university alu mni

THE PERFECT SHOT When advisor David Little isn’t capturing returns for his clients, he’s capturing the moment as a professional photographer DAVID LITTLE strives to put all of his energy into “being as good as one can be, regardless of the vocation.” That’s as true for his day job as a senior investment advisor at HollisWeath, a division of iA Securities, as it is for his passion for photography.

Little began shooting photos while he was a student at Queens University in Kingston, where he ran a photography side business with his wife. He also served as

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concert director in the Queens student government, in charge of booking live bands and concerts; as a result, he got to photograph the events. “By far the most enjoyment I have had throughout all of the years is photographing concerts,” he says.

That work continued after university – Little has photographed everyone from Rod Stewart and Elton John at Maple Leaf Gardens to the Headstones in Kingston.

He’s also shot events such as the Toronto Indy race and the World Windsurfing Championships, along with front-cover photos for World Vision.

Over the years, Little’s methods have evolved as he’s transitioned from shooting on film to digitally. He’s currently in his third term of a digital photography program at Sheridan College to further refine his skills in the medium.

www.wealthprofessional.ca

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CANADA’S LEADING INNOVATION ETF MANAGER Emerge introduced our sub-advisor, Cathie Wood, Founder and CEO of ARK Invest to the Canadian market one year ago today.

We follow the careful investment advice provided

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Disclosure: Commissions, management fees, brokerage fees and expenses may be associated with an investment in ETFs. Before investing, you should carefully consider the ETF’s investment objectives, strategies, risks, charges and expenses. This and other information is in the ETF’s prospectus, which may be obtained by visiting www.emergecm.ca or www.sedar.com. Please read the ETF prospectus carefully before you invest. An investment in an ETF is subject to risks and you can lose money on your investment. Detailed information regarding the specific risks of the ETF can be found in the prospectus. There can be no assurance that the ETF will achieve its investment objective. The ETF’s portfolio is more volatile than broad market averages. Units of the ETF are bought and sold at market price and there can be no guarantee that an active trading market for the ETF units will develop or be maintained, or that their listing will continue or remain unchanged. ETFs are not guaranteed.

Their values change frequently. Past performance may not be repeated. The statements contained in this document are based on information believed to be reliable and are provided for information purposes only. Where such information is based in whole or in part on information provided by third parties, we cannot guarantee that is accurate, complete or current at all times. This document does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Graphs and charts are used for illustrative purposes only and do not reflect future values or returns on investment.

Particular investment strategies should be evaluated according to an investor’s investment objectives and tolerance for risk. Emerge Canada Inc. and related entities are not liable for any error or omission in the information or for any loss or damage suffered.

EMERGECM .CA | 1.833.363.7432 | MARKETING@EMERGECM.CA

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