Annu nual al Present entation tion to Clients nts November 2016 - - PowerPoint PPT Presentation

Portfolio Management & Financial Counsel

Annu nual al Present entation tion to Clients nts

November 2016

Portfolio Management & Financial Counsel

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IN INTRODU ODUCTIO CTION

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There re are many compell lling ing issues s faci cing g investor

• rs around

d the world ld

 Political uncertainty  Geo-political stability  Sustainability & climate change

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IN INTRODU ODUCTIO CTION

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Canadia ians ns have their r own particul cular r conce cerns ns

 Real estate prices are soaring,

particularly in Vancouver and Toronto

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100% 115% 130% 145% 160% 175% 2001 2003 2005 2007 2009 2011 2013 2015

IN INTRODU ODUCTIO CTION

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Canadia ians ns have their r own particul cular r conce cerns ns

Canadian Household Debt as Percent of Disposable Income

Source: Bloomberg.

 Personal debt levels are at an all-time

high

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500 1000 1500 2000 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

IN INTRODU ODUCTIO CTION

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Despite pite the worries ies, , many stock markets ts are near all-time ime highs

S&P 500 Index

 Most U.S. indices near their peak  Canada and many others not far behind

Source: Bloomberg.

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0% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5% 5% 2006 2008 2010 2012 2014 2016

IN INTRODU ODUCTIO CTION

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The relentless decline in interest rates is the “nexus”

Government of Canada 10-year Bond Yield

Source: Bloomberg.

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8.7% 7.9% 4.7% Previous 25 Years Previous 10 Years

• Dec. 31, 2012

Future Long-Term Returns

IN INTRODU ODUCTIO CTION

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Annual Portfolio Returns to/from December 31, 2012 (1)

 Future investment returns likely to be

lower

 Enormous implications for both

institutional and individual investors Current t low rates will l cast a l long shadow w into the future re

Source: C.D. Howe, “Long-Term Returns: A Reality Check for Pension Funds and Retirement Savings”, December 2013.

(1) Notional return from a portfolio of 50% S&P/TSX Bond Universe and 50% TSX Composite.

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AGE GENDA NDA

 How low are interest rates?  Why are interest rates so low?  What are the consequences?  Coping in the new era – Path to financial success

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0% 0% 4% 4% 8% 8% 12% 16% 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

HOW OW LO LOW ARE RATES? TES?

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U.S. 10-Year Treasury Yield

Real ally ly, , Reall lly y Low

You had a mortgage gage here You’re investing here

Source: Bloomberg.

The lowest st rates in severa veral l gener nerat ation ions

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HOW OW LO LOW ARE RATES? TES?

Short and Long-term Interest Rates, from 3000 BC

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Real ally ly, , Reall lly y Low Not merely ly gener nerat ation ional al – actuall lly y unprecedente cedented! d!

Source: Bank of England "Growing, Fast and Slow", February 17, 2015.

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• 0.09%
• 0.63%
• 0.12%

0.75% 1.19% 1.00% 1.59% Japan Switzerland Germany U.K. Italy Canada U.S.

HOW OW LO LOW ARE RATES? TES?

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Global 10-Year Government Yields

Real ally ly, , Reall lly y Low

Source: Bloomberg.

They’re even lower elsewhere

As at Septembe ber 30, , 2016 16

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33% 33% 38% 38% 29% 29% Yield> 1% NegativeYield Yield 0% - 1% 1%

HOW OW LO LOW ARE RATES? TES?

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Distribution of Global Government Bond Yields (1)

 No incentive for thrift  Little constraint on government spending

Real ally ly, , Reall lly y Low

As at Septembe ber 30, , 2016 16

Negative rates are more common than many realize… …and warp reality

Source: JP Morgan Asset Management.

(1) Based on yields within the Bank of America Merrill Lynch Global Government Bond Index.

100% 100%

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Issu ssuer er Federal eral Republi lic of German any Rating AAA Issue date July 19, 2016 Issue price Maturity value Interest income Profit (Loss) €102.79 €100.00 €0.00 (€2.79) Yield/Maturity (0.53%)

HOW OW LO LOW ARE RATES? TES?

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Real ally ly, , Reall lly y Low A guaranteed nteed losing g bet

 Even corporations have issued at

negative rates

• Sanofi, Henkel, even CIBC!

German Bund 0%, due October 8, 2021

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Low w Interest st Rates

Central bank intervention Economic uncertainty Slower growth Lower productivity Demographic shifts High Chinese savings rate

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW?

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Many factor tors have driven n rates lowe wer

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$0t $1t $2t $3t $4t $5t 2006 2008 2010 2012 2014 2016 0% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5% 5% 6% 6% 2006 2008 2010 2012 2014

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Centra ral l Bank Interve vent ntion ion Centra ral l banks have driven ven short- and longe ger-te term m rates lowe wer

Federal Funds Rate

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW?

Source: Bloomberg.

Federal Reserve Balance Sheet

• Quantitative easing includes buying longer-term bonds to

reduce rates

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18% 20% 22% 24% 26% 28% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 50 yrs 55 yrs 60 yrs 65 yrs 70 yrs 75 yrs 1960 1970 1980 1990 2000 2010

Shif ifting ing Demo mogr grap aphic hics

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Percentage of the Population Aged 40 - 65 World Life Expectancy

Source: United Nations Population Division, World Bank.

Greate ater r saving ngs driven ven by aging g popula latio tion n and longe ger life fe expe pecta ctancy ncy

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW?

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38.5% 19.0% 9.0% 4.9% 4.9% 0.0% China Switzerland Germany Canada USA Japan

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High Chinese se Saving ings Rate

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 China is particularly influential

• Limited social safety net
• Underdeveloped financial market
• Smaller families

 Savings have flowed West, driving rates

lower

Household Savings Rates (2013)

Source: OECD.

WHY ARE E IN INTEREST REST RATES TES SO O LO LOW?

Chinese se savings gs – another r leadin ding g expo port rt

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WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Low Economic ic Growth wth Low Inter erest est Rates es

There re are fundame amental tal consequences quences – intende ded and uninte tende ded Broad d Effe fects cts

 Higher pension liabilities  Greater fiscal stimulus  More M&A  Increased debt levels  More savings  Reach for higher returns  Distorted market valuations

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WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Broad d Effe fects cts Lowe wer intere rest t rates result lt in higher her reali lized zed returns rns but lowe wer future re retur urns ns



As interest rates fall…



…prices rise

• Bonds
• Other assets such as

Real Estate and Equities



Many assume Future = Past



Low future returns

• Mathematically so for Bonds
• Similarly for other assets



Possible risks

• Asset bubbles
• Debasement of money

Higher er Realiz alized ed Returns Lower er Inter erest est Rates es Future e ≠ Past Expec ectat atio ion of High Future e Retur turns

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$180m $338m At 7.75% Discount Rate At 4% Discount Rate

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Pensio ion n Funds

Today’s Pension Liability (1)

With lower discount rates, pension liabilities skyrocket…

Expected Annual Pension Payouts (2)

(1) Pension liability is today’s value of the future expected payouts using a discount rate of 7.75% and 4%. (2) Illustrative example of a public sector pension plan with future pension payout entitlements (as shown) that employees are entitled to as of today.

$0m $5m $10m $15m $20m $25m Year 20 Year 40 Year 1 Year 60

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WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Pensio ion n Funds

U.S. State & Local Pension Plans Status (1)

…as a real example demonstrates

At 7.75 75% discount rate

Source: The Economist “Fade to Grey”, September 24, 2016.

(1) Based on a Boston College study of 4,000 American state and local government pension plans.

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WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Pensio ion n Funds How are pensio ion n funds respon

• ndin

ding? g?

 Some have “hit the wall” – restructured  Corporate sector

• Ended plans
• Cut back benefits
• Increased funding
• Sought higher returns

 Public sector is mostly in denial

• 9 European countries have public pension fund liabilities of more than 3x GDP

Source: The Economist “Fade to Grey”, September 24, 2016.

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5.6% 10.6% 8.8% 6.0% 1.8% 6.8% 5.1% 3.5% Bonds Equities 35/65 Blend (pre-tax) 35/65 Blend (after-tax) In 2000 In 2016

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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For individu vidual als, the decli line ne in expe pected cted returns rns is substantia tial

Realistic Return Expectations (1)

(1) Return expectations: the 30-year Canada bond yield is used for the bond return. The expected equity return is based on a 5% risk premium over the long bond. The

35/65 portfolio blend is 35% bonds and 65% equities. The after-tax return is based on a typical blend of returns for a taxpayer at the highest marginal tax rate.

Individ vidua uals ls

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$100k $75k Retirement "N "Nest Egg" 30 yr Flat Spending starting 2000 30 yr Flat Spending starting 2016

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Individ vidua uals ls

(1) Retirement “nest egg” is the retiree’s savings at age 65. The annual spending potential is based on 30 years of flat spending using an after-tax return of

6.0% in 2000 and 3.5% today. Assumes the portfolio is taxable and that the retiree dies at 95 years of age with no savings left.

Lowe wer retur urns ns reduce ce future re spendin ding g power

 Today, $100,000 of retirement spending

requires a $1.84 million nest egg

Retirement Spending Potential (1)

$1.38m $1.38m

• 25%

5%

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$10k $20k $30k $40k $50k $60k $70k 40 40 45 45 50 50 55 55 60 60 65 65 Age

WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Individ vidua uals ls

(1) Assumes that the worker saves each year from age 40 to age 64 to reach their required nest egg. Each year, the worker saves 3% more than the prior year.

Young g workers need d to s save more to reach ch their ir retire irement ment nest egg

Annual Savings to Achieve the Required “Nest Egg” (1)

81% more 3.5% growth wth “New Egg” 6% growth wth “Old Egg”

Required “Nest Egg” at Age 65

$1.38m $1.84m "O "Old Egg" "N "New Egg"

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WHAT AT ARE E THE E CO CONS NSEQUEN QUENCES CES?

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Individ vidua uals ls Some me will ll be tempte ted d to take on more risk to p pursue ue higher her returns rns



Use leverage



Invest in alternative asset classes

• Private equity
• Hedge funds
• Real estate
• Commodities



“Amp up” conventional asset classes

• Increase equity component
• More aggressive equities and bonds



Magnify upside and downside



Illiquid



Manager accessibility and selection difficult



Higher fees



Questionable performance

Choices Complica cati tion

• ns

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CO COPIN ING IN T G IN THE HE NE NEW ERA

 The future will be different

• Low interest rates and lower investment returns
• Longer retirements from increased longevity
• Changing world will keep risk elevated

 The path to success hasn’t changed

• Plan realistically
• Save more and spend less
• Control risk and return

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Yogi Berra was right: “The future ain’t what it used to be” The Path Forwar ard

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CO COPIN ING IN T G IN THE HE NE NEW ERA

Ensure re Adequate te Savings gs Generate te Reason

• nab

able e Returns Path to S Success ess Output Client Controlled + Nexus s Controlled ed

 Have a plan  Stick to it  Long-term

approach

 Quality Path to Financi cial al Succ ccess

Financi ncial Success ess

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Object ctives es

The path to success has never ver been more critic ical al – avoid denia ial! l!

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CO COPIN ING IN T G IN THE HE NE NEW ERA

 Savings and spending swamp other factors  Use realistic assumptions  Seek tax efficiencies  Make allowance for contingencies

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Path to Succes cess – Client nt Controll lled The critica cal l facto tors rs to f fina nanci ncial l succe cess are clie ient nt controlle

• lled

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S&P 500 TSX TSX Global REITs Global Hedge Fund World Infrast structure Emerging Markets Venture Capital Canada Bonds Global Equities Commodities

Nexus Balanced Fund

Global Balanced

1% 1% 3% 3% 5% 5% 7% 7% 9% 9% 11% 3% 3% 7% 7% 11% 15% 19% 23% Return Risk

CO COPIN ING IN T G IN THE HE NE NEW ERA

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Path to Succes cess – Nexu xus Controlled led High qualit ity y investi ting ng has many benef nefits its – and ofte ten n beats ts comple lexit xity

Source: Nexus whitepaper “In Search of Simplicity”, www.nexusinvestments.com/in-search-of-simplicity.

(1) Risk is measured by volatility which is calculated as the annualized standard deviation of monthly returns over the full period.

Annual Investment Returns and Volatility (1)

Period from January y 1, 2000 00 to July 31, 1, 2016 16

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$0 $0 $200 $200 $400 $400 $600 $600 $800 $800 $1 $1,00 000 $1 $1,20 200 1988 1988 1991 1991 1994 1994 1997 1997 2000 2000 2003 2003 2006 2006 2009 2009 2012 2012 2015 2015 $1,19 195 5 Nexus us $178 8 CPI

Growth th of re real wealth th

CO COPIN ING IN T G IN THE HE NE NEW ERA

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The Nexus us Approac ach

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Discipli ipline ne, , patience nce and persis iste tence nce

Nexus Balanced Account Composite (1)

(1) Nexus represents the performance of a composite of Nexus accounts that are managed to a balanced mandate, calculated before deduction of investment

management fees, but after custody fee and expenses. CPI is the “all-items” Consumer Price Index for Canada, not seasonally adjusted.