Worth Allaye-Chan Investment Counsel West Georgia Street Vancouver, BC V6C 3L2

Transcription

1 Worth Allaye-Chan Investment Counsel West Georgia Street Vancouver, BC V6C 3L2 Office: Toll Free:

2 DISCLAIMER The opinions expressed at the seminar will be those of Dr. Brian Worth, and not necessarily those of Raymond James Ltd. Statistics and factual data and other information presented at the seminar are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Securities are offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member-canadian Investor Protection Fund. 2

3 RELATIONSHIPS CLIENT Financial Plan Investment Advice Asset Allocation Portfolio Management Client Service WORTH ALLAYE-CHAN INVESTMENT COUNSEL Registered Portfolio Managers Macro-economic analysis Quantitative stock analysis Buy side (independent) research SRI screening (when requested) Investment Plan/Portfolio Reviews Regulatory membership - IIROC Membership - Canadian Investor Protection Fund CDS participant Capital Management Portfolio Manager Support A registered investment dealer Trading platform and systems Sell side and buy side research Oversight, compliance & reporting 3

4 GOVERNANCE AND POLICIES For Foundations, it is said that the five key components of good financial governance are: Budget Financial Reporting Audit Investment Policy Spending Policy Similar for most investing institutions. Investment Policy is an essential part of good governance. First Nations communities have unique challenges in building an investment policy. Here we will broadly describe parameters that you will need to address. This is not an all-encompassing list and may be more detailed for a higher net worth investor. 4

5 FUNCTIONS OF A FULL INVESTMENT POLICY Once completed, reviewed and updated a full policy will: Define the community as a financial investor Define the structure: key responsibilities and personnel; organizational structure; Define investment risk management structure; Assign responsibilities for reporting, monitoring. Document acceptance of the policy and updates. Specify responsibilities; Describe the process for review and update; Describe the process for engaging and discharging PMs Define roles & responsibilities of committees and officers / staff Assign responsibility for asset allocation and rebalancing. Define a process for rebalancing. 5

6 FUNCTIONS OF A FULL INVESTMENT POLICY. Assign responsibility for risk management, monitoring and reporting. Describe the overall investment objective(s) Describe risk and return objectives Define the investors risk tolerance. Itemize constraints and boundaries Identify tax considerations that may affect investment decisions Identify policy requirements for: liquidity; concentration; base currency; foreign content; use of leverage. State the investment philosophy, Indicate a proxy voting policy. Define metrics for risk measurement Define a time frame and process for rebalancing to target asset allocations. Define a time frame and a process for updating the policy. 6

7 CONTENT What is an Investment Policy? Why do you need one? What is an Investment Policy Statement? Who should be responsible for creating, updating and monitoring? Separating out funds designated for different purposes. Determination of time horizon, risk tolerance and asset allocation for each separate fund Are the return expectations and risk assumptions realistic? Define withdrawal, liquidity, diversification, foreign content, base currency and other constraints or requirements, What about SRI / ESG? Hard policy or overlay? 7

8 CONTENT What metrics are to be used in evaluating performance and risk? Using an appropriate benchmark(s). Choosing a manager(s). Knowledge, trust and communication. Frequency of reporting Documenting acceptance, review and compliance? Engaging and discharging managers SAMPLE; risk & objectives assessment process 8

9 WHAT IS AN INVESTMENT POLICY? A documented roadmap and guidelines of the who, how, where and what for. An IP may be a requirement, but in any event it is a necessity. A set of guidelines to be adopted & reviewed by a new council and / or a new CFO or CIO A central document that contractual relationships with 3 rd party managers must satisfy. A separate policy (IP) might be put in place for distinctly different pools of funds, but cumbersome. In any event, a distinct time horizon, objective and acceptable risk assessment must be done for each pool. 9

10 WHAT IS AN INVESTMENT POLICY? Most themes are very long term Included in main body of the IP Those likely to change, use an Appendix: Short term cash management parameters Project funding parameters People officers committees responsible Return expectations Withdrawal requirements & timing Asset allocation for each pool Foreign content policy. This gives us an opportunity to move off topic momentarily. 10

11 FOREIGN CONTENT Many old IP are very Canada centric, need updating for both: Fixed income duration. After 32 years of declining interest rates, the cycle will change and dramatically affect the reward from fixed income component, and in turn may affect asset allocation decisions and risk. Foreign content allowances. Canadians (and other commodity exporting economies) have enjoyed nearly 20 years of the commodity super-cycle; boosted economy; currency, and markets This super-cycle peaked in 2011 and broke down in 2014 Those days are gone, perhaps for quite some time Is Canada the best place to invest? Is a 5 20% foreign content allowance appropriate in today s world? We can no longer afford to be Canada centric investors Commodity prices are not just In a downturn. Outside of an event commodity prices are returning to the norm Main drivers of the super-cycle Afghan & Gulf Wars China growth 11

12 200 YEARS OF COMMODITY PRICES Through the agency of innovation, technology and improving productivity, commodity prices have been in decline for over 200 years. Aberrations have led to commodity bull markets over the period, the most recent caused by rapid China manufacturing and infrastructure growth. The current period of cheaper commodities is not unusual, in fact it is the norm. 12

13 COMMODITY SUPER-CYCLE End of the commodity super-cycle Source: Bloomberg 100 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 13

14 AN EVOLVING CHINESE ECONOMY China s manufacturing & construction sectors are now less important to their economy. Their GDP growth is not just slowing as it matures, but is changing as service sectors serving the growing middle class represent a much larger portion of their GDP. This is not a smooth rebalancing and overall GDP growth has been volatile; they need less stockpiles of commodities. 14

15 INVESTMENT POLICY - WHO ARE THE KEY PEOPLE? Council will likely hold final authority Investment Committee; Executive Committee; CIO, or CFO responsible for: IPS & IP updates Re-allocating / rebalancing funds between managers or mandates Maintaining records Meeting with investment manager(s) Monitoring investment performance and compliance Engaging / discharging manager(s) Reviewing custody status Instruct manager(s) regarding additions and withdrawals of funds. Continuous reporting to Council 15

16 THE KEY PEOPLE Investment Consultant (if applicable) responsible for: Assist in generating IP & IPS Investment manager search, short listing Monitoring performance and adherence to IPS Assist in assessing relevance of economic and market outlook from managers Advise on update recommendations Advise on rebalancing & asset allocation decisions Advise on fees and custody Accounting & legal Representation as required. 16

17 THE KEY PEOPLE Investment / Portfolio Manager(s) PM One or more PM contracted to invest funds Relationship(s) governed by an IPS which (in sum) reflect the IP One IPS for each manager May assist in the generation of IP, if qualified, but ideally any potential for conflict of interest to be avoided Provide monthly statements of position and transactions Provide data required for maintenance of records (cost base, book value etc.) Provide custody services or use the community s chosen custodian (to CDS or DTCC) Performance reporting (quarterly) Market and economic outlook (quarterly) Provide data to facilitate tax reporting (annual) 17

18 IMPORTANT COMPONENTS OF AN INVESTMENT POLICY & QUESTIONS TO BE ANSWERED a) Time Horizon For a pool of funds, how long can the money be invested? When is it needed? What level of volatility is tolerable? Examples: Operating cash / surplus 6 18 months? Cash management, guaranteed, low volatility, liquidity Schedule of withdrawals Project funding 2 4 years? Still low volatility, highly liquid securities Income biased profile may be appropriate Schedule of withdrawals Minors incentive funds: decades, but with scheduled withdrawals Schedule of payouts Longer horizon Balanced, but equity biased may be appropriate Future generations & trusts Very long term; growth profile? 18

19 GETTING THE RIGHT TIME HORIZON 19

20 THE RIGHT TIME HORIZON 20

21 THE RIGHT TIME HORIZON IS CRITICAL 21

22 TIME HORIZON & RISK Time Horizon, Risk and Mandates AGGRESSIVE GROWTH GROWTH EQUITY MANDATE INCOME BALANCED LOW RISK BALANCED CASH MANAGEMENT TIME HORIZON (YEARS) (Time Frame for Withdrawal(s)) Low Risk Moderate Medium Elevated High Source: Worth Allaye-Chan Investment Counsel 22

23 RISK & REWARD b) Risk & Reward What return is needed for each pool of funds? What risk (volatility) is acceptable for each? Is the assessed risk tolerance correct? What is your ABILITY to take risk? What is your WILLINGNESS to take risk? the sleep at night Example (from a CFA Institute article): You have money but you have already lost $1,000! How much more would you be willing to risk in order to win back your $1,000? Nothing. $200 $500 Another $1,000? This is classic risk tolerance assessment! 23

24 Return REAL RISK US mid/small cap Canadian mid/small cap Canadian equity Global equity Equity balanced Income balanced Bonds Risk (volatility) Maximum drawdown in % -15% -25% -50% -50% -50% 24

25 RETURN EXPECTATIONS c) Return Expectations The CFO, CIO or perhaps Investment Consultant or even the PM will need to manage expectations of return for a given level of risk. For the time horizon involved and the risk tolerance assessed, are the return expectations realistic? It is important to look at the actual returns of different levels of asset allocation over the last 10 years to see if expectations are even somewhat realistic. Note that we believe that the next 5+ years will offer even more modest opportunities than in the past. 25

26 ACTUAL HISTORICAL RETURNS 10/31/2015 Annualized Returns Asset Mix 1 Year 3 Year 5 Year 10 Year 100% XBB 4.05% 3.03% 4.01% 4.73% 90% Bonds 5% TSX 5% SP % 4.37% 4.82% 4.98% 80% Bonds 10% TSX 10% SP % 5.71% 5.62% 5.22% 70% Bonds 15% TSX 15% SP % 7.04% 6.43% 5.47% 60% Bonds 20% TSX 20% SP % 8.38% 7.24% 5.72% 50% Bonds 25% TSX 25% SP % 9.72% 8.05% 5.97% 40% Bonds 30% TSX 30% SP % 11.06% 8.85% 6.21% 30% Bonds 35% TSX 35% SP % 12.40% 9.66% 6.46% 20% Bonds 40% TSX 40% SP % 13.73% 10.47% 6.71% 10% Bonds 45% TSX 45% SP % 15.07% 11.27% 6.95% 50% TSX 50% SP % 16.41% 12.08% 7.20% Source: Bloomberg 26

27 CALENDAR YEAR RETURNS Calendar Year returns * 60% Bonds 20% TSX 20% SP % 1.78% -7.39% 11.80% 8.92% 4.68% 6.03% 9.91% 11.96% 3.23% 40% Bonds 30% TSX 30% SP % 1.02% % 15.21% 10.21% 2.33% 7.43% 15.62% 13.71% 3.88% * 10/31/2015 Source: Bloomberg 27

28 SOCIALLY RESPONSIBLE INVESTING, ENVIRONMENT SOCIAL GOVERNANCE, & IMPACT INVESTING SRI, ESG and Impact investing is an option for inclusion in an Investment Policy Can be quite subjective. Consensus sometimes difficult May need updating and perhaps best as an Appendix Performance relative to benchmark? Some use a simple exclusion policy Can also hold a small amount of a security to enable a voice at the AGM Shareholder activism services 28

29 ELIGIBLE SECURITIES It is common to list types of securities allowed for investment and also some exclusions: Examples (only) Allowed: Common shares Preferred shares Common share warrants Market capitalisation limitations Government bonds Corporate bonds rated A- or higher GICs from CDIC or CUDIC member issuers Many others Not Permitted Private company shares and other securities Futures contracts Naked option positions Other 29

30 DIVERSIFICATION, CONCENTRATION AND LIQUIDITY Examples (only) No more than 7% of funds to be invested in securities of any one company No more than 40% to be invested in any one sector of the Canadian market No more than 25% to be invested in any one sector of the U.S. market Funds must be invested in liquid securities such that all of any one position can be liquidated in an orderly manner in one day 30

31 REPORTING Reporting: Manager(s) shall provide monthly statements of position and transactions Currency of reporting Data to update cost base / book value, monthly Quarterly performance reporting in agreed upon format Adherence to parameters of the IPS Manager self check reporting Quarterly market and economic outlook Outlook for any material impact on the mandate at least quarterly Committee (CIO or CFO) meet with manager(s) at least semi-annually or annually Annual manager performance review Committee (CIO or CFO) reports to council quarterly 31

32 PERFORMANCE BENCHMARK(S) Benchmark(s) An independent reference point for evaluating manager(s) performance Often an index or blend of indices Risk statistics for comparison Performance relative to plan / expectations Quartile performance measurement Position relative to target allocation (tilt) Outlook to rebalance to target? 32

33 EXECUTIVE SUMMARY Investor ABC First Nation Investible Assets $10,000,000 Time Horizon Approximately 10 years Investment Objective Long-term capital appreciation Expected return Higher of 6% p.a. or 2% over inflation Risk tolerance Moderate Approximate fee rate 0.7% of portfolio market value p.a. Benchmark 40% Canada bond universe; 30% S&P/TSX; 30%S&P500 (CAD) 33

34 THANK YOU Worth Allaye-Chan Investment Counsel Raymond James Ltd West Georgia Street Vancouver, BC V6C 3L2 Office: Toll Free: