Should You Be Afraid? November 2011 A GENDA Should You Be Afraid? - PowerPoint PPT Presentation

Should You Be Afraid? November 2011

A GENDA Should You Be Afraid? 1. Our Unsettled World – Why you might be 2. The Intelligent Investor – Why you needn’t be 3. The Responsible Investor – What you should be doing 1

O UR U NSETTLED W ORLD Stock market indexes around the world sank in the first ten months of 2011 Global Stock Market Moves (1) 1.3%  Down significantly Canada U.K. Germany Japan China despite a dramatic U.S. rally in October  Nexus Equity Fund return was -3.8% in -3.2% this period  Nexus Balanced Fund -6.9% return was -1.4%  Nexus Income Fund -9.9% return was 4.9% -10.2% -11.2% 2 (1) Total return (including dividends) to October 31, 2011 in local currency for all markets, except for Japan and China which represent price-only returns that have been adjusted for the current dividend yield.

O UR U NSETTLED W ORLD Ten Months Ended October 31, 2011 Volatility during this period was extreme VIX (1) 60  Dow Jones moved higher or lower by 50 more than 100 points in 3 of every 40 4 trading days in August and 30 September  31 “all or nothing” 20 trading days (2) in August and 10 September, more than all of the 0 decade of the 1990s Jan-11 Mar-11 May-11 Jul-11 Sep-11 3 (1) Measure of the volatility of the S&P 500 Index. (2) From Barron’s Oct 24. An “all or nothing” day is when at least 400 of the S&P 500 stocks move in the same direction.

O UR U NSETTLED W ORLD A range of factors explains investor discontent  Uncertain global economic recovery  Volatile developing market economies  Inflation / deflation  Stagnant housing markets in many countries  Unemployment  European debt crisis  U.S. budget challenges 4

O UR U NSETTLED W ORLD European Debt Crisis The European sovereign debt crisis is real and profound “PIIGS” Debt (1) Greece 160% $350 Italy 120% $1,600 Ireland 112% $117 $164 Portugal 101% Debt / GDP $641 Spain 68% Debt ($bns) 5 Source: RBC Capital. (1) Gross national debt.

O UR U NSETTLED W ORLD European Debt Crisis Capital markets reflect the differing circumstances of each country European 10-Year Yield Spreads (vs. German Bunds) 6% Italy Spain 5% U.K. 4% 3% 2% 1% 0% Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 6

O UR U NSETTLED W ORLD European Debt Crisis Europe will ‘muddle through’ – for years, not months  The Euro-zone is solvent  Balanced current account, little external public debt  Three key questions  Sharing of pain between borrowers and lenders  Allocation of losses between private sector (banks) and governments  Degree of international involvement (China, IMF etc.)  Important steps  Budgetary restructuring – austerity  Shifting of risk to EU, ECB and IMF  Bank recapitalization  Europe may force ECB into “TARP-like” role 7

O UR U NSETTLED W ORLD U.S. Budget Challenges The U.S. budget situation must be addressed Ratio of U.S. Government Debt to GDP (1) 100% 93% 90% 85% 80%  Problems are a recent phenomenon 70% 70% 64% 63% 62% 62% 61% 59% 59% 60% 58% 50% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 8 Source: TradingEconomics.com (1) Gross federal debt.

O UR U NSETTLED W ORLD U.S. Budget Challenges You wouldn’t run your own household this way FEDERAL FINANCES (U.S.) IN “FAMILY” TERMS (1) Total Revenue $4,164,700,000,000 Income $41,647 Expenditures $5,470,000,000,000 Spending $54,700 New Debt $1,305,300,000,000 New Borrowing $13,053 National Debt $14,271,000,000,000 Total Indebtedness $142,710 August Spending Cuts $38,000,000,000 August Cutback $380 Super-Committee Target $150,000,000,000 Lifestyle Adjustment $1,500 (annual rate) (annual rate) 9 Source: Bureau of Economic Analysis. Idea adapted from Arrow Hedge Partners. (1) Calculated by dividing numbers in box on the left by 100,000,000.

O UR U NSETTLED W ORLD U.S. Budget Challenges Revenue and spending both need adjusting U.S. Government Spending, Receipts and GDP  Spending Predominantly 190% GDP problems began in Tax Receipts 2005 170%  Since then:  The economy has 150% grown at 2.8% per year (1) 130%  Spending has grown at 7.5% per year (1) 110%  Federal, state and local taxes have 90% grown at 0.5% per 2000 2002 2004 2006 2008 2010 year (1) 10 Source: St. Louis Fed. (1) Spending, taxes and GDP growth expressed as 5-year nominal growth rates.

O UR U NSETTLED W ORLD U.S. Budget Challenges Taxes are unsustainably low National Tax Burden (1) (1) Current U.S. 24%  Each 1% is $500 billion per year 20-year 27% (2) U.S. Average OECD 35% (3) Average 11 (1) Tax burden is the sum of federal, state and local taxes, divided by national income. (2) “USA Tax Burden at Lowest Level Since ’58”, USA Today, May 6, 2011. (3) “The US crisis”, CA Magazine , November 2011.

O UR U NSETTLED W ORLD U.S. Budget Challenges Mandatory entitlement spending is too high Components of U.S. Government Spending Interest, 6%  Entitlement spending must decline  Mainly social Non-Defence security, Medicare Discretionary, 19% and UI Mandatory  Demographics are Entitlement, 55% making the problem Defence Discretionary, 20% worse  Interest is small but growing rapidly 12 Source: Congressional Budget Office.

O UR U NSETTLED W ORLD U.S. Budget Challenges There is no need for these issues to end in crisis  The U.S. retains considerable financial flexibility  Not yet as serious as for certain European countries  Politics are aggravating the issue  We have low expectations of the ‘Super Committee’ initiative  2012 election might help with resolution 13

T HE I NTELLIGENT I NVESTOR Despite uncertainty, sensible investors can profit over the long term  Equity markets move in long cycles  A quality approach produces superior results  Balanced asset mix and long time horizon reduce risk  Uncertain times often provide the greatest opportunities 14

T HE I NTELLIGENT I NVESTOR Long Cycles Investors in many countries have endured a “lost decade” 10-year Annualized Stock Market Returns (1) 8.5% 4.6% 3.9% 3.7% 3.0% Japan Canada U.S. U.K. Germany China -1.4% 15 (1) Total return (including dividends) to October 31, 2011 in local currency for all markets, except Japan and China, for which only price returns are available.

T HE I NTELLIGENT I NVESTOR Long Cycles Stock market returns tend to occur in long cycles Dow Jones Industrial Average Returns (1) DJ Indus. Avg. 21.0%  Economic and p.a. corporate profit 15.4% p.a. growth a much 12.0% p.a. steadier pattern 0.4% 0.0% 0.3% p.a. p.a. p.a. '99 '20 '29 '49 '64 '81 '99 '11 -4.6% p.a. 21 yrs. 9 yrs. 20 yrs. 16 yrs. 17 yrs. 18 yrs. 12 yrs. 16 Source: Fortune , Dow Jones. (1) Price return only; excludes dividends. Blue line is presented on a logarithmic scale.

T HE I NTELLIGENT I NVESTOR Long Cycles Investment returns ebb and flow across geographies Annualized Return C$/US$ Annualized Return Premium/Deficit Exchange Rate Premium/Deficit S&P 500 (C$) vs TSX Change EAFE (C$) vs TSX C$ ↓ 1.5% p.a. 1970s 1.1% -2.0% C$ ↑ 0.1% p.a. 1980s 12.3% 7.9% 1990s 11.2% -0.2% C$ ↓ 2.2% p.a. C$ ↑ 3.1% p.a. 2000s -9.7% -7.6% 17

T HE I NTELLIGENT I NVESTOR Quality Approach A high quality approach serves investors well through all market cycles Annualized U.S. Stock Returns and Risk (1) By Dividend Yield Quintiles (2) 16% Q2 Q1 14%  The ability to pay Return dividends is a strong 12% Q3 indicator of financial strength and quality 10% Q4 Q5 8% 15% 20% 25% 30% Risk (Standard Deviation) 18 Source: Lehman Brothers. (1) 1,000 largest U.S. stocks by market capitalization; 1969 – 2005. (2) Q1 has highest yield; Q5 has lowest yield.

T HE I NTELLIGENT I NVESTOR Quality Approach Recent turmoil has not diminished the importance of quality Total Annualized Return Annualized Volatility (1) (1) 8.4% 22% 7.8% 7.4% 16% 15% . Dividend S&P 500 Non-Dividend Dividend S&P 500 Non-Dividend Payer Payer Payer Payer 19 Source: RBC Capital Markets. (1) Based on U.S. equity total returns for S&P 500 stocks since 1995.

T HE I NTELLIGENT I NVESTOR Quality Approach A quality approach has worked through the most recent turmoil Total Returns (1) from May 31, 2008 to October 31, 2011 2.2% Shanghai TSX S&P EAFE Composite Nexus Equity Fund -3.5%  Bonds helped the Balanced Fund -7.9% achieve a 8.7% return over the same period -21.5% -22.8% 20 (1) Total return (including dividends) in C$ terms for all markets, except China, for which only price returns are available.