Should You Be Afraid? November 2011 A GENDA Should You Be Afraid? - - PowerPoint PPT Presentation

November 2011

Should You Be Afraid?

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AGENDA

• 1. Our Unsettled World – Why you might be
• 2. The Intelligent Investor – Why you needn’t be
• 3. The Responsible Investor – What you should be doing

Should You Be Afraid?

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OUR UNSETTLED WORLD

Stock market indexes around the world sank in the first ten months of 2011

Global Stock Market Moves

(1)

 Down significantly despite a dramatic rally in October  Nexus Equity Fund return was -3.8% in this period  Nexus Balanced Fund return was -1.4%  Nexus Income Fund return was 4.9%

(1) Total return (including dividends) to October 31, 2011 in local currency for all markets, except for Japan and China which represent

price-only returns that have been adjusted for the current dividend yield.

• 6.9%

1.3%

• 3.2%
• 11.2%
• 9.9%
• 10.2%

Germany China Japan U.K. U.S. Canada

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OUR UNSETTLED WORLD

Volatility during this period was extreme

(1) Measure of the volatility of the S&P 500 Index. (2) From Barron’s Oct 24. An “all or nothing” day is when at least 400 of the S&P 500 stocks move in the same direction.

VIX (1)  Dow Jones moved higher or lower by more than 100 points in 3 of every 4 trading days in August and September  31 “all or nothing” trading days (2) in August and September, more than all of the decade of the 1990s

10 20 30 40 50 60 Jan-11 Mar-11 May-11 Jul-11 Sep-11

Ten Months Ended October 31, 2011

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OUR UNSETTLED WORLD

A range of factors explains investor discontent

 Uncertain global economic recovery  Volatile developing market economies  Inflation / deflation  Stagnant housing markets in many countries  Unemployment  European debt crisis  U.S. budget challenges

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OUR UNSETTLED WORLD

The European sovereign debt crisis is real and profound

“PIIGS” Debt (1)

$641 $164 $117 $1,600 $350 68% 101% 112% 120% 160% Spain Portugal Ireland Italy Greece Debt / GDP Debt ($bns)

European Debt Crisis

Source: RBC Capital.

(1) Gross national debt.

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OUR UNSETTLED WORLD

European 10-Year Yield Spreads (vs. German Bunds)

Capital markets reflect the differing circumstances of each country European Debt Crisis

0% 1% 2% 3% 4% 5% 6% Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Italy Spain U.K.

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Europe will ‘muddle through’ – for years, not months

OUR UNSETTLED WORLD

 The Euro-zone is solvent

• Balanced current account, little external public debt

 Three key questions

• Sharing of pain between borrowers and lenders
• Allocation of losses between private sector (banks) and governments
• Degree of international involvement (China, IMF etc.)

 Important steps

• Budgetary restructuring – austerity
• Shifting of risk to EU, ECB and IMF
• Bank recapitalization

 Europe may force ECB into “TARP-like” role

European Debt Crisis

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The U.S. budget situation must be addressed

OUR UNSETTLED WORLD

Ratio of U.S. Government Debt to GDP

(1) Source: TradingEconomics.com

(1) Gross federal debt.

58% 59% 59% 61% 62% 62% 63% 64% 70% 85% 93% 50% 60% 70% 80% 90% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e

U.S. Budget Challenges

 Problems are a recent phenomenon

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OUR UNSETTLED WORLD

You wouldn’t run your own household this way

Source: Bureau of Economic Analysis. Idea adapted from Arrow Hedge Partners.

(1) Calculated by dividing numbers in box on the left by 100,000,000.

Total Revenue $4,164,700,000,000 Expenditures $5,470,000,000,000 New Debt $1,305,300,000,000 National Debt $14,271,000,000,000 August Spending Cuts $38,000,000,000 Super-Committee Target $150,000,000,000

(annual rate)

Income $41,647 Spending $54,700 New Borrowing $13,053 Total Indebtedness $142,710 August Cutback $380 Lifestyle Adjustment $1,500

(annual rate)

FEDERAL FINANCES (U.S.) IN “FAMILY” TERMS (1)

U.S. Budget Challenges

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OUR UNSETTLED WORLD

Revenue and spending both need adjusting

U.S. Government Spending, Receipts and GDP

Source: St. Louis Fed.

(1) Spending, taxes and GDP growth expressed as 5-year nominal growth rates.

 Predominantly problems began in 2005  Since then:

• The economy has

grown at 2.8% per year (1)

• Spending has grown

at 7.5% per year (1)

• Federal, state and

local taxes have grown at 0.5% per year (1)

U.S. Budget Challenges

90% 110% 130% 150% 170% 190% 2000 2002 2004 2006 2008 2010 Spending GDP Tax Receipts

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OUR UNSETTLED WORLD

Taxes are unsustainably low

 Each 1% is $500 billion per year National Tax Burden

(1)

(1) Tax burden is the sum of federal, state and local taxes, divided by national income. (2) “USA Tax Burden at Lowest Level Since ’58”, USA Today, May 6, 2011. (3) “The US crisis”, CA Magazine, November 2011.

U.S. Budget Challenges

24% 27% 35% Current U.S. 20-year U.S. Average OECD Average

(1) (3) (2)

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OUR UNSETTLED WORLD

Mandatory entitlement spending is too high

Components of U.S. Government Spending

Source: Congressional Budget Office.

 Entitlement spending must decline

• Mainly social

security, Medicare and UI

 Demographics are making the problem worse  Interest is small but growing rapidly

U.S. Budget Challenges

Mandatory Entitlement, 55% Defence Discretionary, 20% Non-Defence Discretionary, 19% Interest, 6%

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OUR UNSETTLED WORLD

There is no need for these issues to end in crisis

 The U.S. retains considerable financial flexibility

• Not yet as serious as for certain European countries

 Politics are aggravating the issue  We have low expectations of the ‘Super Committee’ initiative  2012 election might help with resolution

U.S. Budget Challenges

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THE INTELLIGENT INVESTOR

Despite uncertainty, sensible investors can profit over the long term

 Equity markets move in long cycles  A quality approach produces superior results  Balanced asset mix and long time horizon reduce risk  Uncertain times often provide the greatest opportunities

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Investors in many countries have endured a “lost decade”

10-year Annualized Stock Market Returns

(1)

THE INTELLIGENT INVESTOR

(1) Total return (including dividends) to October 31, 2011 in local currency for all markets, except Japan and China, for which only price returns are available.

Long Cycles

8.5% 3.7% 4.6% 3.0%

• 1.4%

3.9% Canada U.S. U.K. Germany Japan China

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THE INTELLIGENT INVESTOR

Stock market returns tend to occur in long cycles

Dow Jones Industrial Average Returns

(1) Source: Fortune, Dow Jones.

(1) Price return only; excludes dividends. Blue line is presented on a logarithmic scale.

 Economic and corporate profit growth a much steadier pattern

Long Cycles

0.4% p.a.

• 4.6%

p.a. 0.3% p.a. 15.4% p.a. 0.0% p.a. 12.0% p.a. 21.0% p.a.

'99 '81 '99 '64 '29 '49 '20 '11 21 yrs. 12 yrs. 18 yrs. 17 yrs. 16 yrs. 20 yrs. 9 yrs.

DJ Indus. Avg.

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THE INTELLIGENT INVESTOR

Investment returns ebb and flow across geographies

Annualized Return Premium/Deficit S&P 500 (C$) vs TSX Annualized Return Premium/Deficit EAFE (C$) vs TSX C$/US$ Exchange Rate Change

Long Cycles

C$ ↓ 1.5% p.a. C$ ↑ 0.1% p.a. C$ ↓ 2.2% p.a. C$ ↑ 3.1% p.a.

• 2.0%

7.9% 11.2%

• 9.7%

1970s 1980s 1990s 2000s

1.1% 12.3%

• 0.2%
• 7.6%

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THE INTELLIGENT INVESTOR

A high quality approach serves investors well through all market cycles

Annualized U.S. Stock Returns and Risk (1) By Dividend Yield Quintiles

(2) Source: Lehman Brothers.

(1) 1,000 largest U.S. stocks by market capitalization; 1969 – 2005. (2) Q1 has highest yield; Q5 has lowest yield.

 The ability to pay dividends is a strong indicator of financial strength and quality

Quality Approach

8% 10% 12% 14% 16% 15% 20% 25% 30% Risk (Standard Deviation) Return Q5 Q1 Q2 Q3 Q4

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Recent turmoil has not diminished the importance of quality

.

8.4% 7.8% 7.4% Dividend Payer S&P 500 Non-Dividend Payer 15% 16% 22% Dividend Payer S&P 500 Non-Dividend Payer

Total Annualized Return

(1)

Annualized Volatility

(1) Source: RBC Capital Markets.

(1) Based on U.S. equity total returns for S&P 500 stocks since 1995.

THE INTELLIGENT INVESTOR

Quality Approach

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A quality approach has worked through the most recent turmoil

THE INTELLIGENT INVESTOR

2.2%

• 7.9%
• 3.5%
• 22.8%
• 21.5%

Nexus Equity Fund Shanghai Composite EAFE S&P TSX

Total Returns(1) from May 31, 2008 to October 31, 2011  Bonds helped the Balanced Fund achieve a 8.7% return over the same period

(1) Total return (including dividends) in C$ terms for all markets, except China, for which only price returns are available.

Quality Approach

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THE INTELLIGENT INVESTOR

Ten year returns have been modest, but remain strong on a relative basis

5.5% 4.0% 1.1% Nexus Equity Fund (1) Market Benchmark(2) Median

• N. American

Equity Fund (4)

6.1% 5.4% 4.2%

Nexus Balanced Fund (1) Market Benchmark (3) Median Canadian Balanced Fund (4)

Nexus Equity Fund Nexus Balanced Fund

(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. (2) Equity Fund market benchmark is 5% DEX 91-Day T-Bill Index, 50% TSX, and 45% S&P 500 (C$); rebalanced monthly. (3) Balanced Fund market benchmark is 5% DEX 91-Day T-Bill Index, 30% DEX Universe Bond Index, 40% TSX, and 25% S&P 500 (C$); rebalanced monthly. (4) Mutual fund returns from Morningstar Canada. Morningstar presents returns net of management fees.

Quality Approach

Ten years ended October 31, 2011

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THE INTELLIGENT INVESTOR

Balanced asset mix and long time horizon reduce risk

1 Year 5 Year Rolling 20 Year Rolling 10 Year Rolling

51% 18% 17% 19% 21% 28%

• 37%

32% 14% 6% 2%

• 1%

1%

• 2%
• 15%

5%

Annual Return Range

Limiting Volatility

Source: J.P. Morgan Asset Management.

(1) Based on U.S. equity total returns since 1950.

Stocks 50/50 Stocks/Bonds

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THE INTELLIGENT INVESTOR

Periods of turmoil can provide great opportunity

Source: Sanford Bernstein, Apple Inc. 10K, Bloomberg.

(1) 2006 through 2011 fiscal years. (2) Based on 2012 fiscal year estimates.

Apple Inc.

41% 65% Revenue EPS 42% 2011

Valuation Multiples

(2)

5-Year Annualized Growth Rate

(1)

Return on Equity

11.2x 8.8x 5.5x P / E P / E excl. cash EV / EBITDA

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THE INTELLIGENT INVESTOR

Be fearful when others are greedy, and greedy when others are fearful.

• Warren Buffett

Periods of turmoil can provide great opportunity

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THE RESPONSIBLE INVESTOR

In an uncertain world, being a responsible investor is paramount

 Circumstances have changed, pressuring retirement portfolios  Focus on the key factors within your control

• Saving and withdrawal rates

 Pensions and foundations are also adjusting

• Institutional “savers” and “retirees”

 Maximum withdrawal rates are lower than you may think  No “one size fits all” – Nexus offers tailored financial counselling

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Circumstances have changed, pressuring retirement portfolios

THE RESPONSIBLE INVESTOR

Typical Responses  Flight to quality  Over-reliance on equities  Procrastination

Lower Global Growth Longer Life Expectancy High Volatility Low Interest Rates

$

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Focus on the key factors you can control

THE RESPONSIBLE INVESTOR

 Not meeting your retirement

• bjectives
• Lifestyle
• Legacy
• “Running out”

KEY FACTORS  Life span  Inflation  Investment returns  Sustainability THE RISK

• Savings rate
• Spending rate

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Pension plans are adjusting to the new reality

2012 Pension Plan Contribution Increases

(1)

THE RESPONSIBLE INVESTOR

3.3% 10.0% 19.6%

1 2 3

Ontario Teachers OMERS OPSEU Source: Annual pension reports.

(1) Increased pension contribution for employees earning more than $45,000 per year.

Institutional “Savers”

Other Typical Changes  Later retirement ages  Reduced benefits  Eliminate cost of living increases

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Foundations are reducing withdrawal rates

 As perpetual entities, they need to maintain capital

• Withdrawal rate is the key lever

 Canadian foundation payouts have already come down, after pressuring CRA to reduce minimum payouts  Many foundations are reducing payouts now

• 3 of 10 Toronto-area hospitals cutting 2011 payout rates
• Others are reviewing their payouts

 A “perpetuity” withdrawal rate is around 2.3% (1)

• Based on a balanced portfolio and maintaining purchasing power

THE RESPONSIBLE INVESTOR

Institutional “Retirees”

(1) Source: “Perpetual Distribution Rates for Foundations, Endowments and Charitable Trusts: A Non-Gaussian Analysis”, Jim Otar, May 2011.

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Maximum withdrawal rates are lower than you may think

THE RESPONSIBLE INVESTOR

Source: “Probability-of-Failure-Based Decision Rules to Manage Sequence Risk in Retirement”, Larry R. Mitchell Sr., John B. Mitchell and David B. Blanchett.

(1) Maximum withdrawal rate, as a percent of portfolio value at retirement, that

ensures a 90% probability of the portfolio lasting.

Illustrative Portfolio Life Cycle

MWR (1) = 4.75% MWR (1) = 3.5%

Portfolio Size Retirement R + 20 R + 30 Age Increase Savings Rate Lower Withdrawal Rate

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No “one size fits all” – Nexus offers detailed, tailored financial counselling

THE RESPONSIBLE INVESTOR

Your Road Map

 Life span  Legacy plans  Other assets and income  Risk preferences  Financial plan  Estate plan  Investment strategy  Tax efficiency  Adaptability

Your Specific Circumstances Peace

• f

Mind