Wealth Professional 8.03

NON-TRANSPARENT ETFs

How will this new US-based product alter ETFs on this side of the border?

BEYOND EXCLUSION

Why BMO is taking an improvementfocused approach to ESG investing

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ALTERNATIVE INVESTMENT TRENDS The most promising options for diversification in 2020 and beyond

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ISSUE 8.03

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

CONTENTS

@WealthProCA facebook.com/WealthProCA

UPFRONT 02 Editorial

In light of recent news, what’s the best approach to cannabis investments?

42

04 Statistics

Key data that should be on your radar

06 Head to head

FEATURES

SPECIALIZED AND SCALABLE

22

How using unified managed accounts can help advisors spend more time on building client relationships

INDUSTRY ICON

This month’s big movers and shakers

14 Alternative investment update

Cleantech: the future of energy investing?

FEATURES

44

MAKING RENTAL DEVELOPMENT PROFITABLE

Why rentals are poised to be the next big play in real estate investing

Purpose Investments founder and CEO Som Seif on how he built a forward-thinking asset management company from scratch

18

10 Intelligence

Where thematics are headed next

ALTERNATIVE INVESTMENT TRENDS

PEOPLE

08 News analysis

What impact might new non-transparent ETFs have on Canada’s market?

12 ETF update

SPECIAL REPORT

From precious metals to private equity, WP highlights eight trends that are poised to shape the alternative investment landscape this year

How to master communicating across multiple generations

16 Opinion

The key to using tech wisely is blending it with a human touch

FEATURES 50 Not too good to be true

The lesser-known benefits of donating securities through a corporation

52 The building blocks of ESG

BMO’s improvement-focused approach to ESG is putting it ahead of the curve

PEOPLE 46 Advisor profile

As a new advisor, Markus Boudreau left himself no choice but to succeed

48 FEATURES

A STEADY HAND

Portland Investment Counsel portfolio manager James Cole on the mechanics of building a resilient, award-winning fund

55 Career path

For Renee Rebelo, education is key to connecting with clients

56 Other life

Hitting the links with former college golfer Crystina Kertsos

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

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6/03/2020 3:57:23 AM

UPFRONT

EDITORIAL wealthprofessional.ca

Not-so-high times

I

n the wake of Evolve ETFs closing its two cannabis funds, SEED and USMJ, in January, a sector that was once the darling of the thematic investing world has seen nothing but struggle. The shortfalls go far beyond just Evolve – Horizons ETFs has also seen its cannabis fund, HMMJ, drop from a unit value of $24.59 in September 2018 to $8.81 to close January. The cannabis industry’s challenges are also reflected in the Solactive North American Marijuana Index, which saw a sharp decline of 51.03% over the past year. These developments have many advisors and investors contemplating how to approach the sector.

Cannabis investment sparked up as Canada’s nationwide legalization date approached in October 2018. But it wasn’t long before it started to drag. First, supply struggled to meet demand. Next, many cannabis companies, which were now required to report revenues, failed to meet the budding promise of their growth stage.

Cannabis investment sparked up as Canada’s nationwide legalization date approached in October 2018. But it wasn’t long before it started to drag Yet optimism remained, despite the early struggles. The industry hoped the tide would turn as more retail licences became available and edibles were legalized in October 2019. Some major players also began looking to the US as a new frontier of opportunity. Unfortunately, as of February 2020, these measures hadn’t improved the industry’s outlook.

So where does the cannabis industry go from here? Many of the advisors Wealth Professional has spoken to over the last year and a half have shied away from cannabis investing, preferring to take a wait-and-see approach. Those who did get in early have been rewarded – or, rather, not penalized like those who decided to jump on the industry during its growth phase.

There still might be a place for cannabis investments in portfolios moving forward, as the industry might be able to get rolling again. However, one thing this situation has highlighted once again is the value of advice. Those individual investors who decided to sink significant money into cannabis are probably wishing they’d heard from those advisors who spoke with WP, as they might be in a more favourable position right now.

The team at Wealth Professional

ISSUE 8.03 EDITORIAL

SALES & MARKETING

Editor Darren Matte

Vice President, Media and Client Strategy Dane Taylor

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

CONTRIBUTORS Matt Evans

ART & PRODUCTION Designer Marla Morelos Production Manager Alicia Chin 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

EDITORIAL INQUIRIES

darren.matte@keymedia.com

SUBSCRIPTION INQUIRIES

tel: 416 644 8740 • fax: 416 203 8940 subscriptions@kmimedia.ca

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, Singapore, Seoul

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

INSURANCE BUSINESS CANADA john.mackenzie@keymedia.com T +1 416 644 874O

INSURANCE BUSINESS AMERICA cathy.masek@keymedia.com T +1 720 316 0154

2

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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

6/03/2020 3:41:54 AM

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LOW BARRIER OF ENTRY

Mortgage Investment Corporation

6/03/2020 3:41:59 AM

UPFRONT

STATISTICS CONSUMER INSOLVENCY ON THE RISE

EUROPEAN INDEX RALLIES

450

A key European benchmark, the Stoxx Europe 600 Index, reached an all-time high in February when it soared by approximately 8%.

Unlike with previous rallies, which were followed by heavy declines, analysts took a more positive view this time (despite the global market decline precipitated by coronavirus fears) based on the continent’s rebound in manufacturing and because only a small portion of the Stoxx 600 companies and four country indexes are currently trading at record highs, leaving room for further expansion.

9.5%

Increase in consumer insolvencies in 2019 versus 2018

415

403 405

399

137,178

399

392

390

393

Total number of consumer insolvencies in 2019 (the most since 2009)

383

380

1.3%

Increase in consumer insolvencies between the third and fourth quarters of 2019

Oct 1, 2019

Oct 7, 2019

Oct 14, 2019

Oct 21, 2019

Oct 28, 2019

Nov 1, 2019

Nov 4, 2019

CANADIAN MANUFACTURING CONTINUES TO SLIDE Canadian manufacturing sales declined in December 2019 for the second consecutive month, which points to ongoing weakness in the sector, Scotiabank said in its analysis of the data, adding that “there is not much reason for optimism in the short term due to the continuing CN rail network disruption and the coronavirus impacts on the supply chains, travel and business confidence.” $60bn

$58bn

$56bn

1.2%

Decrease in consumer bankruptcy filings between 2018 and 2019 Source: Statistics Canada, Office of the Superintendent of Bankruptcy Canada

$58.18 billion $56.78 billion

$56.66 billion

Jan 2019

Feb 2019

$57.78 billion

$58.74 billion

$57.79 billion

$57.07 billion

$57.53 billion

$57.39 billion

$57.36 billion

Aug 2019

Sep 2019

Oct 2019

$56.80 billion

$56.41 billion

$54bn

$52bn

$50bn

Mar 2019

Apr 2019

May 2019

Jun 2019

Jul 2019

Nov 2019

Dec 2019

Source: Scotiabank Economics Manufacturing Canadian GDP Nowcast, February 18, 2020; Statistics Canada

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6/03/2020 3:42:19 AM

Nov 11, 2019

JOB GROWTH BEATS EXPECTATIONS

STOXX EUROPE 600 INDEX VALUE

Across much of the country, job growth was higher than projected to begin the year. Overall, the Canadian economy gained 34,500 jobs, led by strong numbers in Quebec and Ontario, which made up for the significant losses in Alberta (where most of the jobs shed were part-time).

432

JOB GAINS/LOSSES IN JANUARY 20,000 19,100

424

424

15,900

15,000

417

417 418

420

416

419 415

409

407 408

403

10,000

418

6,500

5,000

411

4,600 3,400 1,700

407

405

0

QC

ON

MB NB

BC

NS

1,200 800

SK

NL

300

PEI

AB

-5,000

-10,000

-15,000 Nov 4, 2019

Nov 11, 2019

Nov 18, 2019

Nov 25, 2019

Dec 2, 2019

Dec 9, 2019

Dec 16, 2019

Dec 23, Dec 30, 2019 2019

Jan 2, 2020

Jan 6, 2020

Jan 13, 2020

Jan 20, 2020

Jan 27, 2020

Feb 3, 2020

Feb 10, 2020

Feb 17, 2020

Feb 24, 2020 -18,800

-20,000

Source: Scotiabank Economics, Statistics Canada

Sources: Stoxx.com, BNN Bloomberg

A WILD MONTH FOR OIL Following a decline in oil prices to start the year, both Brent crude and West Texas Intermediate experienced a volatile February. The ups and downs have been blamed on the residual effects of the coronavirus, which has led to dampened demand. $60

CORONAVIRUS TO IMPACT CHINA’S GDP Scotiabank Economics has significantly downgraded its GDP growth forecast for China in light of the coronavirus. The updated forecast has the country’s GDP falling well below original estimates in the first two quarters of 2020 before stabilizing in Q3 and regaining momentum to end the year.

2019

8%

$55

7% 6%

6.2%

5%

$50

$45

$40

6.4%

Brent crude price per barrel WTI price per barrel Jan 31 Feb. 3 Feb. 5 Feb. 7 Feb. 10 Feb. 12 Feb. 14 Feb. 17 Feb. 19 Feb. 21 Feb. 24 Feb. 26 Feb. 28 Source: Oilprice.com

6.0%

5%

3%

3%

2%

2%

1%

1% Q2

Updated GDP projection year-over-year change

6% 6.0%

4%

Q1

Original GDP projection year-over-year change

7%

4%

0%

2020

8%

Real GDP growth year-over-year change

Q3

Q4

0%

6.0%

6.0%

5.9%

6.3%

4.8%

4.6%

Q1

5.9% 5.9%

Q2

Q3

Q4

Source: Scotiabank Economics, Statista

www.wealthprofessional.ca

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6/03/2020 3:42:20 AM

UPFRONT

HEAD TO HEAD

How do you effectively reach out to clients of all ages?

As new generations come into the investment sphere, how have advisors altered their communication strategies?

Associate investment advisor Evans Wealth Management Team, Richardson GMP

Ashley Currin

Vice-president and financial consultant Doherty & Bryant Financial Strategists, iA Investment Counsel

Aaron Hector

Ethan Astaneh

“We recognize that clients have varying communications preferences, just as they have different needs. We use email communications to gauge client interest in different financial topics, not only to inform and educate them, but also to understand their changing priorities.

Some clients may not even have an email address, so we send a hard copy of all electronic communications to them to make sure they are not excluded. We also offer Webex meetings to give clients a more convenient and interactive way to engage with us.

Our goal is to ensure that we capture everyone under our communications umbrella.”

“My clients range from 34 to 96 years old, so flexibility is crucial. While most of my communication is through email, if I know a client prefers phone calls, then I will call them; if they want to text me or reach out on social media, that’s also OK with me. I just want to be available to them in the mode that works for them.

The same goes for meetings. Most often I meet at my office, but for various reasons, some clients prefer that I meet with them at their home, office or even through a virtual meeting.”

“Many of our clients are families, so we often face multigenerational communication while managing intergenerational wealth. Often we communicate with the wealth creator(s), the ‘first generation,’ in a different manner than their adult children/grandchildren.

We offer a wide range of options and let each client choose what works best for them. For example, we offer web-based conferencing in addition to the traditional in-person meetings – in the office or remote – or phone calls. We have options for those who prefer hard copies, a secure online portal for paperless, and, to engage the client portal on the go, we will soon be launching a client app.”

Financial advisor Nicola Wealth

TALKING THE TALK Although advisors under age 40 make up a relatively small proportion of the financial advice community (only around 11% in the US, according to J.D. Power’s mid-2019 survey of financial advisor sentiment), these digital natives are demanding better technological support from their firms and are ushering in new ways of communicating with clients. “The new generation of mobile financial advisors is interacting with clients and prospects via a range of digital channels, including social media, text, chat and video,” said Mike Foy, senior director of the wealth management practice at J.D. Power. “Wealth management firms that embrace these technologies and train and empower advisors to use them effectively will ultimately win the war for talent, but very few are delivering the solutions that younger advisors demand.”

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6/03/2020 3:42:44 AM

JASON W. BROOKS, CFA President and Portfolio Manager

ALLISON M. TAYLOR, MBA Chief Executive Officer and Portfolio Manager

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Historical Performance (net of all fees and expenses)

Class F

Target Preffered Return

Special Distribution

Total Net Return

2013

10%

1.80%

11.80%

2014

10%

3.50%

13.50%

2015

10%

2.40%

12.40%

2016

10%

n/a

10.00%

2017

10%

n/a

10%

2018

10%

1.95%

11.95%

Awards and Recognitions

2019 Winner Allison Taylor, CEO WP Female Executive of the Year

2019 Winners 3 Year Return, 3rd Place 5 Year Return 2nd Place

2016 Winner Diversified Mature Category

6/03/2020 3:42:47 AM

UPFRONT

NEWS ANALYSIS

A new breed of ETFs Now that the SEC has approved non-transparent ETFs for the US market, what are the implications for Canada’s ETF industry?

IN NOVEMBER, the US Securities and Exchange Commission voted to allow the introduction of non-transparent ETFs to the US market. The funds are essentially a new category of ETF that will allow asset managers to actively manage a fund without having to disclose all of the fund’s holdings on a daily basis, similar to mutual funds. Doing this allows fund managers to keep the strategy of the ETF under wraps and thus insulate it from market reaction.

The introduction of these funds will have a larger impact on ETF industry in the US than in Canada, where ETFs are only required to disclose holdings quarterly or semi-annually, rather than daily. Still, there’s no doubt that

host of fund companies. These developments put the topic of non-transparent ETFs front and centre at the Inside ETFs conference in Florida in late January, where Precidian Investments CEO Daniel McCabe was one of the featured speakers.

“Everybody knows ETFs are lower-cost; you’re going to have tax efficiency, liquidity and the intraday trading,” McCabe said.

“Where I think we begin to shine, and the reason that we’ve been able to license 14 of largest active managers out there, is because the product itself affords you natural arbitrage. Utilizing our vehicle, you can get 100% arbitrage if necessary. If the client chooses, you will have the ability to mitigate front-

“I think one of the questions will be how are people distributing this? I think this is really going to change the distribution ecosystem” Greg Friedman, Fidelity Investments the introduction of these funds could change the industry on both sides of the border.

Shortly after the SEC approval, Precidian Investments announced that it had received approval for its non-transparent ActiveShares line, which has already been licensed by a

8

running. You’ll have the same disclosure requirements that you have in ’40 Act funds, and you do not have to disclose a proxy or substitute portfolio corporation of redemption. So it’s kind of a different model.”

Greg Friedman, head of ETF management

and strategy at Fidelity Investments, believes this new development could shake up the industry quite a bit.

“The ETF has had great growth over the last 20 years in the marketplace,” he said. “We are finding new types of investors. At Fidelity, we believe both mutual funds and ETFs are rather agnostic, and the one aspect that has been missing is how do we access return strategies in an ETF form? We think it’s going to be a highly in-demand product.”

One of the SEC’s concerns was whether, in times of stress, ordinary investors would be able to get a fair price for their shares in non-transparent funds. The regulator made it a requirement for creators of non-transparent ETFs to address liquidity issues.

For Friedman, a main piece of the puzzle is distribution. “I think one of the questions will be how are people distributing this?” he said. “How do they distribute a product that

www.wealthprofessional.ca

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6/03/2020 3:43:16 AM

BEST OF BOTH WORLDS? Precidian Investments claims that its non-transparent ActiveShares ETF product gives investors the best of mutual funds and ETFs. Mutual funds

Traditional ETFs

ActiveShares ETFs

Monthly/ quarterly

Daily

Monthly/ quarterly

Lower cost

Tax efficiency

Intraday trading

Arbitrage eligible Mitigates front-running Mitigates loss of intellectual property Discloses portfolio holdings

Source: Precidian Investments

doesn’t have all the warranties, how do they research these and how do they position them against mutual funds? There’s a place for both, but I think this is really going to

“We know the growth opportunity is there because we’re seeing it, and we know people want the structure,” he said. “The question is how this would sit on a platform. That’s the

“The interesting thing is that the education has already been done. So I think the adoption rate is going to be faster than anticipated” Daniel McCabe, Precidian Investments change the distribution ecosystem.”

McCabe said he believes there is an opportunity in this space thanks to the increase in popularity of active ETFs and the trend of packaging mutual fund strategies in an ETF wrapper at a lower cost.

challenge that needs to be overcome. No one is talking about using a trailer fee in an ETF, but it could be done. You could use flat-fee arrangements that occur today on some platforms. The idea of best interest for the advisors is not going away.”

While the adoption of these types of funds would substantially stray from the traditional ideals of ETFs, particularly their transparency, McCabe feels the groundwork has already been laid for this sort of product, thanks to education around ETFs. “There was a recent study that looked at what the adoption would be,” he said. “The study looked at how long it took for SPDR to gain traction, and then bond ETFs and foreign ETFs. The interesting thing is that the education has already been done. So I think the adoption rate is going to be faster than anticipated. We have been fortunate to work with some large asset managers, which shows they are willing to have the conversation.”

If investors in the US gravitate toward these products – and sacrifice transparency in order to gain better returns and lower fees – it could be an indication of where the ETF industry is headed.

www.wealthprofessional.ca

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6/03/2020 3:43:19 AM

UPFRONT

INTELLIGENCE CORPORATE ACQUIRER

TARGET

PRODUCTS COMMENTS

BMO Financial Group

Clearpool Group

Clearpool is a New York-based provider of holistic electronic trading solutions and an independent agency broker-dealer operating in the US and Canada

Desjardins Group

La Capitale’s mortgage portfolio

The transaction, finalized at the beginning of February, saw more than 6,000 mortgages transferred to Desjardins

Hub International

Benefex Consulting

The global insurance brokerage has acquired the Edmontonbased employee benefits and retirement consulting firm

Morningstar

Hueler Analytics

Morningstar has acquired Hueler Analytics' Stable Value Comparative Universe Data and Stable Value Index

PARTNER ONE

PARTNER TWO

COMMENTS

CDPQ

Piramal Asset Management

Quebec’s pension fund has partnered with Piramal to deploy US$300 million for private credit financing in India

CI Financial Corp.

DoubleLine Capital

DoubleLine, a fixed income asset manager, will subadvise new mandates offered by CI within its lineup of fixed income mutual funds and ETFs

Sionic

Armstrong Wolfe

The Toronto office of global financial consulting firm Sionic will become a formal market insight partner in Armstrong Wolfe’s quarterly COO forums

Wellington-Altus Private Wealth

INFOR Financial

The strategic partnership will provide Wellington-Altus clients with preferred access to all of INFOR Financial's newly issued securities offerings

BMO expands electronic trading platform

BMO Financial Group is set to bolster its electronic trading platform with its acquisition of Clearpool Group, a New York-based independent agency brokerdealer and provider of holistic electronic trading solutions. Expected to close in the second quarter of 2020, the deal will add new capabilities to BMO’s electronic trading platform via Clearpool’s modern, cloud-based platform, which features visual data analytics and customizable algorithmic strategies.

“BMO Capital Markets is accelerating on our strategic priorities of delivering exceptional client experiences, driving an innovation mindset, activating a high-performance culture and simplifying how we do business,” said Dan Barclay, CEO of BMO Capital Markets. “The acquisition of Clearpool is consistent with these priorities, as it gives us access to leading next-gen trading technology and a broker-dealer client base.”

10

S&P Dow Jones Indices revises Aristocrats Index

S&P Dow Jones Indices has announced changes to the S&P/TSX Canadian Dividend Aristocrats Index as a result of an annual review.

The S&P/TSX Canadian Dividend Aristocrats Index measures the performance of companies included in the S&P Canada BMI that have consistently increased dividends every year for at least five years.

As of February 3, 14 new stocks have been added to the Aristocrats Index, including Fiera Capital, Maple Leaf Foods, Great-West Lifeco, Power Corporation of Canada, Sleep Country Canada and Sun Life Financial Services.

Russell Investments opens ETF series on four funds

Russel Investments Canada has launched new ETF series of four of its mutual funds. The Russell Investments Fixed Income Pool invests in fixed income securities of Canadian issuers rated BBB or higher.

The Russell Investments Global Unconstrained Bond Pool focuses on global fixed income securities. The Russell Investments Global Infrastructure Pool invests in equity and fixed income securities from companies involved in or connected to infrastructure. Finally, the Russell Investments Real Assets ETF offers exposure to global real estate securities, infrastructure, commodities and real return bonds.

www.wealthprofessional.ca

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6/03/2020 3:43:41 AM

PEOPLE Franklin Templeton reduces fees across multiple funds

Franklin Templeton has announced fee reductions on 22 funds to “provide Canadians with active investment management at a lower cost.” Some of the funds had fees cut by as much as 43 basis points; the biggest cuts were to the Franklin Bissett Canada Plus Equity Fund, the Templeton Emerging Markets Fund and the Templeton Emerging Markets Corporate Class.

President and CEO Duane Green said Franklin Templeton is “strongly committed to providing Canadians with high-quality investment solutions at competitive fees to help them meet their financial goals.”

NAME

LEAVING

JOINING

NEW POSITION

Tammy Cash

N/A

Women in ETFs

Co-head

Gabriel Castiglio

Fasken Martineau DuMoulin

Fiera Capital

Chief legal officer

Charles Emond

N/A

Caisse de dépôt et placement du Québec

President and CEO

Kevin Ladner

N/A

Grant Thornton

CEO

Albert Ngo

N/A

Empire Life

Senior portfolio manager, fixed income

Women in ETFs to be led by twin tandem Mackenzie unveils global small- and mid-cap fund

Mackenzie Investments has launched a new mutual fund that invests in global small- and mid-cap companies, which, according to Mackenzie SVP and head of product Kristi Ashcroft, represent two-thirds of the world’s companies and are often underrepresented in portfolios. The Mackenzie Global Small-Mid Cap Fund gives Canadian investors the opportunity to gain diversified exposure to small- and mid-cap companies in North America, Europe and Asia. “Small- and mid-cap stocks have historically offered higher absolute returns relative to large caps,” Ashcroft added.

Women in ETFs will be powered by a rare combined energy this year – identical twins Tammy Cash and Tanya Rowntree. Cash is currently head of marketing at Horizons ETFs, and Rowntree is global head of client success and equity capital markets at TMX. While Rowntree has been co-head of Women in ETFs for four years, Cash was recently elected, which means the organization will be led by the pair for the last year of Rowntree’s term.

“We both went off in our own directions in leadership roles at our organizations, and it’s such a rare thing to be able to come together,” Rowntree said. “We’re both passionate about this cause. To have this chance to tie it together with someone that you’re inspired by and that you care about, and that you rarely get the chance to work with, it’s really quite a privilege.”

CDPQ names new president CIBC announces management fee cuts

CIBC Asset Management has reduced management fees on four of its funds by 10 basis points. As of the end of January, management fees have been reduced from 0.95% to 0.85% for F Series of the CIBC Renaissance Global Growth Fund, the Renaissance Global Growth Currency Neutral Fund, the Renaissance International Equity Fund and the Renaissance International Equity Currency Neutral Fund. CIBC Asset Management said the fee reductions reinforce its “commitment to providing value and competitive pricing for Canadian investors.”

Caisse de dépôt et placement du Québec (CDPQ), Canada’s second largest pension fund, has appointed Charles Emond as its new president and CEO. Emond currently serves as executive vice-president for Quebec, private equity and strategic planning at CDPQ, which he joined in early 2019 after nearly 20 years at Scotiabank.

In addition to leading the Quebec investment strategy, he headed the Quebec and international private equity teams, which invest in nearly 800 companies, and led CDPQ’s annual strategic planning process.

“Leading CDPQ is a challenge that I am incredibly proud and greatly humbled to accept,” Emond said. “I also accept it with confidence, because I know I can count on the expertise and immense talent of our teams. CDPQ is a unique institution with a distinctive signature, as it plays a key role in our economy and exports its investment know-how around the world, to the benefit of Quebecers.”

www.wealthprofessional.ca

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6/03/2020 3:43:43 AM

UPFRONT

ETF UPDATE NEWS BRIEFS Evolve closes its marijuana and gender diversity ETFs

Evolve ETFs has announced that it’s closing three of its signature funds: two marijuana ETFs (SEED and USMJ) and its gender diversity ETF (HERS). Evolve said the marijuana ETFs suffered as a result of a sector-wide downturn in pot investments, while the gender diversity ETFs failed to get adequate traction.

Evolve CIO Elliot Johnson told WP that the company is refocusing on its best-performing funds, largely around the field of disruptive technology. The terminated funds will be de-listed from the TSX at the end of March.

CIBC launches fixed income product with flexible yield

CIBC Asset Management has launched the CIBC Flexible Yield ETF (CADHedged), designed to help investors access global fixed income markets with a tactical asset allocation and duration management strategy designed to help manage volatility. The fund will offer exposure to high-yield debt and investment-grade fixed income securities of global issuers, largely by investing in hedge-class units of Renaissance Flexible Yield Fund, which is subadvised by DoubleLine Capital.

Wealthsimple moves into the ETF market with two SRI funds

Toronto-based robo-advisor Wealthsimple has filed a preliminary prospectus for two socially responsible index ETFs, both of which will be managed by Mackenzie Investments.

The Wealthsimple North America Socially Responsible Index ETF will invest primarily in Canadian and US

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equities that don’t violate “commonly held social and environmental values,” according to the company. The Wealthsimple Developed Markets ex North America Socially Responsible Index ETF will do the same for equities originating from Europe, Australasia and the Far East.

Dynamic Funds launches two new international active ETFs

Dynamic Funds has launched two new active ETFs that offer global exposure to dividends and infrastructure. The Dynamic Active Global Infrastructure ETF (DXN) invests in a diversified portfolio of companies operating infrastructure and related businesses around the globe. The Dynamic Active International Dividend ETF (DXW), meanwhile, is primarily focused on equity securities of dividend- or distribution-paying companies that have locations or primarily conduct business outside of North America.

RBC iShares pushes further into ESG with three funds

BlackRock continues to make good on its climate commitment with the launch of three new green ETFs in Canada. RBC iShares has filed a preliminary prospectus for three fossilfuel-screened ETFs, to be managed by BlackRock Canada. The three new ETFs include the iShares ESG MSCI Canada Advanced Index ETF, the iShares ESG MSCI USA Advanced Index ETF and the iShares ESG MSCI EAFE Advanced Index ETF. The three ETFs will replicate an ESG-oriented index selected by BlackRock Canada that screens out companies involved with fossil fuels, palm oil, for-profit prisons, controversial weapons, nuclear weapons, civilian firearms and tobacco, among others.

The future of thematics In partnership with a tech-focused firm, Goldman Sachs is creating thematic indexes centred around innovation and growth Thematic ETFs are always an area of interest for investors, as they provide a direct way to invest in the sectors that make headlines – whether it’s cannabis, cryptocurrency or cybersecurity – without having to gamble on investing in an individual company.

As thematic ETFs continue to evolve, so do the themes they’re built around. Last March, Goldman Sachs entered into a partnership with Motif, a firm that uses technology and data science to build innovative investment products. The goal of the partnership was to identify themes that will present opportunity for investment in the future and create indexes that captured companies that were poised to be part of those themes.

“What we did was, in partnership with Motif, [ask] what does the GSAM fundamental equity team – the team picking stocks globally for our active management funds – think the drivers of growth will be, not over the next two quarters or two cycles, but two decades?” explains Steve Sachs, global head of ETF capital markets for GSAM ETFs. “What are the fundamental changes that are taking place globally in the market to drive structural growth? When you think of shareholder value from a company, where you get the most bang for you buck, it is driven by that growth structure.”

As Goldman Sachs and Motif identified those growth drivers, they landed on a single

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term that dictated their area of focus. “What we came up with was innovation,” Sachs says.

“We wanted to capture who the innovators in the marketplace were and the adopters of that innovation. We took those and built indices around five main themes: a datadriven world, human evolution, the new-age consumer, finance reimagined and the manufacturing revolution.”

“We wanted to capture who the innovators in the marketplace were and the adopters of that innovation” As a result, Goldman Sachs launched a suite of five thematic ETFs focused on those themes. Sachs adds that partnering with Motif allowed Goldman Sachs to back up its ideas with technology.

“We use traditional and non-traditional sources of information to capture what we call thematic beta,” he says. “We look at how much of a particular company is actually exposed to, say, robotics or precision medicine.

Depending on where it fits, the idea is that by building mobile portfolios based around that [thematic beta], you capture that actual thematic data from a very long-term structural growth prospective. It is the rising tide, not the wave hitting the beach – what is going to take place over a long period of time.”

Q&A

Steve Hawkins President and CEO HORIZONS ETFs

Years in the industry 37 Fast fact As of early February, Horizons ETFs had approximately $11.7 billion in AUM and 94 ETFs listed on major Canadian stock exchanges

ETFs’ impact and advantages What impact have ETFs had on the investment management industry?

ETFs have brought this new disruptive technology to the investment management industry as a whole. I think the way of the traditional mutual fund, with high fees and expenses, is going to go away. The entire investing public is waking up to the notion of ETFs and low-cost investment strategies that can be delivered in a very liquid, diversified vehicle like an ETF.

What are some of the key advantages ETFs provide to advisors?

ETFs provide intraday liquidity, being able to trade in and out of positions, and the ability to access every asset class, sector or even new themes in a responsible, generally low-cost and diversified way.

That is very important for people to asset-allocate, to make decisions with respect to where they want to make investments for their clients or if they want to rotate in or out of a sector, broad asset class or theme. People can use ETFs to access pretty much any investment strategy these days in an appropriate manner in respect to making investment decisions for their clients.

What are the keys for Horizons when you’re building new ETFs? We use a lot of different strategies and have the benefit of being part of a global ETF organization, a global asset management organization. We get feedback from all around the world. We talk to our sister companies to understand where people are going with their investment dollars, but nothing beats talking to wealth professionals to understand what they are doing, what they need to manage their business better and what their clients are looking for. They are the best source of information for us to structure new products, new strategies and new themes for investors now and into the future and to help wealth professionals manage their business better.

What’s next for ETFs? I think thematics should be part of every advisor’s portfolio. It is no longer the way of investing in the S&P 500 and buying and holding and going away and not even looking at it anymore. People want to invest where money is going: new technologies, new ways of living their life. For example, how is healthcare going to affect us all? So, looking at things like artificial intelligence, robotics, marijuana – these are all things that are involved in our day-to-day lives, and they will be into the future.

People want to invest where innovation going, from an investment perspective. ETFs provide low-cost, diversified exposure to all of these themes, and they are going to continue to evolve with those types of themes in that regard.

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UPFRONT

ALTERNATIVE INVESTMENT UPDATE

Making the case for cleantech investment Green energy is poised to capitalize on a new wave of investors looking for sustainable options

technologies that address arid climates and vertical and urban farming.

In addition to helping address climate change, Ouaknine says, investing in cleantech can be profitable – with the right approach.

“There is a misperception that you can’t make money investing in cleantech,” he says.

“It is grounded in some truth because a lot of cleantech funds haven’t produced yields for investors. One of the main problems is that investors have funded these technologies without them having a solid plan for commer-

“I could foresee a change in technologies used to power the world”

While Canada’s energy sector has been volatile lately, as awareness of climate change grows, one sub-sector that appears set to prosper is cleantech. Stephan Ouaknine, founder and managing partner of Inerjys, has embraced this view, building a portfolio of cleantech companies and applying those companies’ products to other cleantech projects.

Inerjys’ launch was inspired by Ouaknine’s time in the telecom industry, where he witnessed the change brought about by disruptive technologies. “I could foresee a

NEWS BRIEFS

change in technologies used to power the world, replacing carbon with safe replacements,” he says. “I saw the need for innovation and disruptive technologies.”

Inerjys defines cleantech as “any technology that can produce clean, renewable energy significantly cheaper and at parity with ‘dirtier’ technologies.” This has led Inerjys to some interesting areas, including wind, solar and water technology; water treatment; and battery storage technology. Inerjys has also worked on initiatives in agriculture with

Alternative assets industry now worth $10 trillion

According to a new report from industry analysts Preqin, the alternative assets industry reached a new milestone last year, surpassing US$10 trillion in assets under management globally in June 2019, the latest month of figures available. In the first six months of 2019 alone, assets in alternatives grew by $700 billion to $10.31 trillion. The alternative investment industry is now on track to reach $14 trillion in AUM by 2023, based on the average growth rate of 8% witnessed between 2013 and 2018.

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cialization. Cleantech is capital-intensive, so to make a bet on a new technology may not come naturally. We have made it a mission to be heavily involved in the commercialization of these technologies and help them scale.”

So far, depending on the project, Inerjys has seen returns as high as 40%, and it currently has projects expected to yield 5x to 10x multiples.

“For cleantech to grow, we need different fund models – you can’t apply a traditional venture capital model and start investing in cleantech,” Ouaknine says. “The other thing is the masses need to be mobilized. Students, for example, care about climate change. There need to be more investment platforms for smaller investors, a way to provide access to cleantech for all those interested.”

WGAM and Kilgour Williams team up on private credit

Montreal-based private equity platform Walter Global Asset Management (WGAM) is entering the private credit space through a new partnership with Kilgour Williams Capital, a Toronto-based firm that actively invests in consumer and smallbusiness loans. Its minority stake in the firm will allow WGAM to use its network and platform to help make Kilgour Williams a leader among Canadian fund managers that offer a family of credit funds, in addition to helping to enhance its investor relations and distribution network.

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Q&A

Ray Sawicki SVP and CIO MANDEVILLE PRIVATE CLIENT

Years in the industry 25 Fast fact Sawicki manages Mandeville’s Canadian and US equity strategies and provides leadership for private and alternative investing, portfolio construction, and risk management

The importance of private equity Why is it important for investors to incorporate private equity in their portfolios?

If you look at large institutional investors, the Canada Pension Plan Investment Board for example, how do they invest their money? Investments in traditional assets, such as public stocks, bonds and mutual funds, is not how this group maximizes their wealth creation opportunities. These investors have evolved to include significant allocations to non-traditional investments, including private equity, real estate, alternative strategies and commodities.

Why wouldn’t all investors want to replicate this thinking in their own portfolios? A primary impediment for retail investors is they haven’t had the investment knowledge and, more importantly, access to highquality non-traditional opportunities. Private equity, for example, expands the investment universe beyond traditional public securities, introducing a broader opportunity for investment return and greater portfolio diversification in areas that often have a lower correlation to public stocks and bonds, and hence serves to lower overall portfolio risk.

What are the main benefits to adding private equity to a portfolio?

A key challenge that investors face is they are bombarded by information in real time. Public security prices are impacted by information on a second-by-second basis, which leads to fear and greed and can even amplify these emotions. If markets rally sharply, this often leads to a ‘buy more’ mentality. If the reverse, panic may set in and

TDAM launches global real estate fund

TD Asset Management is giving investors the opportunity to invest in global real estate with the launch of the TD Greystone Global Real Estate Fund LP. Aiming for strong long-term, risk-adjusted returns, the fund provides exposure to more than 500 properties located in approximately 15 countries. “As investors increasingly look to manage portfolio risk, there is now a greater demand for adding a global real estate allocation that can complement an existing Canadian real estate mandate,” said TDAM’s Colin Lynch.

give rise to a ‘sell all’ impulse. The public market, with its valuation transparency, promotes these tendencies.

Private investments, with their more opaque information structure and valuation frequencies, allow a longer-term focus and greater investor discipline. Private equity, which is not marked to market as frequently as public stocks or bonds, allows investors to be more disciplined and less emotional in their investment decision process.

Another important benefit of investing in private equity is the ability to capture an illiquidity discount.

Generally speaking, few investors require 100% of their portfolio to have immediate liquidity, and there is a significant opportunity cost for liquidity. If you take two identical businesses, with the only difference being a publicly listed company versus a private business, the intrinsic value of the two should otherwise be identical.

However, because the private company is not liquid and cannot easily or quickly be converted to cash, the private business has an illiquidity discount and can generally be acquired at a lower cost.

Has increased investor information added to the demand for private equity?

The perception of private equity is often slanted by news stories and positioning in the general media. As private equity as an asset class becomes more accessible and broadly invested, benefits to retail investors are being discussed, and client demand is increasing. Prior misperceptions and generalizations, from risk to costs, are being rightly keeled – and that, along with education, is making private equity more embraced.

Canadian VC funding increases for third straight year

The Canadian venture capital space raised $4.1 billion over 469 deals in 2019, marking the third straight year of increased funding, according to the latest MoneyTree Canada report from PwC Canada and CB Insights. VC funding for Canadian companies rose 16% yearover-year in 2019, and median deal size increased by 13%, even as the number of deals fell by 11%. Seed- and early-stage funding represented the majority of VC deals in 2019; technology companies led the way with record levels of investment.

Hedge fund industry braces for pullback in 2020

The hedge fund industry expects withdrawals of close to $20 billion this year, according to Goldman Sachs.

The bulk of withdrawals are expected from endowments, foundations, pension and sovereign wealth funds. Hedge funds have come under fire in recent years for underperformance; most investors surveyed by Goldman Sachs blamed this on macroeconomic conditions, but around half said the industry has become too big and has been hampered by the rise of passive and quantitative strategies.

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UPFRONT

OPINION

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

Tech with a human touch Advisors who don’t embrace technology are much more likely to be replaced than those who do, writes Matt Evans TWO SIGNIFICANT disruptions have occurred in our industry in the last 20 years.

The first is the democratization of information over the internet. Advisors no longer have exclusive access to information on investments. The asymmetry of information is much less lopsided for the client who cares about being informed.

The second is the commoditization of investment management, as seen in both the proliferation of index investing and the rise of robo-advisors.

These two factors mean that advisors today must show more value than simply claiming to be a conduit for information on investments. This has two implications for experienced wealth professionals.

First, advisors are shifting away from simply being investment or insurance advisors to offering a wider array of services such as financial planning, private banking, and estate and tax planning in an effort to show value, justify fees over lower-cost alternatives and strengthen relationships with clients.

Second, investment brokers are moving up-market. Industry data shows that both the average book size and average client size for investment brokers in Canada have doubled in the last eight years. According to an industry report, average household AUM increased from $534,814 in 2012 to $1,082,771 in 2019, while the number of households served by an advisory team decreased by about 10% to an average of 193.1 households per advisor.

The result is that we, like many advisors, are becoming more selective about who we

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let into our client base and have widened our team to include a dedicated financial planner, a dedicated insurance consultant and a dedicated business planning specialist, along with retaining an accounting firm to provide advice to clients. We think of it as a kind of ‘family office light’ and believe that there will continue to be a profitable group of clients with at least $750,000 in assets to support such a business model.

through social media, traditional media or an email campaign, advisors need to be front and centre where their clients are consuming information. Because this is not our core competency, we work with two marketing companies to help us engage existing clients and target new ones.

The personal connection is a big part of our value proposition as modern advisors.

Accordingly, we’ve tried to make it easier for clients to engage with us. We have adopted smart scheduling software to make it simple for clients to book meetings using Onehub.

Appreciating that our clients are busy, we also facilitate virtual meetings through Zoom.

As a result of these two initiatives, we have noticed an increase in frequency and a shortening in the length of client meetings.

The net result is that we feel we’re spending about the same amount of time per year with clients, but that time is being spread out over more interactions.

Financial planning software is an excellent example of technology being used to distill complicated long-term projections into

“Robo-advisors will never replace human advisors. Humans both need and desire human contact, communication and confirmation” Ultimately, any technological disruption forces incumbents to get better or face extinction. Top teams have been growing quickly because they have been propelled to be better and do more for clients. Advisors who want to succeed and grow in the next decade will need to emulate the ensemble practice model, using a team to service clients.

Robo-advisors will never replace human advisors. Humans both need and desire human contact, communication and confirmation. The element that is changing is that advisors, like all professionals, are increasingly relying on technology to deliver service.

In our practice, technology falls under three categories: marketing, communication and computation.

Advisors need to market themselves across different media platforms. Whether it be

something digestible and easy for a client to understand. We use both publicly available software (RazorPlan and Snap Projections) and propriety software we’ve developed to help clients quantify and visualize what’s happening with their financial plan.

While this is par for the course now, it’s easy to forget that such a thing didn’t exist even 20 years ago. Technology is allowing us to be better practitioners – and we feel that more advisors should embrace it without fearing that fintech will replace them.

Matt Evans is a portfolio manager at the Westmount Wealth Group at IAS Securities, where he focuses on the design, execution and monitoring of model portfolios. With more than a decade of industry experience, Evans holds CIM and CFP designations and is working toward his CAIA designation.

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PEOPLE

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ARCHITECT OF INNOVATION Som Seif has always been driven by the desire to build something, starting with Claymore and continuing today with Purpose Investments

FROM A young age, Purpose Investments founder and CEO Som Seif had a passion for building things and seeing them progress from plan to reality. This led him to the University of Toronto to study engineering with the goal of becoming an architect.

But after his first year, Seif shifted to business. While he might not be building structures, his decision led to other creations.

Two decades into his time in the financial services industry, Seif has already built two successful asset management companies and is considered a leading industry innovator.

Seif ’s first job came in RBC’s investment banking division. He was there for five and a half years, but based on the hours and effort he put in, he says it felt like he earned a decade of experience.

“It was an amazing experience,” he says.

“Even though it was one of the hardest periods of my life with the learning, effort and hours, I couldn’t have asked for better years.”

The drive to build something kept creeping up, though. By his mid-20s, Seif had realized he didn’t want to be a banker for the rest of his life.

“If I wasn’t going to be an architect, I had to think of another way to do it,” he says. “At 28, the opportunity came to build

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something. In 2004, I left RBC and started Claymore, which was quite amazing.”

Finding his purpose Seif quickly grew the Claymore team. In less than eight years, the company’s AUM reached almost $8 billion. Then, in 2012, his

by March 31, Seif had built his next business plan. Yet instead of jumping right in, he took time to evaluate what he wanted to do. He and his family spent time travelling, and Seif told himself that if he came back energetic and excited, he would move ahead.

When he returned, his heart was racing, and

“We are focused on building products that are relevant, complement others and have a role in portfolios. We wake up each day trying to fill in the gaps or improve our existing offerings” financial partner, Guggenheim, wanted to exit, although Seif had no desire to sell.

“I’d say the biggest individual challenge for me was selling Claymore, because when I started the business, I never thought I would sell it,” he says. “I really felt I would run, own and build it for 25 to 30 years. For the first while, I worked on being the buyer, but when it got to a certain price, it made sense to exit together. After the sale, I felt like it ripped my baby away, so I had a big chip on my shoulder.”

The Claymore sale closed on March 2;

he got right to work. On January 1, 2013, he launched Purpose Investments.

For Seif, Purpose was the culmination of where he had envisioned taking Claymore, yet now he had a clean slate to do it.

“I think every asset management company thinks their job is to beat the market, but it is about focusing on outcomes, client needs and risk management,” he says. “I wanted to set Purpose apart by doing that. We are focused on building products that are relevant, complement others and have a role in port-

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PROFILE Name: Som Seif Title: Founder and CEO Company: Purpose Investments Based in: Toronto Years in the industry: 21 Career highlight: Seeing the people around him flourish and grow

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PEOPLE

INDUSTRY ICON

folios. We wake up each day trying to fill in the gaps or improve our existing offerings.”

That culture of innovation has been a driving factor for Seif, which he can trace back to his Claymore days. “We thought about ETFs and factors before everyone else,” he says. “We think about things in advance – where the industry is, where it’s going – and lead innovation. We launched the first cash ETF at Claymore, then Purpose launched the first cash high-interest savings fund. Now, four years in, everyone is launching one. That

you know it won’t negatively impact returns.”

Onward and upward Purpose’s initiatives don’t end on the investment product side. Through Purpose Financial, the company is working to solve problems across the financial services spectrum. Purpose recently announced an agreement to acquire Wealthsimple for Advisors and integrate it into Purpose Advisor Solutions. The company is one Seif was familiar with, as he’d helped Michael Katchen found Wealthsimple.

“You can always do amazing things, but there is always more to be done. Constant innovation and leadership are what drive us because if you stand pat, you are going backwards” is flattering – I don’t see it as a negative; it’s good because the client benefits from our innovation broadly.”

Other innovations Seif takes pride in include Purpose’s structured note and premium yield strategies, both of which were firsts in Canada. The innovation doesn’t stop there – in October 2019, Purpose announced it had embedded ESG as a core factor in its entire investment process.

“When I started Purpose, I said, ‘We need to figure this out,’” Seif says. “We spent five years building our ESG models and collecting data because it’s fundamental to me. The way we rolled it out was not just an ESG fund – we launched it into our core.

“My hope is that if we can do it, everyone can do it. I don’t know if it will ever happen, but it would be awesome. We believe that ESG data will and has been able to improve perfor­ mance of investment decisions, reduce risk, and, more importantly, it feels better to allocate to companies doing better things when

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“When I started Purpose, I had a vision for how we can help support the advisor industry, an area that has been neglected, and how the industry would change,” Seif says. “Wealthsimple for Advisors struggled inside what Wealthsimple wanted to do. It made logical sense to bring the two businesses together. Now we are the only true platform for full-service advice, which allows advisors to be independent.”

Seif says Purpose has more initiatives in the pipeline that he thinks will “blow the socks off the industry.” One of the things the company is working on is expanding its full-service financial platform for small businesses, another area Seif believes is underserviced in Canada.

“I think the best is still yet to come,” he says. “You can always do amazing things, but there is always more to be done. Constant innovation and leadership are what drive us because if you stand pat, you are going backwards – that’s something the whole industry can push itself for.”

PURPOSE INVESTMENTS AT A GLANCE

FOUNDED 2013

HEADQUARTERS Toronto

AUM $8.7 billion

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6/03/2020 4:01:11 AM 2019-10-31 1:30 PM

SPECIAL REPORT

ALTERNATIVES

ALTERNATIVE INVESTMENT TRENDS As more investors look to protect and diversify their portfolios, alternative investments are gaining popularity. But with so many options on the table, how can you determine what’s right for your clients? WP takes a closer look at eight of the biggest alternative investment trends for 2020 THE NEED to diversify portfolios has never been greater. The public markets aren’t what they used to be – 20 to 30 years ago, the public investable universe was significantly larger than it is today. At the same time, new regulations and lower barriers to entry have made it easier than ever for advisors and investors to access alternative investments, making them

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an increasingly viable option for diversifying portfolios and generating returns.

Inspired by pension funds and endowments, which moved toward alternatives years ago, investors and advisors are rethinking the traditional 60/40 equities-to-bonds asset allocation. As this transition to alternatives trickles down to retail investors, areas such

private equity, private debt, commodities and liquid alternatives are finding places in portfolios that aim to replicate the returns institutional players have achieved.

On the following pages, WP examines some of the biggest trends in alternative investments to highlight the many ways portfolios can benefit from alternative exposure.

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Gold and precious metals continue to soar Amid low to negative interest rates around the world, gold and other precious metals are riding an upward trend – but are investors missing out?

SINCE JUNE 2019, the price of gold has been steadily trending upward, and the precious metals space has seen values increase almost across the board. Gold and other metals have traditionally been seen as insurance for portfolios during down markets; however, Maria Smirnova, senior portfolio manager at Sprott Asset Management, believes there’s another reason behind the recent uptick.

“When there is global turmoil, investors flee to gold for safety,” she says. “The increasing demand for gold and silver has

been propelled by macro events such as central banks easing to stimulate growth, no rising inflation and treasury buyback programs. While the general market has been strong – though some volatility has spilled over into gold – I’d say the real reason behind the strength is low interest rates.”

Smirnova adds that political instability in places such as Iran, along with trade wars and the coronavirus outbreak, have all contributed to uncertainty in the market, which has ultimately led the price of gold to surge from less than US$1,300 an ounce last

June to above US$1,600 in February.

This positive movement has also been seen among other precious metals in the market. Silver saw a rise in value between June and September 2019 before tapering off in the fall and into 2020. Palladium made headlines in January when it hit a record high of US$2,502 an ounce, while platinum has also seen increases between the spring of 2019 and early 2020.

“When it comes to palladium and platinum, the challenge is the supply and demand – specifically the supply,” Smirnova

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SPECIAL REPORT

ALTERNATIVES

explains. “Palladium has benefited from the move to higher regulations for car emissions, which has had a knock-on effect. Whether it is sustainable is another question because of potential substitution from platinum.”

Yet despite the rosy outlook for gold, Smirnova says it hasn’t resulted in a sudden influx of investments into the precious metal. “Investors have been selective; we still haven’t seen general investors embrace gold,” she says. “The story, based on price, has been great, but actual gold stocks have not seen the same growth. Some stocks have performed well, but it varies case by case.”

Yet Smirnova feels that might be changing. She says companies in the space are generating real cash flow, and many have made improvements to their business models, their costs, and how they use capital and generate returns on equity.

“Companies in our portfolios are generating real cash flow – some projects are expected to have 20% FCF yield, and we anticipate a strong 2020,” she says. “It does come back to a case-by-case basis, but we believe there is significant value to be realized in the sector. Investors are hesitant because of the mistakes made in the past by these companies, but these companies have moved to fix those issues and be more prudent.”

As with any investment, there are still risks when it comes to gold and other metals. Smirnova says investors need to be aware of political risks, which can have a knock-on effect on permits and ultimately the commodity itself.

“Some areas of the world have greater political risks,” she says. “North American companies tend to trade at higher multiples than African companies. It is important to understand the location of a given project.

You need to be aware of many aspects when investing in mining companies, such as infrastructure and water, topography, and the surrounding community.”

While Smirnova says she doesn’t like to make price projections, she has been pleased with gold’s performance so far this year. “If

24

THE RISE OF GOLD $2,000

GOLD PRICE PER OUNCE

$1,500

$1,000

$500

$0

Feb 2019

Mar 2019

Apr 2019

May 2019

Jun 2019

Jul 2019

Aug 2019

Sep 2019

Oct 2019

Nov 2019

Dec 2019

Jan Feb 2020 2020

Source: Goldprice.org; all figures in US$

“Investors have been selective; we still haven’t seen general investors embrace gold” Maria Smirnova, Sprott Asset Management gold surpasses $1,600 and is able to hold, I will be very bullish,” she says. “As for silver, its ratio to gold is currently 89 to 1, but it was at 79 to 1 last July. If it can get back to around 80 to 1, I will be more bullish because that is where we will see more investor interest.”

She also believes the current state of the global economy will bring more attention to precious metals as investors look to insulate their portfolios.

“We are living in a world of low and negative interest rates with slowing growth,” Smirnova says. “These are real assets that act as a diversifier to the general market. We don’t know how long this strong market will last, so I think now is a good time to have gold and silver in your portfolio as insurance.”

This material may not be distributed, published, or reproduced, in whole or in part, without the prior approval of Sprott Inc. This material should not be considered an offering to invest in any product. Investments, commentary and statements are unique to this strategy and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this presentation are those of the Portfolio Manager of Sprott Asset Management LP and may vary widely from opinions of other Sprott affiliated Portfolio Managers.

The intended use of this material is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs.

This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The investments discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Additionally, opinions are subject to change without notice.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Past performance is no guarantee of future returns. ®Registered trademark of Sprott Inc.

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6/03/2020 3:48:40 AM

BEST KEPT SECRET?

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6/03/2020 3:48:45 AM

N O T F O R L O N G. IA CLARINGTON GLOBAL ALLOCATION FUND Loomis Sayles, one of the most respected firms in global investing, has been delivering exceptional results. Let clients in on the wealth-creation potential of IA CLARINGTON GLOBAL ALLOCATION FUND.

1 Year

2 Years

3 Years

Manager tenure1

IA Clarington Global Allocation Fund – Series F

18.9%

9.6%

12.4%

8.6%

60% MSCI AC World Index,2 40% FTSE World Government Bond Index (currency hedged)

13.6%

7.1%

8.8%

6.7%

Peer group (Global Equity Balanced)

11.6%

4.5%

6.4%

4.7%

Source: Morningstar, as at January 31, 2020.

Learn more at iaclarington.com/GAF

Loomis Sayles is the trade name of Loomis, Sayles & Company, L.P. 1Effective February 23, 2015, the sub-advisor of the Fund changed from Aston Hill Asset Management Inc. to Loomis, Sayles & Company, L.P. and IA Clarington Investments Inc. Unless otherwise indicated, all data is as at January 31, 2020. IA Clarington Global Allocation Fund (Series F) 1 year: 18.9%, 2 years: 9.6%, 3 years: 12.4%, manager tenure: 8.6%, 5 years: 9.0%, since inception: 8.7%. 60% MSCI AC World Index, 40% FTSE World Government Bond Index (currency hedged) 1 year: 13.6%, 2 years: 7.1%, 3 years: 8.8%, manager tenure: 6.7%, 5 years: 7.0%, since inception: 9.2%. Peer group (Global Equity Balanced) 1 year: 11.6%, 2 years: 4.5%, 3 years: 6.4%, manager tenure: 4.7%, 5 years: 5.2%, since inception: 7.5%. The inception date of series F of the Fund was July 19, 2010. Manager tenure data from March 1, 2015. There are various important differences that may exist between the Fund and the stated indices that may affect the performance of each. The benchmark is a blend of FTSE World Government Bond Index (currency hedged) (40%) and MSCI AC World Index (60%). The FTSE World Government Bond Index (or WGBI) (currency hedged) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently comprises sovereign debt from over 20 countries, denominated in a variety of currencies. The MSCI AC World Index (MSCI ACWI) is a free float-adjusted market capitalization weighted equity index comprising 23 developed and 23 emerging market country indexes. The Fund’s market capitalization, geographic, sector, credit quality and currency risk exposure may differ from that of the benchmark. The Fund may hold cash while the benchmark does not. Overall, the Fund’s bond and equity exposure can differ from the benchmark. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance. The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decision. Indicated mutual fund rates of return include changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Returns for time periods of more than one year are historical annual compounded total returns while returns for time periods of one year or less are cumulative figures and are not annualized. Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with mutual fund investments, including investments in exchange-traded series of mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. 2MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.

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6/03/2020 3:49:12 AM

to F) nt ty uly ce (or es ty er to ot re ny ne ual es ect ot ial

SPECIAL REPORT

ALTERNATIVES

THE GLOBAL HEDGE FUND INDUSTRY AT A GLANCE

6,050

Number of investors

6,208

Number of fund managers

16,258

Number of funds

Hedge strategies get new life Outperformance from equities has made hedge funds less desirable in recent years, but hedge strategies are being reborn in liquid alternative funds AS EQUITIES have continued their strong bull run and investor attention has become increasingly focused on fees, hedge strategies have been falling out of favour. However, Julian Klymochko, CEO of Accelerate Financial Technologies, points out that hedge strategies are meant to bring diversification to portfolios and cautions against comparing them to a standard benchmark.

“One thing you do not want is something highly correlated to the equity market,” he says. “When the equity markets are doing well, people want exposure to that.

Uncorrelated strategies, especially in 2019, have fallen out of fashion; however, they do add value in terms of portfolio divarication.”

Klymochko adds that while it appears that hedge strategies haven’t kept up with

the markets over recent years, that perception is often based on an unfair comparison.

“The common mistake is the notion of incorrect benchmarking,” he says. “Much of the time, people benchmark hedge funds to the S&P 500, which, for the vast majority, is an incorrect benchmark. When you look to benchmark any strategy, you want to have equivalent risk. Typically, that is measured through standard deviation.”

Klymochko also points out that hedge strategies are still attracting capital; the number-one strategy he has seen succeed has been merger arbitrage.

“Many strategies do have merit, irrespective of what the broad-based indices are doing, because investors understand the low correlation and the value-add of that

$3.66 trillion AUM as of Q4 2019

-$15.4 billion Asset flow in Q4 2019

3.52%

Hedge fund performance in Q4 2019 Source: AIMA.org

specific strategy,” he says. “If you look at merger arbitrage over the past five years, that strategy has increased dramatically. It is a tried-and-true strategy that is steadily attracting assets.”

Accelerate has a few hedge strategies at work in its liquid alternative funds. In May 2019, the firm launched the Accelerate Absolute Return Hedge Fund (HDGE), a long-short equity strategy that is 100% systematic, re-creating what a human portfolio manager would do. It goes long on stocks expected to overperform and short on those expected to underperform. The selection process is handled entirely through Accelerate’s system, which considers a number of factors, produces rankings and runs risk models to mitigate various risks with the goal of generating returns uncorrelated to broad-based indexes.

Within the long-short strategy, Klymochko has noticed some trends: opportunity in

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6/03/2020 3:49:16 AM

SPECIAL REPORT

ALTERNATIVES “You want strategies that will zig when your traditional assets zag, like a market correction” Julian Klymochko, Accelerate Financial Technologies attractively priced securities, typically know as value stocks, due to their recent underperformance; a premium on growth stocks, which historically underperform, as investors tend to pay more for them; and a move toward passive indexing.

Klymochko cautions investors who are currently shying away from hedge strategies that no one knows when the market is going to turn, and therefore a long-term approach to asset allocation – one that includes the diverse sleeve of alternative strategies – is prudent.

“The key goal is low correlation to traditional securities, reduce risk and increase risk-adjusted returns,” he says. “You want strategies that will zig when your traditional assets zag, like a market correction.”

Getting investors to return to hedge strategies might be a challenge, but Klymochko believes the key lies in educating end investors on how these strategies can help diversify their portfolio and mitigate risk.

“There are many strategies that aren’t aiming to beat the market,” he says. “Many are looking to manage risk, volatility – and, in liquid alternatives’ case, in a low-cost way.

That can provide significant benefits to a portfolio. The thing to look at in terms of risk is liquidity and transparency. Pay attention to the transparency and liquidity of underlying assets. It is also the responsibility of the manager to educate clients beyond a quarterly letter. We need to get investors up to speed on the benefits of the strategies.”

28

Private equity comes to the fore Building a diversified portfolio that includes smallcap companies with growth potential increasingly means turning to private equity MANY ADVISORS and investors look to pension plans, endowments and foundations for inspiration when it comes to alternative investments. One of the numbers that jumps out is the large allocation these portfolios have to private equity: 24% for the CPPIB, 19% for the Ontario Teachers Pension Plan and 38% for the Yale endowment fund, to name a few.

So why do so many institutional investors favour this space?

“It’s simply because they’re trying to achieve preservation of capital, which is paramount,” explains Dan Brintnell, managing director at OCP Fund Management. “Then it becomes, how do you achieve excess returns without excess risk? I always compare it to the public market, and the tradeoff is that you’re holding these assets for a longer period of

time. The question I get is, ‘How much should I allocate?’ For the answer, you need to look at your overall assets and look at your need for liquidity. Then measure it in years. Ask how much liquidity you need in five, seven or 10 years, and then you can build a private equity program.”

Brintnell points out that portfolio construction has changed significantly in the past 20 years. In the ’80s and early ’90s, it was possible to build a diversified portfolio through the public market. However, now that the universe of publicly traded companies has shrunk significantly, that’s no longer the case.

“The public market today is primarily made up of big, large-cap companies,” he says.

“There is virtually no small-cap, so because of that, there is an absence of growth companies.”

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MUTUAL FUNDS VERSUS PRIVATE EQUITY Comparing the five-year annual returns from US private equity funds and US mutual funds between 2013 and 2018 by performance quartile highlights how much greater the return dispersion is in the private equity space.

60% 50% 40%

1st quartile

30% 20%

2nd quartile

10%

3rd quartile

0% -10%

In addition to the benefit of diversifying a portfolio with exposures not found on the public side, there are other advantages to including private equity.

“Statistics say that if you take a traditional public-market portfolio and add units of private equity, you can decrease the units of risk,” Brintnell says. “The simple reason why is that in the private equity space, companies are going through many screens and deep dives before being added to a fund.”

The tradeoff, he reiterates, is illiquidity. “If you are not prepared to not have access to that capital for five to 10 years, structurally this is not for you – not because it is a risky investment or the managers aren’t doing their job, but it just wouldn’t make sense.” However, he adds, the lack of intraday or daily trading in private equity can keep investors from making timing mistakes.

For advisors looking to increase their clients’ exposure to private equity, Brintnell stresses the importance of knowing what type of investments a manager is looking at. He notes that there are four tiers in the private market, and returns vary between them.

“If you look at the difference between Tier 1 and Tier 4 investments in the public market, it is very narrow,” he says. “On the private side, the return dispersion is huge. If you do not have the expertise in the underlying sectors and companies running a private equity pool,

4th quartile -20% -30% -40%

US equity mutual funds

US private equity Source: Morningstar, Burgiss

“Statistics say that if you take a traditional public-market portfolio and add units of private equity, you can decrease the units of risk” Dan Brintnell, OCP Fund Management you aren’t adding value, so you need to have expertise in the space to grow top-line revenue.”

As for areas within private equity that have seen increased attention lately, Brintnell points geographically to North America, Europe and Asia and notes that there’s a diverse range across vintage (the year a private equity fund was issued), industry and sector.

“The goal of a private equity portfolio is to achieve preservation of capital and increase units of risk-adjusted return versus the public markets,” he says. “The tradeoff is having to hold the company for a longer period of time.

But the liquidity premium you are getting

over the public markets is about 7%.”

While companies such as OCP have made private equity funds more accessible to investors at lower minimums, Brintnell says there is still more to be done in educating investors on the benefits private equity.

“When I talk to groups, I use the word ‘democratization’ because that is what is happening with private equity investments,” he says. “You are seeing some great structures around the world that have created the ability for investors and advisors to actually get access at a reasonable price point and implement these types of funds in their portfolios.”

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6/03/2020 3:49:19 AM

SPECIAL REPORT

ALTERNATIVES

Liquid alternatives make a splash Since becoming available to retail investors a year ago, liquid alternative funds have seen strong inflows as numerous products have hit the market LIQUID ALTERNATIVE funds officially entered the retail marketplace on January 3, 2019, giving everyday investors access to alternative strategies that were previously unavailable to them. In just over a year, the space has grown significantly, reaching nearly $7 billion in AUM with 30 providers and close to 100 products.

“Liquid alternatives are a game-changer

30

for Canadians, with the market forecasted to be $100 billion by 2025,” says Belle Kaura, chair of AIMA Canada and CCO and VP of legal at Third Eye Capital. She adds that “popularity will gain traction as we head into a downturn. There is a burgeoning market with a flood of products coming to market – by mid-year 2019, there were 40 funds, and by early this year, there were approximately

100. It is an unprecedented time of innovation and opportunity for the industry.”

Kaura notes that the majority of these funds revolve around equities. “Most of the products launched are equity-focused mandates with alpha-generating objectives to produce risk-adjusted returns that out­perform benchmarks, followed by multi-strategy funds with absolute return objectives,” she says. “The greater number of alpha strategies launched, as compared to market-neutral strategies, is likely a result of restrictions on maximum shorting [50% of net asset value].”

Kaura believes that leaves room for credit strategies to grow moving forward. “Fewer credit-focused strategies have been introduced,” she says, “which make it a potential growth area as more investors demand yield in a low rate environment.”

While fees on these products can be greater than traditional mutual funds, the minimum investment level is significantly less than traditional hedge funds, Kaura points out.

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“Management fees are around the 1% range, also in line with mutual funds, and performance fees are in the 15% to 20% range,” she says. “Unlike conventional mutual funds, liquid alts are permitted to charge incentive fees based on the performance of the fund, consistent with the typical compensation structure of private alternative funds. There is a need for education on the role that performance fees play in aligning the interests of managers and investors, as many advisors are uncomfortable with performance fees.”

The education aspect is a challenge the industry is still dealing with, not only in terms of performance fees, but also in familiarizing investors with the vast number of strategies that can be used by these products. Addressing liquid alternatives’ high risk rating is another key obstacle.

“Widespread adoption of liquid alts hinges on the assignment of fair and accurate risk ratings by dealers,” Kaura says. “All alternative funds, regardless of investment mandate, have historically been unfairly rated as highrisk, limiting investors from accessing these strategies. Many dealers continue to label all liquid alts as high-risk, particularly in the absence of three-year track records. While risk ratings continue to be a barrier to broad distribution of liquid alts, we are seeing some positive traction with dealers changing their approach to risk rating.”

At this late stage of the market cycle, Kaura anticipates more adoption of liquid alts as investors look for products that are less correlated to the market.

“As we head into a more challenging market environment with global quantitative tightening, trade wars and escalating macroeconomic concerns, investors need to prepare for volatility of equity markets and declining fixed income returns,” she says.

“The long bull market allowed investors to be complacent, something they can no longer afford to do. A market environment with low or negative equity market returns will bring into sharper focus the benefits of alternatives as both defensive and offensive solutions.

“There is a burgeoning market with a flood of products coming to market … It is an unprecedented time of innovation and opportunity for the industry” Belle Kaura, AIMA Canada With the advent of liquid alts, investors are now better able to achieve their financial goals by building a balanced portfolio that preserves capital and protects against downside risk to deliver risk-adjusted returns.”

While liquid alternatives are still relatively new, Kaura foresees their trajectory heading upward and believes they will facilitate a change to the traditional 60/40 equities-to-bonds asset allocation.

“We are still in the very early stages of the liquid alternatives story in Canada – the space has a lot of runway to grow,” she says.

“We conducted a survey last year where

advisors predicted that they plan to allocate 10% of their book to alternatives, so we do anticipate a new allocation strategy to emerge with alternatives making up between 5% to 10% of retail investor portfolios. We expect growth of the sector to accelerate with ETF launches, greater takeup by the $550 billion fund-of-funds market and new strategies. Sales will ramp up once there are proven track records, dealers understand how to properly allocate to alternatives, distribution channels widen with risk rating changes, and the MFDA sales channel of over 80,000 advisors is able to sell alternatives.”

HOW LIQUID ALTS ARE PERFORMING Scotiabank’s Alternative Mutual Fund Index, which tracks the performance of the Canadian alternative mutual fund universe, showed a healthy 5.33% return for the investment vehicle for 2019.

YTD RETURN, DECEMBER 2019

30%

28.88%

25%

20%

22.76% 19.13%

15%

10% 6.87% 5.33%

5%

1.61% 0% S&P TSX Composite

S&P 500 S&P 500 (quoted in USD) (CAD-adjusted)

Scotiabank DEX 91-Day Alternative Treasury Bill Mutual Fund Index, Index Equal-Weighted

DEX Universe Bond Index

Source: Scotiabank, December 2019

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6/03/2020 3:49:24 AM

SPECIAL REPORT

ALTERNATIVES

Opportunity remains in the energy sector While major headlines have been bleak, one firm has a positive outlook on the sector, thanks to specific areas of opportunity

BAD NEWS about the energy sector tends to dominate headlines – and indeed, larger projects are still facing significant headwinds, according to the experts at Calgarybased alternative investment fund manager Invico Capital. But the firm still has a positive outlook on certain segments of the industry.

Founded in 2005, Invico manages more

manager Jason Brooks. “There is optimism in 2020 because of the anticipated growth in Western Canada. Capital spending has been down since 2015, in part due to growth in the US, but it was a Canadian-made problem. This year, infrastructure is leading the recovery. Pipelines are under construction or are planned. We have the LNG project in

“It is critical to play from the right side of the balance sheet – that’s why we like the private debt side of energy” Allison Taylor, Invico Capital than $600 million in assets and offers funds specializing in private debt in industries like real estate, agriculture, film and media, industrial services, infrastructure, and energy.

Energy is one of the major components of Invico’s Diversified Income Fund; given its presence in Western Canada, Invico is well connected and has the relationships needed to capture deal flow. The extensive backgrounds of its principals and employees make Invico an expert in the oil and gas industry.

“The space has had its challenges in Canada, with a declining commodity price dating back to 2014–15 and headwinds up to this year,” says president and portfolio

32

BC, and with capital being spent, there will be modest recovery. Over time, new oil capacity should also help drilling.”

For Brooks, the key difference in 2020 is that the US industry isn’t as attractive as it once was, and this has people looking to Canada instead. As an alternative player, Invico looks at private opportunities in the sector to add yield for unitholders. While that opportunity has been in the US over the last few years, now that the harvest period for growth is over, the firm is pivoting back to Canada.

“In 2020, we are back on this side of the border, looking at the private side,” Brooks says.

“We see growth opportunities in infrastructure

and its maintenance. There is no public market for this type of exposure to energy, so there are opportunities in this smaller niche area.”

Brooks does note that it’s important to separate these opportunities from the mega projects that have struggled.

“What’s happened is there were headwinds and a dramatic differential blowout at the end of 2018, where the price of Western Canadian crude sank to uneconomic terms,” he explains.

“There was a fundamental lack of cash flow in the system, but when the clamps were put on the production of large companies, it provided room for small growth companies not part of

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OIL’S UPS AND DOWNS Western Canadian Select price per barrel

West Texas Intermediate price per barrel

$80

$70

$60

$50

$40

$30

$20

$10

$0

blowout 2015

2016

2017

2018

Dec. 2018

2019

2020

Source: Economic Dashboard, Alberta.ca, as of January of each year, all figures in US$

“We see growth opportunities in infrastructure and its maintenance” Jason Brooks, Invico Capital

the Alberta OPEC controls. It stabilized the market – there is now a reasonable differential, specifically on light oil, and gas is better.

With modest improvement and additional small projects, there are opportunities.”

Invico CEO and portfolio manager Allison Taylor adds that “these adjustment differentials did help [mega companies], but they are being curtailed and cutting capital budgets.

You have this separation between the headline-driven space and what is required to restore the economy back to some level of growth. You need those projects, and they may not be built still.”

Both Brooks and Taylor believe the opportunity in energy is a result of its low pricing, resulting in the ability to put capital to work.

“People are pricing the industry like it will be gone in two or three years, and we know that is not the case,” Brooks says. “We are able to buy in and get investors the best yield.”

While Invico sees this trend continuing, there are a couple of concerns the firm is keeping an eye on. The main one is regulation bottlenecks, which could create delays on pipelines and impact the companies Invico is targeting, as well as the entire industry. The second is a lack of equipment and labour, much of which moved to the US when the industry there was growing.

But overall, Brooks and Taylor believe the worst is behind the energy industry and feel now is the time for advisors to work with expert

managers to gain access to opportunities.

“A lot of the opportunities come through the network, and the ability to access it is critical,” Taylor says. “Being in Calgary, on the ground, and having the relationships is key.

Many times, investors and advisors try to play the energy sector from the equities side of the balance sheet. There is a lot of risk there, and with a downturn, you can see value evaporate.

It is critical to play from the right side of the balance sheet – that’s why we like the private debt side of energy.

“It’s important for advisors to work with groups who have the expertise and access to deals and can structure them properly.

Advisors need to continue to allocate portions to alternatives as a way to mitigate risk and diversify away from equities, which is why we think this is a great way to play energy.”

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SPECIAL REPORT

ALTERNATIVES

Opportunities arise in real estate As alternative investments become more broadly accepted, private real estate investments could be set to grow within investor portfolios FOR MANY years, real estate has been an asset class that pension funds and other large institutions have allocated considerable portions of their portfolios to, often through the direct purchase of real property or through private investment with real property managers. This form of real estate investment, however, is only just catching on with smaller institutions, investment advisors and retail investors. As a result, private real estate investment could see significant growth over the next five to seven years.

John Courtliff, managing director and portfolio manager at ICM Asset Management, believes that while private real

34

estate investment has strong portfolio benefits, investors need to be aware of the differences from publicly traded securities of real estate companies.

“Publicly traded real estate securities have historically been relatively highly correlated with broader public market equities, while private real estate has had a much lower correlation,” he says. “Owing to its low correlation to public markets, private real estate investment contributes more to portfolio diversification. Lower volatility also results in higher risk-adjusted returns. The downside is that investors are not able to readily trade out of their investment, should

their circumstances change.”

As investors seek to allocate capital to real estate after a decade of strong returns since the financial crisis of 2008–09, Courtliff highlights some of the challenges facing real estate investors in today’s environment.

“There has been, and continues to be, an incredible amount of capital pursuing real estate. This has driven cap rates to very low levels,” he explains. “Income available to an investor from buying property in today’s market is quite low. It makes investing in the current environment increasingly challenging. The tailwind from cap rate compression will not be as supportive of future real estate

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returns, which means that return expectations for the future cannot reasonably be as strong as the past several years. Managers will either be reliant on strong rental rate growth or will need to find differentiated strategies to generate future returns.”

Asked where he sees opportunity today, Courtliff highlights that ICM is focused on property investments where value creation requires a higher degree of active management. This includes taking on properties with lease-up risk, those in need of renovation and repositioning within a market, and new development opportunities.

“We believe that the price of stabilized buildings presents a high degree of risk, and that we can best manage that risk through active strategies,” he says. “There is no silver bullet, however; in trying to mitigate one risk, investors are generally required to take on a different set of risks. The key for active real estate investors is to understand and manage the balance of risks that each asset or portfolio is exposed to.”

Courtliff adds, “From a property type perspective, we generally believe that the challenges retail assets have faced in the last few years will continue, with the exception of defensive retail, such as grocer-anchored centres. Much of the challenge faced by retailers is the shift in consumer behaviour towards online purchases, which itself has been the catalyst for the strength in distribution and logistics-oriented industrial real estate. We have been investing in this theme for a few years and believe this trend has more room to run. While we also see opportunity in multi-family across several markets and select office opportunities, industrial is the wedge of our portfolio that will continue to grow more quickly over the coming year or two.”

ICM has made investments in large-scale industrial development projects in the US and Mexico over the last few years and intends to make further investments in similar projects.

When it comes to investing successfully in real estate, Courtliff believes that it’s important for investors and advisors to partner with managers who have a demon-

CONSTRUCTION INVESTMENT INCREASES Investment in building construction has steadily increased over the past five years as housing tries to keep up with demographics. $15.5bn

$14bn

$12.5bn Jan 2015

Jul 2015

Jan 2016

Jul 2016

Jan 2017

Jul 2017

Jan 2018

Jul 2018

Jan 2019

Jul 2019 Source: Statistics Canada

“Publicly traded real estate securities have historically been relatively highly correlated with broader public market equities, while private real estate has had a much lower correlation” John Courtliff, ICM Asset Management strated track record in the space.

“We are a real estate investment firm with the operational expertise, experience and teams of people required to capitalize on opportunities that we see in property markets,” he says. “These are resources that passive investors, such as financial advisors and individual investors, generally lack; thus, their approach to investing in real estate needs to be very different.”

He adds that investors should be looking at opportunities with a diversified portfolio of assets, rather than just a single or

small number of properties or property types in a geographically concentrated area, as there is generally greater risk with concentrated portfolios.

While there are risks to be managed, Courtliff believes that private real estate is a beneficial asset class for retail investors as part of a properly constructed portfolio. It’s also why he believes that private real estate investment is poised to grow among investment advisors and retail investors as they accept and look to include greater allocations to alternative investments within their portfolios.

www.wealthprofessional.ca

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20/03/2020 1:55:47 AM

SPECIAL REPORT

ALTERNATIVES

Private debt outshines fixed income With some returns in the 6% to 9% range, private debt has become an asset class that investors can’t afford to overlook SINCE THE global financial crisis, low interest rates have made it challenging for investors to earn strong returns from traditional fixed income. But given Canada’s aging population, investors aren’t exactly clamouring to redirect their money into equities to achieve the rates fixed income used to produce. This has led many investors to look at alternative sources of income, such as private debt, that can provide those returns without the same risks as equities.

“Many people perceive a high return with a higher risk, which has led to many inefficiencies within private debt,” says Rob Anton, managing director and head of sales and

36

product development at Next Edge Capital.

“But there is not as much risk in the space as they perceive in order to achieve the returns.”

Anton explains that in the aftermath of the financial crisis, banks were forced to deleverage their balance sheets after being bailed out. “That created a void in the marketplace that still exists today because banks still tend to lend less to smaller companies,” he says. “That has created an opportunity on the private lending side.

Private loans are not rated; they are privately negotiated, which means there is an inefficiency mark and excess yield.”

That inefficiency and business fragmenta-

tion creates opportunities. Anton adds that the cost of capital is higher for these types of loans, which can be passed on to investors in the form of returns.

With the rise in popularity of private debt, Anton has noticed a few themes emerge, primarily investors’ desire for security.

“The number-one thing is a return bogey,” he says. “Private lending can’t be sold on prospectus; it has to be offered by memorandum and to accredited investors. People are looking for extra yield than fixed income without taking a ton of chances. To attract money, you need to offer 6% or more, show where the security is and how money is

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6/03/2020 3:49:37 AM

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6/03/2020 3:49:39 AM

SPECIAL REPORT

ALTERNATIVES “Banks still tend to lend less to smaller companies.

That has created an opportunity on the private lending side” Rob Anton, Next Edge Capital

WHO’S INVESTING IN PRIVATE DEBT?

16% Private-sector pension funds 13% Public pension funds 13% Foundations 9% Endowment plans 9% Insurance companies 9% Asset managers 6% Fund of funds managers 8% Family offices 6% Wealth managers 14% Other

Source: Preqin Private Debt Online 2018

returned if something goes wrong. In our case, we focus on loans that are asset-backed with things like receivables, real estate and inventory. The trend in private lending has definitely been on the more conservative side.”

While the returns are the primary benefit for investors, Anton notes that private debt’s low correlation to stocks and bonds, consistency of returns, and capital preservation are all ancillary benefits. However,

38

he also outlines a few things investors and advisors need to be aware of.

“Private lenders negotiate the loans, so you need to have trust in the underwriting team, the security behind it and strategy to get money back,” he says. “I hope the past returns don’t give people a false sense of security. If the economy goes into a recession or we have a GDP risk and the economy takes a downturn and unemployment rises, the businesses

we lend to will be impacted. The returns we have seen have been in good times, but that doesn’t mean they will always be like that – there can be sensitivity to market health.

“The other thing is investors really need to know what they are getting involved with,” he adds. “A lot of products in the space look similar, so it’s important to understand each one’s specific strategy.”

Anton believes that as long as rates stay where they are, more investors will turn to private debt. “I think we will see more money into the space and more products created,” he says. “At some point, we will go through a recession, but I think it will separate the weak from the strong. We have been preparing for the last one or two years with active monitoring because we realize it will be inevitable and will impact the players.”

That said, Anton still thinks private debt has a place in more portfolios – if advisors and investors do their homework.

“Many people have adopted alternative income strategies, but the percentage is still low,” he says. “There is room for advisors to incorporate it in more portfolios because many solutions make sense and can add a higher return than traditional fixed income without the risk. At this later stage of the bull market, it makes sense to protect fixed income with private debt. The underlying consideration is ‘buyer beware’ – this is a different asset with different ways of making money, so know your risk and what protection you’re being offered.”

www.wealthprofessional.ca

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6/03/2020 3:49:44 AM

Investors as mortgage lenders Mortgage investment corporations are a uniquely Canadian investment opportunity that has been around since the ’70s, but they’re just starting to gain traction MORTGAGE INVESTMENT corporations (MICs) have existed since 1973, when the Canadian government created them to bridge the gap between traditional lending and the general population’s borrowing needs.

The uniquely Canadian vehicle is a way for investors to diversify into the Canadian real estate market with property-backed residential and commercial mortgages.

While there are hundreds of MICs in Canada with different sizes and objectives, the proportion of MICs in the private debt space is still relatively low. Yet after 2016 regulation changes that allowed this investment to be offered by memorandum, that number has been on the rise.

“Part of the reason is that the marketplace in Canada has become more aware of the power of alternatives,” says Julian Clas,

“With a MIC, specifically a private MIC like ours, you are diversifying away from the market. If the market is down, you won’t see the MIC fluctuate” Julian Clas, Canadian Mortgages Inc. VP of capital markets and funds at Canadian Mortgages Inc., which operates the CMI MIC. “When advisors and portfolio managers speak about alternatives, they generally compare it to the large pension plans in Canada and try to mimic their allocation. The traditional 60/40 equities-to-bonds exposure isn’t used there; instead, there is allocation to things like real estate in the form of a MIC, REIT,

development or owning property itself. So the space as a whole has been a driver for the increase in demand for MICs.” A MIC allows investors to pool their money by buying shares. The MIC then invests these funds in mortgages that generate a yield through interest rates and fees charged to the borrowers. This yield produces monthly cash flow for investors.

www.wealthprofessional.ca

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6/03/2020 3:49:45 AM

SPECIAL REPORT

ALTERNATIVES

“Mortgages are easy to understand – investors get the concept,” Clas says. “I think the other factor was that once they were offered by memorandum in 2016, it opened them up to more investors, and you started to see investors look at them. For us at CMI, we have seen our MIC grow 100% in just the last year.”

Given the tighter lending policies at the banks, Clas believes this type of investment is good for the market. As the alternative space continues to grow, he says, so will MICs. MICs vary considerably in terms of how they’re constructed, but all managers must abide by some basic rules. MICs must have at least 50% of their investments in the residential space and must lend exclusively in Canada. Some MICs choose to diversify with more allocation to commercial, or they can go almost exclusively residential, as CMI has done – 99% of its fund is concentrated in the residential space.

Clas believes there are a few reasons why investors should consider including a MIC in their portfolio. “The main thing for clients is diversification,” he says. “With a MIC, specifically a private MIC like ours, you are diversifying away from the market. If the market is down, you won’t see the MIC fluctuate. The return is based on the mortgages paying out on a monthly or yearly basis, depending on how the MIC is set up.”

In terms of risk, “one thing to consider is the illiquidity – you cannot sell it right away,” Clas says. “Most MICs have lock-up periods of 30 days to five years or have a penalty for exiting early. Since they are offered by memorandum, they are not vetted by regulation, so you need to understand what is in the MIC, or it could affect what you are entitled to or how you get out.”

Clas stresses that all investors and advisors must do their due diligence when considering a MIC, given the vast number of options and their strategies.

“Track record is important – you are relying on a manager,” he says. “Not every broker can manage a MIC. For investors and advisors, look at the manager. Ask have they

40

RESIDENTIAL MORTGAGE GROWTH BOUNCES BACK The year-over-year growth rate in residential mortgage credit has started to climb again after experiencing a setback with the market correction in 2018. This indicates that people are willing to borrow to purchase houses, which improves the viability of MICs. 8% 7% 6% 5% 4% 3% 2% 1% 0% Jan 2015

Jul 2015 Jan 2016

Jul 2016

Jan 2017

Jul 2017

Jan 2018

Jul 2018

Jan 2019 Jul 2019

Dec 2019 Source: Bank of Canada

done underwriting, how is the MIC structured, how is it raising money, how long is the timeline, do they have skin in the game, what are the fees, are they being audited, what is the deal flow? It’s one thing to raise money, but if it reaches a certain state or size, how are

they going to keep the yield going?”

Clas notes that there are some MICs, such as CMI’s, that have stricter regulations and raise their capital in a compliant way – all the more reason for advisors and investors to do their homework on the investment.

www.wealthprofessional.ca

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6/03/2020 3:49:49 AM

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6/03/2020 3:49:50 AM

SPECIAL PROMOTIONAL FEATURE

TECHNOLOGY

Specialized and scalable Anne Tardif of Croesus tells WP how a unified managed account strategy can help advisors grow business by eliminating operational inefficiencies

SPECIALIZATION IS a watchword for today’s investment advisors and portfolio managers. Every client comes with their own set of demands, and the range of investment products and strategies seems to grow almost daily. A ‘one size fits all’ approach can’t sustain an advisory practice anymore.

That’s the dilemma Montreal-based fintech firm Croesus set out to address by adding integrated unified managed account (UMA) and

42

unified managed household (UMH) capabilities into its popular advisor platform.

“The UMA approach enables a portfolio manager to split an account into sleeves,” explains Anne Tardif, Croesus’ business product manager. “If you have a Canadian unregistered account, you can assign that account to three different external managers.

One will manage fixed income, the other one can manage Canadian equity, and the other

one might manage the international equity.

Instead of opening three accounts, you can use the same account and split the account into three sleeves. This enables the PM to save on costs because they don’t have to open three accounts.”

UMH strategies allow for a different approach, Tardif adds, enabling managers to provide tax optimization strategies for their clients. Because a UMH portfolio includes different account types, it could be more efficient to buy certain types of financial instruments in the appropriate account.

Tardif and the Croesus team integrated this strategy into their platform in order to meet the needs of modern PMs, who are fielding more questions than ever from increasingly informed investors. This strategy, Tardif explains, allows an advisor or a PM to let specialists handle the investments within the accounts while maintaining the core relationship with their client.

When overseeing a UMA strategy, PMs and advisors can use Croesus to measure the performance of each sleeve and each of their sub-managers, shifting more resources into better-performing sleeves and replacing underperforming managers. The Croesus platform allows for necessary changes to be made quickly to maximize performance.

In the five years since Croesus launched UMA functionality, it has added new features to meet ongoing industry demand. Integrated within the platform is a smart rebalancing algorithm that suggests new purchases for a PM to stay on target. But because each client is different, Croesus has integrated custom constraints. Now, for example, a PM can make sure that a client doesn’t buy a large stake in the company they work for. When a client transitions from an RRSP to a RRIF account, the algorithm can integrate the required withdrawals into its rebalancing calculations, keeping aside the money that needs to be withdrawn.

The exclusionary feature allows for ESG integration in UMA strategies, too, giving PMs the ability to exclude certain companies, or even whole sectors, that don’t mesh with a client’s investment values.

www.wealthprofessional.ca

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6/03/2020 3:50:31 AM

HOW UNIFIED MANAGED ACCOUNTS WORK Traditional approach

Cash

Fixed income

Unified managed accounts

Equity

Cash

Fixed income

Equity

Overlay portfolio manager

Cash Fixed income Equity

Account #1

Account #2

Historically, UMAs have been a strategy for managing high-net-worth investors, as it’s easier to sleeve off investments from one account when the core account pulls from a vast pool of resources. The benefits might not seem as obvious for an advisor managing clients with fewer assets, but Tardif believes they’re there.

“I think it’s a very good way to be structured,” she says. “It’s an approach structure to manage all your portfolios. All your clients can be managed the same way. It’s then easy to rebalance almost all your clients at the same time. This will enable advisors to focus on growing their business, because everything is structured and scheduled.”

This helps advisors refocus on seeking more clients, bringing in new money and developing better relationships with existing clients, she adds. And the system is scalable – it organizes, tracks and rebalances clients’ investments, no matter how big an advisor’s book grows. In fact, Tardif says, it functions better with a bigger book and offers a clarity that compliance departments love.

“For example, if you have 1,000 clients and you have 1,000 UMA accounts for those clients, you can deliver international equity to

Account #3

Single account

“All of your clients can be managed the same way. It’s then easy to rebalance almost all your clients at the same time” Anne Tardif, Croesus all of those clients and rebalance each of their strategies with a few clicks,” she says. “We can regroup all the same orders to submit them as one block order. This way, all the portfolios trade at the exact same average market price and meet the clients’ equity needs.”

This is Croesus’ ‘have your cake and eat it too’ solution: UMAs allow PMs and advisors to specialize their investment solutions while scaling their businesses. They can grow their own AUM as they grow their clients’ money within sleeves. Compliance can be kept happy, and strategic moves can be made in an organized, structured way.

Today, many advisors are positioning themselves as holistic financial planners, and Tardif and the Croesus team maintain that a UMA strategy on their platform can better facilitate this role. But there’s still a place in

the UMA strategy for advisors who prefer to function as stock pickers, too.

“When you want to focus on the relationship with all your clients or focus on developing your business, then you should shift your accounts into this model,” Tardif says.

“You do not have to micromanage – you just need to look at your portfolio and make sure the relationship with your client goes well.

In terms of asset allocation, you just need to assign the UMA sub-accounts at the desired targets for each of the external managers and focus on what we call overlay management.

“If you’re very good at stock picking or analyzing all the fundamental or technical details of a security,” she adds, “then a UMA can set you up to do this. If you’re good at managing relationships, just manage relationships and try to bring in new money.”

www.wealthprofessional.ca

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6/03/2020 3:50:32 AM

SPECIAL PROMOTIONAL FEATURE

REAL ESTATE

Making rental development profitable Centurion Asset Management CEO Greg Romundt tells WP why he believes rental developments are the next smart play in real estate

THERE’S A new real estate boom coming to Canada, but it’s not centred on condos. It’s being driven by perhaps the least sexy part of the housing market: rental apartments.

“As an industry nationally, we’re going to build as many apartments in the next 10 years as we’ve built in the last two generations,” says Greg Romundt, president and CEO of Centurion Asset Management. “We’re very bullish [about rental apartments]. That’s where we think the biggest opportunity is and what we’re most excited about.”

According to Romundt, a confluence of factors is driving demand for rentals, pushing rents to a place where rental developments are profitable again. The first is immigra­ tion, which is causing demand for rental housing to far exceed supply. There’s often a false logic that dominates among investors and developers: that newcomers to Canada will buy property even before they land. But Romundt says that while the immigrant experience might result in homeownership down the road, at least during the first few years of settling in, most immigrants rent.

The second trend is regulation. Govern­ ment actions to prevent a runaway housing market where buyers can purchase with no money down have increased the barrier for ownership, forcing more people to rent.

The third trend is millennial demand.

As a generation, millennials tend to value experience over ownership, preferring to live in downtown cores where they can’t afford

44

to buy. They’re marrying later, if at all, and having fewer kids. Renting facilitates the life­ style choices many millennials are making.

The fourth trend is age. Greying baby boomers are realizing they don’t need the big house in the suburbs now that the kids have moved out. Instead, they’re looking for a hassle-free rental property after cashing in on their home, maybe even spending half the year somewhere warm.

ments that Romundt is most excited about, though, which the firm invests in through Centurion Real Estate Opportunities Trust.

Both trusts are designed to offer investors returns from investments in rental housing.

The aim is to provide individual investors with monthly income, diversification and solid annual returns. It’s an ambitious play, but Romundt has come up with a strategy to realize those ambitions.

“As an industry nationally, we’re going to build as many apartments in the next 10 years as we’ve built in the last two generations” Greg Romundt, Centurion Asset Management “We’ve got a lot of old rental product in this country, and there’s only so much you can do with it,” Romundt adds. “Not everyone wants to live in a renovated 50- to 60-year-old apartment. There are lots of people who are willing to pay a little bit more for brand-new buildings with higher levels of amenities closer to transit.”

Centurion is betting on this confluence of factors to drive demand for rental stock.

Through Centurion Apartment Real Estate Investment Trust, Centurion is investing in a portfolio of existing rental apartments in Canada and the US. It’s the new rental develop­

“We want to be investing our capital where we think people are going,” he says. “Boiled down, we’re looking at the exurbs of ‘MTV’ [Montreal, Toronto and Vancouver].”

Romundt explains that urban centres, especially in Toronto and Vancouver, are still too expensive to drive profitable rental developments. Condos remain king, and a developer can make more by selling condos than they could by building rental stock. This means that a successful strategy needs to step outside those city centres.

“Look at Hamilton,” Romundt says.

“Hamilton has just gone through this explo­

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6/03/2020 3:50:53 AM

RENTS ON THE RISE IN THE CANADIAN EXURBS Kitchener-Cambridge-Waterloo

Hamilton

Victoria

$1,200

$1,100

$1,000

$900

$800

$700

$600

$500

1992

1993

1994

1995 1996

1997

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2011

2012 2013 2014

2015

2016

Source: CMHC Rental Market Survey

sion in the last five years. I think part of that is because people are buying into it who couldn’t buy into Toronto.”

Romundt is also looking at where the momentum is heading, taking into account the factors that come along with movement to the exurbs, including more jobs, rising incomes, low vacancy rates and rising rents.

Combinations of these factors make a city an appealing investment opportunity.

In Ontario, that means locations like Kitchener, Cambridge, Waterloo and Aurora.

In BC, it’s Victoria, Burnaby, Abbotsford and Surrey. Montreal is something of an exception with its lower property values, though they’re set to rise. Anticipating growth, Centurion is investing in new developments and rental stock in the city of Montreal proper.

Centurion’s other screen is partnership.

The company doesn’t scope out sites and build them, but rather invests with solid development partners, providing those developers with expertise on suite sizes, suite mix, location, pricing and amenity packages.

“We allow them to bring their building skills, and we can provide debt and equity management,” Romundt says. “We provide the skills that we have in-house, and they bring the skills that they have.”

When Centurion turns down a deal, it’s often because it doesn’t see a good fit with the partner – Romundt is as careful about who he goes into business with as he is about where he’s investing. Even if the potential partner a solid builder, the two firms might have misaligned goals.

Romundt is confident about the forces driving demand for rental housing. He thinks

rentals will always be the lowest-volatility sector in the real estate field because of a core need for housing. Even if prices go down, despite the fundamental tailwinds driving them up, this core need will keep smart investments in good locations paying dividends.

“When I look at apartments, I say, ‘We have 400,000 new people per year we’ve got to provide housing to,’” he explains. “The tailwind is exceptionally strong. I know with virtual certainty that because of that imbalance, if I can build a property, I’ll be able to fill it. Now, I might not get the dollars that I want right away. So instead of getting $2 a foot, I might get $1.80 on lease-up. I might not make the returns that I want on the desired time horizon, but we know that the demand drivers are just never going away and we’ll get there eventually.”

www.wealthprofessional.ca

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6/03/2020 3:50:56 AM

PEOPLE

ADVISOR PROFILE

Breaking the mould Markus Boudreau’s non-traditional background has given him a unique perspective on wealth management, to the benefit of his clients

MARKUS BOUDREAU doesn’t have a typical advisor’s background. Born in Budapest, Hungary, to a German mother and Quebecois father who were missionaries, Boudreau saw how money can be a taboo subject, but also how not talking about it can cause hardships. Growing up, Boudreau was homeschooled, but he still developed a fascination with finance.

“From a very young age, I understood that whether we talk about it or not, a large amount of our lives revolves around money,” he says. “I always had an interest in finance, and so I sought out all the info I could consume. I read tons of books and anything I could find on the internet.”

Boudreau’s family moved to Canada when he was 14. Four short years later, he decided to move out on his own and needed to find full-time employment.

“I really stumbled into wealth management,” he says. “I started looking for a job and came across an ad for an administrative assistant with an advisor at Manulife Securities. I met with him and got the job.

Working with an experienced advisor was great – I learned a lot about the investment management side from him.”

Boudreau quickly realized it was an area he wanted to be in and emerged himself in Canadian Securities Institute courses. He also spent time in Manulife’s mentorship program. In addition to the investment

46

management basics he gleaned from his first boss, Boudreau learned about the interpersonal side of the business from another mentor who still works in the same building with him.

When Boudreau struck out on his own with his practice, Markus Boudreau Wealth Management, he faced tough challenges in his first year. “Not having a base salary, starting as a new independent advisor, I would often make 2,500 to 3,000 calls per week in order to grow my business,” he says. “I made nearly no money in my first full year.”

Yet Boudreau left himself no choice but to succeed, making sacrifices in his personal life in the name of sticking with his goal.

“It is one of the biggest challenges young advisors face, because to be truly independent, you need to work only based on your own production – that means no pay unless you produce,” he says. “This is extremely chal-

lenging for young people who have lifestyles that require a constant influx of income and who refuse to lower their lifestyle, albeit temporarily, in order to start this business.”

After meeting this challenge head-on, Boudreau has found success. His first year on his own, he brought in $14 million in assets.

Now, after four years on his own and six total in the industry, he has seen that number grow to close to $100 million (including jointly managed accounts) and a client base of more than 200 households.

Thanks to the time he spent working with both of his mentors, Boudreau has found that the formula for success is to find a model that works, copy it and then optimize it to your own style.

“My approach to wealth management, at the beginning of a new relationship, is to truly understand a client’s needs and goals in order to be able to present them with a

BOUDREAU ON WORKING WITH MANULIFE Boudreau says he enjoys working under the umbrella of a firm like Manulife Securities because it allows him to be independent and have zero bias when making recommendations to clients.

“Manulife has an excellent reputation in every division: pension plans, insurance, mutual funds and the independent wealth management division,” he says. “This means we are not tied to one company’s products. We have access to all the mutual funds, stocks, bonds and ETFs available to Canadians. Our group has always been fiercely independent and will stay that way. This allows us to ensure we always offer the best possible products, no matter which company they are offered by.”

www.wealthprofessional.ca

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19/03/2020 2:42:26 AM

FAST FACTS: MARKUS BOUDREAU

PRACTICE Markus Boudreau Wealth Management

FIRM Manulife Securities

LOCATION Dorval, QC

YEARS IN THE INDUSTRY 6

“Starting as a new independent advisor, I would often make 2,500 to 3,000 calls per week in order to grow my business. I made nearly no money in my first full year” comprehensive proposal and guide them to make sure everything is clear and transparent in order to optimize their situation,” he says. “After a plan is put in place, I continue to be a central point of contact for all wealth management needs and any other experts they may need to access.”

In addition to his growing AUM and client base, Boudreau has also earned recog-

nition from Manulife, which named him Top Rookie in 2017. Yet he says the most rewarding aspect of his career so far is the growth he’s witnessed within himself.

“My number-one highlight is how I have grown as a person,” Boudreau says. “My mindset has expanded, and with the knowledge I have acquired, it has allowed me to help others.”

CERTIFICATIONS CSC, WME, CPH

TARGET CLIENTS Entrepreneurs, professionals, individuals not yet retired, couples

ACCOLADES Manulife Securities Top Rookie, 2017

www.wealthprofessional.ca

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19/03/2020 2:42:27 AM

SPECIAL PROMOTIONAL FEATURE

PORTFOLIO MANAGER

A steady hand Portland Investment Counsel portfolio manager James Cole, whose funds have won several awards, shares the investment philosophy that’s steered him through his 37-year career

AN INDUSTRY veteran of nearly four decades, James Cole is a senior vice-president and portfolio manager at Portland Investment Counsel and the manager behind Portland’s award-winning Portland Focused Plus Fund LP, which he has constructed with a focused strategy aimed at long-term success.

Cole’s multi-award-winning fund is built around three key strategies. First, he prides himself on focus, going deep on a narrow field of consistent performers. Second, he maximizes returns with a leverage strategy, a play that might come back to bite a less seasoned portfolio manager. Finally, he rounds out his approach by attempting to protect against downside risk at every stage. It’s an investment philosophy that has served Cole well for years and one he believes in so much that he’s willing to put his own skin in the game.

“One of the defining facets of the last 11 years is that the returns available to investors in so-called safe investments like cash and bonds have been close to zero, and close to zero doesn’t cut it,” Cole says. “Stocks are the only game in town, but people are generally not professional investors in equities. The advantage they get with the fund is that it has a professional, seasoned manager whose skin is in the game right along with them.”

He explains how the three principles that drive the Portland Focused Plus Fund LP all fit together within the fund. First, Cole takes pride in saying that the fund is, to his know-

48

ledge, “the world’s most focused investment fund.” It’s currently composed of holdings in five banks, one auto parts manufacturer and a small stake in Berkshire Hathaway.

“If I wouldn’t invest a lot in a company,” Cole says, “I don’t invest anything at all.”

The second principle is leverage, which has proved to be a good strategy over the past 11 years as central banks have made money so cheap to borrow. The principle of borrowing to invest is not unfamiliar to Canadians – indeed, the housing market is underpinned by leverage, and most Canadians who have used leverage to buy their homes have seen benefits as a result.

Cole explains that the same principles apply to equities, except that interest rates for margin borrowing are typically much lower than for mortgages. The fund typically borrows at an interest rate of around 2%, which is tax deductible. Borrowing, Cole says, will enhance rates of return if returns on investments exceed the cost of borrowing.

Leverage has some risk, though. As much as it magnifies positive returns, it also magnifies negative returns. Cole says that especially in the alternatives space, more and more portfolio managers are aiming to use leverage. But, he warns, there’s a serious learning curve with leverage, and some portfolio managers might not have used leverage before. Cole has been using leverage since his early days and knows how to manage it,

balanced with focus.

“I’m always focused on what I expect the business to generate in terms of a rate of return,” he says, “but I also think about the downside, asking, ‘How bad could this get?’”

That outlook informs his third principle: preservation of capital, where his primary focus is protection from downside risk.

“If you can’t find investment ideas that meet your criteria, preserve your capital and live to fight another day,” he says. “I think anybody who’s been in the business for 37 years and doesn’t [admit] they have some scars isn’t being completely honest.”

In Cole’s case, those scars represent the lessons learned by every portfolio manager with real experience, which have become key to his management style. He has the knowledge to apply those lessons to the funds he manages to try to safeguard them for the future.

Cole has another reason to safeguard his funds: They contain a lot of his own money.

When he pitched the Portland Focused Plus Fund LP to Portland’s executive chairman,

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WHO IS JAMES COLE? Title: Senior vice president and portfolio manager Company: Portland Investment Counsel Inc./ AIC Limited Designations: CFA Education: Bachelor’s degree in economics from Trent University Years in the industry: 37 Years as portfolio manager: 25 Awards: The investment funds Cole manages have won several awards, including Canadian Hedge Fund Awards, Lipper Awards, FundGrade A+ Awards and the Private Capital Markets Association of Canada’s Investment Fund of the Year Award.

“If you can’t find investment ideas that meet your criteria, preserve your capital and live to fight another day” Michael Lee-Chin, he put a significant amount of his own money into the fund.

That had a few advantages. The first is that it made the fund economic from day one, helping to ensure that its operating expense ratio was reasonable. The second is that as the fund’s portfolio manager, Cole was able to align his interests with those of the fund’s investors and eliminate the need to manage his own personal investment portfolio on the side. Today, Cole’s investment in the fund represents a significant part of his personal net worth.

“That’s what we like to see in the senior executives of the companies in which we invest, that they have major skin in the game,” he says. “That way, the management’s

incentives are truly aligned with those of the investors, as mine are.”

Five years ago, Cole had the audacity – or “foolhardiness,” as he puts it – to provide an expected 50-year asset class return forecast in an annual letter to investors. He predicted that common equities would outperform bonds, which in turn would outperform cash. Five years in, that prediction is proving accurate.

In early 2019, regulatory changes were made to allow retail funds to make use of alternative investment strategies typically reserved for accredited investors, giving rise to alternative mutual funds, also known as liquid alternatives. Cole says he’s looking forward to the rise of liquid alternatives as

part of the industry’s future, as he believes they are an ideal tool to democratize alternative investment strategies and expand them to most Canadians.

“I think the opportunity [of liquid alternatives] is a very exciting one because the constraint that we all live with in this industry is that in order to invest in my two Portland Focused Plus funds, investors generally must be accredited investors … those tests limit access to about 4% of the Canadian population. Ninety-six per cent of Canadians generally aren’t permitted to invest in the Portland Focused Plus funds, but anybody can invest in liquid alternative funds.

“We at Portland greatly believe in democratizing investment opportunities,” he adds.

“That’s why, subject to regulatory approval, Portland has recently filed a preliminary prospectus for a new liquid alternative fund named the Portland North American Alternative Fund. We want the 96%, who have only been able to watch as the 4% earn greater returns, to be able to take part.”

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SPECIAL PROMOTIONAL FEATURE

CHARITABLE GIVING

Not too good to be true WP spoke to the experts at Abundance Canada to find out how donating publicly traded securities via a closely held corporation can benefit both investors and the greater good

THE PROCESS of donating securities to numerous charities can be complicated. That’s why Sally’s* accountant encouraged her to take advantage of an array of tax and CDA benefits by donating publicly traded securities from her holding company. Sally’s advisor introduced her to Sherri Grosz, a gift planning consultant with Abundance Canada.

charitable donations. The organization also has extensive experience processing donations of securities from corporations.

“Donating securities from her corporation to Abundance Canada was as easy as signing a transfer form, and the resulting benefits amazed Sally,” Grosz says. When Grosz spoke with Sally after tax season,

“Donors are able to make significant donations in a given year and then take some time to think strategically about the causes they want to support” Sherri Grosz, Abundance Canada A public foundation that believes generosity changes everything, Abundance Canada helps donors give many types of assets, both during their lifetime and through their estate, while retaining the flexibility to disburse funds to any Canadian charity immediately or over time.

Abundance Canada has long been an advocate of donating publicly traded securities as the most tax-efficient way to make

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Sally told her, “Oh my goodness, this almost seems too good to be true. I will definitely do this again, and I’m sorry I didn’t listen to my accountant sooner.”

Sally was even more surprised to learn about the additional benefits of donating publicly traded securities from her holding company. While individuals receive a tax credit for charitable donations, corporations receive a tax deduction. When publicly

traded securities are donated to a Canadian charity like Abundance Canada, the capital gains inclusion rate drops from 50% to 0%.

“An additional benefit for corporations is that the tax-free portion of the capital gain is added to the corporation’s capital dividend account (CDA),” Grosz says. Because the entire capital gain is tax-free when the corporation donates publicly traded securities, the entire capital gain is added to the CDA. A positive balance in the CDA can be paid out to shareholders as a tax-free dividend.

Grosz believes this is something more advisors need to consider; she says this strategy works particularly well for a closely held corporation, as the balance in the CDA account benefits all shareholders. A corporation with 40 different shareholders, for example, would need to have shareholder agreement to make the donation, and any capital dividend would benefit all the shareholders. The more shareholders, the more complicated the process could become. She suggests advisors looking to employ this strategy first focus on clients who own such closely held corporations and have built publicly traded securities into their investment strategy.

The biggest barrier Abundance Canada runs into with this strategy is disbelief. “I can recall at least three occasions in 2019 when I was mentioning this particular scenario to some professional advisors, and they looked at me and said, ‘Only the nontaxable portion is added to the CDA,’” says Rick Braun-Janzen, Abundance Canada’s director of gift planning. “And I said, ‘Yes, and in this case, 100% of the gain is not taxable.’ On the surface, you think this is too good to be true, but thankfully it is true.”

Braun-Janzen believes advisors need to consider this strategy as they design and implement financial plans for their clients who donate to charity.

“Really, it’s about being donor-advised,” Grosz says. “Where a donor has publicly traded securities held personally or by their corporation, they can donate those to

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THE BENEFIT OF DONATING SECURITIES The example below shows the tax savings and CDA boost a corporation can receive when donating publicly traded securities in kind to charity – in this case, a tax savings of $20,000 to the corporation due to the elimination of the tax on the capital gain. In addition, the shareholder(s) can receive a larger amount of tax-free capital dividends from the corporation.

Abundance Canada and have the proceeds from sale added to a Gifting Fund. The donor can then provide recommendations to Abundance Canada on how those funds should be used to support their favourite charities now and in future years.

“Donors are able to make significant donations in a given year and then take some time to think strategically about the causes they want to support, the distribution timeline that best supports those charities and whether to distribute earnings, capital or a combination of the two. It really fits our model of flexibility for donors.”

One of Grosz’s clients donated securities from their corporation to make a significant charitable gift to reduce their tax burden when they sold their business. Some of their investments had substantial unrealized gains, while others had unrealized losses. The donor was able to sell the securities with the losses and donate the securities with gains,

Selling securities and donating cash

Donating securities in kind

Fair market value of donation (a)

$100,000

$100,000

Adjusted cost base

$20,000

$20,000

Capital gain

$80,000

$80,000

Taxable capital gain

$40,000

$0

Tax on capital gain @ 50% (b)

$20,000

$0

Value of tax deduction @ 50% (c)

$50,000

$50,000

Amount added to CDA

$40,000

$80,000

Total cost of donation (a + b – c)

$70,000

$50,000

Tax-free capital dividend paid to shareholder(s)

$40,000

$80,000

producing a considerable tax benefit to offset the taxes due on the sale of their company.

This client also withdrew a tax-free dividend from the CDA and then made a personal donation as well. Grosz says the donor was grateful that their financial advisor had suggested investing in securities years earlier and had taken time to explore charitable giving as part of the financial plan.

This client now speaks very highly of their advisor to others.

“All advisors should know their client’s overall plan, both the financial planning piece and also the charitable giving plan,” Grosz says. “You need to determine whether this opportunity might benefit your clients both now and in the future.” *Client’s name has been changed

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SPECIAL PROMOTIONAL FEATURE

ESG

The building blocks of ESG BMO Global Asset Management’s approach to ESG focuses on inclusion so that investors don’t miss out on opportunities because of sector exclusion

ENVIRONMENTAL, SOCIAL and governance (ESG) investing is a relatively undefined frontier in Canada. With no standardization of what can be considered ESG, the label is up for interpretation. Recently, numerous products have hit the market, all of which boast their own ESG strategy.

In earlier forms, many ESG products focused on exclusion – avoiding companies in certain sectors – which was something BMO

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Global Asset Management wanted to avoid when crafting its ESG portfolios, which focus on companies in any sector that are making an effort to improve all three areas of ESG. “Here in North America and Canada, it’s different from in Europe, where ESG is more defined,” says Mark Raes, MD and head of product at BMO GAM. “In Canada, we are heading towards a consensus, but we’re not there yet. There are certain industries

like firearms or tobacco that you expect to see excluded, but beyond that, it becomes a question of sustainable versus responsible.

The more accepted approach is now about inclusion and improvement as opposed to exclusion. You want to work with companies through active ownership, proxy voting and other ways you interact with the company, and not exclude wide areas of the marketplace because then you aren’t improving those industries.”

For Raes, the obvious industry this relates to, especially in Canada, is energy. “With the energy sector, do you want a zero-carbon approach, which I would consider a thematic because it is heavier on the environmental consideration?” he says. “Or do you want to have energy companies so you capture the market, but identify and work with the most progressive ESG companies looking to transform their practices? That’s where we are, and I think that’s where the industry is heading.”

Yet with no standardization across the industry, Raes says advisors looking to create an ESG portfolio need to start with the investor’s goal.

“When constructing ESG portfolios, the first question an investor or asset allocator needs to ask is how they want to approach ESG,” he says. “Do they view it as something they want to fully incorporate across their portfolio, or are they looking for complementary positions to include things like active strategies or geographies where they may have less exposure? It really depends on the starting point, and then you align your investments.

Beyond that, it’s the same things you think about with regular portfolio construction: risk tolerance, level of growth needed, equity/fixed income split and any bias or desire to invest in one area over another.”

In January, BMO launched a suite of eight ESG ETFs focused on equity and fixed income, including a balanced ETF, which Raes believes is a great entry point for investors looking for ESG exposure in a simple, all-in-one format.

“We have a long history on the active side

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with our responsible investing team that goes back to the 1980s,” he says. “They manage our active Sustainable Opportunities Global Equity Fund. So we offer active and passive strategies, and we would like to continue to offer more ESG strategies of both. We hope that the demand continues to grow and we can meet it with more options.”

Raes believes education will be the key to driving demand. “We are still in the stage where education is the most important thing,” he says. “There is a basic level of education needed around the umbrella term ‘responsible investing.’ From there, education is needed on approaches: exclusionary/inclusionary, sustainable and thematic. There is lingo people need to get comfortable with. Beyond that, measurement is advancing as firms are starting to create a greater acceptance on how to measure companies and ESG.” To further that education, BMO has built out supporting documents and web presence on ESG so both advisors and investors have access to information. Raes says plans are also in the works to visit branches to chat directly with advisors about ESG. One area that’s critical, he says, is debunking the misconception that focusing on ESG means sacrificing returns.

“If you look at the history of our indexes, you aren’t sacrificing returns taking an ESG approach to your portfolio,” he says. “It shatters the myth because the evidence shows you’re not. Of course, there will be periods where certain companies underperform, but if you look at a long-term track record, it is not the case. That might be the most important piece of education: By aligning with an ESG strategy, you are not giving up returns.”

Raes says that misconception originated when ESG funds took a more exclusionary approach, but as the concept has evolved, that’s no longer the case.

“If you look back historically, with an exclusionary approach, that was the number-one concern with ESG investing,” he says. “Now, with a sustainable approach, that hurdle has been overcome. It is now

THE GROWTH OF RESPONSIBLE INVESTING IN CANADA $2.5trn

$2trn

$2.13 trillion

$1.5trn

$1.51 trillion $1trn

$1.01 trillion $500bn

$459.53 billion $0

2006

$556.68 billion

$517.96 billion

2008

2010

$600.88 billion

2011

2013

2015

2017

Source: Responsible Investment Association

“If you look at the history of our indexes, you aren’t sacrificing returns taking an ESG approach to your portfolio” Mark Raes, BMO Global Asset Management shifted from ‘Why should I invest in an ESG mandate?’ to ‘Why not?’”

With the numbers supporting the case for ESG, Raes believes now is the time for advisors to educate themselves on the subject to better engage with the next generation of investors, who will want ESG incorporated in their portfolios.

“For advisors, there is a need, especially when you consider wealth transfer and millennials’ interest in the subject, to get up the curve to interact with that generation of investors,” he says. “People’s interest in the area is coming to the forefront, and that will reflect in their investments. Investing in ESG provides investors or advisors the benefit of aligning their investments with their values.

It allows you to feel good to contributing to positive change without sacrificing returns.”

Raes reports that BMO has already seen a groundswell of interest from investors.

“By there being more conversations, this has potential to transform the investing landscape,” he says. “It is a question for investors of whether it is a replacement or complementary strategy. The more it becomes a replacement strategy, the more it will lead to greater transformation.”

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms. ®/™Registered trademarks/trademark of Bank of Montreal, used under license.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements.

In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

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March 25, 2020 | Arcadian Court Toronto investesg.ca

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PEOPLE

CAREER PATH

COACH FOR LIFE

Determined to set a good example for her clients, Renee Rebelo is always looking for a new means of education Raised amid financial struggle, Rebelo had her sights set on law school. But when her father died, her plans were upended.

“A week before university started, he had an aneurysm at age 42.

I stayed behind to help my mom sort out her finances; Dad had always done everything. I wondered how many other people don’t have a clue just like I didn’t. One institution I worked with liked me and offered me a job.”

1995 CHANGES PLANS

2001 2002 CHANGES FOCUS Handling the death of a client led Rebelo to an epiphany about the direction of her career.

“While coaching the wife, I thought, I need to focus on the entire picture and have more of a financial planning brief. Right then, I was approached by [Credential Financial Services]. I became the manager of their insurance arm; I was responsible for educating four branches in these products.”

2008 GETS SAVVY Concurrent with her move into financial planning, Rebelo started Savvy Livin for Women, aimed at engaging women in the process.

“I thought a gathering that was just women would make them more open to asking questions and being engaged in the presentations. We wanted an element of fun; we’d have speakers and then a wine and fashion show, with a few hundred women at each event. I kept it simple: I didn’t use lingo, and they walked away learning something because they understood it.”

2018 WRITES HER FIRST BOOK A moment of inspiration from a radio show about resolutions eventually led to the publication of Rebelo’s first book in October 2018.

“I realized that there was no such thing as financial decluttering. I posted on Facebook: ‘Who would be interested in financial decluttering?’, and two hours later, I had over 100 messages. I created the 30-day declutter challenge on a Facebook page; within that group was a publisher who said it should be a book.”

CLIMBS THE LADDER Despite starting at the bottom, Rebelo became a manager within six years and was the highest producer of auxiliary insurance in the region.

“I would educate people on their finances and try to help people to make sure the same thing didn’t happen to them [as happened to my family]. When I was promoted to management, I was the first person they had ever hired who didn’t have a university education.”

2008

SEIZES AN OPPORTUNITY The global financial crisis hit just as Rebelo decided to go out on her own, but she embraced the market downturn as an opportunity.

“I knew people were losing money and taking more notice of their investment statements, so I got out there and started educating.

People would talk to me because they weren’t completely happy – unlike their advisors, I wasn’t avoiding them” 2009

STARTS A NETWORK Determined to involve men in her outreach efforts, Rebelo created Like Minded Business Networkers.

“I put on Friday lunches; anybody who was in business could come and learn from each other and make connections. The mindset was ‘there’s enough business for everyone in this world.’ I got the word out, and we grew quickly. Ultimately, it grew to four chapters and 1,500 members.”

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PEOPLE

OTHER LIFE

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

K ertsos has shot a hole in one before, but as luck would have it, she did it “during my [golf scholarship] college years – but in the su mmer!”

69

Kertsos’ best-ever golf score

5

Pairs of golf shoes she owns

24

Tournaments Kertsos played in college

HOLE IN ONE There are few places investment associate Crystina Kertsos would rather be than out on the golf course CRYSTINA KERTSOS started golfing at age 7 while accompanying her dad, who “spent every single day on the course.” So when she cracked her femur playing soccer as a teenager, it was only natural that the gentler sport should take centre stage.

“I’m super competitive,” Kertsos says.

“I was losing my mind [not being able to

56

play a sport], so thought I would give competitive golf a go.”

It wasn’t long before Kertsos was recruited by a coach, entered and won tournaments, and was offered a golf scholarship to an American university, where she went on to study business finance.

Even now, in the midst of a demanding

career as a Toronto-based investment associate, Kertsos makes time to play in a few events a year. She also finds that the pastime helps with work: “It’s the best conversation starter with clients or potential clients,” she says. “I can talk to a 6-year-old, a 16-year-old or a 96year-old.”

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WPA2

May 28, 2020 • Liberty Grand, Toronto

THANK YOU FOR YOUR NOMINATIONS! Wealth Professional would like to thank its readers for the incredible response to the call for nominations for the 6th annual Wealth Professional Awards! It is great to see so many talented individuals, teams and organizations within the wealth management and financial planning industry who have excelled over the past year.

Finalists will be announced in Wealth Professional in April. Winners will be selected by an esteemed, independent judging panel and revealed during the highly anticipated black-tie awards gala on May 28 at the Liberty Grand in Toronto.

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Value.

Discipline.

Results.

ICM Asset Management was founded in 2003 to preserve and grow the wealth of retail, private client and institutional investors looking to diversify their portfolios through the use of alternative asset classes.

Today, we manage more than $1 billion of assets on behalf of our investors in an array of investment opportunities focused on real estate, private equity, private debt and infrastructure strategies.

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www.icmassetmanagement.com Calgary | Atlanta | MĂŠxico City | Munich

Years in Business

$1B

Assets Under Management

$160M

Business

Management

Investors

00_OBC.indd 1

Distributed to Investors

0

Investment Losses Losses6/03/2020 3:39:33 AM