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April 24, 2017

One-third Of CFOs Aspire To CEO Role

While chief financial officer (CFO) may be a major career goal for some, a number of financial executives are looking further up the ladder, says a survey by Robert Half Management Resources. The survey shows nearly one-third of Canadian CFOs (32 per cent) say they are at least somewhat motivated to become chief executive officer (CEO) of their organization. When asked what unique attributes financial executives would bring to the CEO position, CFOs most commonly cited fiscal management and efficiency improvement, finance and data-driven decision-making, investor and stakeholder management, and economic and business awareness. Respondents noted other top contenders for the CEO role are chief operating officers. Four per cent of CFOs are ‘very motivated’ to reach the CEO role in their organization, 28 per cent are ‘somewhat motivated,’ while 58 per cent say they are ‘not at all motivated’ (11 per cent say they didn’t know or gave no answer). “With CFOs’ insight into, and influence over, fiscal growth across the business, they are well-positioned to take the helm as CEO,” says David King, Canadian president of Robert Half Management Resources.

Shift To Passive Increases Correlations

The shift to passive investing has had some surprising results, says William J. Booth, managing director, portfolio manager, and senior research analyst at Epoch Investment Partners. In fact, it may be affecting market dynamics, he said at the ‘Focusing on what you can control when investing in public equities’ session at TD Asset Management’s ‘Sharing of Knowledge Learning Series 2017.’ Academic findings show high levels of passive investing have raised correlations across stocks, reducing the diversification benefits of all styles of equity investing. With the ability to diversify risk falling, markets have grown more fragile and stocks in indexes are more expensive than non-index stocks because of the amount of money moving to passive funds. While investors cannot control the market environment, they can control how they invest. It is essential that investors look at companies through a financial lens where a company’s value is based on free cash flow generated, not an accounting lens since earnings are “an opinion,” he said. “Cash is a fact.”

Shadow Banks Put System At Risk

Shadow banks ‒ non-bank lenders and other financial intermediaries that operate outside the realm of banking regulation ‒ are putting consumers, investors, and the overall financial system at risk, says a paper by the Global Risk Institute. ‘Shadow Banking: Non-bank Credit Intermediation Heightens Risks for Global Financial System’ notes that despite regulatory reforms in the wake of the 2007-2009 financial crisis, or perhaps because of them, non-bank entities continue to grow and innovate. Growth in the non-bank sector has been significant. The Financial Stability Board estimates that shadow banks around the globe had US$36 trillion in assets at the end of 2014, or more than a quarter of the traditional banking industry. And while they provide more sources of liquidity, thereby supporting economic growth and diversifying risk across the financial system, they are not subject to the same regulatory standards and safeguards for capital, liquidity, or leverage that protect the banking system. This means they can take on much higher levels of risk. The paper questions whether borrowers are sufficiently aware of the risks, including the risk of a forced asset sale if they default, or if their lender goes under and they cannot find financing from other sources.

Majority Of Managers Underperform

Less than the majority of managers outperformed their respective benchmarks, regardless of their mandate or performance period, says the ‘SPIVA Canada Scorecard.’In domestic equities, it shows Canadian equity market delivered double-digit returns during the 12-month period ending December 31, 2016. During the same period, the S&P/TSX Composite and the S&P/TSX 60 posted returns of 21.08 per cent and 21.3 per cent, respectively. This meant the strong market run caused the majority of active managers investing in domestic equity to underperform their respective benchmarks, with just under one-fifth of Canadian equity funds (17.31 per cent) outperforming the S&P/TSX Composite over the one-year period. It says no Canadian dividend and income equity funds were able to outpace the S&P/TSX Canadian Dividend Aristocrats and for actively managed funds in the Canadian small/mid-cap equity category, managers were not able to keep pace with the 20.5 per cent return of the S&P/TSX Completion Index with only 19.44 per cent of managers outperforming.

Hedge Funds Continue Positive Start

The hedge fund industry continued its positive start to the year with another month of gains in March, says the Preqin All Strategies Hedge Fund benchmark. It recorded returns of 0.68 per cent through the month, building on gains of 1.01 per cent and 1.46 per cent in February and January, respectively. First quarter 2017 performance now stands at 3.18 per cent, which marks the best opening quarter performance since 2013 as hedge funds sustained their recent strong performance. With just one month of losses recorded since February 2016, the industry has now returned 11.61 per cent over a 12-month period. Event driven and equity strategies posted returns of 4.18 per cent and 4.06 respectively, the highest of any leading strategy. All leading strategies delivered gains through the quarter, but relative value strategies posted the lowest returns at 1.06 per cent, after the strategy also recorded the smallest gains in 2016.

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April 17, 2017

CEOs Earn Moderate Increases

The median total compensation of CEOs rose six per cent in 2016, up from the four per cent increase in 2015, says an analysis by Willis Towers Watson. The firm analyzed the summary compensation tables in the proxy statements of 365 companies in the Standard & Poor's 1500 index filed as of March 31.The moderate increase in total compensation was largely driven by uneven corporate performance, annual bonuses that rose a median five per cent, and a sharp decline in the value of stock options exercised (55 per cent at the median). Some 59 per cent of the companies analyzed paid annual incentive awards to CEOs at or above target levels in 2016, compared to 58 per cent in 2015. CEO salaries rose two per cent in 2016, following a two per cent increase the previous year.

Responsible Investing Assets Grow

Strong investor demand and rising concern about climate change have led to growth of 25 per cent in global assets under management (AUM) in responsible or sustainable investments since 2014, says a report by the Global Sustainable Investment Alliance. The report, which details the global landscape for responsible investing (RI), indicates that $22.9 trillion of assets is being professionally managed under RI strategies worldwide. The region showing the fastest growth has been Japan, followed by Australia/New Zealand, and Canada. In terms of AUM, Europe is the biggest market for responsible investing, followed the U.S. and Canada, respectively. In Canada, the RI market has grown by 49 per cent to $1.09 trillion from $729 billion in two years. In relative terms, it says 38 per cent of total professionally managed assets use RI strategies and the dominant sustainable investing strategy in 2016 was ESG integration, followed by corporate engagement and shareholder action. As well, recent policy developments in Canada could help drive further growth in responsible investing, says the report.

Wealth Inequality Due To Age

Wealth inequality in Canada is largely the result of differences in people's age, where wealth accumulation is a slow and steady process over a long period of time, says a study by the Fraser Institute. Wealth, measured by a household's net worth, includes the value of all assets ‒ house, business, stocks, bonds, savings, etc. ‒ minus all debts, such as the mortgage, a line of credit, and credit card debt. “Most wealth inequality is explained by totally normal changes in our economic situation as we age ‒ the 25-year-old with no wealth today will most likely be a 65-year-old with a net worth close to $1 million a few decades from now, and there's nothing worrying about that,” says Christopher Sarlo, Fraser Institute senior fellow, economics professor at Nipissing University, and author of ‘Understanding Wealth Inequality in Canada.’ The study finds that in Canada, between 80 and 87 per cent of wealth inequality between people can be explained by the stage of their life ‒ in other words, their age. Canadians usually acquire the most wealth when they hit their peak earning years ‒ between 55 and 69 ‒ just before retirement. What's more, wealth inequality in Canada has actually declined over the past four decades, says the report. Specifically, between 1970 and 2012 (the latest year of available data), the gap in net worth among Canadians shrunk 17 per cent. In other words, by traditional measures of inequality, the gap between the most well-off, in terms of wealth, and the least well-off has actually been declining.

Wealthiest Investors Most Optimistic

America’s wealthiest investors are more likely to credit factors outside of their control for their wealth creation, says a study by Spectrem. ‘Financial Behaviors and the Investor’s Mindset’ shows that among ultra high net worth (UHNW) investors (with a net worth between $5 million and $25 million), 58 per cent cite being in the right place at the right time as the primary reason for their wealth. Unsurprisingly, the wealthiest investors are also the most optimistic. Among mass affluent investor households (with a net worth up to $1 million), slightly more than half (53 per cent) say they are better off than they were a year ago. This compares with 61 per cent of millionaire households and 67 per cent of UHNW investors who believe the same.

Four Seasons Opening Hotel In Tunisia

Four Seasons Hotels and Resorts and investment firm Mabrouk Group are opening the Four Seasons Hotel Tunis in Tunisia in late 2017. The hotel will offer views of the coast in the exclusive Gammarth neighbourhood and feature Arabic-inspired architecture and Mediterranean influences. Set along 500 metres (1,600 feet) of beachfront, the 200-room hotel will be located near Tunis' central business district and major cultural attractions, including the town of Sidi Bou Said and the historic ruins of Carthage. Once established, the hotel will offer the largest accommodations in the city, many with outdoor terraces overlooking the Mediterranean. It will also feature an expansive Roman-inspired spa, as well as a series of pools, gardens, and fountains that echo the design of the historic medina, creating a tranquil oasis within the heart of Gammarth.

Non-U.S. Funds Performed Better

Private equity (PE) and venture capital (VC) funds based outside the U.S. performed much better in the third quarter of 2016 than the second, say benchmark indices of the two asset classes from global investment firm Cambridge Associates. The Cambridge Associates LLC Global ex U.S. Developed Markets PE/VC Index returned 4.9 per cent, measured in U.S. dollars, to investors in the third quarter of 2016, while the Cambridge Associates LLC Emerging Markets PE/VC Index generated a 2.6 per cent return. The two indices returned 1.3 per cent and 0.7 per cent, respectively, in the second quarter of 2016. “A somewhat stronger euro, coupled with distributions outpacing contributions nearly three to one, helped boost third-quarter returns for PE and VC in developed markets outside the U.S. from their second-quarter returns,” says Andrea Auerbach, head of global private investments at Cambridge Associates.

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April 10, 2017

Policy Risk More Acute

Policy risk, which may be more acute this year due to the surprising election results of 2016, is the greatest concern of Patrick Blais, senior portfolio manager, Canadian equities, at Manulife Asset Management. In its ‘Global Intelligence Interim Outlook: Spring 2017’ report, he says the worst case scenario is the U.S. implementing what their trade partners construe to be contentious policies, laying the grounds for a subsequent trade war. Canada is closely linked to the U.S., says Blais, and specific industries are under the microscope of the new U.S. administration: dairy, auto parts manufacturers, and apparel manufacturers are three examples. The level of the U.S. dollar versus the Canadian dollar also has the potential to impact returns and as a result it is being monitored closely. The overall view on the equity markets is constructive, but ongoing disruption in the global political landscape will likely cause increased volatility in the markets.

Paso Robles Alternative To Napa, Sonoma

Wine and California brings up images of Napa and Sonoma, both well-known and visited for their wineries. However, a far less hectic and slower paced area is Paso Robles, says Peter Volny, a frequent contributor to Private Wealth Canada. In the article ‘Paso Robles – A Less Commercial Napa, at the Private Wealth Canada website, he recounts his impressions and experiences during a driving tour of this growing wine centre.

Virtuoso Launches Luxury Hotel Booking Tool

Virtuoso has launched a luxury hotel booking tool, that comes with complementary perks. When visitors to www.virtuoso.com request a reservation at any of the approximately 900 participating luxury hotels available worldwide, the booking will be routed to a Virtuoso travel advisor. If the traveler already works with a Virtuoso advisor, the booking will be sent to them. The advisor will service the booking; assist with other aspects of the trip such as transfers, private guides, and exclusive experiences; and serve as a safety net to resolve any issues that may arise before, during, or after the stay. Travelers will receive a host of complimentary benefits, worth up to $450 per stay. These include an upgrade to the next room category when available, breakfast for two, early check-in and late check-out if available, high-speed internet access, and an additional perk such as a candlelit dinner or spa treatment. Some properties also offer in-demand experiential perks such as wine tastings, language classes, guided bike tours, or a hands-on cooking encounters with a local chef.

Political Climate Concerns Affluent Investors

Confidence among affluent investors was unchanged in March, says Spectrem Group. However, the report also indicated that while investors have increasing optimism about the U.S. economy, they also register growing concern over the state of the country's political climate. The ‘Spectrem Affluent Investor Confidence Index’ (SAICI) edged downward one point to six, while the ‘Spectrem Millionaire Investor Confidence Index’ (SMICI) was unchanged at 10. Both indices were higher than in March 2016. When asked what they consider to be the most serious threat to achieving their household's financial goals, 30 per cent of affluent investors cited the political climate. This is the highest percentage in the 13-year history of the indices.

Policy Actions Poised To Tip China

Potential policy actions are poised to tip China from one economic outcome to another after three decades of steady growth, says a white paper from Vanguard. ‘Navigating the transition: China’s future at a crossroad’ says China faces a challenging policy dilemma. Pushing needed structural reforms too aggressively without a sufficient policy cushion could cause a ‘hard landing;’ while failing to implement necessary reforms could lead to a collapse in productivity growth and ‘Japan-style stagnation.’ While the odds of these two tail risks are significant, the paper’s baseline view centres on a ‘smooth rebalancing’ scenario, with China engineering a soft landing while gradually implementing necessary structural reforms. Roger Aliaga-Diaz, Vanguard chief economist, Americas, says investors should remain “patient, yet vigilant, during the transition.”

Fund Indices Improve In Quarter

Forty-one of the 44 Morningstar Canada fund indices increased during the quarter ended March 31, 2017, including 18 indices that increased by three per cent or more. Asian equity funds posted three consecutive months of solid performance, becoming the top performer in the first quarter of 2017. The fund index that tracks the Asia Pacific ex-Japan equity category increased 3.6 per cent in March, bringing its quarterly tally to 11.1 per cent. U.S. stocks remained flat in March, as did the funds that invest in them. Both the benchmark S&P 500 Index and the Morningstar U.S. Equity Fund Index increased by 0.1 per cent for the month. In Canada, the S&P/TSX Composite Index had three consecutive months of weak but positive performance, ending the quarter with an increase of 2.4 per cent. The Morningstar Canadian Equity Fund Index followed the same pattern but underperformed the benchmark. Most fixed income funds saw light but mostly positive movement during the quarter, with the traditional bond fund indices increasing between 0.7 per cent for Canadian short-term fixed income to 1.8 per cent for high yield fixed income.

Canadian ETF Assets Rise

The Canadian ETF Industry assets rose an additional $2.7 billion in the month of March, bringing the total assets to $123 billion as at the end of the first quarter, says the Canadian ETF Association. This underpins the ongoing strong net issuances and favourable contributions from the markets. Assets under management (AUM) are 29.1 per cent higher than year ago and 2.5 per cent higher than at the end of February. The estimated aggregate creations for March are $3.75 billion, offset by total redemptions of $1.6 billion. While markets remained supportive, the relative contribution made by net new inflows into ETFs rose strongly relative to February.

Desjardins Launches ETFs

Desjardins Global Asset Management Inc. (DGAM), acting as manager and portfolio advisor of the Desjardins Exchange Traded Funds (ETFs), has launched seven exchange traded funds (ETFs). The full suite of Desjardins ETFs includes four fixed income funds, one preferred share fund, and four multi-factor-controlled volatility funds that take into account the analysis of six factors. The launch of three categories of ETFs allows DGAM to increasingly diversify its offerings and to meet the evolving needs of its clients and partners through securities traded on the stock markets.

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April 3, 2017

Federal Reserve Poses Greater Risk

Investors should not be confident that the U.S. federal reserve knows what it is doing, says Lacy Hunt, executive vice-president and chief economist at Hoisington Investment Management Company. In the session ‘Will The New Administration’s Economic Initiatives Overcome the Dynamics of Extreme Over-Indebtedness?’ at the CFA Society Toronto’s ‘2017 Annual Spring Pension Conference,’ he said the emphasis on the fiscal initiatives of the new administration are misplaced. While markets have rushed to judgment that U.S. President Donald Trump’s fiscal programs have great promise, they may or may not happen. Instead, the focus should be on the federal reserve as when it engages in tightening activity, recessions typically follow. Since 1947, there have been 14 tightening cycles and the fed has only been able to engineer three soft landings. And the economy today is weaker than at the start of any of the recessions since 1947. He cited reduced monetary growth, high levels of indebtedness, and a velocity of money at its lowest since 1950 as indicators of the state of the economy. In 1997, for example, it took $1 to generate $2.20 of GDP. Today, that dollar only produces $1.44 of GDP. As a result, Trump’s fiscal initiatives will be largely ineffective if they are funded by debt, producing only transitory fleeting gains. In fact, in terms of tax cuts, when Ronald Reagan cut taxes in the 1980s, the gross debt was 37 per cent of GDP. Today, it is 106 per cent and will move dramatically higher in the next 20 years. As debt levels move higher, the negative impact on growth moves up, he said.

CFO-led Forum Looks At Sustainability

The Prince of Wales’s Accounting for Sustainability Project (A4S) has launched a Canadian chapter of its CFO Leadership Network, says Pamela Steer, CFO of the Workplace Safety and Insurance Board and a member of the A4S Global Advisory Committee. In the article ‘Canadian CFOs And The Prince of Wales’s A4S Project Join Forces On Sustainability’ on the Private Wealth Canada website, she says the network provides a CFO-led forum where they can join together and talk about how to make sustainable practices normal practices and find solutions to common issues they face.

Tax Management Path To Affluent Investors

The line between robo advice and managed account technology is blurring, says a report by William Trout, senior analyst, wealth management practice, Celent. ‘Robo UMA: Automated Advice and the Battle for the Affluent Investor’ says a shared focus on tax management represents a starting point for greater integration and the construction of a digital platform that is fully relevant to the investor. The diffusion of discrete operational tech (centering on portfolio risk, rebalancing, and trading/accounting functions) through a digital lens has the potential to disrupt the turnkey asset management provide (TAMP) business model. Account performance is directly influenced by the quality of the rebalancing process, and reflected in terms of dispersion, tax savings/losses, and the management of cash positions. “Since the 2000s, the development of the UMA has been iterative, not innovation driven,” says Trout. “TAMPs have solidified their market position, but at a long-term competitive cost. TAMPs face a strategic reckoning. Partnerships and acquisitions are on the table as digital disruptors capture the zeitgeist, and increasingly, market share.”

Economy Continues To Surprise

The Canadian economy continues to surprise naysayers as economic improvements and employment trends have contributed to the steady rise in domestic equities from 2016 lows, says the ‘Canada Market Perspective’ in Russell Investments’ ‘Global Market Outlook ‒ Q2 Update.’However, “not to spoil the party, but we believe that although recession probabilities are low, vulnerabilities exist which should not be ignored,” says Shailesh Kshatriya, director, Canadian strategies, at Russell Investments Canada Limited. “Specifically, the consumer has been the most consistent contributor to growth over the last several years, despite rising household indebtedness. Consumer indulgence may go on a bit longer as housing continues to defy rationality. However, at some point debt-to-disposable income levels, which are now approaching 170 per cent, will become self-limiting.” The report says business investment has detracted from growth for eight consecutive quarters since the downturn in oil prices, which started in 2014. “We would prefer to see consumers pass the baton to businesses, which need to start spending,” Kshatriya says. “Although business surveys point toward improvement on this front, we await data that is more measurable.”

Primary Concerns Shift

The primary concerns of firms working in asset management such as disruption from robo-advice and the challenge of managing alternatives have all receded over the past year to make way for worries connected to political change, says a survey from Linedata. It found the Brexit vote, the election of Donald Trump, and the possibility of a swing towards right wing populism in Europe have become the year’s defining trend in the eyes of asset managers and related firms such as custody banks across all geographies. Cybercrime, the dominant concern last year with a 33 per cent score, fell to 18 per cent this year as last year’s main concerns have been “comprehensively relegated to second-tier issues.” Nearly a quarter of respondents highlighted political and policy change as the primary disruptive force in asset management: a concern that did not even rank in last year’s survey.

Sustainable Strategies Continue To Grow

The amount of assets in sustainable investment strategies continues to grow globally, albeit at a slower pace than previous years, says the Global Sustainable Investment Alliance’s biennial report. Assets invested in sustainable strategies rose to $22.89 trillion globally at the beginning of 2016, up 25 per cent from the start of 2014. They account for 26 per cent of all professionally managed assets globally. By comparison, sustainable assets grew 61 per cent globally between 2012 and 2014.Canada had $1.09 trillion in sustainable assets under management (AUM) at the start of 2016, up 49 per cent. In comparison, Europe had $12.04 trillion, up 12 per cent from 2014; and the U.S., $8.72 trillion, up 33 per cent. The report attributes Canada’s growth in sustainable AUM to money managers’ increasing focus on sustainable investing, an increasing awareness of ESG long-term risks and opportunities and the rise of millennial investors who are more likely to consider ESG factors in their investment decision-making. The most common sustainable investing strategies globally remain negative/exclusionary screening.

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