The Return of Volatility: An Update on Equity Markets

Transcription

1 The Return of Volatility: An Update on Equity Markets

2 Equity markets have exhibited recent volatility S&P 500 INDEX, 2008 TO ,000 2,500 2,000 2,900 1,500 2,800 2,700 2,600 1,000 2,500 2, ,300 2, Source: Thompson Reuters Datastream, Cidel Asset Management

3 as have the bond markets 10-year U.S. Treasury yields, 1950 to % 14% 3.0% 12% 2.8% 10% 2.6% 8% 2.4% 2.2% 6% 2.0% 4% 2% 0% Source: Thompson Reuters Datastream, Cidel Asset Management 3

4 We are nearly nine years into this bull market Source: Thompson Reuters Datastream, Cidel Asset Management 4

5 We feel the market had simply become too complacent CBOE SPX VOLATILITY VIX (NEW) - PRICE INDEX Source: Thompson Reuters Datastream, Cidel Asset Management

6 and although wage inflation is finally showing up AVERAGE HOURLY WAGE GROWTH 4.0% 3.5% 2.9% 3.0% 2.5% 2.0% 1.5% 1.0% Source: Thompson Reuters Datastream, Cidel Asset Management

7 Growth is the best it has been in 10+ years S&P 500 EARNINGS REVISIONS BREADTH, 2000 TO 2018 % OF GLOBAL PMI INDEXES >50 100% 20% 95% 15% 90% 10% 85% 5% 0% 80% -5% 75% -10% 70% -15% 65% -20% 60% -25% 55% 50% % Source: Thompson Reuters Datastream, Cidel Asset Management 7-35%

8 and recession indicators are benign S&P 500 INDEX, MOVING AVERAGE TECHNICALS 3,000 S&P 500 Composite 50D moving average U.S. YIELD CURVE STEEPNESS HIGH YIELD DEBT MARKET 200D moving average ISHARES IBOXX $ HI.YLD. CPRT.BD. 50D moving average of ISHARES IBOXX $ HI.YLD. CPRT.BD. RECESSIONS 2,800 4% 2,400 ßFLATTER STEEPERà 95 2, , , YEAR YIELD LESS 3-MONTH YIELD 5% 100 3% 2% 1% 1, % 1,600 1, U.S. WEEKLY UNEMPLOYMENT CLAIMS 3W MA US UE Claims % S&P 500 INDEX, MOVING AVERAGE TECHNICALS 10W MA Trendline RECESSIONS CONFERENCE BOARD LEADING TO COINCIDENT RATIO INVENTORY-TO-SALES RATIO RECESSIONS AVERAGE <-- LEADING-TO-COINCIDENT RATIO (4Q MA) Source: Thompson Reuters Datastream, Cidel Asset Management

9 But, valuations aren t low MSCI WORLD INDEX FORWARD P/E RATIO, 1988 TO 2018 S&P 500 INDEX FORWARD P/E RATIO, 1985 TO x 30x 25x 25x 20x AVERAGE=16.0x Current=16.8x 20x 15x 15x 10x 10x 5x EUROSTOXX 50 INDEX FORWARD P/E RATIO, 1999 TO x x 25x 25x 20x 20x Current=14.0x AVERAGE=13.0 x 15x AVERAGE=13.3x 10x 5x MSCI EMERGING MARKET INDEX FORWARD P/E RATIO, 1988 TO x 15x Current=17.4x AVERAGE=15.1 x Current=12.9x 10x x Source: Thompson Reuters Datastream, Cidel Asset Management

10 Consumer price inflation is low and well contained CONSUMER PRICE INFLATION, SELECTED REGIONS, 2011 TO % 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% UNITED STATES 2013 CANADA UNITED KINGDOM Source: Federal Reserve Bank of St.Louis, Cidel Asset Management EURO AREA 2018 JAPAN

11 and growth + low inflation = high multiples FAIR VALUE FORWARD EARNINGS MULTIPLES Nominal Perpetual Earnings Growth Nominal Cost of Equity 15 1% 2% 3% 4% 5% 8% 14x 17x 21x 26x 35x 9% 13x 15x 17x 21x 26x 10% 11x 13x 15x 17x 21x 11% 10x 11x 13x 15x 18x 12% 9x 10x 11x 13x 15x = Historic norm with 4-5% US 10yr = New norm with 2-3% US 10yr? Investors shouldn t expect low multiples with synchronized growth, benign credit markets, and low interest rates!

12 Cidel Asset Management Q4 2017

13 Investment Teams Fixed Income Team Balanced Fund Asset Mix Arthur Heinmaa, CFA Charles Lannon, CFA Robert Gibson, CFA Bill McKay, CFA Ronald Patton, CFA, CA Pierre Bouchard, CFA Barry Da Silva, CFA Robert Spafford, CFA Global Equity Team Arthur Heinmaa, CFA Robert Spafford, CFA Stephen Caldwell, CFA Gary Lew, CFA Ben Thalman, CFA Strategic Asset Allocation Canadian Equity Team Robert Gibson, CFA Susan Blanchard, CFA Stephen Caldwell, CFA Cameron Marr Robert Vidinovski, Mfin Ronald Patton, CFA, CA Charles Lannon, CFA Philip Young, CFA Cameron Marr 17 Bill McKay, CFA Anojan Palarajah Raj Kohli, CFA Shahlar Mammadov

14 Global Equity Investment Team Investment Team Responsibilities Years Experience Charles Lannon, CFA, Head of Global Equities Lead Portfolio Manager, Financials Cidel 14 Industry 22 Arthur Heinmaa, CFA, CEO Cidel Asset Management Chief Investment Officer Cidel 30 Industry 30 Robert Spafford, CFA, Lead Portfolio Manager, Dividend & Income Telecoms, Materials and Energy Cidel 12 Industry 21 Stephen Caldwell, CFA Portfolio Manager Healthcare and Industrials Cidel 8 Industry 24 Phillip Young, CFA, AVP, Investment Analyst Technology, Consumer Discretionary and Utilities Cidel 7 Industry 8 Cameron Marr, Investment Analyst Global Real Estate and Consumer Staples Cidel 5 Industry 5 18

15 Canadian Equity Invetment Team Investment Team Responsibilities Years Experience Robert Gibson, CFA Head of Canadian Equity Financials Cidel 19 Industry 39 Pierre Bouchard, CFA Lead Portfolio Manager, Canadian Total Return Equity Consumer Discretionary, Consumer Staples, Utilities Cidel 11 Industry 17 Susan Blanchard, CFA Lead Portfolio Manager Small Cap Cidel 47 Industry 47 Stephen Caldwell*, CFA Portfolio Manager Healthcare, Industrials and Technology Cidel 8 Industry 24 Barry Da Silva, CFA, Portfolio Manager Energy Cidel 3 Industry 23 Robert Spafford*, CFA Lead Portfolio Manager, Dividend & Income Telecommunications and Materials Cidel 12 Industry - 21 Cameron Marr*, Research Associate Real Estate Cidel 5 Industry 5 *Member of the Canadian and Global Equity teams 19

16 Investment Philosophy We believe superior investment results are generated for clients by: Investing in financially strong, growing businesses that have a history of returning cash to shareholders; and by Constructing a concentrated portfolio that balances diversification with conviction; and by Focusing on risk management in order to reduce volatility and minimize the frequency and severity of negative alpha; and by Following a standardized and repeatable investment process which is designed to provide a consistent, sustainable and differentiated approach. 20

17 Dividends are the largest determinants of returns over the long-run 100% 6.9% 90% 80% 70% 21.4% 51.1% 41.6% 43.0% 64.5% 60% 50% 59.6% 40% 30% 37.5% 41.0% 38.5% 16.8% 19.8% 19.0% 3 YEARS 5 YEARS 10 YEARS 20% 10% 0% 11.4% 1 YEAR DIVIDEND YIELD DIVIDEND GROWTH 28.6% 20 YEARS MULIPLE EXPANSION / CONTRACTION Source: MSCI Research, decomposition of MSCI ACWI Index total return, analysis over period Dec 1994 to Sep

18 Defensive equity investing systematically outperforms ALPHA GENERATION ORGANIZED BY VOLATILITY* Alpha - Investing outperformance - High is good Higher Risk Higher Return Alpha Volatility - Measure of risk - Low is good Positive Alpha Generation Negative Alpha Generation Higher growth, high volatility strategies have underperformed Investors consistently overpay for perceived growth potential Source: Betting Against Beta, Andrea Frazzini and Lasse H. Pedersen, May 2013 *Based on monthly return data from 1984 to 2012 for all available common stocks on the Xpressfeed Global database for the following 20 markets: United States, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom. 22

19 Investment Style Build a high conviction portfolio with high active share 30 to 40 stocks; benchmark agnostic Focus on quality, low volatility stocks minimize negative alpha Invest globally up and down the capitalization spectrum Expected holding period 2-5 years, so turnover typically 20-35% per annum Source: Cidel Asset Management, evestment LLC *evestment Global Core Equity Universe 1Reflects a representative account in the Global Equity Strategy. 23 December 31, 2017 Cidel Global Equity Median Global Equity Manager* Active Share 95.4%1 87.8% Up Market Capture (5yr) 95.6% 101.6% Down Market Capture (5yr) 82.8% 95.7% Standard Deviation (5yr) 9.0% 10.2%

20 Key Characteristics: Geographic Diversification GLOBAL BREAKDOWN BY UNIVERSE 70% 60% 50% 40% 30% 20% 10% 0% GLOBAL GDP UNITED STATES DEVELOPED EUROPE MSCI WORLD INDEX DEVELOPED ASIA PACIFIC CIDEL GLOBAL EQUITY EMERGING MARKETS U.S. makes up 25% of Global GDP, but 60% of Global Market Cap We optimize to gain access to Global growth while minimizing volatility of returns Source: Thompson Reuters Eikon as of December 31, CANADA

21 Key Characteristics: Security Selection % Dividend Payers 105% Cash-generative Companies with a strong history of returning cash to shareholders 100% 95% 90% 85% 80% Global Equity MSCI World % Investment Grade Balance Sheet 120% Strong Balance Sheet Companies with an investment grade balance sheet 100% 80% 60% 40% 20% 0% Global Equity MSCI World EPS Growth ( 3Year Annual) 6% Visible Growth Opportunities Companies with meaningful record of growth and clear path to future growth 4% 2% 0% -2% -4% Global Equity MSCI World As at December 31, 2017 Source: Thomson Reuters Eikon, Bloomberg and Cidel Asset Management 25

22 Idea Generation Step 1 Using Screening and Proprietary Research Screening Valuation - P/E Ratio - FCF Yield - EV/EBITDA -Dividend Yield Proprietary Research 200+ Management Meetings each year Addresses the pitfalls of US-focused screening tools Includes benefits of local market travel and on-the-ground research Quality - Return on Equity - Δ to ROE - Return on Assets Growth Risk - Historical growth in earnings and dividends - Projected growth in earnings and dividends - Balance Sheet Rating - Net Debt / EBITDA - Beta - Beta in Down Markets 26

23 Research Process Step 2 Standardized stock analysis Stocks passing quality and volatility screens are subject to a rigorous 8-stage analysis Preliminary Valuation Confirmation of Moat Industry Analysis & Competitor Evaluation Management Track Record Review Risk & Financial Statement Analysis Management Interview Final Valuation Decision & Source of Funding Our proprietary stock picking methodology is designed to minimize frequency and severity of negative alpha generation. 27

24 Research Process Step 3 Proprietary Valuation Technique Distinct Approach to Valuation and Price Targets: What is probabilistic range for growth, profitability, discount rates? Valuation as a histogram of outcomes, not just a fixed number Key Benefits: Illustrates downside risks on individual stocks Enables opportunistic purchases Reinforces sell discipline Defends against the deficiencies in DCF modeling 28

25 Historical Performance (US$) Annualized Returns (% p.a) 30 Annualized Returns (% p.a) YTD 1 Year 3 Year Cidel Global Equity Value Added Percentile Rank1 5 Years 10 Years Since Inception* MSCI World - ND 6.0% 6.0% 2.0% 1.0% 2.4% 3.7% *As at December 31, Inception Date: 1/1/1998. Past performance is not indicative of future returns. Performance results are presented gross of management and custodial fees and net of trading commissions. A client s return will be reduced by such fees and any other expenses that it may incur relative to its advisory account. 1eVestment Global Core Equity Universe 29

26 Historical Performance (US$) Calendar Year Returns (%) Cidel Global Equity MSCI World - ND Return (%) Value Added Percentile Rank1 YTD % -4.6% 4.7% 5.1% -7.3% 1.0% 5.5% -0.6% 7.8% 4.6% *Inception Date: 1/1/1998. Past performance is not indicative of future returns. Performance results are presented gross of management and custodial fees and net of trading commissions. A client s return will be reduced by such fees and any other expenses that it may incur relative to its advisory account. 1eVestment Global Core Equity Universe 30

27 Cidel Global Equity (US$) 31

28 Cidel Global Equity (US$) Risk Metrics 32

29 Current Portfolio: Country & Sector Weights Regional Breakdown1 Industry Breakdown1 70.0% Energy 60.0% Materials Industrials 50.0% Consumer Discretionary 40.0% Consumer Staples Heath Care 30.0% Financials 20.0% Information Technology Telecomm Services 10.0% Utilities 0.0% North America Asia & Pacific Basin Global Equity Europe Latin America Africa & ME Real Estate 0.0% MSCI World Global Equity Source: Thomson Reuters Eikon, Bloomberg, Cidel Asset Management. 1 Reflects a representative account in the Global Equity Strategy % 10.0% 15.0% 20.0% MSCI World As at December 31, 2017

30 Disclaimer The Cidel Group consists of, but is not limited to, the following companies: Cidel Bank & Trust Inc., Cidel (Pty) Ltd., Cidel Bank Canada, Cidel Trust Company, Cidel Asset Management Inc. (operating as Toron Asset Management International, Cidel and Cidel Financial Group) and AFL Investments. In Canada, Cidel Bank Canada is regulated by the Office of the Superintendent of Financial Institutions and provides banking services and Cidel Trust Company is a non-deposit taking trust company regulated by the Office of the Superintendent of Financial Institutions. Cidel Asset Management Inc. is regulated by the Ontario Securities Commission and provides investment management services. Past performance is not an indication of future results. The material contained in this document is for information purposes only. It is not intended as an offer or solicitation for purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. The information contained herein should not be construed as financial or investment advice on any subject matter. Where applicable, Cidel has selected a benchmark so that a relevant and relative comparison can be made between the performance of the portfolio vs. the benchmark. Where possible, Cidel has selected a benchmark that best fits the portfolio composition based on asset class, geographic and currency allocations. Benchmark performance does not include the cost of investing and should be taken into account when comparing net performance (i.e. after management fees have been deducted) of the portfolio vs. the benchmark. Please contact your Cidel representative if more detailed information is required on the benchmark. We have endeavored to offer current, accurate and clearly expressed information. However, since inadvertent errors may occur, relevant legislation and regulations may change and or the application of laws and regulations may vary; the information may be neither current nor accurate. Additionally, the information contained in this document is intended to provide general guidance and is not intended to replace or serve as substitute for any professional or tax advice, consultation, advisory or service, nor does any information constitute a comprehensive or complete statement of the issues discussed. All individuals should obtain specific professional advice with regard to the respective tax or other professional area. No action should be taken or omitted to be taken in reliance upon any of the information provided and in no event shall Cidel Bank & Trust Inc., its subsidiaries, its directors, principals, agents or employees be liable for any direct, indirect, incidental, special, exemplary, punitive, consequential or other damages whatsoever including but not limited to contract, negligence or other tortuous actions arising out of or in connection with any content of the information provided or other use hereof. 41