IMPLEMENTING YOUR TRUST AND INVESTMENT STRATEGY AFOA 16 TH NATIONAL CONFERENCE 2016

Transcription

1 IMPLEMENTING YOUR TRUST AND INVESTMENT STRATEGY AFOA 16 TH NATIONAL CONFERENCE 2016 Jeff Frketich, CPA, CGA, CFA Peace Hills Trust Don Stuart, CFA Dixon Mitchell

2 2 Agenda Background What is a Trust Implementing a Trust Investment Process Reporting and Fees Questions

3 3 Background IfitisaSpecificClaimSettlementwithCanada,the Settlement Agreement will require that the compensation be paid into a trust established by the Nation The trust must be for the long term benefit of the Nation Canada will not place restrictions on your trust Agreement

4 4 Background Ifthesourceofthefundsisfroman ImpactBenefit Agreement, the Participation Agreement will set out requirements for the trust Contractual requirements Minimum parameters The trust must be consistent with the Participation Agreement

5 5 What is a Trust? 1. AtrustisnotaNationnorisitanIndigenousPerson 2. It is a separate legal entity 3. A trust protects and separates assets; trust funds cannot be mixed with other Nation funds 4. Allows for clear monitoring over time 5. Itisarulebookthatpreservesandprotectsfundsfortoday s and future Members

6 6 What is a Trust? It s a Relationship! THE SETTLOR THE TRUSTEES BENEFICIARIES Directs the funds to be placed in the Receive the benefits from the Trust Protect & manage the Trust Property Trust The The The

7 7 Trusts -Why have Them? Trust are good vehicles in and of themselves: They offer protection from creditors The preserve the capital and provides long term cash flow A way to turn a non renewable resource into a renewable resource Stops the fear that the funds may not be used for the purpose for which they were intended

8 8 Implementing a Trust General comments: Take the time to do it right the first time Get professional help Beware the expensive amateur Ask for, and check, references First question to ask every supplier is what s in this for you?

9 9 Implementing a Trust Begin by setting up a working group: Should include Council members, elders, youth, on/off reserve members, lawyer, financial advisors and trust experts The working group then begins: 1. Establish a plan 2. Engage the community 3.Write a draft trust 4. Engage the community 5. Take the trust to Ratification

10 10 Implementing a Trust -The Plan Start the discussion with what is the purpose of the trust? What does the Nation want to accomplish with the money No matter how much money you get, it is never enough, so you must prioritize Outsiders can come up with a laundry list, but it is your money, so the Nation must decide Establish reasonable timelines; write them down

11 11 Implementing a Trust -The Plan Make sure to discuss the possible elephant in the room: PCD How much? Can there be encroachments on capital? Can the Trust provide loans or loan guarantees? What is considered income? Investments? Reporting Council and the Trustee (s)? How long will the Trust last?

12 12 Implementing a Trust Community Engagement Provide basic trust training to Membership Go to Members and ask them what their vision is for the trust - What do they see the trust accomplishing? Explain the options and consequences of the choices Run the numbers Talk to as many Members as possible, both on and off reserve

13 13 Implementing a Trust Draft a Trust Agreement Put it on paper so that everyone can see what it looks like Don t go to a dentist about a sore foot Go through it clause by clause: Does it make sense, is it consistent throughout the document Professional trust experts can be a big help

14 14 Implementing a Trust Community Engagement Yes, again! Engaging the community is a positive action: Make sure Membership is provided a copy of the trust and a simplified version of the trust in plain language Make sure to post all this on your website Go through the trust in simple format Allow for lots of feedback from Membership We have found tables of smaller groups are better than a large group format. Some members are too shy to ask questions

15 15 Implementing a Trust Ratification Give Members lots of notice as to how and where to vote Provide assistance to Elders who need transportation If you have had lots of communication with membership and provided them with opportunities to provide feedback, you should have a positive vote

16 Investment Process Investment Policy Statement 16 The trust should call for an IPS to be written Crucial part of the investment process Job description for your Investment Manager. Written by a CFA, but NOT your Investment Manager.

17 Investment Process Investment Manager Search 17 Important part of due diligence Shows Members that the process was unbiased Provides historical record of how the process took place and why decisions were made When done correctly, the Nation can not make a bad choice

18 Investment Process Investment Manager Search 18

19 19 Planning to Invest Today s Agenda No forecasts for: Interest Rates Price of Oil Canadian Dollar GDP growth TSX & S&P performance Lotto Max winning numbers For this information to be useful, two assumptions are required: 1. I have a better crystal ball than everyone else. 2. You d actually be able to put the predictions to good use. Instead, this presentation will cover two important questions: 1. Why invest? 2. What does a successful investment plan look like?

20 20 Who is Dixon Mitchell? Discretionary asset manager established more than 15 years ago on a foundation of client service, investment excellence, corporate integrity Clients include both individuals and institutions First Nations accounts are important part of institutional client base growth due to match between DM corporate personality and First Nations culture and goals DM is owned by its employees, FN clients always deal with at least one of the firm s senior partners

21 21 Options for placing First Nations Assets 1. CASH Advantages most liquid, secure Disadvantages no growth/income, value eroded by inflation $13.6m

22 22 Options for placing First Nations Assets 2. BONDS/GICs Advantages relatively liquid, secure, returns are certain Disadvantages interest rates very low, yields will only cancel out inflation (at best) 3. REAL ESTATE Advantages can touch it, rental income/development possible Disadvantages maintenance costs, high concentration, limited liquidity 4. DIVERSIFIED FINANCIAL PORTFOLIO Advantages potential for higher returns/income, reasonable liquidity, portfolios can be customized to meet investor profile Disadvantages returns not guaranteed, price transparency can undermine ability to maintain long term investment

23 23 Don t Build without a Plan Imagine a First Nation receives capital and selects DM! Identify community profile Sensitivity to risk, preference for current income vs. long term growth, past investment experience / knowledge Establish investment goals Time horizon, expenditure objectives, legacy and education goals Construct Investment Policy Statement Encapsulates goals and limitations of community Identifies acceptable investment vehicles to meet these aims Establishes performance objectives and review policies

24 24 DM approach vs. typical 1 st Nations Goals At core of DM s mgmt. approach is a hierarchy of objectives: 1. Capital integrity ensuring that client assets are safeguarded through time FN Perspective intergenerational continuity 2. Cash flow generation owning assets that produce, grow, and distribute cash flow FN Perspective funding of community goals 3. Capital appreciation generating capital growth within portfolios FN Perspective ensuring assets keep up with rising costs

25 25 Components of a Financial Portfolio 1. CASH - to meet client liquidity needs - accumulated dividends/interest - proceeds of position sale not yet deployed 2. FIXED INCOME - government and corporate bonds - dampens portfolio volatility - maturities arranged to immunize known expenditure needs 3. EQUITIES - Canadian and foreign stocks - generate both capital growth and dividend income - most volatile component of portfolio

26 26 What is a Stock? Part ownership of a business Companies become successful because they: offer a product or service that people want/need are able to charge a premium for that item, or deliver for less than their competitors create barriers to competition that protect their business For DM, worthy stocks represent operating business which: generate and distribute cash flow are run by ethical and talented management teams can be purchased at reasonable valuations relative to their underlying fundamentals

27 27 Typical DM Stock Dominant Canadian discount retailer, founded in 1992 by current CEO

28 28 What we like about Dollarama Management consistency founder is still CEO Alignment of interests insiders own more than 6% of co. Room for growth 740 stores Ontario & East, 215 stores Manitoba & West Economies of scale strong product networks, volume discounts, branding and margin control Economically counter cyclical, not reliant on a small number of large customers Not impacted by commodity prices, interest rates, regulation These attributes have allowed Dollarama to generate significant earnings growth over past decade

29 Dollarama sales and income 29

30 30 Cash flow production and use: Change in cash = -$55m CFO = $1,325m Debt repaid = -$177m Capital Expenditure = -$460m Dividends paid = -$125m Acquisitions = $0 Share repurchase = -$580m

31 31 Dollarama the stock DM first bought Dollarama in 2013 at approx. $30/share Sold 1/4of balance Sold 1/3of position Original Purchase Sold 10% of balance Sold remaining shares Final sale at $82.30, shares now at $73

32 32 The opposite of Dollarama This summer, Valeant Pharmaceuticals became largest company in TSX bigger than Royal Bank Valeant s meteoric rise gave it outsized influence on the index and within index-based portfolios

33 33 Valeant Pharmaceuticals But Valeant s business model was driven by tax aversion and an extremely aggressive pricing strategy, obscured by opaque and misleading accounting practices As a steward of client capital with a disciplined investment approach, DM could not own Valeant, despite weight in TSX Most other managers disregarded the stock s shortcomings: 73 Cdn funds had at least 4% of assets in VRX as of last report In Q2, VRX was 3 rd largest holding in AGF Cdn Dividend Fund Nat l Bank Canadian Equity Growth Fund allocated nearly 5% of assets to VRX in March; manager said it was too high a risk to avoid Valeant because of its heavy weighting in the TSX

34 34 Valeant (cont d) Valeant shares fell 60% this summer on government probing, questions re: the sustainability of its business model, and revelations about questionable dealings

35 35 Taking care of clients In our experience, real life goals are best achieved by: establishing a financial plan and investment policy that reflects objectives, constraints, and unique circumstances of each client allocating assets to a management style that matches these requirements by investing in an appropriate subset of the overall market at a reasonable cost monitoring and reviewing plan, making adjustments to plan and portfolio to reflect changing investor profile helping clients stay invested during difficult periods

36 36 Reporting to Membership Members have a right to know what is going on in the trust they are beneficiaries If you don t give them the facts, they will just start making things up Set up regular reporting procedures, and stick to them: Annual meetings with Members; include Investment Manager(s) Newsletters, secure website; post audits; financial reports

37 37 Administration Fees What is all this going to cost? What should it cost? Remember that any money spent on Administration does NOT go to the Nation Rule of thumb is the total annual administration cost should not be more than 1% of the asset value There are economies of scale: A $50 million trust will cost less than a $10 million trust A trust will cost more in the first year or so

38 38 Thank You and Questions Jeff Frketich, CPA, CGA, CFA AVP Trust Services Direct Line: Cell: Don Stuart, CFA VP Dixon Mitchell Direct Line: Cell:

39 39 DM client experience since exception To 31-Dec year 3 year 5 year Inception Portfolio 4.2% 10.8% 9.2% 7.2% Benchmark 2.1% 8.9% 7.0% 5.1% Notes: Benchmark = 40% Broad Bond Univ., 39% S&P/TSX Total Return Index, 21% S&P 500 ($C) Total Return Index; returns are calculated before management fees, but after the deduction of all trading costs

40 40 DM Canadian Equity Portfolio value added Since inception in 2000, the DM Cdn Equity Portfolio has outperformed the TSX by more than 5% per year, on average Over the past five years, DM s approach has added significant value above the TSX index Note: returns are calculated before management fees, but after the deduction of all trading costs

41 41 DM Disclosure The information herein has been obtained from sources that Dixon Mitchell Investment Counsel Inc. believes to be reliable, and although care has been taken in preparing this presentation, Dixon Mitchell Investment Counsel Inc. does not guarantee its accuracy or completeness, and is not responsible for any errors or omissions. The portfolio rates of return in this report are calculated in percentage terms based on Time Weighted Returns after deduction of investment management fees and all trading costs. The rates of return are historical rates of return. We do not guarantee any rates of return and past rates of return do not provide an indication as to the future rates of return. Future rates of return could be positive or negative. Rates of return for periods greater than one year are annualized.