The Renaissance QUARTERLY FUND PROFILES / PRACTICE MANAGEMENT / OUTLOOK / OPINION
Q4 – DEC. 31, 2016
The Rising Tide of Interest Rates Adjusting Course for What Lies Ahead
For Advisor Use Only
PAGE
In this issue
7 8 12
Economic Outlook What to Expect in 2017
4
Tax and Estate Prescribed Rate Loan Strategy Still Popular
6
Global Market Perspectives Plotting a Course for an Uncertain Year Ahead
7
The Rising Tide of Interest Rates
8
Solution Highlight A Fixed Income Solution in a Rising-Rate Environment
11
The Science of Sleep
12
Thanks to Our Supporters Laser-Focused, Ongoing Communication is Key
15
Brain Calisthenics
16
From the Managing Director of the Renaissance Sales Team
Calm Clients Down As Rates Heat Up Welcome to the winter edition of The Renaissance Advisor. It’s been an eventful few months! Prior to turning the page to 2017, the U.S. Federal Reserve hiked its key interest rate. With the prospect of additional increases this year, your clients will look to you for guidance. In our feature article, The Rising Tide of Interest Rates—Adjusting Course for What Lies Ahead, we asked a number of experts for insights on where to look for the best investment opportunities. As economic and market trends can affect investments, clients will benefit from your expertise and objective counsel. You’re in a unique position to help them identify suitable investment options to meet their unique goals. With the wind down of one of the dreariest winter months and the busy RRSP season, you may be feeling tired. In The Science of Sleep— A Wake-Up Call for the Sleep Deprived, read about the importance of good shut-eye and why we may not be getting an adequate amount. You’ll be surprised at just how crucial sleep is to your overall well-being. We also hear from our experts. Jamie Golombek discusses the benefits of the prescribed rate loan strategy, and Ben Tal looks ahead with some predictions for 2017. The Solution Highlight is dedicated to the Renaissance Floating Rate Income Fund. The fund provides exposure to floating rate loans, which can offer higher yields than traditional bonds—a key benefit in a rising-rate environment. Contact your Renaissance sales representative today for more information. As always, we appreciate your business and welcome your feedback.
Shelly McLean Managing Director, National Sales Renaissance Investments
What to Expect in 2017 ECONOMIC OUTLOOK
Economic Growth At this point, it appears that the U.S. will outperform Canada in 2017. This wouldn’t really be a result of Trump’s policies, where the main impact will be felt in 2018. It’s really due to the weakness of the Canadian economy. While energy prices are likely to rise a bit, the main benefit will be to energy company profits as opposed to real production and investment activity. The oil sector needs higher and stable oil prices to start drilling again. In addition, the rotation from energy to non-energy export activity in Canada will take longer than expected. This is due to capacity constraints as well as reduced demand from the U.S. manufacturing sector as it adjusts to the ongoing strength of the American dollar. At the same time, it’s reasonable to expect another solid year from American consumers, given still elevated pent-up demand and higher wage growth as labour market activity remains strong. We expect GDP growth in Canada to average 1.7% in 2017 versus an average of 2.2% in the U.S. In Canada, we expect B.C. and Ontario to lead the way.
“We expect GDP growth in Canada to average 1.7% in 2017 versus an average of 2.2% in the U.S. In Canada, we expect B.C. and Ontario to lead the way.” Interest Rates We believe the correction in the long end of the bond market that took place in the last two months of 2016 is sustainable. At least for 2017, inflation expectations will remain elevated and the prospects of growing debt levels will maintain the pressure. Accordingly, we see the yield on the U.S. 10-year Treasury bond ending 2017 at roughly the same level it is now, give or take 10 basis points. The same thinking applies to Canadian rates.
4
As for the short end of the curve, our guess is that the U.S. Federal Reserve (Fed) will hike rates three times in 2017. The Fed will likely choose to react to the clear elevation in inflation expectations and the current thinking that the economy is operating very close to full capacity. For the Bank of Canada (BoC), while the likelihood of another cut is less than 25%, it’s very reasonable to expect the BoC to be on hold in 2017.
Oil Prices There has been a clear change in Saudi Arabia’s oil agenda, with the country more likely to accept reduced production and higher prices. Add to that some modest improvement in global oil demand and we see reason to believe that oil prices can reach $60 in 2017. However, at that price level, U.S. production is likely to shift gear and the U.S. will act as a de-facto swing producer in the market. In fact, this is already happening. Accordingly, with increased U.S. production, it’s difficult to see oil prices rising above the $60 mark.
The Loonie We strongly believe the loonie will face some offsetting forces in 2017. Higher oil prices will act as a positive while diverging U.S.-Canadian monetary policy will act as a negative. It’s reasonable to assume that the impact of changes in interest rates will outweigh the impact of energy prices, suggesting that the loonie might lose modest ground during the year.
“Higher oil prices will act as a positive while diverging U.S.-Canadian monetary policy will act as a negative…the impact of changes in interest rates will probably outweigh the impact of energy prices, suggesting that the loonie might lose modest ground during the year.”
The Euro Despite better economic performance in 2017, the euro is likely to be fragile, at least in the early part of 2017. This is not just because of the impact of Trump on the U.S. currency or even the European Central Bank’s (ECB) policy— the main factor here is politics. We have the elections in the Netherlands on March 15, the first round of the French election in the spring and the big event is the German election in the fall. The refugee crisis in Germany is clearly a major issue facing Chancellor Merkel. This is not to say that Merkel will lose the election, but with so much uncertainty, the euro will pay the price. We expect the euro to lose some ground in the first half of the year.
In Canada, it’s reasonable to assume that the TSX performance in 2016 will not be repeated in 2017. But we still see some opportunities. With oil prices rising, the loonie losing some ground and improved prospects regarding pipelines, the energy sector is well positioned for further gains. The steepening yield curve should be beneficial for financials. Given the high level of uncertainty regarding what Trump will actually do, these are our best guesses at this point. The main assumption here is that the real impact of the Trump policies will be felt in 2018, and that’s also when frictions with Congress might start as we see more evidence of rising debt. But until then, the market might continue to benefit from early days of Trump euphoria in 2017.
Equities This is a tough one. It’s reasonable to assume that 2017 will not be as good as 2016. But are recent gains sustainable? We believe they are. In the U.S., if we are right and the bond market doesn’t reverse its course in 2017, we will not see much inflow into the fixed income market at the expense of equities. The U.S. corporate tax cut will act as a significant boost to corporate profitability, which is starting from a relatively low base given the performance of the past few years. As well, repatriation of corporate cash back to the U.S. should lead to a notable improvement in mergers and acquisitions (M&A) and stock buy-back activity. It’s not unreasonable to suggest that recent gains are sustainable, at least in 2017. The energy sector as well as industrials might see further gains due to Trump’s energy policies, increased global spending on infrastructure and probably better-than-expected growth coming from China.
“The U.S. corporate tax cut will act as a significant boost to corporate profitability, which is starting from a relatively low base given the performance of the past few years.”
“With oil prices rising, the loonie losing some ground and improved prospects regarding pipelines, the energy sector is well positioned for further gains.”
Benjamin Tal is Deputy Chief Economist for CIBC. Described as one of Canada’s leading experts on the real estate market by the International Monetary Fund, he is responsible for analyzing economic developments and their implications for North American fixed income, equity, foreign exchange and commodities markets. www.renaissanceinvestments.ca/en/economy/ renaissanceinvestments.ca/en/economy/
5
Prescribed Rate Loan Strategy Still Popular TAX AND ESTATE
Here's how the income splitting strategy works.
Interest rates have remained low for years. One of the advantages of having such low rates means that a prescribed rate loan strategy to split investment income among lower-income family members continues to be popular.
Under this strategy, a high income spouse (or partner) would loan funds at the prescribed rate to a lower income spouse. This strategy can be expanded to help fund minor children's expenses, such as private school and extracurricular activities, by making a prescribed rate loan to a family trust. The trust then invests the money and pays the net investment income, after the interest on the loan, to the kids either directly or indirectly by paying their expenses. If family members have zero or little other income, this investment income can be received perhaps entirely tax-free. The prescribed rate is set quarterly based on the yield on Government of Canada 90-day Treasury bills, albeit with a lag. A formula in the Income Tax Act regulations takes the simple average of three-month Treasury bills for the first month of the preceding quarter, rounded up to the next highest whole percentage point. The lowest possible rate is 1%. With low interest rates over the past several years, the prescribed rate has been 1% since April 2009 (except for the last quarter of 2013 when the rate rose briefly to 2%). You need only use the prescribed rate in effect at the time the loan was originally extended, even if the prescribed rate increases in the future. So it makes sense to consider implementing loans while the prescribed rate is still at an all-time low of 1%.
“With low interest rates over the past several years, the prescribed rate has been 1% since April 2009...�
6
Our example includes Jack, who is in the highest tax bracket, and Diane, who is in the lowest bracket. Jack loans Diane $500,000 at the current prescribed rate of 1% secured by a written promissory note. Diane invests the money in a portfolio of Canadian dividend-paying stocks with a current yield of 4%. Each year, she takes $5,000 of the $20,000 in dividends she receives to pay the 1% interest on the loan to Jack. She makes sure to do this by January 30, each year starting the year after the loan was made as required under the Income Tax Act. The net tax savings to the couple would be having the dividends taxed in Diane's hands at her low rate instead of in Jack's hands at his high rate. This is offset slightly by having the $5,000 of interest on the promissory note taxable to Jack (and deductible to Diane). Before implementing this strategy, clients should consult with their legal and tax professionals to make sure this makes sense for them.
Jamie Golombek is Managing Director, Tax and Estate Planning, CIBC Wealth Strategies. He works closely with advisors to help them provide integrated financial planning solutions for their high-net-worth clients. Jamie is frequently quoted in the media as an expert on taxation. Follow @JamieGolombek
renaissanceinvestments.ca/en/jamie_golombek/
Plotting a Course for an Uncertain Year Ahead GLOBAL MARKET PERSPECTIVES
Last quarter, we discussed how monetary policy would need to “pass the baton” to looser fiscal policy in order to keep the global economic expansion on track.
This was a pressing issue in light of the fact that the monetary policies of the world’s main central banks had reached their limits. Interest rates were in negative territory, and asset purchase programs (also known as quantitative easing) were depleting the stock of government debt available for purchase. Over the last few months, this transition has evolved faster than we were expecting. The most significant event was in the U.S., with the surprise election of Mr. Trump and a Republican majority in Congress. Republicans based their election campaign platform on tax reform and infrastructure spending in a bid to “make America great again.” Unfortunately for market participants, many details are still missing with regards to Trump’s proposed fiscal policy shift. Still, the prospect of fiscal stimulus amid accommodative monetary conditions in the U.S. has dramatically changed the financial dynamics. Bond yields have risen, along with inflation expectations while rising stock prices are anticipating only a positive impact from the expected policy boost.
“...the prospect of fiscal stimulus amid accommodative monetary conditions in the U.S. has dramatically changed the financial dynamics.” Other aspects of a new Trump administration, such as trade protectionism and the potential imposition of tariffs on trading partners, have so far been treated with benign neglect by financial markets. This may come to haunt investors in the first 100 days of the new administration. For example, renewed strength in the mighty U.S. dollar is likely to negatively impact manufacturing employment prospects, the very base of Trump’s election supporters. Continued strength in the greenback makes it more likely that
the new administration will make good on the implementation of trade restrictions. This development is the one that is most likely to unnerve financial markets and trigger retaliation from trading partners impacted by the new measures. The U.S. Federal Reserve also remarked that fiscal spending, when the U.S. economy is at full employment, will likely trigger a faster tightening of monetary policy, given the rising wage inflation risk. Elsewhere in the world, fiscal stimulus has also gradually appeared on government agendas. However, Europe has limited scope to expand fiscal spending. Germany may be the exception as it benefits from a budget surplus and may use some of it ahead of its fall election. However, this is not expected to be a game changer for eurozone growth as a whole, given the remaining demographic and debt headwinds. Fiscal room is also limited in Japan given its high debt level while China can use some fiscal levers. While the economic expansion is expected to continue in 2017, growth is not expected to accelerate. In addition, uncertainty around this forecast is unusually large given the many policy unknowns as we enter 2017.
Luc de la Durantaye is Head of Asset Allocation and Currency Management with CIBC Asset Management. He is responsible for strategic and tactical asset allocation, currency management, absolute return strategies and index management.
Perspectives For the period beginning January 1, 2017
Asset Allocation Outlook as at January 1, 2017 Underweight
Neutral
Overweight
Asset Class
PLOTTING A COURSE FOR AN UNCERTAIN YEAR AHEAD
Significant Moderate
Fixed Income
3
3 3
Canadian Government Bond Canadian Corporate Bond International Government Bond
3
Equity Canadian Equity U.S. Equity
Since the U.S. election of Donald Trump last November, the prospect of fiscal stimulus amid accommodative monetary conditions in the U.S. has dramatically changed global financial dynamics. Other aspects of a new Trump administration, such as trade protectionism and the potential imposition of tariffs on trading partners, have so far been treated with benign neglect by financial markets. This may come to haunt investors in the first 100 days of the new administration.
Moderate Significant
3
Equity Relative to Fixed Income
Canadian Money Market
The global economic expansion is expected to continue in 2017, but growth is unlikely to accelerate. Uncertainty around our forecast is unusually large this quarter, given many policy unknowns as we enter 2017.
International Equity (Developed Markets)
3
3 3 3
Emerging Markets
Underweight
G to Go renaissanceinvestments.ca re to read the full PPerspectives re report
Neutral
Overweight
Currency (versus U.S. Dollar) Significant Moderate
Canadian Dollar Euro
3 3
Japanese Yen British Pound
3
Swiss Franc Australian Dollar Emerging Markets
3
Moderate Significant
3 3 3 Perspectives | 1
renaissanceinvestments.ca/en/economy/
7
r sing tide THE
of interest rates
Adjusting Course for What Lies Ahead As market watchers expected, the U.S. Federal Reserve (Fed) upped its key interest rate by 25 basis points in December 2016. The Fed also indicated that there would likely be additional hikes in 2017. Meanwhile, the Bank of Canada (BoC) is sitting tight on a low key interest rate. See the insights within and what some of our experts have to say on which main asset classes to watch, how the new U.S. administration will work with the Fed and where financial markets may head.
How rising rates affect different asset classes Investors have a wide variety of investment options. When considering stocks or bonds, the current key interest rate (the federal funds and discount rate in the U.S., the overnight rate in Canada) influences each asset class in different ways.
FIXED INCOME/BONDS When central banks raise key interest rates, these moves affect the price of existing bonds. Some bonds, however, are impacted more by interest rate increases than others. When key interest rates move higher, the current market value of existing bonds declines, with short-term bonds declining less than long-term bonds. Short-term bonds are generally less sensitive to key rate moves. This difference in sensitivity occurs because an investor’s money is committed for a longer period of time with a longterm bond. They have to wait longer for the bond to mature, receive the principal back and re-invest it at the new, higher rate. In effect, bonds with longer maturities are locked in at a lower rate for a longer period of time. Keep in mind that if a bond is held to maturity, the face value of the bond is returned to the investor (except in the case of default). In this discussion, we‘re talking about a decline in value that can occur when a bond is sold prior to its maturity date. Changes in key interest rates also don’t affect all types of bonds equally. Government and agency bonds tend to be the most sensitive to market interest-rate fluctuations because of their high credit quality. Corporate bonds are somewhat less sensitive to interest rates than their government counterparts because of their higher relative risk. High-yield bonds do not correlate exactly with either investment-grade bonds or stocks. Because their yields are higher than investment-grade bonds, they're less vulnerable to interest rate shifts, especially at lower levels of credit quality. Similar to stocks, the outlook for this asset class improves with a stronger economy.
8
EQUITIES/STOCKS Changes in key interest rates can also affect equity values. On the positive side, key interest-rate increases can mean the economy is robust and growing, which is good for businesses looking for growth opportunities. As a result, this could be one factor driving up stock prices. A potential challenge comes when businesses need to borrow money from banks to run and expand their operations. When key rates rise and borrowing becomes more expensive, companies might not borrow as much. They will also pay higher rates of interest on their loans when they do borrow. Less business spending can slow the growth of a company, resulting in decreased profit.
Where to consider investing as rates rise se With stocks and bonds both affected by interest rate changes, where can investors look in a rising-rate ising-rate h in with environment? Some of our experts weigh their suggestions.
TREASURY-INFLATION PROTECTED SECURITIES CURITIES Ignacio Sosa, Director of the Product Solutions Group at DoubleLine® Capital and Jeffrey Gundlach, CEO of DoubleLine® and one of the world’s most successful bond investors, agree. “Buying securities like 30-year U.S. Treasuries doesn’t sound attractive to us,” says Sosa. Now that U.S. rates have increased, “You’re much better off buying Treasury-Inflation Protected Securities, or TIPS. We think that’s a better way of recognizing that rates are increasing and inflation could go up.” The principal of a TIPS increases with inflation, as measured by the consumer price index. Gundlach, whose firm manages more than $100 billion, has been selling bonds and buying TIPS, which are still cheap relative to nominal bonds.1 As of December 31, 2016, the Renaissance Flexible Yield Fund, managed by Gundlach, had allocated a large portion of its U.S. government debt allocation to TIPS. This aligns with the firm’s overall view. MORTGAGE-BACKED SECURITIES Sosa also sees commercial mortgage-backed securities as an opportunity. “Generally, you’re lending about 70% of the value of a building. So you have quite a bit of room for the building to decrease in price and you’d still be protected,” he says. Commercial real estate prices fell substantially in 2008 and have risen to near their old levels only in cities like New York, Los Angeles and San Francisco. Many cities are still well below their highs. “We think this
is a very attractive asset class,” says Sosa. “Mortgage-backed securities are less sensitive to interest rates and have proven to be very resilient.” ALTERNATIVE FIXED-INCOME INVESTMENTS “Monetary policies have been pushed to their limit, bringing government bond yields to very low levels, and negative interest rates in Europe and Japan,” says Luc de la Durantaye, Head of Asset Allocation and Currency Management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio. “That has raised the question of whether government bonds are safe.” “In places with negative interest rates, government bonds are no longer a safe ha haven; you’re guaranteed to have a loss in holding certain government bonds ar around the world, certainly developed government bonds,” he adds. “Since m monetary policy has reached its limit, it might even backtrack. That means that go government bond yields might turn back up to a positive level, which means th that you might have losses holding government bonds in Europe and Japan, an and continued very low rates in North America,” says de la Durantaye. So where can an investor find safety in those circumstances? “In our lowergr growth, lower expected-return environment, high-quality corporate bonds can st still offer decent expected returns,” says de la Durantaye. But he also suggests co considering high-yield and emerging markets debt in local currency, which still of offers attractive rates of return. HIGH-YIELD BONDS “Even though interest rates are rising, some bonds can still thrive in a higherrate environment,” says Nicholas Leach, Vice-President of Global Fixed Income, High Yield at CIBC Asset Management. “If the economy is strong enough to warrant a rise in interest rates, that’s actually good for corporate issuers, both high yield and investment grade,” he says. Interest rate increases signal the economy, as a whole, is expanding, indicating strong opportunities for increased profits. This, in turn, means there’s a greater likelihood that businesses offering high-yield bonds will be able to continue to meet their financial obligations. In short, rising rates can mean a stronger issuer and less risk of default. “As the economy improves, companies are able to grow their revenues and cash flows, and improve mprove their credit metrics. Default rates tend to be much eads tend to tighten, and that provides a pretty good cushion lower. Credit spreads for bondholders inn the event of rising ays Leach. interest rates,” says
9
New year, new game: The outlook for 2017
Bank of Canada and the Fed part ways
Given the controversy over the new U.S. administration’s economic plan and the prospect for several key interest rate increases, our experts show there’s room for more than one opinion on the outlook for 2017.
Presently, the BoC and the Fed have divergent monetary policies.
John Braive, Vice-Chairman, Global Fixed Income, CIBC Asset Management, on the economy: “We don’t know what the economy is going to look like later this year. Right now everyone is looking at recent data and saying it’s going to be strong. But we don’t know when that will happen. The bond market has reacted negatively and yields have moved up enough that the bond market is oversold. We think there are opportunities here to buy the bond market.� Patrick O’Toole, Vice-President, Global Fixed Income, CIBC Asset Management, on inflation: “We may see some inflation by deregulation and tax cuts to a certain extent in 2017. But it’s going to be tough to get really sustained inflation, in our view. Also, the U.S. consumer is still where they were 20 years ago; the median household income level is still below what it used to be. The appetite for inflation just isn’t there. So any higher prices we see that come from commodities or increased wages may be absorbed in corporate profits rather than corporations passing that on to the consumer.�
The winds of political change We have a new administration in office south of the border. How will its actions impact the Fed’s policies?
The rate increase by the Fed signals that the U.S. economy is improving, and the numbers bear it out. In the third quarter of 2016, the economy was expanding at a 3.2% annual pace, its fastest rate in two years. The job market was also booming, with the jobless rate dropping to a nine-year low of 4.6%.5 In contrast, in its latest policy statement, the BoC kept its key rate unchanged at 0.5%. The BoC commented that the key vulnerabilities to the Canadian financial system continue to be elevated household debt, imbalances in the housing market across the country, and “fragile� fixed-income market liquidity.6 While these key aspects remain a focus, it’s important to highlight that Canada ended 2016 with an uptick in job numbers, with full-time positions rising by 81,000.7 Patrick O’Toole feels that the BoC can afford to sit tight. “They’ve already got many factors working in their favour to get Canada’s growth working better. Key points include stimulative interest rates, a low Canadian dollar, which should continue to help our export sector, and infrastructure spending at the federal government level. In addition, the U.S. economy is doing a little better than Canada, which should help us become a little stronger,� he says. Why have Canadian lenders increased rates?
President Donald Trump’s campaign promises included deep tax cuts and increased infrastructure spending to restore lost jobs and accelerate the American economy. But Fed Chair Janet Yellen doesn’t feel the current state of the economy warrants a deficit-fuelled stimulus to improve job creation.2 With low U.S. unemployment and consistent hiring, Yellen thinks that employers no longer need large tax cuts and heavy infrastructure spending to create jobs. In fact, she suggests that with unemployment at a nine-year low, such a major stimulus could increase government debt.3 In addition, such actions could also cause the economy to overheat; that is, its productive capacity would be unable to keep up with growing demand. If that were to happen, Yellen says that the Fed would likely have to repeatedly raise its key interest rate, which would slow growth. The nonpartisan Committee for a Responsible Budget estimates that Trump’s proposals would add $5.3 trillion to the national debt over 10 years.4
When it comes to interest rates, most of the attention is on the BoC’s overnight rate, which governs short-term lending, like lines of credit and variable mortgage rates. Fixed-rate mortgages, however, are tied more closely to Canadian bond yields of corresponding maturity. Consequently, as Canadian longer-term bond yields (five years and up) have increased, so too have fixed mortgage rates.
FOR ADDITIONAL INSIGHTS: watch U.S. Rate Increase— Now What? with John Braive and Patrick O’Toole at renaissanceinvestments.ca, and listen to these podcasts at advisor.ca/togo: Invested in Canada? Monitor These 3 Trends with Colum McKinley and Corporate Bonds Will Keep Paying Off with Patrick O’Toole.
Sources: 1 HTTP WWW BARRONS COM ARTICLES GUNDLACH BOND YIELDS COULD HIT IN FIVE YEARS s 2, 3, 4 http://www.news1130.com/2016/12/15/yellen-signals-caution-about-trumps-economicSTIMULUS PLAN s 5, 6 HTTP WWW CBC CA NEWS BUSINESS MONETARY POLICY DIVERGENCE s 7 CIBC Economics
10
A Fixed Income Solution in a Rising-Rate Environment SOLUTION HIGHLIGHT: RENAISSANCE FLOATING RATE INCOME FUND
Initial portfolio composition: A globally diversified balanced portfolio comprised of 30% Canadian equities, 30% global equities, 40% domestic fixed income and 0% floatingrate loans. Adding varying degrees of exposure to floating-rate loans while reducing exposure to traditional bonds provides the potential for improved returns (see graph). This also reduces the portfolio’s expected risk (standard deviation).
Why invest in the floating-rate loan asset class? The coupon rate is reset regularly. As short-term interest rates increase, so does the coupon payment, making this asset class very attractive in a rising-rate environment.
HYPOTHETICAL ILLUSTRATION
Expected Portfolio Return (CAD)
7.7%
Exposure to floating rate loans typically offers higher yields than traditional bonds. Low correlation to other asset classes, providing the benefits of diversification and risk management.
Portfolio Allocation % Floating-Rate Loans / % Traditional Bonds
7.6% 15% / 25%
7.5%
10% / 30%
7.4% 7.3%
5% / 35%
7.2% 0% / 40%
Considered ‘senior’ debt and, is therefore, secured by a company’s assets. Repayment comes before unsecured bonds, preferred shares or common stock.
7.1% 7.9%
8.0%
8.1%
8.2%
8.3%
8.4%
Expected Portfolio Risk (Standard Deviation) Sources: Morningstar Direct, CIBC Asset Management
Position your clients’ portfolios to benefit from rising interest rates Performance Renaissance Floating Rate Income Fund
6 Months
YTD
1 Year
3 Years
Since Inception
7.6%
3.4%
3.4%
10.0%
10.1%
As at December 31, 2016. Inception date: September 16, 2013.
Assumptions: Expected equity returns are based on historical data dating back to 1950. Data for bank loans goes back to 1992. Expected fixed income returns are based on current yields as at November 30, 2016. Standard deviation is based on historical data for all asset classes. Canadian equities represented by the S&P/TSX Composite Total Return Index. World equities represented by the MSCI World Index (CAD). Domestic fixed income represented by the FTSE TMX Canada Universe All Government Bond Index with 10 year+ maturity until 1990, then WG Bigar All Government Bond Index. Floating-rate loans represented by the Credit Suisse Leveraged Loan Index (CAD). Commissions, trailing commissions and, management fees and expenses all may be associated with mutual fund investments. Please read the Renaissance Investments family of funds simplified prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The examples included in this document were included for illustration purposes only and should not be expected to be repeated nor are they indicative of future results. Hypothetical performance results and examples have many limitations. There may be material differences between hypothetical performance results and actual results subsequently received by the investor. One of the primary limitations of hypothetical performance results is that it may be prepared with the assistance of hindsight. In addition, the scenario does not include or account for the ability to withstand losses or adhere to a particular strategy which can adversely affect actual results. There are many other examples that are likely to have a material impact on actual results which cannot be accounted for in the preparation of hypothetical performance results. ©2016 Morningstar Research Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. 11
A wake-up call for the sleep deprived Did you get a solid eight hours of shut-eye last night? If you think you can get by on less, dream on. Scientists have been studying the role of sleep for centuries. While there is still no clear answer, recent research has served up some compelling findings about sleep’s powerful effects on our health and well-being.
12
Most of us think that we need sleep to replenish the energy we’ve used throughout the day. However, the amount of energy saved by sleeping for even eight hours is miniscule— about 50 calories, the same amount of energy in a piece of toast. In reality, sleep provides more than just rest. It actually plays a critical role in immune function, metabolism, memory, learning, and other vital functions.
Restorative Theories
why we need sleep
One reason we sleep is based on the belief that sleep time is when the body repairs and rejuvenates itself. Lack of sleep seriously compromises—even halts—our body’s ability to grow muscle, repair tissues and release growth hormone. What better reason to catch a few more ZZZs?
The Learning Process There’s more. Not only is sleep critical for optimal physical health, it also has a profound impact on learning and memory. This relationship can be described in terms of three functions: ACQUISITION
CONSOLIDATION
RECALL
Occurs when we are awake: We introduce our brain to new information.
Occurs when we sleep: It’s the process we use to create lasting memories.
Occurs when we are awake: It’s our ability to tap into stored information.
Even though research tells us that sleep is critical, a multitude of studies and surveys show that we are a dangerously sleep-deprived nation.
80,000
LOST WORKING DAYS
the sleep deficit
Canadian workers lose about 80,000 working days a year because of sleep deprivation. Productivity is lost by absenteeism—employees calling in sick—or 'presenteeism,' when employees are on the job but working at a suboptimal level.
33% of men aged 30–49 sleep only four to six hours a night, instead of the recommended eight hours.
33% of Canadian children are sleep deprived.
33%
OF MEN LACK PROPER SLEEP
33%
OF KIDS ARE SLEEP DEPRIVED 13
How much sleep do we need? There’s no magic number that is prescribed for everyone. For most adults, seven to eight hours a night appear to be the best amount of sleep while others need as few as five hours or as many as 10. But don’t stress about the number of hours you’ve clocked in bed; rather, assess your energy level while you are awake. Experts say that if you feel drowsy during the day, even during boring activities, you haven’t had enough sleep. “Burning the candle at both ends” has become so accepted, and expected, in our society that what is really abnormal sleepiness is now almost the norm.
What would happen if we didn’t sleep?
Screen ime is killing sleep time One of the main culprits behind our sleep deprivation? In a word, technology. Do you take your smart phone to bed with you or watch TV before lights out? Your bedtime routine could be why you’re lying awake counting your ceiling tiles instead of sleeping. The problem lies with electronic devices—they emit a blue light that works against sleep. For example, if you read on an iPad before bed, studies have found that you will produce lower levels of melatonin—a hormone linked to sleepiness. You’ll also experience shorter restorative rapid eye movement cycles and delayed circadian rhythms. Rapid eye movement sleep is the most restorative part of our sleep cycle, and is when our brains and bodies are re-energized and dreaming occurs. Our internal biological clock, circadian rhythm, regulates when we feel sleepy and awake, and fluctuates throughout the day. If you miss out on these two important aspects, you’ll feel sleepier the next morning despite having slept eight hours the night before. What’s more is that you don’t have to be staring directly at a television or computer screen; if enough blue light hits the eye, the brain can stop releasing melatonin. Consequently, using technology makes it harder to sleep. So turn off your devices a few hours before bed and read a good book in dim light. It may be a big step in re-establishing your relationship with sleep and becoming your most productive self.
14
A good way to understand the role of sleep is to look at what would happen if we didn't sleep. Not getting enough sleep seriously affects our brain's ability to function. After just one night without sleep, concentration becomes more difficult and our attention span shortens considerably. With continued lack of sufficient sleep, the part of the brain that controls language, memory, planning and sense of time practically shuts down. Sleep-deprived individuals find it difficult to respond to rapidly changing situations and to make rational judgements. Lack of sleep is said to have been a contributing factor to the Exxon Valdez, Chernobyl and Three Mile Island disasters, and the Challenger shuttle explosion. Sleep deprivation also has a major impact on emotional health. Research has found that sleepy people focus on negativity and are unable to properly process emotional information. Sources: http://www.bbc.co.uk/science/humanbody/sleep/articles/whatissleep.shtml https://www.thestar.com/business/2016/11/30/canada-loses-80000-working-days-a-year-due-tosleep-deprivation.html http://globalnews.ca/news/3033503/canada-third-most-sleep-deprived-country-study/ https://www.washingtonpost.com/national/health-science/blue-light-from-electronics-disturbssleep-especially-for-teenagers/2014/08/29/3edd2726-27a7-11e4-958c-268a320a60ce_ story.html?utm_term=.12a4375b9257 http://globalnews.ca/news/2597950/8-reasons-why-you-should-aim-for-8-hours-of-sleep-tonight/ http://healthysleep.med.harvard.edu https://www.nichd.nih.gov https://sleepfoundation.org https://www.soundsleepinstitute.com http://www.mentalhealthcanada.com
Laser-Focused, Ongoing Communication is Key THANKS TO OUR SUPPORTERS
Without the support of advisors like you, Renaissance Investments would not enjoy the privilege of helping so many Canadians realize their investment goals. Here is one of the outstanding professionals we are so very proud to work with.
What do you love about the business? I’ve always loved the markets and our business because there’s an element of the unknown. It’s also a privilege to provide valuable advice to clients as their financial plans evolve in an ever-changing environment. What is your personal formula for building strong client relationships? I believe it is crucial to develop relationships that work for both the client and the advisor. As long as expectations are realistic, the relationship will be strengthened. I focus on the development of the Investment Policy Statement (IPS), and ensure we're meeting the needs and expectations outlined in the IPS. What is your clients’ number one concern and how do you address it? Each client is unique but an overriding concern is ensuring investment returns are sufficient to meet future goals. The current low interest-rate environment has challenged clients to think differently. That means, they need to consider the risk they are willing to take versus the risk they may need to take to meet their return expectations. How will you help clients manage the rising interestrate environment? We've maintained low duration within fixed income portfolios for several years. While there was an opportunity cost to this as rates continued to move lower, the asymmetrical relationship between risk and reward kept us away from making long duration bets. This appears to be working lately, and I anticipate this trend will continue.
To address your clients’ fixed income needs, what types of funds would you consider? We've been allocating a portion of clients’ fixed income assets to the Renaissance Flexible Yield Fund. The fund’s active duration mandate is attractive. The fund also has the flexibility to allocate assets based on credit spreads. Best tip for gaining new clients? I keep a short list of highly qualified prospects. This way, I can keep in contact with them on a regular basis. In my communications, I am laserfocused in order to address their specific needs. Favourite hobbies? I like watching and playing hockey and golf. And, I'm an avid skier. What is the one item you can’t be without? My sense of humour.
Van Simpson CPA, CA, CFA, CFP Portfolio Manager Director, Wealth Management
Firm: Scotia Wealth Management ent Location: London, ON Years in Business: 24 Team Members: 7
15
brain calisthenics Word scramble – Unscramble the following letters to spell words from the article on pages 8-10:
1.
ercuos
2.
maceptdi
3.
rborow
4.
rlieietns
5.
irsnig
6.
hisounc
7.
tiusmuls
8.
tlnrilio
9.
oxpter
10.
roensvg
Sudoku – Complete the Sudoku puzzle so that each and every row, column and 3x3 box contains the numbers one through nine only once.
3
4
5
1
2
1
8
7
5
6
7
6
3
3
9 8
7
3
9 8
3
9
7
4 1
3
7
4
9
2
2
5 1
6
Source: 4puz.com
Spot the difference – Can you spot the five differences between the pictures below?
Check your answers at renaissanceinvestments.ca/magazine/answers/ 16
FOR ADVISOR USE ONLY Renaissance Investments, Axiom Portfolios and Renaissance Private Investment Program are offered by CIBC Asset Management Inc. The views expressed in this document are the personal views of the authors and should not be taken as the views of CIBC Asset Management Inc. This document is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. The information contained in this document has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. Any information or discussion about the current characteristics of the funds or how the portfolio manager is managing the funds that is supplementary to information in the prospectus is not a discussion about material investment objectives or strategies, but solely a discussion of the current characteristics or manner of fulfilling the investment objectives and strategies, and is subject to change without notice. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements. ™ Renaissance Private Investment Program is a trademark of CIBC Asset Management Inc. ® Renaissance Investments, Axiom and Axiom Portfolios are registered trademarks of CIBC Asset Management Inc. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.
Printed in Canada on 25% Post Consumer Recycled Paper
The
Renaissance Flexible Yield Fund
JEFFREY
GUNDLACH managed by
AND AGAIN IN 2016!
“50 Most Inf luential” – Bloomberg Markets, 2012, 2015, 20161
“The New Bond King” – Forbes, 2014 2
A global, multi-sector fixed income mandate from acclaimed DoubleLine® bond manager Jeffrey Gundlach is available on an exclusive basis to Canadian investors: Tactical allocation – Designed to capture opportunistic gains from market fluctuations Active duration management – Can help contain risk in all interest rate environments Diversified sources of yield – Access to a broader range of fixed income securities Contact a Renaissance representative at: 1-888-888-FUND (3863) or
renaissanceinvestments.ca
“Money Manager of the Year” – Institutional Investor, 20133
(1) Bloomberg Markets magazine September 5, 2012, October 5, 2015 and September 22, 2016. 50 Most Influential magazine editors favour recent accomplishments above lifetime achievements to build their list. They rely on the rankings, profiles, and cover stories they publish throughout the year in Bloomberg Markets. (2) Forbes Magazine, November 24, 2014 - “Glory To The New Bond King” (3) Institutional Investor. www.usinvestmentawards.com May 2013. Manager winners are selected by the editors of the magazine based on the results of a survey conducted of U.S. institutional investors. DoubleLine® is a registered trademark of DoubleLine Capital LP. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. To obtain a copy of the Renaissance Investments family of funds simplified prospectus, call 1-888-888-FUND (3863). Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ®Renaissance Investments is offered by, and is a registered trademark of, CIBC Asset Management Inc.
RS 5 YEoA f
sight
In Expert
Rising rates and Trump – where to invest in the U.S.? l of All eptica k S e “B ype” Fed H ,
the
ive hn Bra ment By: Jo set Manage s A C IB C Listen
Now
s U.S. Look a o t e r e “Wh Rise” Rates Sosa, acio By: Ign Line le b u o D Listen
Now
est in e to Inv “Wher ction U.S.” le Post-E ardy,
nts ter H vestme By: Pe n Century In a Americ Listen
Now
Presented by
EXPERTISE THAT SPANS OFFICES,
COMPANIES AND
OCEANS. A wealth program built on specialized investment expertise handpicked from across the globe.
Family account linking* Management fee reductions back to the first dollar invested* Multiple purchase options*
Learn more at rpip.ca
Renaissance Investments and Renaissance Private Investment Program are offered by CIBC Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. To obtain a copy of the Renaissance Private Pools simplified prospectus, call 1-888-888-FUND (3863). Alternatively, you may obtain a copy from your advisor. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ™Renaissance Private Investment Program is a trademark of CIBC Asset Management Inc. ®Renaissance Investments is a registered trademark of CIBC Asset Management Inc. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.*Refer to the simplified prospectus for more information on Management Fee Reductions, family account linking and multiple purchase options. 02001E(201702)