Annu nual al Present entation tion to Clients nts November 2016 - PowerPoint PPT Presentation

Portfolio Management & Financial Counsel Annu nual al Present entation tion to Clients nts November 2016

Portfolio Management & Financial Counsel 1

INTRODU IN ODUCTIO CTION Portfolio Management & Financial Counsel There re are many compell lling ing issues s faci cing g investor ors around d the world ld  Political uncertainty  Geo-political stability  Sustainability & climate change 2

IN INTRODU ODUCTIO CTION Portfolio Management & Financial Counsel Canadia ians ns have their r own particul cular r conce cerns ns  Real estate prices are soaring, particularly in Vancouver and Toronto 3

INTRODU IN ODUCTIO CTION Portfolio Management & Financial Counsel Canadia ians ns have their r own particul cular r conce cerns ns 175% 160% 145%  Personal debt levels are at an all-time 130% high 115% 100% 2001 2003 2005 2007 2009 2011 2013 2015 Canadian Household Debt as Percent of Disposable Income Source: Bloomberg. 4

IN INTRODU ODUCTIO CTION Portfolio Management & Financial Counsel Despite pite the worries ies, , many stock markets ts are near all-time ime highs 2000 1500  Most U.S. indices near their peak 1000  Canada and many others not far behind 500 0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 S&P 500 Index Source: Bloomberg. 5

INTRODU IN ODUCTIO CTION Portfolio Management & Financial Counsel The relentless decline in interest rates is the “nexus” 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% 2006 2008 2010 2012 2014 2016 Government of Canada 10-year Bond Yield Source: Bloomberg. 6

IN INTRODU ODUCTIO CTION Portfolio Management & Financial Counsel Current t low rates will l cast a l long shadow w into the future re 8.7% 7.9%  Future investment returns likely to be 4.7% lower  Enormous implications for both institutional and individual investors Previous Previous Dec. 31, 2012 Future Long-Term 25 Years 10 Years Returns Annual Portfolio Returns to/from December 31, 2012 (1) Source: C.D. Howe, “Long - Term Returns: A Reality Check for Pension Funds and Retirement Savings”, December 2013. 7 (1) Notional return from a portfolio of 50% S&P/TSX Bond Universe and 50% TSX Composite.

AGE GENDA NDA Portfolio Management & Financial Counsel  How low are interest rates?  Why are interest rates so low?  What are the consequences?  Coping in the new era – Path to financial success 8

HOW OW LO LOW ARE RATES? TES? Portfolio Management & Financial Counsel Real ally ly, , Reall lly y Low The lowest st rates in severa veral l gener nerat ation ions You had a mortgage gage here 16% 12% You’re investing here 8% 8% 4% 4% 0% 0% 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 U.S. 10-Year Treasury Yield Source: Bloomberg. 9

HOW OW LO LOW ARE RATES? TES? Portfolio Management & Financial Counsel Real ally ly, , Reall lly y Low Not merely ly gener nerat ation ional al – actuall lly y unprecedente cedented! d! Short and Long-term Interest Rates, from 3000 BC Source: Bank of England "Growing, Fast and Slow", February 17, 2015. 10

HOW OW LO LOW ARE RATES? TES? Portfolio Management & Financial Counsel Real ally ly, , Reall lly y Low They’re even lower elsewhere 1.59% 1.19% 1.00% 0.75% -0.09% -0.12% -0.63% Japan Switzerland Germany U.K. Italy Canada U.S. Global 10-Year Government Yields As at Septembe ber 30, , 2016 16 Source: Bloomberg. 11

HOW OW LO LOW ARE RATES? TES? Portfolio Management & Financial Counsel Real ally ly, , Reall lly y Low Negative rates are more common than many realize… …and warp reality 100% 100% 29% 29% Yield> 1%  No incentive for thrift Yield 0% - 1% 1% 38% 38%  Little constraint on government spending NegativeYield 33% 33% Distribution of Global Government Bond Yields (1) As at Septembe ber 30, , 2016 16 Source: JP Morgan Asset Management. 12 (1) Based on yields within the Bank of America Merrill Lynch Global Government Bond Index.

HOW OW LO LOW ARE RATES? TES? Portfolio Management & Financial Counsel Real ally ly, , Reall lly y Low A guaranteed nteed losing g bet Issu ssuer er Federal eral Republi lic of German any Rating AAA Issue date July 19, 2016  Even corporations have issued at negative rates Issue price €102.79 • Sanofi, Henkel, even CIBC! Maturity value €100.00 Interest income €0.00 Profit (Loss) (€2.79) Yield/Maturity (0.53%) German Bund 0%, due October 8, 2021 13

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW? Portfolio Management & Financial Counsel Many factor tors have driven n rates lowe wer Central bank intervention High Economic Chinese uncertainty savings rate Low w Interest st Rates Demographic Slower shifts growth Lower productivity 14

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW? Portfolio Management & Financial Counsel Centra ral l Bank Interve vent ntion ion Centra ral l banks have driven ven short- and longe ger-te term m rates lowe wer 6% 6% $5t 5% 5% $4t 4% 4% $3t 3% 3% $2t 2% 2% $1t 1% 1% 0% 0% $0t 2006 2008 2010 2012 2014 2006 2008 2010 2012 2014 2016 Federal Funds Rate Federal Reserve Balance Sheet • Quantitative easing includes buying longer-term bonds to reduce rates Source: Bloomberg. 15

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW? Portfolio Management & Financial Counsel Shif ifting ing Demo mogr grap aphic hics Greate ater r saving ngs driven ven by aging g popula latio tion n and longe ger life fe expe pecta ctancy ncy 28% 75 yrs 26% 70 yrs 24% 65 yrs 60 yrs 22% 55 yrs 20% 50 yrs 18% 1960 1970 1980 1990 2000 2010 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Percentage of the Population Aged 40 - 65 World Life Expectancy Source: United Nations Population Division, World Bank. 16

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW? Portfolio Management & Financial Counsel High Chinese se Saving ings Rate Chinese se savings gs – another r leadin ding g expo port rt 38.5%  China is particularly influential • Limited social safety net 19.0% • Underdeveloped financial market • Smaller families 9.0% 4.9% 4.9%  Savings have flowed West, driving rates 0.0% lower China Switzerland Germany Canada USA Japan Household Savings Rates (2013) Source: OECD. 17 17

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES? Portfolio Management & Financial Counsel Broad d Effe fects cts There re are fundame amental tal consequences quences – intende ded and uninte tende ded  Higher pension liabilities Low Inter erest est  Greater fiscal stimulus Rates es  More M&A  Increased debt levels  More savings Low  Reach for higher returns Economic ic Growth wth  Distorted market valuations 18

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES? Portfolio Management & Financial Counsel Broad d Effe fects cts Lowe wer intere rest t rates result lt in higher her reali lized zed returns rns but lowe wer future re retur urns ns Expec ectat atio ion of Higher er Realiz alized ed Lower er Inter erest est Future e ≠ Past High Future e Returns Rates es Retur turns …prices rise Many assume As interest rates   Low future returns   • Bonds • Mathematically so for Bonds Future = Past fall… • Other assets such as • Similarly for other assets Real Estate and Possible risks  Equities • Asset bubbles • Debasement of money 19

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES? Portfolio Management & Financial Counsel Pensio ion n Funds With lower discount rates, pension liabilities skyrocket… $338m $25m $20m $180m $15m $10m $5m $0m Year 40 Year 60 At 7.75% At 4% Year 1 Year 20 Discount Discount Rate Rate Today’s Pension Liability (1) Expected Annual Pension Payouts (2) (1) Pension liability is today’s value of the future expected payouts using a discount rate of 7.75% and 4%. 20 (2) Illustrative example of a public sector pension plan with future pension payout entitlements (as shown) that employees are entitled to as of today.

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES? Portfolio Management & Financial Counsel Pensio ion n Funds …as a real example demonstrates At 7.75 75% discount rate U.S. State & Local Pension Plans Status (1) Source: The Economist “Fade to Grey”, September 24, 2016. 21 (1) Based on a Boston College study of 4,000 American state and local government pension plans.

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES? Portfolio Management & Financial Counsel Pensio ion n Funds How are pensio ion n funds respon ondin ding? g?  Some have “hit the wall” – restructured  Corporate sector • Ended plans • Cut back benefits • Increased funding • Sought higher returns  Public sector is mostly in denial • 9 European countries have public pension fund liabilities of more than 3x GDP Source: The Economist “Fade to Grey”, September 24, 2016. 22