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February 12, 2018

Market Panic Limited To Low Vol

While the increase in interest rates played a role in last week’s financial markets panic, it was actually limited to low vol strategies, says Robert Swanson, principal and chief market strategist at Cambridge Global Asset Management. The rise in rates caught people off guard, he told the ‘Portfolio Manager Panel Discussion’ at CI Institutional Asset Management’s ‘2nd Annual 2018 Investment Forum,’ and as a result, a sell-off in these strategies was triggered. Drummond Brodeur, vice-president and global strategist at Signature Global Asset Management, agreed, saying the events of earlier this week were not about fundamentals. It was all about short vol strategies ticking up and forcing a massive rebalancing with levered volatility structures being forced to unwind and investors selling off in the 15 minutes after markets closed. And while investors need to watch for other impacts and forced deleveraging in other areas, the fundamental outlook not changed for the global economy, he said. Roger Mortimer, a senior portfolio manager and senior vice-president at Harbour Advisors, called it an “interesting exercise.” The end result was equity markets corrected a little bit and bond yields went a little higher. It also brought increased focus on the risk of being all in on anything.

Fossil Fuel Divestment Growing

The movement to divest from fossil fuels is the fastest in history and is being done by leading institutional players, says Jeff Rubin, a senior fellow at the Centre for International Governance Innovation. Delivering the keynote address at the ‘MSCI ESG Seminar Series: A multi-asset class approach to climate risk,’ he said initially, it was based on moral grounds much like other movements which, for example, opposed apartheid in South Africa. However, now the divestment by these large institutional investors is being done because of a belief that they should not be investing in things that are detrimental to wildlife on the planet. As well, the realization that the long-term financial risks of climate change are now near term changed the game. Nowhere is this felt more than in the fall of gas and coal prices which is being felt particularly in Canada. These stocks have become some of the worst performers in the market and the move to stop using fossil fuels for transportation does not auger well for the future. It also calls into question the decision to develop the oil sands in Alberta and built pipelines to ship the product. Canadian oil from the oil sands is among the most expensive to produce and if demand falls further, the price will drop more. Instead, Canada should be focusing on other sources of energy like hydro-electric, he said, and with longer growing seasons in the country because of climate change, agriculture is another source of future economic prosperity.

Executive Pay Reaches Significant Number

The executive pay floor has reached a significant number for shareholders, finds a report by executive and broad-based compensation firm Accompass and Equilar, a provider of board intelligence solutions. The report, ‘Canadian Executive Pay Trends,’ an overview of the executive compensation landscape across the publicly-traded companies that make up the TSX Composite Index, analyzes themes such as gender diversity, age, and tenure, as well as the compensation pay mix among Canadian organizations. It shows that a $1 million floor is the new median compensation level for top level executive positions. This amount “can be a significant price tag from a shareholder's point of view,” says Jonathan Foster, vice-president of Accompass. “At these levels, organizations must continuously monitor the compensation programs in place for their executive teams, ensuring dollars are being spent efficiently and effectively.” The report also indicates that, on average, more than 75 per cent of CEO compensation is at risk as it is awarded in the form of annual bonuses and equity. “As all trends fade over time, it appears that stock options have lost their charm as the dominant equity vehicle of choice,” says Foster. “The analysis indicates that performance-based equity awards are now leading the charge with a 60 per cent utilization rate for top executives.” The report also notes that one in 40 CEOs are female, indicating a slow progression in gender diversity at the CEO level.

Practices To Increase Use Of Direct Investments

More than two-thirds of high-net-worth (HNW) practices expect to increase their allocations to direct investments/co-investments over the next two years, says research by Cerulli Associates. Meanwhile, only 22 per cent of practices indicate they have plans to increase use of third-party-managed private equity funds. As the private equity market has evolved, many HNW practices have moved toward direct deals, which give investors the opportunity to invest directly in a portfolio company and offer a number of potential benefits, including higher returns and increased control/oversight. Among those leading the trend are multi-family offices (MFOs), many of which were founded by successful executives and entrepreneurs who are comfortable making strategic investments in private companies due to their source of wealth. Direct investing allows family offices to retain nearly complete control throughout the investment process and offers greater flexibility in negotiating terms with the underlying company, often leading to lower fees and better investment terms. In addition, many family offices are seeing greater demand for these types of investments from younger and entrepreneurial-spirited clients, who want to be more involved in managing their families’ wealth and, in some instances, have actually become a primary source of deal flow for their firm. Another main factor that is gaining interest among next-generation clients is environmental, social, governance/socially responsible investing (ESG/SRI). As a result, family offices are beginning to make a more concentrated effort to introduce investments that are aligned with younger inheritors' values, including clean energy, gender equality, and human rights.

Online Luxury Shopping Makes Gains

From only a fringe of total luxury sales one decade ago, online shopping continues to gain widespread adoption among high-income consumers who report that 38 per cent of their luxury spending takes place on computers or mobile devices. Nonetheless, the physical store remains the preferred place to make a purchase for a majority of shoppers, says Luxury Institute's ‘2018 State of the Luxury Industry’ survey. While 52 per cent of high-income consumers prefer buying luxury products in a brick-and-mortar store, 21 per cent prefer doing so online, and 27 per cent have no preference for either channel. The preference gap continues to narrow in favour of online shopping. Compared to results from last year’s survey, preference for online shopping gained two percentage points. Even as online commerce gains traction, the instore experience remains the driver of company revenue. Affluent consumers from around the world say that 60 per cent of their luxury spending is done in stores with 36 per cent in brand boutiques and 24 per cent in department stores. Product availability is the factor that matters most to consumers when they decide where they want to shop, both online and instore. When shopping online, other important features that affluent consumers want to receive from luxury brands are free delivery and returns on goods purchased and the ability to reserve a product online for purchase instore. For instore shopping, helpful sales professionals and exclusive offers are highly prized by high-income consumers.

FX Trading Moving To Algos

Approximately 20 per cent of institutional foreign exchange trading volume is now executed via algos and FX is likely to move steadily in the direction of equity markets where ‘algos’ account for more than half of trading volume, says a report from Greenwich Associates. Foreign exchange has long been one of the world’s most liquid and electronic marketplaces, says ‘The Evolution of FX Algos: From “Nice to Have” to “Need to Have” ’ and approximately 60 per cent of respondents say algos have materially reduced the overall cost of trading FX. “With all of the data available demonstrating the benefits and cost savings, the ability to execute a trade with an algo will soon become a ‘need’ as opposed to a ‘nice to have’,” says David Stryker, a principal with the Greenwich Associates markets team and author of the report. It projects that algorithmic trading will continue to proliferate in global FX markets. “With the push from regulators, as well as best-execution committees and policies, traders are going to need to reduce costs while maintaining (or improving) the quality of the execution,” says Stryker. “Algos help with both.”

Robust Activity Ahead This Year

Morguard Corporation’s ‘2018 Canadian Economic Outlook and Market Fundamentals Research Report’predicts another year of robust commercial real estate investment activity in Canada, given healthy demand for quality assets across the country. “Investors remain enthusiastic about the Canadian commercial real estate market after a record volume of transactions in 2017,” says Keith Reading, director of research at Morguard. “There is a high supply of capital ready to be invested and Canadian commercial real estate is a proven performer.” The downtowns of Vancouver, BC, and Toronto, ON, are expected to remain the most coveted of markets for investment in 2018. However, with a limited supply of properties available, investors will be forced to look for opportunities further afield. Suburban Toronto and Ottawa, ON, as well as Montreal, QC, are expected to see strong activity levels in 2018 while Alberta, which had previously depressed country-wide statistics, is also showing signs of reanimation. In the retail market, the Sears liquidation will put a damper on near-term fundamentals in the country’s shopping centres. The departure will be partially offset by a steady stream of new international entrants to Canada. Reading believes the retail market will continue to offer stable long-term opportunity for Canadian investors as malls are being re-envisioned as investors and landlords turn to non-traditional tenants including medical, services, entertainment, and government agencies as part of their transformation into community hubs.

Ninepoint Launches Funds

Ninepoint Partners LP has launched the Sprott International Small Cap Fund and the Sprott Concentrated Canadian Equity Fund. Both funds complement its diversified offerings for investors and will be available for purchase at the beginning of March. The international small cap fund will invest in a diverse range of sectors and industry groups across the globe, limiting currency and industry specific risks. The fund will be sub-advised by Global Alpha Capital Management, an affiliate of Connor, Clark and Lunn Financial Group. The concentrated Canadian equity fund will focus on a concentrated portfolio of select Canadian companies and will be sub-advised by Scheer, Rowlett & Associates, an affiliate of Connor, Clark and Lunn Financial Group. It will work to uncover value by utilizing a comprehensive investment process that includes value screens, discount verification, profit sustainability analysis, and security valuation.

Chinese Equity Performs Best

Twenty-four of the 44 Morningstar Canada Fund Indices increased during January, with nine of them increasing by two per cent or more, while 18 of the 20 losing indices decreased by 1.6 per cent or less. The best performer was the one that tracks the Greater China equity category, which followed up its chart-topping 35.9 per cent increase in 2017 with an 8.7 per cent increase in January. While currency effects detracted from returns during the month, stock markets in Hong Kong, Shanghai, and Taiwan posted solid gains of 9.9 per cent, 5.3 per cent, and 4.3 per cent, respectively. Fund indices that track the Asia Pacific ex-Japan equity and Asia Pacific equity categories, which were among the top performers in 2017, also continued their winning streak in January, increasing 3.5 per cent and 3.3 per cent, respectively. In the United States, the S&P 500 Index posted a total return of 5.7 per cent, but the U.S. dollar depreciated by two per cent against its Canadian counterpart, resulting in an increase of 3.6 per cent for the U.S. equity fund index. This was the third-best result among indices in January. Domestic equity funds were among the worst-performing equity categories for the month, as the energy sector continued to impede the Canadian market. The Morningstar Canadian equity fund index had the worst result among all diversified equity categories with a 1.4 per cent decrease, matching the total return of the S&P/TSX Composite Index.

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February 5, 2018

Affluent Canadians Worried About Wealth Transfer

The biggest inter-generational wealth transfer in Canadian history is taking place now, but the majority of affluent Canadians are keeping their heirs in the dark on how they plan to pass on their wealth, says a poll by IPC Private Wealth of the Investment Planning Counsel. The survey shows that 58 per cent of wealthy Canadians have not discussed instructions for their estate with their heirs and of that percentage, 12 per cent do not plan to talk about their inheritance plan at all with their beneficiaries. Strategic Insight projects that approximately $1 trillion in personal wealth will be transferred from one generation to the next in Canada between 2016 and 2026, with roughly 70 per cent of that in the form of financial assets. Amid this wealth exchange, 32 per cent of affluent Canadians say they are worried about how their heirs will handle their inheritance and 36 per cent say their children don’t have the financial literacy to manage a potential windfall. Yet, the data revealed that only one in five (19 per cent) say they have introduced their children to a financial advisor or have taken them to a planning meeting with the person currently managing their money (18 per cent). “There is an opportunity for financial advisors to start that dialogue with their clients on inheritance planning and help educate the next generation on how to steward their finances,” says Paul Wylie, senior vice-president of business development at IPC Private Wealth. “Advisors can play a quarterback role and help clients overcome their fears over their heirs’ ability to manage their wealth.”

Bill Would Impact Business Voting And Disclosure

Bill 101 will impact business’ voting and disclosure policies, among other things, says Blakes in a ‘Business Class’ bulletin. The Bill, ‘Enhancing Shareholders Rights Act, 2017,’ is a private member’s bill that has passed second reading in the Ontario Legislative Assembly and proposes changes to the Business Corporations Act (Ontario) (OBCA) including majority voting for directors, diversity disclosure, and shareholder approval of binding compensation policies. Blakes says some of the proposed changes to the OBCA align with the changes to the Canada Business Corporations Act (CBCA) that were proposed by the federal government in Bill C-25. However, the proposed OBCA amendments go beyond the proposed CBCA amendments in a number of ways, including a reduction in shareholding thresholds to three per cent for director nominations by shareholders and meeting requisitions and the ability of shareholders to make proposals for binding executive compensation policies. It is currently uncertain whether Bill 101 will be passed into law and, if it is, how it will change in the process. More information is available here

Economic Recovery Not Typical

Fixed income investors believe the global economy is on the path to recovery, but not via the typical normalization process that has historically occurred after an economic slump, says Invesco’s first-ever ‘Global Fixed Income Study.’ It found 58 per cent of investors believe this is taking place. As well, North American investors no longer fear that inflation will accelerate as a result of quantitative easing. Instead, the majority expects moderate growth and little inflation risk. “The big risk for investors is that they are underestimating inflation risk in a strong global economy,” says Rob Waldner, chief macro strategist at Invesco. There is a strong appetite for alternative credit such as bank loans and real estate debt, it says, and on average, investors allocate 19 per cent of their fixed income portfolios to alternative credit strategies, with the largest appetite in North America at 26 per cent. Larger investors (those with assets under management greater than US$15 billion) typically have higher allocations to alternative credit than smaller investors which are not able to exploit alternative credit strategies to the same extent as their larger peers. Alternative credit provides fixed income investors with the opportunity to diversify portfolios away from traditional return drivers, such as rates and term, towards alternative drivers, such as illiquidity and manager skill, as well as to pursue absolute return strategies unconstrained by traditional benchmarks.

Concours Now Showcase For Cars

Concours in the Hills has grown into what is Arizona’s premier show for high-performance, exotic, collector, classic, and race cars in the first years since it was started by Peter Volny, a frequent contributor to Private Wealth Canada on automobiles and travel. In 2017, the show drew 647 cars and one genuine Vietnam era Cobra Gunship helicopter, raising over $90,000 for charity. To learn more about this year’s event, which takes place February 10 in Fountain Hills, AR, see Concours In The Hills at the Private Wealth Canada website.

Factor Investing Based On Risk, Not Returns

There is a contradiction between score-based factor design choices and the statistical beta-based risk analysis, says a survey by the EDHEC-Risk Institute and ERI Scientific Beta. It says analysis of the extreme risk of factor portfolios is still fairly basic and does not really allow the extreme risks to be appreciated. The survey shows multi-factor strategies tend to be implemented in a passive investment context. Even when dynamic, factor investing is generally based on risk budget management rather than active views of returns. And, in spite of its limitations, the score-based approach dominates. Even though factor investing was founded on analyses in terms of betas, the measurement of betas is still in a minority and is rudimentary. As well, although valuation-based methods have been widely criticized in academia both for the value bias introduced and for their effectiveness and methods based on momentum are often highly sample-dependent and criticized for their arbitrary aspect, investors still favour these two approaches. Professor Noël Amenc, CEO of ERI Scientific Beta, says that, “While investor interest in dynamic factor investing is growing, it should be recognized that the techniques used for risk measurement or risk control do not yet correspond to the state of the art. In the same way, in spite of the lack of academic or empirical evidence supporting factor timing, it is favoured by a considerable share of investors and, within this framework, approaches are used that lack sophistication and are not necessarily appropriate for capturing factor premia regimes.”

RI Funds Perform Strongly

Canadian responsible investment (RI) mutual funds performed strongly in the last quarter of 2017, with more than two-thirds outperforming the industry average in their respective fund classes, says the Responsible Investment Association (RIA). Using data provided by Fundata, its quarterly performance reviews of RI funds in Canada shows a significant majority of RI funds with a medium- to long-term track record outperformed their industry averages, highlighting the durable value of incorporating environmental, social, and governance factors into investment decisions. It says 60 per cent of funds with a three-year track record outperformed and almost 70 per cent with a five-year track record outperformed. In the Canadian equity fund class, the average return of RI funds outperformed the industry over the short-, medium-, and long-term. In the global equity fund class, approximately 70 per cent of RI funds outperformed in the three-month, one-year, three-year, and five-year periods. Approximately 70 per cent of Canadian fixed income RI funds outperformed the average fixed income fund over the three-, five-, and 10-year periods.

Hedge Funds Positive Every Month

The Preqin All-Strategies Hedge Fund Benchmark generated 1.15 per cent in December. In addition to pushing the benchmark’s annual return to its highest level since 2013, the positive end to the year also marks the first time the benchmark has recorded a positive return during every month of a calendar year. Funds focused on the Asia-Pacific region were the top performers of 2017, with the region delivering its strongest annual performance this decade (18.66 per cent), up from the 2.37 per cent generated in 2016. Funds of hedge funds bounced back from a negative November to record a positive end to 2017, up 6.59 per cent for the year. Liquid alternatives also produced a better full-year performance than they did in 2016, with alternative mutual funds and UCITS up 7.03 per cent and 6.68 per cent respectively.

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January 29, 2018

Carbon Gap Enormous

Science tells us the gap between the carbon concentration created by business as usual and what the world can tolerate is enormous, says Matthew Kiernan, founder and CEO of Inflection Point Capital Management. Speaking at the La Française and Impact Beyond Frontiers’ ‘Zero Carbon: Rising to the Energy Transition Challenge’ event, he said contrary to the views of some denizens of the U.S. White House, climate change is real, causing a global industry restructuring, and changing the competitive advantage in some of those industries. And while it is not evident in Canada, elsewhere there are huge amounts being invested by those who see the opportunity. Investors do have options, he said. They can get ahead of the train before it leaves the station, get on the train as it leaves the station, or follow it. The one option they cannot select is to do nothing. And they can no longer use fiduciary duty as a reason for doing nothing. Investors used to think there was trade-off between returns and taking action, he said. Now a strong case can be made that by not taking climate change into account, they are a “derelict” fiduciary.

Wealthy Leaving UK

The United Kingdom experienced its first major outflow of migrating millionaires in 2017, says a report by New World Wealth. The UK had been one of the biggest recipients of migrating high-net worth individuals ‒ defined as those with net assets of $1 million or more ‒ but last year, while around 1,000 wealthy individuals entered the UK, around 5,000 packed their bags and left, the report says. It suggests high property and inheritance taxes, Brexit, and rising crime levels in London as possible reasons behind the increase of fleeing residents. New taxes on non-domestic residents and foreigners with homes in the UK made it more expensive and more complicated for those migrating to buy homes in Britain and the region’s traditionally high inheritance taxes make the UK even more unappealing to high net worth individuals. Many European residents, meanwhile, returned to their home countries in 2017. London, in particular, has fallen out of favour with high-net worth individuals as they moved instead to quiet UK villages or farther afield to ‘safer international cities,’ the report says, like Sydney and Melbourne, Australia; and New York City, NY; and San Francisco, CA. Australia and the U.S. logged the biggest influx of the wealthy, logging 10,000 and 9,000 new rich residents respectively. China lost the most high-net worth individuals.

Bitcoin Enters Bubble Territory

Goldman Sachs is warning its wealthiest clients that there’s no doubt that the rise in bitcoin’s price (BTC) has pushed it into bubble territory. The firm’s private wealth management division’s annual outlook for wealth clients, ‘(Un)Steady as She Goes,’ says the meteoric rise of cryptocurrencies has “moved beyond bubble levels.” In fact, cryptocurrencies already dwarf both the dot-com bubble and the notorious Dutch ‘Tulipmania,’ a period where tulip bulbs became a prized commodity between 1634 and 1637 and prices went haywire. The mania surrounding cryptocurrencies is well illustrated by the price surges seen in companies that announce some type of affiliation with blockchain technology or cryptocurrencies. However, despite some serious drawbacks from cryptocurrencies, Goldman also acknowledges some benefits. It says, “the concept of a digital currency that leverages blockchain technology is viable given the benefits it could provide – ease of execution globally, lower transaction costs, reduction of corruption since all transactions could be traced, safety of ownership, and so on.” But bitcoin does not provide any of these key advantages, it says. Not only is there no ease of execution, but settlement often takes as many as 10 days. In late 2017, the price discrepancies among 17 U.S. exchanges for one bitcoin amounted to $4,156, or about a 31 per cent difference between the high and low prices. Transaction costs have skyrocketed, and frequent hacking has wiped out entire wallets and exchanges of their bitcoin holdings. It does not see cryptocurrencies maintaining their current value in the long-run and also doesn’t see them replacing the U.S. dollar replaced as the global reserve currency.

Investors Fail To Separate Political Beliefs

The biggest mistake American investors have made over the past 15 to 18 months is failing to successfully separate their political bias from their investment judgment, says Philip J. Orlando, senior vice-president, chief equity market strategist, with Federated Investors. Speaking at the firm’s ‘2018 U.S. Economy and Market Outlook,’ he said that overall, he is bullish on the U.S. economy with many indicators pointing in the same direction and that’s up. “The individuals who have been able to look through the chaos and emotions have done pretty well,” he said, as from November 2016 to January 2018, the S&P500 total return was up almost 40 per cent. As well, U.S. GDP has moved forward since the great recession. He said corporate revenues and earnings in 2017 are the best in six years, despite the hurricanes, and much of this is due to U.S. corporate tax reform and jobs act. The tax cuts will bring in billions of dollars in federal tax revenue through repatriation and allow companies to reinvest in themselves. U.S. President Donald Trump has also altered the trajectory of more than 1,600 Obama-era regulations, making business executives feel that the government is not working against them. Confidence metrics are surging and this sharp rebound in business confidence suggests the upside to the GDP is sustainable, said Orlando. Forecasts are for a three per cent increase in real GDP in the U.S. for 2018. As well, the risk for a recession is likely off the table for the next couple of years.

Right Geographies Can Cope With Sharp Downturn

With global equity funds sold in Europe facing headwinds over valuation worries, providers will need to prove they can identify the right geographies and companies to cope with the sharp downturn in certain markets that many pundits are anticipating, says Cerulli Associates. With the distinction between developed and emerging markets beginning to blur, it believes that the latter may offer better value. The bull run that saw the S&P 500 rise more than 20 per cent last year has extended into the early days of 2018. Many other key indices around the world are also in record-high territory. Although S&P 500 company earnings are forecast to rise by a further 11 per cent in 2018, it believes that markets may be pricing in too much optimism, with share price growth outstripping earnings growth. Nevertheless, opportunities exist for global equity funds with strong stock pickers who know the geographies and sectors to turn to when valuations are stretched and cheap companies are hard to find, says Angelos Gousios, director of European retail research at Cerulli.

Impact Fixed Income Fund Ready For Investors

Addenda Capital’s impact fixed income pooled fund is seeded and ready to take in new investors. The fund was designed for Canadian institutional investors and high net worth clients who wish to generate positive impacts while delivering market-like returns. “More and more, investors are looking to effect change while achieving financial returns. Some pensions and endowments want to align better their investments with their mission and their values. We are making impact investing accessible to investors as they can simply substitute some or all of their traditional fixed income allocation with our impact fixed income fund,” says Roger Beauchemin, president and chief executive officer of Addenda Capital. Initially established in December 2017, the fund includes mainly Canadian securities such as investment grade public debt, loans, and commercial mortgages. Its investments are currently focused on four broad themes: climate change, health and wellness, education, and community development.

Investing Enters Late Innings

If investing were a ballgame, this might be categorized as a later inning, says Mawer Investment Management’s ‘Quarterly Update, Q4 2017.’ Exactly how late or how many innings this ballgame will have, it says, is unknown at this point. However, there are risks accruing in the system ‒ equity valuations in particular. However, there are also positive forces keeping the momentum going such as synchronized global growth, still-low interest rates, and increasing yet mild levels of inflation. And although the odds of an equity market correction have increased in the medium term, this supportive period may remain for some time yet. This bull market cycle has already lasted longer than many expected and it may continue to surprise. When cycles end, the closing signals are usually seen in the credit market. At this time, there are still not many signs from the credit market that the final inning is about to be entered, it says. To manage through the current environment, investors can try to time the storms or seek to ride through them. However, in the absence of unique portfolio requirements such as an immediate need for liquidity or changes in personal circumstances, it discourages investors from trying to front run a downturn.

Advisors Bullish On Cannabis

After a robust quarter, Canadian investment advisors remain bullish on Canadian equities, U.S. equities, and cannabis, says the ‘Q1 2018 Advisor Sentiment Survey’ by Horizons ETFs Management (Canada) Inc. The bullish sentiment of Canadian investment advisors remained positive on Canadian and U.S. equity indices, despite relatively flat performance in the fourth quarter of 2017. The survey found 65 per cent of advisors bullish on the S&P/TSX 60 Index, compared to 62 per cent that were bullish in the fourth quarter survey when the index only returning 4.11 per cent. For U.S. equities, advisors’ bullish sentiment for the S&P 500 Index increased significantly heading into the first quarter, rising to 65 per cent from 53 per cent last quarter. A budding sector upon which advisors have become dramatically more bullish is the Canadian cannabis industry. Almost two-thirds of advisors (64 per cent) expressed bullish sentiment for the North American Marijuana Index, compared to 46 per cent who were bullish on the space in the fourth quarter last year. Steve Hawkins, president and co-CEO of Horizons ETFs, says, “With the government legalizing recreational usage on July 1, 2018, advisors are expecting big revenues from these companies.”

Hedge Funds Conclude With Strong Quarter

Hedge funds concluded 2017 with the strongest quarterly capital inflow since the second quarter of 2015 with technology, healthcare, and emerging markets leading industry gains, says the Hedge Funds Research ‘HFR Global Hedge Fund Industry Report.’ The inflows helped increase total hedge fund assets under management (AuM) by $59 billion to $3.21 trillion in the fourth quarter of 2017 ‒ the sixth consecutive quarterly record. Of this, $6.89 billion was new capital which brought total 2017 inflows to $9.8 billion. Flows by firm size for the full year 2017 were led by managers with less than $1 billion. These received $7.4 billion of new capital while the industry’s largest managers (those with greater than $5 billion AuM) received $6.3 billion of inflows.

Private Equity Sees Rapid Growth

The private equity industry has grown rapidly in recent years, with 2017 setting new records for both fundraising and dry powder, says Preqin. It says as the market has swelled, fund managers have been matching or even exceeding their target sizes with increasing frequency with just 20 per cent of funds failing to reach their target in 2017. In fact, growing proportions of private equity funds are reaching or surpassing their stated hard caps with over half (56 per cent) of funds closed between 2015 and 2017 meeting or exceeding their maximum fund size. This trend is most evident in North America-focused vehicles and buyout funds which have each seen one in five vehicles closed since 2007 exceed their hard caps. It also seems to be more prevalent in vehicles which targeted $500 million or more which have exceeded their maximum sizes at a far greater rate than their smaller peers, despite having a larger average buffer between target and hard cap.

Top Quartile Performers Below Historic Average

The number of funds delivering consistent top quartile returns over a three-year period remains below the historic average despite improved performance at the end of last year, says a ‘FundWatch’ by the multi-manager team at BMO Global Asset Management. It shows just 1.24 per cent of funds delivered consistent top quartile performance over three years. This was an increase from 0.8 per cent at the end of the third quarter of 2017, but below the historic average of between two per cent and five per cent. The number of funds generating above-median returns in each of the last three years fell from 9.7 per cent to nine per cent at the end of 2017.

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January 22, 2018

Asia Becoming Centre Of Financial World

By 2030, Asia will be the centre of the financial world driven by the economies of China and India, says Blair Reid, a partner and senior portfolio manager, multi-asset and income, at BlueBay Asset Management Inc. Speaking at the CPBI Ontario ‘Pension Investment Forecast,’ he said the world is changing. For 1,800 of the last 2,000 years, population size determined economic and financial dominance and the Far East was the dominant area. However, the industrial revolution changed that and by 1980 the world financial centre was in middle of the Atlantic Ocean between the U.S. and Europe. Today it is in the Middle East and moving quickly to Asia. It used to be the developed markets that were driving global growth. However, their influence is fading exponentially and all growth is coming from the emerging markets. He sees a bumpier road ahead where micro-country and sector issues play a bigger part in deciding which markets are not supported. Despite this, most portfolios are not changing as fast as the economy is, he said.

Smart Sustainability Marries ESG With Smart Beta

Tony Campos, director of ESG product management at FTSE Russell, apologizes for introducing a new term to the lexicon of responsible investing. However, he thinks ‘smart sustainability,’ the marriage of ESG and smart beta, is a developing trend. He told the ‘Smart Sustainability: ESG Integration into Passive Investing and Smart Beta Strategies’ session at its ‘Multi-Asset Seminar & Discussion’ that just as indexes have evolved over the past 15 years moving from information tools to investment strategies, interest in ESG (environment, social, and governance) evolved at the same time and it now aligns with smart beta by delivering rules based systems designed to achieve certain outcomes. Requests to include ESG in index construction can range from simple screens like tobacco and land mines right up to complete ESG inclusion. There is also a wide range of motivations from a desire to avoid long-term risk to doing societal good and improving performance. However, more client engagement now recognizes the need to invest in a world that is changing with ESG objectives that align with broader portfolio objectives as opposed to investing to change the world.

Risk Fails To Explain Security Worth

While many define risk as volatility and/or the expected change in the value of a security, Talbot Babineau, CEO of IBV Capital, sees things a bit differently. “The market assesses risk on the basis of volatility or the degree of change in the value of a security over time,” he says. While this might be useful in some cases to quantify, compare, model, and explain risk, it often does not reflect the reality of what the security is worth. This is the critical flaw with volatility ‒ it doesn’t consider what a security is worth, relative to what it’s currently trading for when it quantifies risk. Assessing and managing risk is the most important element of investing, he says, as how risk is defined has a material impact on how funds are invested and on the composition of returns. So, while many avoid volatile securities, since market participants associate volatility with risk, if the securities are attractively priced and exhibit the business characteristics, they are appealing.

Canada 'Favoured Market'

Canada is “the favoured market” due to its greater sector leverage to global growth and firming commodity prices, says GLC Asset Management Group’s ‘2018 Capital Market Outlook.’ It says Canada’s valuations are more reasonable than its global peers. As a result, GLC holds a positive view toward Canadian equities, believing financial conditions and the global economy have enough momentum to support Canada’s modest earnings growth target of 10 per cent coming from a broad swath of S&P/TSX sectors. With a solid 2018 dividend yield estimate of three per cent, it sees total returns in the neighborhood of seven per cent for 2018. Factors that should see the Canadian economy’s growth rate moderate in 2018 include the prospect of shrinking competitiveness due to a narrowing in U.S./Canadian corporate tax rate differentials; rising costs from carbon and other taxes, along with various provincial moves on minimum wages and regulations; and potential trade friction with the U.S. Even if NAFTA goes well, it says, the U.S. is moving toward a more protectionist stance.

Caution Issued On ICOs

The Autorité des marchés financiers (AMF) is cautioning investors about the risks associated with initial cryptocurrency or token offerings, more commonly known as ‘initial coin offerings (ICOs).’ ICOs are limited-time offerings over the Internet of digital ‘assets’ ‒ cryptocurrencies or tokens ‒ the use and eventual value of which are intrinsically tied to projects that, in many cases, are only at an early stage. Despite their growing popularity, cryptocurrencies and ICOs remain speculative, high-risk investments. Investors who are attracted to this type of market should make sure they fully understand how cryptocurrencies and ICOs work, know the many types of risk involved, and are prepared to potentially lose the entire value of their investment. Businesses that plan on issuing cryptocurrencies or tokens must understand and meet their obligations under securities laws. In particular, issuers and sponsors could be subject to prospectus and registration requirements.

Long-term Trends Influence Price Of Gold

The future price of gold is best understood through long-term irreversible trends, says Nick Barisheff, president and CEO of BMG Group Inc. Today’s macro trend changes are part of a looming tectonic shift that started decades ago and have not been adequately reported by the mainstream media, he said in his remarks at the Empire Club of Canada’s ‘Investment Outlook 2018.’ They can be found at Macro Trend Changes For Gold In 2018 And Beyond at the Private Wealth Canada website.

Bargaining Environment Growing Complex

Economic uncertainty, the need to contain costs, and legislative changes are all factors that will make the bargaining environment increasingly complex this year, says the Conference Board of Canada’s ‘Industrial Relations Outlook 2018.’ “Despite stellar economic growth and record-breaking employment numbers in 2017, a slower Canadian economy and lingering uncertainties in the global economic climate will create a challenging bargaining environment this year,” says Allison Cowan, its director of total rewards and labour relations research. “Legislative changes surrounding employment and labour standards, minimum wage increases, and the legalization of recreational cannabis bring a number of additional complexities to the bargaining table.” Wages continue to be the top bargaining issue for both management and unions in 2018. For unionized employees, the average projected negotiated wage increase for 2018 is 1.4 per cent, slightly lower than the 1.7 per cent increase for contracts negotiated in 2017. Private sector organizations are projecting higher increases (1.7 per cent) than are public sector organizations (1.1 per cent). Aside from wages, top priorities for unions include reducing precarious employment and improving health and safety provisions for members. For employers, flexible work practices are the second most important issue after wages, marking the first time that they have been a top-three negotiation issue for management in over a decade.

More Moderate Growth Coming

HSBC Canada Asset Management’s ‘Outlook for 2018’ sees a “less-than-Goldilocks economy” likely to deliver more moderate growth. It says after such a long economic expansion, many economists say a recession is due. However, it disagrees. Growth trends are still synchronized across advanced economies and emerging markets. Recession risk is effectively zero for now. Typical factors that drive recessions ‒ significant monetary tightening, economic imbalances, and external shocks ‒ are not present and leading economic indicators aren’t pointing to an imminent downturn. The key risk comes from a meaningful pick-up in inflation that forces policy-makers to tighten more aggressively. A major rate surprise might require a significant market adjustment.

Executives Missing Chance To Grow

Canadian executives may be missing the chance to help others and grow their careers in the process. In fact, 61 per cent of chief financial officers (CFOs) report they’ve never served as a mentor, finds a survey by Robert Half Management Resources. However, those who have been a mentor say it provides the internal satisfaction of helping others (32 per cent) and the opportunity to improve their leadership skills (27 per cent). Twenty-three per cent say it helps them build their professional network and 17 per cent say it keeps them current on industry trends. Those interested in becoming mentors should start by determining their value and specifying the type of advice and assistance they can provide. Then, they can seek opportunities both within their company and outside of it. Many groups actively seek mentors for their members, including university and high school alumni groups, community and philanthropic organizations, and professional and business associations.

Affluent Consumers Shifting To Discount Retailers

Affluent consumers – those making more than $100,000 annually – are becoming more price sensitive as they embrace industry disruptors such as artificial intelligence (AI), Amazon, and mobile technology to compare prices, says a survey by technology company First Insight. The survey finds that 42 per cent of affluent shoppers now frequently shop at discount retailers versus only 27 per cent at full-price retailers. Another 36 per cent say their discount shopping has increased. Twenty-one per cent of affluent shoppers report they are more inclined to visit online discount retailers, compared to only 12 per cent of overall respondents. The survey shows a vast majority of affluent consumers (74 per cent) check Amazon for products and pricing before looking elsewhere, versus 60 per cent of overall consumers. This is likely driven by the affluent shopper’s view that product pricing online is better. Half of affluent respondents felt that prices of products in physical retail stores are increasing, while slightly less (46 per cent) felt online retail stores’ pricing was increasing.

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Private Wealth News Archive 2011
Private Wealth News Archive 2010


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