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March 12, 2018

Cryptocurrencies Attract Ultra-rich

Cryptocurrencies have attracted investments from the ultra-rich around the world even though they may lack sufficient understanding of the technology behind the asset class, says a Knight Frank ‘Wealth Report.’ It shows around 21 per cent of respondents in the annual survey of wealth advisers and private bankers said their clients increased investments in cryptocurrencies in 2017. In a separate question, they were asked about their understanding of blockchain and found there's a huge amount of misunderstanding about it. Blockchain is the distributed ledger technology that allows transactions to be recorded and maintained. Property remains the cornerstone of most wealthy individuals, accounting for up to 50 per cent of many portfolios.

Gender Parity Improves Many Indicators

Teams managed by a balanced mix of men and women are more successful across a range of measurements, finds a study by Sodexo. Operating margins, client satisfaction, and employee retention, among other key performance indicators, were all higher among gender-balanced teams, meaning a ratio between 40 to 60 per cent women to men. “These results add a new, compelling dimension to a growing body of research that demonstrates the business benefits of gender equity,” says Rohini Anand, senior vice-president corporate responsibility and global chief diversity officer, at Sodexo. The report also shows that operating margins significantly increased among more gender-balanced teams than other teams. As well, gender-balanced entities had an average employee retention rate that was eight percentage points higher than other entities and an average client retention rate that was nine percentage points higher. Engagement also increased and accidents decreased. Sodexo says 87 per cent of management teams in Canada are gender-balanced. The full study is available here

Advisors Use Smart Beta To Diversify

Canadian financial advisors primarily use investment products and strategies based on smart beta indexes to improving diversification and increase yield, says a FTSE Russell survey. It found 31 per cent used them to improve diversification while 30 per cent are looking to increase yield. These uses ranked ahead of transparency (24 per cent), cost (21 per cent), and tax efficiency (18 per cent) which are typically associated with use of index-based investment approaches. “We are seeing smart beta gain more widespread acceptance among financial advisors in Canada. And, as shown in our latest research, these advisors are using a variety of innovative new index-based investment products to pursue a broad range of investment objectives,” says Marina Mets, managing director, fixed income, at FTSE Russell.

Mawer Launches ‘Boring’ Investment Podcast

Mawer Investment Management Ltd. has launched the ‘Art of Boring’ podcast series to complement its blog of the same name. This podcast for investors offers a glimpse into a company managing over $48 billion in assets for individual and institutional investors. It shares key insights into the ‘boring’ investment approach that has helped the company’s clients navigate the investment landscape for more than 40 years. The first podcast features insights from Paul Moroz, deputy chief information office and co-manager of Mawer’s global equity and global small cap strategies, from his most recent research trip to India. Moroz discusses India’s growing need for capital, the impact India’s change in administration has made to the investing landscape, and how the wide range of Indian management team capabilities creates more inefficiencies in the market and, therefore, more investing opportunities. Future episodes will feature investment insights on China from Peter Lampert, manager of Mawer's emerging markets equity strategy and co-manager of Mawer's international equity strategy; the human and machine approach of Mawer’s research lab from Canadian equity analyst Justin Anderson; and the competitive advantage firm culture has when leading a high performing team from Vijay Viswanathan, director of research. The podcast is available online here and also on iTunes, Google Play, and Stitcher.

Hedge Funds Get Taste Of Volatility

Hedge fund managers finally got a taste of market volatility last month. However, despite suffering losses, they fared better than major stock indexes. Data from Hedge Fund Research showed that hedge funds beat the MSCI World Index and the S&P 500 during February after the CBOE Volatility Index, or VIX, spiked. During February, hedge funds in the HFRI Fund Weighted Composite Index declined 1.8 per cent, while the S&P 500 declined 3.8 per cent. The MSCI World Index, which measures the performance of large and mid-sized companies in developed markets, saw a slightly bigger drop of 4.3 per cent. More volatility in the market leaves room for hedge funds to outperform as managers are able to take advantage of more dispersion, or the difference between positively and negatively performing assets, in the market.

Equity Funds In Red

Only seven of the 44 Morningstar Canada Fund Indices increased in February, all of them by 0.7 per cent or less, while 12 of the 37 losing indices decreased by two per cent or more. The top performers all tracked fixed income categories with the best performance for the floating rate loans fund index which increased 0.7 per cent. With every major stock market in the world down three per cent to six per cent last month, all of the 22 fund indices that track equity categories were also in the red. However, because the Canadian dollar depreciated against most foreign currencies, the losses for many foreign fund categories were limited to one per cent or less, while domestic equity funds generally ended up at the bottom of the performance rankings with more severe losses. The worst-performing fund indices were the ones that track the energy, precious metals, and natural resources equity fund categories.

Actively-managed ETFs Hit New High

Actively-managed ETFs and ETPs listed globally reached a record high of US$79.3 billion at the end of January 2018, shattering the previous record of US$75.2 billion set at the end of 2017, says ETFGI’s January 2018 Active ETF and ETP industry insights report. In January 2018, actively-managed ETFs/ETPs listed globally saw net inflows of $3.08 billion. Fixed income ETFs/ETPs gathered the largest net inflows with US$1.47 billion, followed by equity ETFs/ETPs with US$1.22 billion.

Forstrong On RBC Platform

Forstrong Global’s portfolio strategies have been added to RBC Dominion Securities A+ platform. Its core portfolio solutions and globally focused completion strategies will be available to RBC Dominion Securities advisors and their clients. These strategies have been designed to meet the challenge of exponential change during these increasingly globalized and discontinuous times.

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March 5, 2018

Rules Proposed For Trust Reporting

In response to what the government views as significant gaps in current trust reporting requirements, the federal budget has announced additional filing and reporting requirements will be introduced, says an Osler, Hoskin & Harcourt ‘Budget Briefing.’ A trust resident in Canada will be required to file a tax return every year regardless of whether it has tax payable or distributes a portion of its income. In addition, the scope of what needs to be reported in certain trust returns will be expanded. Trusts resident in Canada and non-resident trusts that are required to file a return will be required to list all trustees, beneficiaries, and settlors of the trust, as well as anybody who has the ability to exert control over trustee decisions. The expanded filing and reporting requirements will not apply to a number of categories of trusts, including mutual fund trusts, segregated funds and master trusts, and trusts governed by registered plans. New penalties will be introduced for failure to file a return with the additional information. A basic penalty will range from a minimum of $100 to a maximum of $2,500 with an additional penalty equal to five per cent (with a minimum of $2,500) of the fair market value of the property held by the trust during the year where the failure to file was made knowingly or due to gross negligence. Once proposed and enacted, the new reporting requirements and penalties will apply to returns required to be filed for 2021 and subsequent taxation years.

State Street Engaging On Weapons

State Street Corp. plans to engage with weapons manufacturers and distributors to learn more about how they will ensure the safe use of their products, following the February 14 shooting at a high school in Parkland, Fla. “We will be engaging with weapons manufacturers and distributors to seek greater transparency from them on the ways that they will support the safe and responsible use of their products,” it says in a statement. It will also seek to ensure that any shareholder resources used to influence legislation and regulations or fund other advocacy efforts is consistent with the company’s public views. Its money management arm, State Street Global Advisors, is an investor in firearms manufacturers American Outdoor Brands Corp. and Sturm Ruger & Co. and distributor Dick’s Sporting Goods. BlackRock has also said it will speak with gun manufacturers and distributors to learn about their response to the Florida high school shooting. It also holds shares in American Outdoor Brands, Sturm Ruger, and Dick’s Sporting Goods.

China’s Abolishment Of Term Limits Potentially Damaging

The Chinese Communist Party’s decision to abolish presidential term limits is potentially damaging to the long-term prospects for establishment of the rule of law, says Andy Rothman, an investment strategist at Matthews Asia. However, it is unlikely to have a significant impact on near-term economic prospects or the investment environment, says his article ‘Interpreting The End Of Term Limits In China’ at the Private Wealth Canada website. And while this is likely just a lust for power by Xi Jinping, China’s leader, he didn’t really need to take this step, says Rothman.

Strong Returns Help Drive Private Equity

The strong returns and distributions of the private equity industry have helped to drive increased interest in the asset class, says Preqin. However, record levels of dry powder have increased competition for assets and have helped to drive up already high prices, leading to fund managers identifying valuations as the biggest challenge they face in 2018. Although the majority of fund managers are still confident in their ability to deliver returns, concerns over high pricing have prompted over a third of managers planning to reduce the targeted returns of their funds in market. Distributions outstripped capital calls as well in 2017, further increasing investor appetite for private equity investments. This has led to increasing levels of competition for deal opportunities among managers and 92 per cent of respondents say finding attractive investment opportunities is as difficult or harder than 12 months ago.

Risk Appetite Drops

The risk appetite of European investors dropped in February, but remained just inside positive territory. State Street’s ‘European Investor Confidence Index (ICI)’ fell 12.9 points to 100.6 which suggests fewer investors were increasing their allocations to risk assets. However, the global version of the index showed an increase of 4.4 points to 107.4 and North American and Asian investors expressed a renewed appetite for risk. The North American ICI increased by 6.1 points to 104.4 and the Asian ICI rose 7.8 points to 108.5. “The month of February was far from boring. Global markets witnessed inflation concerns and growing fears about the pace and degree of rising rates. However, it appears that the return of market volatility did not suppress institutional investors’ risk-seeking appetite,” says Kenneth Froot, of State Street Associates.

Smart Beta Assets Reach New High

Assets invested in smart beta ETFs and ETPs listed globally reached a record high of US$696 billion at the end of January 2018, shattering the previous record of US$658 billion set at the end of 2017, says ETFGI’s January 2018 industry insights report. In the month, they saw net inflows of $9.43 billion with multi-factor smart beta products gathering the largest net inflows with $4.55 billion. This was followed by value factor with $1.34 billion.

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February 26, 2018

CEOs Optimistic About Revenue Growth

A record-breaking 88 per cent of Canadian chief executive officers (CEOs) are optimistic about their company's prospects for revenue growth and 72 per cent believe global economic growth will improve over the next 12 months, says PwC’s ‘21st Global CEO Survey.’ The U.S. is still considered a top choice for growth by 88 per cent of Canadian CEOs (despite NAFTA uncertainties) followed by China (53 per cent), the UK (30 per cent), and Germany (19 per cent). The key threats to growth include geopolitical uncertainty (88 per cent), protectionism (84 per cent), and cyber threats (81 per cent). The report also shows that 67 per cent of Canadian CEOs (versus 64 per cent globally) believe that core technologies such as artificial intelligence (AI), robotics, and blockchain will disrupt their business models. However, fewer than one in three (versus 47 per cent globally) say they understand how these technologies can improve their customer experience and create competitive advantage. Canadian CEOs also expressed concerns around the availability of digital skills within their own industries and among their senior leadership teams. On digital skills specifically, 65 per cent of CEOs are concerned about the availability of digital skills in their workforces and 60 per cent felt there is a shortage of such skills in the Canadian labour market. As well, only 33 per cent of Canadian CEOs are concerned about a lack of trust in business compared to 60 per cent globally. A majority of Canadian CEOs are taking positive steps to build trust by focusing on their organizational values to be purpose-led and values driven; promoting diversity and inclusion; and investing in cybersecurity and data protection to build trust with employees and customers.

Canadian HNW Investors Among Most Aggressive

High net-worth (HNW) investors in Canada have some of the world’s most aggressive portfolios, says a report from UK-based research firm GlobalData PLC. The ‘2017 Global Wealth Managers Survey’ finds that the typical HNW investor portfolio is 38.6 per cent devoted to equities and 24.9 per cent in fixed income. On a country level, the markets where HNW investors have most equity exposure include Canada (64.7 per cent), the U.S. (56.9 per cent), and the Netherlands (56.9 per cent). The survey shows the prime motivation for equity exposure among most of the top 10 markets for equities is capital appreciation. The two exceptions are Germany and the UK, where dividend income is more important when investing. As well, 70.5 per cent of investors globally are open to new investment ideas, with China and India showing particularly strong openness. For Canada, openness to new ideas is slightly ahead of global level at 70.8 per cent.

Jitters Cast Shadow Over Outlook

Just when the world economy seemed to be shifting to a higher gear, equity market jitters have cast a shadow over the global outlook, says an ‘AB Global Economic Outlook.’ However, at this stage, it doesn’t think there’s reason for major concern as market losses have been modest in light of the strong gains of recent years. As well, cyclical momentum is strong and monetary and fiscal policy are still highly supportive. However, it says it’s hard not to see recent market turmoil as a taste of what’s to come as in a world in which central-bank support for asset prices can no longer be taken for granted. For the time being, it says monetary accommodation will be withdrawn gradually and that market concerns are, therefore, overdone. But that’s likely to change later in the year as the risk of an upside inflation surprise starts to rise, bringing with it the prospect of a more aggressive monetary policy response. “Either way, bond yields look set to rise further,” it says.

Private Debt Outperform Expectation

Four out of 10 alternative investment consultants feel private debt has outperformed their expectations in 2017 – the highest proportion of any asset class, says Preqin’s ‘February Private Debt Spotlight.’ As a result, even as fundraising and assets under management reach record highs, the majority (53 per cent) are recommending that investors increase their allocations to private debt in 2018. In fact, eight per cent of consultants now recommend that private debt investments form more than 15 per cent of investors’ portfolios, a proportion that no surveyed consultant advised a year before. These recommendations come despite key issues facing the industry in 2018. Three out of four consultants note that central banks raising interest rates in key markets will be a challenge for the market in 2018. As well, deal flow (68 per cent) and governance (55 per cent) will be issues.

Bristol Gate Launches ETFs

Bristol Gate Capital Partners Inc. has launched Canadian dollar-denominated units of Bristol Gate Concentrated Canadian Equity ETFs, Bristol Gate Concentrated U.S. Equity ETFs, and U.S.-dollar denominated units of Bristol Gate Concentrated U.S. Equity ETFs. They seek to generate long-term growth of income and capital by investing primarily in a concentrated portfolio of publicly-traded equity securities of Canadian and U.S. companies that pay a dividend.

ETFs Hit New High

Assets invested in ETFs listed in Canada increased by $4.94 billion during January to reach a new record high of $122 billion, says ETFGI’s January 2018 Canada ETF and ETP industry insights report. This topped the previous record of US$117 billion set at the end of 2017. In January 2018, ETFs listed in Canada saw net inflows of $1.68 billion. Equity ETFs gathered the largest net inflows with US$852 million, followed by active ETFs with US$636 million.

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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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