Diversified Growth Funds IIES 2017
Agenda Background Overview of Diversified Growth Funds (DGFs) DGF Example & Comparison Appendix 1
Background
A Challenging Environment Has Led to New Investor Realities Meeting Future Objectives from 2017 Take More Risk Add New Asset Classes Increase Fulfillment Complexity Manage Asset Mix Source: Callan Capital Market Projections 3
What are the Implications for Institutional Investors? More Time, Energy and Resources must be devoted to: Managing asset mix over short and long term horizons Benchmarking performance against multiple objectives Researching and understanding new investment products Monitoring more investment managers Managing the liquidity and cash flows of complex portfolio structures Keeping management fees under control 4
The DGF Concept Increasing Manager Flexibility to Pursue Better Risk-Adjusted Returns Lower Degree of Manager Flexibility Higher Typical Growth Portfolio Diversified Growth Fund Domestic Equities Foreign Equities Alternatives Dynamically Managed array of growth strategies including Equities, Credit, Alternatives Etc Investor Responsibility for Asset Allocation Managers 5
Overview of Diversified Growth Funds
Diversified Growth Funds What are they? DGFs are: Targeting equity-like returns with less risk Multi-asset class diversified solutions Total return oriented over a full market cycle (Cash/CPI+ Benchmark) Dynamically managed with a high degree of asset allocation flexibility Focused on risk management and tail risk mitigation DGFs are not: Hedge Funds Tactical Asset Allocation vehicles Credit Beta Magic 7
Diversified Growth Funds Background The term DGF was first coined in 2006 by HSBC 1 to describe the emergence of a new age balanced fund in the UK 1990s: Allocations to bonds and equities that were static relative to the benchmark Early 2000s: Wider range of asset classes and more benchmark agnostic Post 2008: Increasing emphasis on dynamic asset allocation 1 Diversified Growth Funds: A Recipe for Growth, HSBC Actuaries and Consultants, August 2006 8
Diversified Growth Funds Evolution Proliferation has led to different sub-classes of DGF strategies, primarily differentiated by the sources of risk and return driving performance 1 Diversified Beta Dynamic Diversified Inflation Passively managed funds with fairly static asset allocation Dynamic portfolio construction mixing strategic and opportunistic asset allocation Greater focus on risk management Explicit focus on real assets (real estate, infrastructure, commodities, RRBs) Targeting growth with inflation sensitivity 1 Sources: Cambridge Associates, Mercer, HSBC Global Asset Management 9
Diversified Growth Funds Example Asset Allocation Snap Shot in a Leading Dynamic DGF 1 Diversified Beta Dynamic Diversified Inflation 1 Source: Buck Consultants 10
Diversified Growth Funds Why are they Increasingly Popular? Better risk/reward proposition Increased diversification Strong emphasis on risk management Simple turnkey solution one pooled fund Liquid Compelling fee proposal Challenging to replicate à la carte Source: Callan Capital Market Projections 11
Diversified Growth Funds Who Uses Them and Who Supplies Them? Very popular vehicle in the UK with growing (worldwide) supply and demand Primary DGF Investors Corporate DB plans in de-risking mode Public DB plans seeking sustainability Smaller investors with lower resources Endowments & Foundations DC plans (popular default option in UK) Some of the Leading Suppliers Schroders Asset Management BlackRock Standard Life Investment Baillie Gifford Invesco 12
Diversified Growth Funds How are They Being Used by Institutional Investors? Growth Portfolio Replacement Substitute entire exposure to growth assets (e.g. equities) by one or more DGF managers Typically small and medium-size pension plans, de-risking pension plans Growth Portfolio Complement Dedicate a portion of growth assets (e.g. equities) to one or more DGF managers Typically public and large pension plans Outcome-Oriented Investors Dedicate a portion of total assets to one or more DGF managers Typically public pension plans, endowments and foundations DC Investment Option Allow plan members to allocate to one or more DGF managers / set as part of default option 13
DGF Example & Comparison
Diversified Beta Fund Sample Asset Mix* For Illustrative Purposes 7% 8% Sovereign 11% 13% Investment Grade Credit High Yield Credit 6% 9% 6% 7% Emerging Market Debt Large Cap Domestic Equities Large Cap Foreign Equities Low Volatility Equities Developed Market Small & Mid Cap Equities Emerging Market Equities 8% 11% 9% 5% Global Infrastructure Commodities & Precious Metals Absolute Return Strategies Total Sovereign: 8% Total Credit: 26% Total Equity: 42% Total Alternatives: 24% *See portfolio disclosures and methodology described in appendix. 15
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 12-Month Rolling Returns Aiming to Achieve Equity-Like Returns With Lower Risk Simulated Historical Analysis For Illustrative Purposes 60% 50% 40% 30% Baseline Equity Portfolio* Diversified Beta Fund* Portfolio Statistics Baseline* Div. Beta* Volatility 14% 10% Downside -30% -21% Return 6.8% 6.8% 20% 10% 0% -10% -20% Debt Ceiling Q1 2016-30% -40% Financial Crisis *See portfolio disclosures and methodology described in appendix. January 2004 to July 2016 This information is meant for investors with sophisticated investment knowledge sufficient to fully understand the risks and limitations of simulated performance data. Simulated performance data is for illustrative purposes only and not indicative of actual results. Please refer to the simulation disclosure at the end of this presentation for complete disclosure of notes and simulated performance information. 16
Dynamic DGF Adjusting Risk Allocations to Enhance Downside Protection Basic Principle of Dynamic Risk Allocation Volatility & Uncertainty Volatility & Uncertainty = LOWER portfolio risk = HIGHER portfolio risk Objective: Winning by not Losing 17
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 12-Month Rolling Returns Dynamic Asset Allocation Improves the Risk/Return Profile Simulated Historical Analysis For Illustrative Purposes 60% 50% 40% Baseline Equity Portfolio* Diversified Beta Fund* Dynamic DGF* Portfolio Statistics Baseline* Div. Beta* Volatility 14% 10% Downside -30% -21% Dynamic* 6% -5% 30% Return 6.8% 6.8% 5.9% 20% 10% 0% -10% -20% Debt Ceiling Q1 2016-30% -40% Financial Crisis *See portfolio disclosures and methodology described in appendix. January 2004 to July 2016 This information is meant for investors with sophisticated investment knowledge sufficient to fully understand the risks and limitations of simulated performance data. Simulated performance data is for illustrative purposes only and not indicative of actual results. Please refer to the simulation disclosure at the end of this presentation for complete disclosure of notes and simulated performance information. 18
Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dynamic DGF Time Varying Portfolio Exposures Simulated Historical Analysis For Illustrative Purposes 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Equity Absolute Return Credit Sovereign Bonds This information is meant for investors with sophisticated investment knowledge sufficient to fully understand the risks and limitations of simulated performance data. Simulated performance data is for illustrative purposes only and not indicative of actual results. Please refer to the simulation disclosure at the end of this presentation for complete disclosure of notes and simulated performance information. 19
Diversified Growth Funds Considerations For Investors Benchmarking Delegation of Asset Mix Authority Exposure to New Asset Classes Lack of Performance History Looking Different than Peers 20
Diversified Growth Funds Summary of Value Proposition Aim to Achieve Long-Term Investment Objectives with Greater Likelihood A total return orientation for the fund allows the manager flexibility to implement best ideas supporting the objective of delivering the desired premium over inflation Potential to Reduce Downside Risk Dynamic tail risk mitigation strategies can reduce the risk of short-term drawdowns and result in a smoother path of returns Diversify Growth Assets Multi-asset, multi-strategy approach including traditional and alternative asset classes that can replace or complement existing return-seeking allocations Simplify Governance Single manager provides access to multiple asset classes and reduces the burden on investors to allocate across, fulfill and monitor different individual strategies 21
Appendix
Baseline Equity Portfolio & Diversified Beta Fund Disclosures Regarding Simulated Performance History Baseline Equity Portfolio 30% S&P/TSX Composite TR Index 70% MSCI World TR Index (CAD) Diversified Beta Fund 8% FTSE TMX Canada Federal Bond Index 4% FTSE TMX Canada All Corporate Bond Index 9% BofA/ML U.S. Corporate Index (USD) 7% BofA/ML U.S. High Yield Index (USD) 2% JPM EMBI Global Diversified Index (USD) 2% JPM CEMBI Diversified Index (USD) 2% JPM GBI-EM Broad Diversified Index (USD) 5% S&P/TSX Composite Index 3% BMO Canadian Small Cap Index 3% S&P/TSX Canadian Low Volatility Index 2% S&P 500 Index (CAD) 3% Russell 2500 Index (CAD) 2% Russell 2000 Index (CAD) 4% MSCI U.S. Minimum Volatility Index (CAD) 2% MSCI EAFE Index (CAD) 5% MSCI World Index (CAD) 4% MSCI World Minimum Volatility Index (CAD) 5% MSCI Emerging Markets (EM) Index (CAD) 4% MSCI Emerging Market (EM) Small Cap Index (CAD) 7% HFRI EH: Equity Market Neutral Index (USD) 6% S&P GSCI Commodity Index (USD) 5% S&P GSCI Gold Official Close Index (USD) 6% S&P Global Infrastructure Index (USD) 23
Dynamic DGF Disclosures Regarding Simulated Performance History Simulated Performance Disclosure The simulated data is hypothetical performance for a period. The Dynamic DGF returns are a simulation of a quantitative investment strategy and the purpose of the data is to demonstrate the capability of such a strategy if it had been employed during that period. This data is shown for illustrative purposes only, and should not be relied on as an indicator of future returns. Quantitative investment strategies use complex statistical models in an effort to control portfolio-level risk and to construct an optimal portfolio using the existing opportunity set and information at hand. Portfolio construction using the model involves trade offs between various risk measures such as drawdown, value at risk, volatility etc. The mathematical and statistical models that guide portfolio construction are reliant on historical data and the long term return expectations of underlying assets. The simulated historical performance record was constructed using a custom quantitative investment model and assumes that the same portfolio construction and risk management algorithms used to manage the portfolio today were used in the past, based on the data available at the time. We use the benchmark of the funds (or market index representations where applicable) as proxies to simulate the performance of the actual underlying funds the strategy invests in, to span periods when the funds may not have been in existence. Performance of the proxies may not accurately represent the performance of investments in actual funds. Simulated results are shown before management fees and before the fixed fund operating expense. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Simulated results are achieved by means of the retroactive application of a back-tested model that has the benefit of hindsight. The back-testing of performance also differs from actual account performance because an actual investment strategy may be adjusted any time, for any reason, including a response to material, economic or market factors. As trades have not actually been executed, the results may have under-or-over compensated for the impact of certain market factors, such as lack of liquidity. Some relevant events or conditions may not have been considered in the assumptions and actual events or conditions may differ materially from assumptions. Prospective investors should fully understand the risks, assumptions and limitations of the simulated performance data, and evaluate whether they are appropriate for their investment purposes. 24
Disclaimer This presentation is intended for institutional investors only. This document has been provided by Phillips, Hager & North Investment Management (PH&N IM) for information purposes only and may not be reproduced, distributed or published without the written consent of PH&N IM. It is not intended to provide professional advice and should not be relied upon in that regard. PH&N IM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by PH&N IM, its affiliates or any other person as to its accuracy, completeness or correctness. We assume no responsibility for any errors or omissions. The views and opinions expressed herein are those of PH&N IM as of the publication date and are subject to change without notice. This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except pursuant and subject to the respective offering documents and subscription materials, which shall be provided to qualified investors. This document is for general information only and is not, nor does it purport to be, a complete description of an investment in any RBC, PH&N or BlueBay funds. If there is an inconsistency between this document and the respective offering documents, the provisions of the respective offering documents shall prevail. Commissions, trailing commissions, management fees and expenses all may be associated with the funds mentioned in this presentation. Please read the offering materials for a particular fund before investing. The performance data provided are historical returns, they are not intended to reflect future values of any of the funds or returns on investment in these funds mentioned in this presentation. Further, 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. The unit values of non-money market funds change frequently. For money market funds, there can be no assurances that the fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual fund securities are not guaranteed by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Past performance may not be repeated. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. The amount of risk associated with any particular investment depends largely on the investor s own circumstances. Investors should consult their professional advisors/consultants regarding the suitability of the investment solutions mentioned in this presentation. This document may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility. PH&N IM is a division of RBC Global Asset Management Inc. (RBC GAM Inc.). RBC GAM Inc. is the manager and principal portfolio adviser of the Phillips, Hager & North (PH&N) investment funds. RBC GAM Inc. is registered with the various securities commissions of Canada as a portfolio manager, which permits it to provide discretionary investment management services to its clients, and as an exempt market dealer which permits it to act as a dealer for prospectus exempt trades in certain circumstances. RBC GAM Inc. is also registered as an Investment Fund Manager in Ontario, British Columbia, Quebec and Newfoundland and Labrador and as a Commodity Trading Manager in Ontario. Each of RBC GAM Inc. and BlueBay Asset Management LLP (BlueBay) is a wholly-owned subsidiary of Royal Bank of Canada, and an affiliated company and may be considered as related issuers and/or connected issuers under applicable securities legislation. / Trademark(s) of Royal Bank of Canada. Used under licence. RBC Global Asset Management Inc., 2017. IC1702118 25
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