Discretionary Management

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1 1 Discretionary Management This update is focused on the strategies and securities held in discretionary managed accounts for my clients. Money is fuel. It allows you to either do the things you want to do, or prevents you from doing them when you don t have enough. The purpose of investing is to match the money you have and will earn to the things you want to do over your lifetime. A financial plan helps you figure out what you want to do, what you have, and what you will earn. The rate of return needed in the plan forms a framework for design of the portfolio. Reporting allows you to compare portfolio results to the plan. An Investment Policy Statement sets out the parameters in selecting and trading securities. It is designed based on the unique financial plan and personal situation of each family I manage. I craft various models. Each contains a variety of securities according to an investment goal. Each client uniquely is assigned a portion of these models based on their unique situation on a household basis. When securities in a model are changed, the aggregate change across all clients is formed into bulk buy or sell trades. The bulk trade is managed by our trading group to get the best price, and then allocated to all affected accounts. This allows all clients to be treated equally, fairly, and immediately when changes to a portfolio are desired. Having the discretionary ability to enact trades proactively without contacting dozens of clients to individually authorize each investment transaction has significant benefits. It frees clients from having to make constant and numerous decisions. Relationships and communications with clients focus on understanding their situation, designing solutions, and finding appropriate securities. The person with authority to make securities decisions is the one responsible for their returns. A combination of direct ownership of stocks and bonds, baskets of securities held in exchange traded funds, and use of experts that have access to global markets and unique strategies are all used to form a uniquely crafted portfolio. Richardson GMP Suite 4700, th Avenue SW Calgary, Alberta T2P 1G1 Tel Fax Brad Hunter, CA, CFP, CIM Director, Wealth Management Portfolio Manager Tel Rita Penno Associate Tel Chris Mitchell Associate Tel

2 Fall Investment Picture

3 Fall Fixed Income Reduced in Managed Portfolios Over the summer, fixed income continued to be reduced in managed accounts. There was a slight increase in the amount of equity held, most of which went to international equities. U.S. equity exposure continued to be around 50% more than Canadian exposure. Cash balances also rose as there was a larger amount of rotation within securities in the portfolio that are not yet fully implemented. Growth oriented accounts experienced similar asset mix movements, but also saw exposure to alternative investments decrease (by about 3% on average). Balanced Account Managed Portfolio Asset Mix Change Growth portfolios tend to have more than double the level of U.S. equity compared to Canadian. They hold less bonds and experienced a greater increase in total equities held. Conservative, income based accounts have much more fixed income and less of everything else. They are as close to minimum fixed income levels as possible. The chart below shows how poorly bond returns have been the last three periods interest rates went up in Canada. Source: Richardson GMP, sample client account balanced portfolio A big question is, why have any fixed income at all? Fixed income provides low expected long-term returns in today s yield environment. If rates rise in the short-term, it will further diminish fixed income results. The reason to hold fixed income relates to understanding risk tolerance and investment objectives. It may be needed to reduce volatility, produce steady income, or provide various quality of guarantees on principal at maturity. If held to maturity, fixed income usually returns the yield promised when bought. A portion of fixed income might make sense for investors who can t stomach the volatility and uncertainty of other asset classes, or who don t need to take as much risk. How much is the right amount of fixed income? A software program might tell you to put your age divided by 100 in fixed income. But a professional advisor might offer a more personalized solution by reviewing your personal goals, risk tolerance, and return expectations as well. Let s review your case!

4 Fall Here s a list of bonds that were sold, matured, or redeemed across managed accounts so far in 2017: Sold (usually at lucrative premiums to maturity): Matured: Redeemed (called away before maturity): Alimentation Couche-Tard 3.319% 01Nov19 Rogers Communications 4.7% 29Sep20 Saskatoon 4.7% 14Feb21 Shaw Communications 5.5%07Dec20 Sun Life 5.863% 31Dec19 Thomson Reuters 3.309% 12Nov21 Assorted provincial bonds Brookfield Office Properties 4.3% 17Jan17 Home Trust 2.35% 24May17 Enbridge Income Fund 5% 22Jun17 Caisse Centrale Desjardins 2.5% 05Oct17 Sirius 5.625% 23Apr17/21 Alliance Grain 9% 14Feb16/18 Professional Global Fixed Income Managers Add Value Buying Canadian fixed income directly for clients has four big advantages: It keeps costs down since you aren t paying another management expense fee. Having an end maturity date ensures that the account ultimately earns the total yield to maturity at the time the bond was offered. Owning baskets of fixed income means that the security itself never matures, and always varies in price with interest rate changes. It allows the bond holder to have a guarantee of principal and interest based from the bond issuer. (The guarantee is as good as the credit quality of the issuer). It allows control over the credit quality held, term to maturity, and tax optimization. Using third party professionals to manage fixed income adds expertise, including access to global securities and markets retail investors don t have access to. Fixed income fund managers often own global bonds, providing a much larger universe of credit opportunities compared to the relatively small Canadian market. Emerging market bonds as well as high yield bonds can add significant yield, yet also be held in a diversified manner. Funds are able to hedge currencies of global bond positions, to allow clients to have a more stable yield experience. The average credit quality of bonds held can be better while the yield is also higher. They are able to participate in agency and non-agency mortgages and loans directly. They can own asset backed securities and commercial mortgage backed securities. They can own floating rate loan products to help protect against rising rates. They have institutional access to new issue, which often lets them buy at discounts. There is no bid/ask spread that is lost when trading funds, unlike when individual bonds are purchased. Combining direct ownership of Canadian bonds to reduce fees and control maturities with the expertise and significantly expanded global universe of fixed income products available to third party managers can help maintain a stable fixed income portion of a portfolio.

5 Fall Sector Shifts in Equity Increases in exposure to Health Care and Financial stocks represented the biggest changes in the equity components of managed portfolios. With the repeal of Obamacare failing twice, investors feel it is less likely that any significant change to health care will happen for the next few years. Pharmaceutical stocks began their prolonged period of weakness in late 2015, over a year before the U.S. election. The immense cost of drugs and health care seemed to be an easy election issue target. Clinton was expected to cut drug company profits further. No one was quite sure what Trump would replace Obamacare with. Many companies in the health sector continued to grow their profits while investors reduced health stocks and stayed on the sidelines. This past summer, the failure to make any meaningful change to government programs seems to be the catalyst for investment capital to return. Equity Sector Allocation Managed clients now have 10% of their equity in health care compared to none at the beginning of These include four individual biotech/drug stocks and a biotech exchange traded fund. Managed clients increased their exposure to financial stocks by 8-10% over the summer to now hold a quarter of their investments in that sector. Canadian banks represented the greatest amount of new financial positions added to portfolios. Higher interest rates brought about by the Bank of Canada over the summer is positive for the net margins and profitability of Canadian banks. The global trend of inflation and rates rising is also helpful, coupled with Canada posting strong GDP and job growth. Technology stocks also represent one-quarter of equity held. A focus continues to be on large internet commerce companies that are leading changes in how business around the world is conducted. Through exchange traded funds, companies like Apple, Google, Samsung, Facebook, Amazon, Netflix, Ebay, PayPal, Microsoft, and many other leading global companies continue to be stock market leaders. This is supplemented by individual stocks owned in the software and semiconductor manufacturing space. Industrial and consumer stocks represent about one-eighth of the equities held. U.S. Military and Aerospace stocks owned in an exchange traded fund basket represent a portion of the industrial sector held. Global security budgets continue to escalate whether it relates to cybersecurity, terrorism, or global political tensions. Industrial companies manufacture things or build infrastructure. U.S. tax changes are expected to reward companies that build and invest in America, with industrial companies potentially being a primary beneficiary. Three of the larger consumer stocks that are held include Disney, Electronic Arts, and Spin Master. These are three companies at the forefront of consumer entertainment. Disney in particular is in the midst of a broadcasting revolution on how content is delivered to media consumers. Their intention to launch a streaming service with their own content that includes ESPN is, in my view, visionary. They are supported by strong growth in their base theme parks, blockbuster films, and consumer product lines. Source: Richardson GMP, sample client Account, balanced portfolio

6 Fall There is also a growing commitment to international exposure outside of Canada and the United States. It is still relatively small at only 5% of equity in a portfolio. Weakness in the U.S. dollar is usually accompanied by global GDP strength for the ensuing year. Valuations are attractive in Europe, particularly in Germany and France. Managed portfolios don t hold any exposure to the United Kingdom which still holds Brexit uncertainty. Global managers at Mawer and Dorsey Wright have very attractive and specialized skills investing around the globe, particularly in emerging markets. It is notable what is absent in managed portfolios as well. Utilities, telecom, and staples stocks are under-owned. Valuations tend to be high in these groups while growth is very low. During times where markets are strong, regulated and low growth industries tend to under-perform. Commodity companies also have little exposure in portfolios. With most commodities trading at half or less of their peak prices set a couple years back, many energy and metals companies are struggling to survive by cutting costs. Stocks don t tend to make significant gains when cost cutting is going on. High levels of energy inventories continue to make meaningful energy price growth very difficult. Managed Account Results Benchmark Managed Portfolios Most managed clients hit a new portfolio high for the year recently. Canadian dollar falling combined with a surge in global stock markets over the last few weeks were the biggest contributors to the recent surge in results. Client portfolios had a very strong start to the year, especially relative to Canadian indexes. Source: Richardson GMP, net of fees, unaudited Growth Portfolio is one specific growth-oriented managed account. The asset mix is approximately 80% equity, 5% fixed income and 15% alternative investments. Balanced Portfolio is one specific balanced managed account. The asset mix is approximately 47% equity, 32% fixed income, 16% alternatives, and 5% cash. Selected accounts are considered representative of growth and balanced portfolios across most managed client accounts. The level of cash varied throughout the quarter. Individual managed accounts vary in results due to customization. Deposits or withdrawals to portfolios, and the resulting implementation of changes in securities held represents the largest cause for differences in accounts. Client-directed and non-model securities held in managed accounts can also result in a significant performance deference from the average experience. Markets slowed over the summer. A surge during that time in the C$ negatively impacted holdings of global equities. Continued strength and performance by U.S. and global positions was masked during the summer by accounts reporting performance in Canadian dollars. Once the Canadian dollar s surge reversed, the global gains became more apparent.

7 Fall Represents the six largest tactical positions held in managed accounts. They are all exchange traded funds.

8 Fall Represents the six largest individual stocks held in managed accounts.

9 Fall Call Me for a Discussion Want a partner to help you with managing your financial decisions? Have enough to do at work? Wish you could spend more time with your family? Is watching Netflix more appealing than reviewing charts and financial statements? When do you get time to develop your hobbies and personal interests? Not sure how to structure a portfolio to optimize tax reduction? Can t keep up with all the changes in taxation, technology, and financial markets? Please give me a call. Let s find out if we can save you some time, improve your results, and give you a greater sense of confidence in your financial strategy. I sincerely appreciate your business. I strive to earn your trust. I appreciate introductions you could make for me to any family or friends that might benefit from our services. Regards, Brad A. Hunter, CA, CFP, CIM Portfolio Manager, Director, Wealth Management Richardson GMP Limited Suite th Avenue SW Calgary, AB T2P 1G1 Direct Brad.Hunter@RichardsonGMP.com Web The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Insurance services are offered through Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC,NB,NS,PEI and NL. Additional administrative support and policy management are provided by PPI Partners. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.