FOR PRIVATE CLIENTS ONLY Luft Financial Model Portfolios Semi-Annual Review July 26, 2017 Your Vision Robert Luft, CIM, CFP Luft Financial Portfolio Manager Director, Private Client Group Robert.Luft@holliswealth.com Elvis Picardo, CFA, CIM Portfolio Manager Elvis.Picardo@holliswealth.com Aaron Arnold, CIM, BA Investment Advisor Aaron.Arnold@holliswealth.com Our Goal HollisWealth is a trade name and a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Luft Financial is a personal trade name of Robert Luft. This presentation was prepared solely by Elvis Picardo, CFA, who is a Portfolio Manager at HollisWealth 1 (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this presentation are those of Robert Luft, Elvis Picardo, and Aaron Arnold alone and not those of HollisWealth Registered trademark of The Bank of Nova Scotia, used under licence. Registered trademark of The Bank of Nova Scotia, used under licence.
Semi-Annual Review () Market Review The first half of 2017 was a record year for global equities, as worldwide market capitalization reached an all-time high of US$77.8 trillion in June (source: World Federation of Exchanges), triple the low point of US$25.5 trillion in March 2009 during the depths of the Great Recession. However, the TSX Composite Index ( TSX ) was notably absent from the global rally, as its 0.69% decline in the first six months of 2017 was one of the worst performances among major markets over this period. The TSX has been weighed down by a steep fall in the Energy sector and tepid performances by the Materials and Financials groups (Figure 1), three sectors that collectively constitute two-thirds of the index. The S&P 500 surged 8.24% in the first half of 2017, led by outsized gains in the Technology (+23.09%) and Health Care (+17.35%) sectors. Figure 1: TSX Composite Index Top/Bottom 5 sectors (YTD as of July 25, 2017) Source: FactSet Portfolio Changes In January, we increased our equity allocation to Canada and EAFE (Europe, Australasia and Far East), while taking some profits in the U.S. and trimming exposure to emerging markets. We also booked partial profits in our preferred share funds because of their diminished appeal in an environment of rising bond yields. In addition, we added stocks that satisfied our investment criteria such as Visa Inc. (NYSE: V) and Hydro One (TSX: H). We also added BMO MSCI EAFE ETF (TSX: ZDM) and SPDR S&P Pharmaceuticals ETF (NYSE: XPH) to gain exposure to the EAFE and U.S. pharmaceutical sectors. In June, we completed a major rebalancing of client portfolios. The rebalancing activity involved trimming our positions in Antrim Balanced Mortgage Fund (ABM 103) in order to scale back exposure to Canadian residential mortgage securities, and adding a floating interest-rate fund ia Clarington Floating Rate Fund to position portfolios for higher interest rates in future. 2
Semi-Annual Review () Portfolio Constituents Major Movers In the first half of 2017, the three best performers among our portfolio constituents (in local currency terms) were Micron Technology (NASDAQ: MU, +36.2%), Restaurant Brands International (TSX: QSR, +26.9% and Visa Inc. (NYSE: V, +20.2%). The three worst performers were BMO S&P/TSX Equal Weight Oil & Gas ETF (TSX: ZEO, -19.4%), Westshore Terminals Investment Corp. (TSX: WTE, -18.9%) and General Electric (NYSE: GE, -14.5%). Recent Performance: Although our investment portfolios are geographically diversified, they have a significant correlation with the TSX, given that our largest exposure is to the domestic market. With the TSX retreating in the two preceding months (-1.5% in May and -1.1% in June), the Pension model which is our biggest mandate fell 1.6% in June for only the second decline in the last 16 months. This drop is attributable to a combination of factors profit-taking in securities that had hitherto posted solid gains; softness in commodity and energy stocks; and last but not least, the abrupt appreciation in the Canadian dollar. Note that our Pension model is approximately 33% exposed to the US dollar, and when the Canadian dollar strengthens significantly, it can have a detrimental effect on the performance of our portfolios. While the Canadian dollar rose 5% versus the USD in June, for cumulative gains of 10% since the beginning of May, we expect the currency s advance to moderate substantially over the rest of 2017. Looking Ahead On July 12, 2017, the Bank of Canada hiked its benchmark rate by 25 basis points, the first increase in seven years. While the Bank of Canada had consistently downplayed the strength of the economy earlier in the year, robust economic data was increasingly difficult to ignore. Fueled by household spending, the Canadian economy expanded at a 3.7% annualized pace in the first quarter of 2017, capping its strongest three-quarter gain since 2010. On July 24, 2017, the International Monetary Fund (IMF) said in its World Economic Outlook Update that the global recovery remains on track, with output projected to grow by 3.5% in 2017 and 3.6% in 2018 (Figure 2). The IMF also revised its 2017 growth forecast for Canada upward to 2.5% the fastest growth pace among G-7 economies citing buoyant domestic demand and indicators suggesting resilient Q2 activity. Synchronous growth in the world s biggest economies the U.S., Eurozone, China, Japan and India bodes well for the commodities price outlook and by extension, for the Canadian economy and TSX. Index earnings for the TSX are forecast to grow 19.7% to $901 in 2017 (source: FactSet); on that basis, the TSX presently trades at a forward P/E of 16.9, which we believe is a reasonable multiple and could propel improved performance in the second half of 2017. In the U.S., notwithstanding the political drama that has jeopardized President Trump s pro-growth agenda, earnings growth for the S&P 500 is forecast at 20.3% to a record $127.87 (source: S&P Dow Jones Indices), implying a 19.4 forward P/E. While the Canadian dollar s recent surge despite the weakness in crude oil prices (Figure 3) could indicate that it may be shedding its petro-currency status, a sustained rebound in commodity and energy prices could potentially trigger further gains in the loonie. We are comfortable with our currency exposure, as a couple of our securities (such as ZDM and Fidelity American Equity Fund) are hedged to CAD, and we expect gains from the rest of our portfolios in a durable equity market to more than offset any losses from adverse currency movements. 3
Semi-Annual Review () Figure 2: The Global Economy Is Recovering Source: IMF World Economic Outlook Update July 2017 Figure 3: CAD Shaking Off its Petro-Currency Status? (Chart Source: FactSet) Our Investment Policy The Portfolio Management Committee (PMC) uses rigorous selection criteria and conducts thorough due diligence to select the highest quality securities for the Model Portfolios. Our investment style is value-driven, with a greater focus on preserving wealth rather than beating the markets. We manage client accounts on a household basis, to the extent possible, enabling our clients to benefit from higher levels of tax efficiency. While the PMC s objective is long-term growth with risk mitigation, it monitors all investments and takes tactical trading decisions as warranted by market conditions to generate higher risk-adjusted returns. 4
Semi-Annual Review () DISCLAIMER This commentary was prepared by Robert Luft and Elvis Picardo, Portfolio Managers and Aaron Arnold, Investment Advisor who are with ("HollisWealth"). This is not an official presentation of HollisWealth. The views, including any recommendations, expressed in this presentation are those of the presenter and are not necessarily those of the dealer. All investments involve risk and prior to investing, the specific risks should be discussed with an investment professional. This commentary may contain forward-looking statements based on current expectations and projections about future general economic factors. Forward-looking statements are subject to inherent risks and uncertainties which may be unforeseeable, and such expectations and projections may be incorrect in the future. Forward-looking statements are not guarantees of future performance and you should avoid placing undue reliance upon them. 5