Investment Options For Co-ops. CHF Canada, AGM Victoria, June 8/18 Joe Hayes, Encasa

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1 Investment Options For Co-ops CHF Canada, AGM Victoria, June 8/18 Joe Hayes, Encasa Investing (n-vsting) The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. CHF Canada Workshop 1

2 Why invest Risk management Loss of value of capital Financial management Growth of capital Board fiduciary Oversee and mange all assets of the organization Plan for future capital requirements Investing basics CHF Canada Workshop 2

3 Investing basics Asset classes Asset sectors Bonds and equities Mutual funds Exchange Traded Funds Compounding Risk Volatility Socially responsible investment / ESG Main Asset Classes Cash / cash equivalents Bonds / Fixed income Equities/ stocks Alternatives Bank deposits Money market instruments Guaranteed investment certificates Debt issued by governments or corporations Shares or share equivalents issued by corporations Complex Limited regulations Limited Market 6 CHF Canada Workshop 3

4 Asset classes Risk and return 7 Asset sectors Materials Telecommunication Services Consumer Discretionary Consumer Staples Energy Financial Health Care Industrials Information Technology Utilities Sectors used in Encasa Social Housing Investment Funds Canadian Equity Fund Method to categorize stocks Area of the economy in which businesses share the same or a related product or service Each sector has unique characteristics and risk profile CHF Canada Workshop 4

5 Bonds (fixed income) Issued by government or corporations Government bonds generally very secure Fixed term (maturity) Fixed coupon (rate of return) Interest payable over the course of the bond term (usually semi-annually) Principle (par value)can be paid over the term or at maturity Example: $1,000 bond (par 5% / 10 year term Interest earned $50 / year x 10 years = $500 Par value at Year 10 - $1,000 Bonds - risks Rate of return based on risk of bonds Lower for government bonds Higher for corporate bonds Higher the longer the bond term Bonds are bought and sold (traded) Can be held to maturity Can be bought and sold before maturity Value when sold before maturity may not be the same as the initial purchase price (face value) CHF Canada Workshop 5

6 Bonds risks Interest rate risk When interest rates rise, bond prices fall. When interest rates fall, bond prices rise Inflation risk This is the risk that the return you earn on your investment doesn t keep pace with inflation. Market risk This is the risk that the entire bond market declines. If this happens, the price of your bond investments will likely fall regardless of the quality or type of bonds you hold Credit risk If you buy bonds from a company or government (issuer) that isn t financially stable, there s more of a risk you ll lose money. This is also called default risk (possibility the issuer won t pay back the par value of the bond when it matures). Bond performance CHF Canada Workshop 6

7 Equities Stocks / equities Own part of business (shareholder) Claim on some of the company s assets and earnings Part of company profits may be paid as a dividend to shareholders Amount of dividends varies from year to year Based on company performance Based on company need for cash (reinvestment, debt payment, etc.) Value of stock varies Based on company performance General market conditions Other factors Stocks performance over time (TSX SP/TSX) CHF Canada Workshop 7

8 Mutual funds Pool of investments Investments selected by portfolio manager Each fund as a defined objective Retail mutual funds open to all investors Mutual funds Variety of mutual funds Common types: Fixed income funds Short and longer term Equity funds Canadian Foreign Mixed Balanced funds Mix of fixed income and equities Provide exposure to a large array of securities with a single investment CHF Canada Workshop 8

9 Mutual funds Many funds accessible by all types of investors Not limited by size of investment Type of investor (retail or institutional) Advantages significant: Professional management Access to markets Diversification Costs More than $1 trillion is invested in mutual funds in Canada Liquidity (ability to cash in investments at any time for retail funds) Encasa Social Housing Investment Funds example of fully liquid retail mutual fund Mutual funds - costs Management Expense Ratio (MER) The MER is the total of the management fee, operating expenses (or administration fee) and GST/HST Sales Commissions (load) One-time fee paid for the sale of units in a mutual fund No load funds do not have sales commissions (e.g. Encasa SHI Funds) Can be paid at time of purchase (front-end load) or at sale (back-end load) Short-term trading fees Usually apply when investment is intended to be long term Not charged by all funds CHF Canada Workshop 9

10 Mutual Fund Returns Value of a fund unit is expressed as the Net Asset Value (NAV) Retail Mutual funds calculate this daily Returns are two parts Capital gains (losses from sale of securities bonds or stocks) Distributions or earnings from the securities Value of unit rises / decreases with values of underlying securities (bonds and stocks) When earnings from fund units are re-invested in the funds, impact can be significant (compounding) Exchange Traded Funds (ETF) Marketable security similar to an index fund Tracks an index, a commodity, bonds or a basket of assets Trades like a common stock Tracks the value of the underlying securities Different liquidity than retail mutual funds Does not have a daily net asset value Market determines liquidity Often has lower management fees Commissions on buys and sells CHF Canada Workshop 10

11 Returns effect of compounding $20,000 $18,000 $16,000 $14,000 Compound Interest Investment Earned interest / capital gains is re-invested When asset value increases, more interest is earned $12,000 $10,000 $8,000 Period (month) 1.5% Investment beginning of period 3% Investment beginning of period 6% Investment beginning of period Returns effect of inflation $54,548 $40,101 $29,386 Inflation Rate 22 CHF Canada Workshop 11

12 Risk Risk is the probability that an investment s actual return will be different than expected Can be measured and used to compare securities / funds Different kinds of risk Market Business Currency Credit Inflation Interest rates Securities selection Risk mitigation Selection of investment products Match risk tolerance of investor Diversification Asset types Asset classes Sectors Number of securities Securities selection process Mutual funds offer risk mitigation by the way in which they are constructed Diversified Broad range of securities CHF Canada Workshop 12

13 Volatility The rate at which the price of a security increases or decreases for a given set of returns Can be measured Investors must decide on tolerance for fluctuations in the value of their investments By type of security selected By type of fund chosen Fixed income tends to have less volatility than equities Historical Calendar Year Investment Fund Returns SH Canadian Short-Term Bond Fund 10 Year annualized return 2.66% SH Canadian Bond Fund 10 Year annualized return 3.99% SH Canadian Equity Fund 10 Year annualized return 5.45% Rates of return and distributions are for Series A units of the Social Housing Investment Funds (Funds). The Funds offer different series, which are subject to different fees and expenses. The Management Fee for Series B is higher than for Series A, which could affect performance. The rates of return published are used only to illustrate the effects of the compound growth rate and are not intended to reflect future values of the mutual fund or returns on investment in the mutual fund 26 CHF Canada Workshop 13

14 Model Investment Portfolio Historical Calendar Year Investment Fund Returns Portfolio 1 10 Year annualized return 2.66% Investment of $100,000 = $130, Portfolio 2 10 Year annualized return 3.61% Investment of $100,000 = $142, STB: 100% BF: 0% CEF: 0% STB: 45% BF: 45% CEF: 10% Portfolio 3 10 Year annualized return 4.17% Investment of $100,000 = $150, STB: 25% BF: 50% CEF: 25% Portfolio 4 10 Year annualized return 4.56% Investment of $100,000 = $156, STB: 15% BF: 45% CEF: 40% 27 Model Investment Portfolio Historical Calendar Year Investment Fund Returns Portfolio 5 10 Year annualized return 5.21% Investment of $100,000 = $166, STB: 5% BF: 15% CEF: 80% The model portfolios provide hypothetical performance information using the stated fund allocations. Each model portfolio is calculated based on monthly Social Housing Investment Fund Series A returns and assuming that allocations are rebalanced at the end of each month. Performance information comprises hypothetical returns based on a model portfolio, rather than actual returns. Providers should assess their overall investment objectives and risk tolerance to determine an appropriate asset mix for their portfolios. Past performance is not indicative of expected future returns. 28 CHF Canada Workshop 14

15 Responsible investing - SRI Socially Responsible investment Investment in securities that have positive social or environmental values Most often achieved by excluding securities That do not meet agreed principles That are issued by companies whose products or actions considered harmful to individuals and / or communities Common exclusions are: Alcohol, Tobacco, Arms manufacture, poor environmental records, poor labour and child labour practices, gambling, pornography Most SRI policies allow for some excluded content (e.g. limit on % of income from excluded businesses) Responsible - ESG Builds on goals of SRI Selection of securities based on Environmental, Social and Governance criteria Uses a combination of screens and risk assessment Often includes active shareholder engagement where criteria not met by company Can be more flexible than fixed screens Broader assessment than many SRI approaches Allow inclusion of securities of companies that may have one characteristic that needs improvements but on balance meet overall rating CHF Canada Workshop 15

16 Area of focus Activity Potential impact on financial performance Environment Resource management Avoid or minimize environmental and pollution prevention liabilities Reduced emissions and Lower costs/increase profitability climate impact through energy and other Environmental efficiencies reporting/disclosure Reduce regulatory, litigation and reputational risk Indicator of well-governed company Area of focus Activity Potential impact on financial performance Social Workplace Diversity Health and safety Labor-Management relations Human rights Product Integrity Safety Product quality Emerging technology issues Community Impact Community relations Responsible lending Workplace Improved productivity and morale Reduce turnover and absenteeism Openness to new ideas and innovation Reduce potential for litigation and reputational risk Product Integrity Create brand loyalty Increase sales based on products safety and excellence Reduce potential for litigation Reduce reputational risk Community Impact Improve brand Corporate philanthropyloyalty Protect license to operate CHF Canada Workshop 16

17 ESG Framework (cont) Area of focus Activity Potential impact on financial performance Corporate Governance Executive compensation Board accountability Shareholder rights Reporting and disclosure Align interests of shareowners and management Avoid negative financial surprises or blow-ups Reduce reputational risk Investment where to start Capital planning What are future requirements Financial plan What are current and future reserves When will reserves / capital be required Investment policy Statement of objectives Risk tolerance Asset allocation Based on advice CHF Canada Workshop 17

18 Risk (Volatility) Asset allocation (Investment strategy) Asset allocation is based on: Investment goals (capital requirements) Liquidity requirements Timing of requirements Investor knowledge Risk tolerance An ideal asset allocation would match specific financial instruments with the timing of liabilities Short-term funds (1-5 years) would be cash equivalents and shorter duration bonds Bond funds (4-10 years) for the mid-term horizon include government and corporate bonds Longer term funds (8 years +) would consist of a highly diversified portfolio of equities Range of Investment Options Trade-offs Between Risk and Returns SH Canadian Equity >7yrs 5-7yrs SH Canadian Bond 1-5yrs SH Canadian Short-Term Bond Years to Capital Expenditure CHF Canada Workshop 18

19 Managing investments Based on an investment strategy Should be reviewed annually Review capital needs Review investment strategy to ensure capital requirements being met Rebalance allocation of assets Social Housing Investment Program (SHIP) Three investment funds Opportunity for effective investment of capital, operating and other reserves Advice and support for investors access to professional money management expert advice and understanding of investment needs individuals who know social housing programs and requirements 38 CHF Canada Workshop 19

20 SHIP program origins Program created in 2002 in Ontario targeted to non-profit and co-op housing providers Response to low % returns on reserve fund, eroded by high fees investment returns %< inflation Successful 15 year performance track over 870 investors significant growth in assets positive returns to unitholders Ownership of Encasa Financial Inc. expanded in 2014 includes BCNPHA, Co-operative Housing Federation of BC, Co-operative Housing Federation of Canada, Housing Services Corporation (Ontario) pan-canadian access to Social Housing Investment Program 39 Program Statistics as of December 31, unitholders Total Assets Under Management $546 million Total Assets Under Management $546 M Millions of dollars AUM has grown an average of 4.1% ($17.9M) each year over the past 10 years* * As of the end of CHF Canada Workshop 20

21 Management Fees and Ranking as of December 31, 2017 CSTBF CBF CEF MER (Series B) * 0.85% 1.04% 1.34% Average MER of comparable Canadian funds ** 1.12% 1.26% 1.89% * The Management Fee described in the prospectus. ** The independent source of this data is Morningstar. 41 Socially Responsible Investing (SRI) The Social Housing Investment Funds invest in companies that conduct themselves in a socially responsible manner and have socially responsible business practices. Sustainalytics Integrates environmental, social and governance factors into their investment processes (ESG). Avoid Alcohol tobacco pornography gaming Favour Environment workers rights strong governance 42 CHF Canada Workshop 21

22 Rates of Return Rates of Return for Series B as of December 31, months 2 % 6 months 2 % 1 year % 3 years 3 % Since Inception Social Housing Canadian Short-Term Bond Fund-Series B Social Housing Canadian Bond Fund-Series B Social Housing Canadian Equity Fund-Series B Rates of Return for Series A as of December 31, (Nov 24, 2014) 3 months 2 % 1 year % 3 years 3 % 5 years 3 % 10 years 3 % Social Housing Canadian Short-Term Bond Fund-Series A Social Housing Canadian Bond Fund-Series A Social Housing Canadian Equity Fund-Series A Rates of return assume reinvestment of all distributions, after deduction of fees. 2. Three-month and 6-month rate of return is a simple return on investment (not annualized). 3. Annualized returns. The management fee for Series B is higher than for Series A, which could affect performance. Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or Fund Facts document before investing. The performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charge or income taxes payable by any unitholder that would have reduced turns. Mutual funds are not guaranteed. Their values change frequently and past performance may not be repeated. 3-year GIC vs. Social Housing Canadian Short-Term Bond Fund Year GIC return (%) 3.0% 3.0% 1.4% 1.4% 1.4% 1.1% 1.1% 1.1% 1.2% 1.2% CSTBF return (%) 6.8% 6.6% 3.1% 3.1% 1.6% 1.1% 2.5% 1.9% 0.7% -0.4% 10-year return 1.8% 2.7% Rates of return shown are for Series A units of the Social Housing Canadian Short-Term Bond Fund (Fund). The Fund offers different series, which are subject to different fees and expenses. The Management Fee for Series B is higher than for Series A, which could affect performance. GICs are investments that guarantee the deposit principal, while earning a pre-determined rate of return for the investment term. 44 CHF Canada Workshop 22

23 3-year GIC vs. Social Housing Canadian Bond Fund Year GIC return (%) 3.0% 3.0% 1.4% 1.4% 1.4% 1.1% 1.1% 1.1% 1.2% 1.2% CBF return (%) 2.4% 8.3% 6.4% 7.8% 2.9% -1.7% 8.2% 3.0% 1.4% 1.7% 10-year annualized return 1.8% 4.0% Rates of return shown are for Series A units of the Social Housing Canadian Bond Fund (Fund). The Fund offers different series, which are subject to different fees and expenses. The Management Fee for Series B is higher than for Series A, which could affect performance. GICs are investments that guarantee the deposit principal, while earning a pre-determined rate of return for the investment term. 45 Legal Disclosure This information has been provided by Phillips, Hager & North Investment Funds Ltd. (PH&NIF) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. PH&NIF takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Due to the possibility of human and mechanical error as well as other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, PH&NIF is not responsible for any errors or omissions contained herein. PH&NIF reserves the right at any time and without notice to change, amend or cease publication of the information. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus or Fund Facts documents before investing. The performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Past performance may not be repeated. Encasa Financial Inc. is the fund manager for all Social Housing Investment Funds. RBC Global Asset Management Inc. (RBC GAM) is the portfolio adviser for all Social Housing Investment Funds. PH&NIF, which uses the business name PH&N Investment Services, is the principal distributor of the units of the funds. The management fees and operating expenses associated with the Social Housing Investment Funds are paid by the respective fund. RBC GAM and PH&NIF are indirect, wholly-owned subsidiaries of Royal Bank of Canada. / Trademark(s) of Royal Bank of Canada. Used under licence. RBC Global Asset Management Inc CHF Canada Workshop 23

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