The World Doesnt End Every Day November 2012 We dont think its so - - PowerPoint PPT Presentation

November 2012

The World Doesn’t End Every Day

1

 We don’t think it’s so bad  We’ll tell you why

2

AGENDA

• 1. A Tumultuous Period
• 2. Seeking Safety
• 3. Long Live Equities

3

A TUMULTUOUS PERIOD

Investor psychology has been damaged by a series of negative events since 2000

 Investors have suffered through a dismal period

• Poor equity returns and high volatility

 Economic outlook remains anemic  Major economic/political downside ‘event’ risks remain

4

Investors have suffered through a dismal period

 US$ total return of 1.7% per year since the Millenium  Translates into a 1.3% loss per year in C$ S&P 500 Total Return Index (1)

Source: Bloomberg.

(1) Represents the US dollar total return, indexed to 100 at December 31, 1999.

A TUMULTUOUS PERIOD

.

50 70 90 110 130 1999 2001 2003 2005 2007 2009 2011 Tech Bubble Credit Crisis Housing Bubble Bursts Sep 11, 2001

5

Economic recovery has been a major disappointment

 Mediocre growth  Chronic unemployment  Staggering deficits  Political gridlock U.S. Real GDP Across Economic Cycles (1)

Source: Bank of Canada.

(1) The horizontal axis numbers refer to the number of years before and after the onset of the recession. The “Big Five modern financial crises” indicates the

average economic path for the following crises: Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992).

This Recovery

A TUMULTUOUS PERIOD

6

Major geo-political and economic risks persist

 European economic and political break-up  Middle East unrest  Territorial friction between China and Japan  U.S. ‘fiscal cliff’

A TUMULTUOUS PERIOD

7

SEEKING SAFETY

Investors have sought safety, and these responses, while natural, have flaws

 Investors are avoiding risk by fleeing to apparently ‘safe’ assets  No ‘silver bullet’ – typical responses present new risks themselves  Recent experience – good or bad – often overwhelms investors’ emotions

• Leads to a ‘bandwagon effect’

8

Many investors have sought ‘safe havens’

It’s not always easy to stick to the plan… The traditional safe havens are back in fashion  Fixed income  Gold  High-yielding equities

SEEKING SAFETY

9

Good bond returns have prompted investors to take refuge in Bond Funds

Canadian Mutual Fund Flows (2) (March, 2009 – August, 2012)

(1) Total return from DEX Universe Bond Index since June 30, 1989. The 10-year Canada yield is the forward 10 year yield-to maturity at each date. (2) Data from Investment Funds Institute of Canada.

.

($28bn) $42bn Equity Funds Bond Funds

Canadian Bond Returns and Yield (1)

Fixed Income

SEEKING SAFETY

.

$0 $100 $200 $300 $400 $500 $600 $700 1989 1994 1999 2004 2009 0% 2% 4% 6% 8% 10% 12% 14% Value of $100 Invested (LHS) 10-year Canada Yield (RHS) Bond Return CAGR 8.1% $621 1.8%

10

Gold has found new lustre in these uncertain times

Gold Price

Source: Bloomberg.

Market Capitalization of SPDR Gold ETF  Gold ETF explosion – cause or effect?

Gold

SEEKING SAFETY

.

US$0 US$400 US$800 US$1,200 US$1,600 US$2,000 2003 2005 2007 2009 2011 2013 SPDR Gold ETF launched 12-Nov-04 Gold Price CAGR since Gold ETF launch = 18.7%

.

$0bn $10bn $20bn $30bn $40bn $50bn $60bn $70bn $80bn 2005 2006 2007 2008 2009 2010 2011 2012 2013

11

High-yielding equities have also been a crowd favourite

Source: Bloomberg.

(1) Represents the total US dollar return from the overall S&P 500 and the Utility sector of the S&P 500, both indexed to 100 at November 1, 2002.

 Other high-yield alternatives exist S&P 500 vs. Utilities Total Return (1)

High-Yielding Equities

.

50 100 150 200 250 2002 2004 2006 2008 2010 2012 S&P 500 Utilities

SEEKING SAFETY

12

In the search for safety, investors have overlooked other risks

Asset Class Concern

 Investors may be

• verpaying

 No intrinsic value  Cost to carry  Poor long-term return  Potential capital loss  Erosion of real value

Fixed Income Gold High-yielding equities

SEEKING SAFETY

13

Risk of capital loss is significant if interest rates normalize quickly

(1) Total period return (not annualized). This assumes an investor buys a 10-year Government of Canada bond yielding 1.79% and sells it after the indicated holding

period, during which period the yield on the bond increases or decreases in equal increments to the yield indicated under ‘If yield changes to…’.

10-Year Canada Bond Projected Holding Period Total Returns (1)  Historical “normal” range for interest rates is 4% to 6%  Rates are certain to normalize, but we expect it to be gradual

Fixed Income – Short Run

SEEKING SAFETY

Holding Period 1.0% 4.0% 6.0% 1 yr 8.1%

• 13.8%
• 25.6%

2 yrs 9.2%

• 10.6%
• 21.5%

3 yrs 10.2%

• 7.3%
• 17.2%

4 yrs 11.1%

• 4.0%
• 12.7%

If yield changes to …

14

The real return from Canada Bonds over the next 10 years will be negative…

Prospective 10-Year Canada Bond Return (annualized) (1)

Fixed Income – Long Run … it has happened before

Historic Real Return on Long Bonds (annualized)

Source: Triumph of the Optimists, TD Newcrest.

(1) Assumes a 10-Year Canada bond was purchased on October 31, 2012, is held to maturity, and the marginal tax rate is 46%.

SEEKING SAFETY

.

After-tax Real Return Assumed Future Inflation Tax Payable Pre-tax Return 1.79%

• 0.82%
• 2.00%
• 1.03%

Value of $100 in 10 years' time is $90.13

.

2012 - 2021 (10 years) 1980 - 2011 (32 years) 1940 - 1979 (40 years) 1920 - 1939 (20 years) 1900 - 1919 (20 years)

• 6.6%

7.3%

• 1.1%

7.4%

?

15

It is difficult to make money investing in gold Gold

 No intrinsic value  Value depends on human emotion  Earns no income  Costly to store

Source: Triumph of the Optimists, Timothy Green’s Historical Gold Table.

(1) This is US$ real return, assuming no storage or insurance costs for gold. Over the full 112 years, inflation rates in Canada and the U.S. have been

similar (3.0% and 3.1% per year, respectively).

.

Gold (US$) Cdn Equities Cdn Bonds Cdn T-Bills 1.6% 0.9% 6.1% 2.1%

(1)

Long-Term Real Returns (1900 to 2011 annualized)

Challenges Holding Gold

SEEKING SAFETY

16

Investing only in dividend stocks presents concentration and valuation risks

Source: TD Newcrest, Bloomberg.

(1) Top 40 Canadian Dividend Stocks are based on the highest dividend-paying stocks with market capitalizations of at least $1 billion. Market cap. weighted. (2) The two dividend portfolios are equally weighted and the two indices are market cap. weighted

Top 40 Canadian Dividend Stocks Sector Allocation (1)

High-Yielding Equities

As of October 31, 2012

Forward Price/Earnings Multiple (2)

SEEKING SAFETY

.

25.6x 13.7x 16.0x 12.6x Top 40 Cdn Dividend Stocks TSX Index U.S. S&P 500 Dividend Aristocrats S&P 500 Index

.

Financials, 45% Other, 7% Energy, 30% Telecom, 18%

17

Investor behaviour is flawed, but predictable

 It feels best to be part of the crowd  Recent experience almost always extrapolated  Fear or greed dominates

The Madness of Crowds

SEEKING SAFETY

18

The current environment is reminiscent of 1979

 Stock returns poor for a decade  Inflation out of control  Iran hostage crisis  Soviet invasion of Afghanistan

“Only the elderly who have not understood the changes in the nation’s financial markets, or who are unable to adjust to them, are sticking with stocks” BusinessWeek, August 13, 1979

Concerns in 1979

SEEKING SAFETY

The Madness of Crowds

19

LONG LIVE EQUITIES

Equities have strong prospects for the long term – if part of an appropriate investment plan and strategy

 Equities may well surprise to the upside – as demonstrated by market history  Pre-conditions for economic and equity outperformance are in place  An appropriate investment plan and strategy is necessary

• Fit with investor’s circumstances – the role for fixed income remains
• Limit real risk
• Nexus’s controlled-risk investment approach is proven

20

Equities overcome challenges

(1) Selected from 20 negative events since 1930. For all of these events, the total equity return for the following 4-year period was positive.

Dow Jones Industrial Average

LONG LIVE EQUITIES

.

10 100 1000 10000 100000 1910 1930 1950 1970 1990 2010 Asian Financial Crisis +36% FDR Closes Banks +258% Pearl Harbour +67% Cuban Missile Crisis +41% Watergate & Oil Embargo +1% Savings & Loan Crisis +105%

Blank

4-Year Price Return After Event (1)

21

Economic growth has always reverted to trend

Source: Businessweek.com “The Business Cycle Doesn’t Care Who’s President”, October 11, 2012.

Economic Reversion to Trend

Actual U.S. GDP vs. Trend

LONG LIVE EQUITIES

2010 1950 1990 1970 1960 1980 2000

22

Based on history, stocks are set to outperform bonds

Source: AllianceBernstein.

(1) For each event, the worst 10-year period of equity underperformance is represented. The 10-year periods are year end to year end.

As of December 31, 2011 the previous 10-year period of equity underperformance was 2.1%.

Market Reversion

Relative Market Returns over 10-Year Periods (1)

(S&P 500 Return minus 10-Year Treasury Bond Return – annualized in US$)

LONG LIVE EQUITIES

.

• 7.4%

The Era of Discontent The Great Depression The Credit Crisis + 6.8%

• 3.0%

+ 4.5%

• 4.9%

?

1999 - 2009 1928 - 1938 1938 - 1948 1964 - 1974 1974 - 1984 2009 - 2019 Bonds beat Equities Equities beat Bonds

23

Current stock market valuations are extraordinary

Source: AllianceBernstein.

(1) S&P 500 data from Irrational Exuberance, Robert J. Shiller, updated through June 2012.

Equity Valuations

Stock Market Multiples and Interest Rates (1)

LONG LIVE EQUITIES

24

Most investors need equities and fixed income Strategic Asset Allocation

Investor’s Circumstances Strategic Asset Allocation Asset Class Characteristics

Portfolio Longevity Risk Tolerance Long High Short Low  Equities

• Growth with volatility

 Fixed income

• Stability

More Equities More Fixed Income

LONG LIVE EQUITIES

25

To benefit from equities, investors must control risk Controlled Risk

Equity Portfolio Fundamentals

 Long-term investing, not trading  Quality, sustainable companies  Intelligent diversification  Attractive valuations

LONG LIVE EQUITIES

Controlled Risk

26

A year ago who would have predicted this?

LONG LIVE EQUITIES

1-Year Nexus Asset Class Returns (1) 1-Year Relative Returns

(1) Returns are shown prior to the deduction of management fees. (2) 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. (3) Mutual fund returns from Morningstar Canada. Morningstar presents returns net of management fees.

.

10.9% 4.6% 12.8% 19.8% 8.0% Nexus Balanced Fund Bonds Canadian Stocks U.S. Stocks EQIT

.

10.9% 7.6% 6.5% 5.3% Nexus Balanced Fund (1) Market Benchmark(2) Median Canadian Balanced Fund (3) Top Quartile Canadian Balanced Fund (3)

A Proven Approach

As of October 31, 2012

27

In good times and bad, this approach has worked

LONG LIVE EQUITIES

Balanced Fund 10-Year Returns Equity Fund 10-Year Returns

(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) 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$); rebalanced monthly. (3) Mutual fund returns from Morningstar Canada. Morningstar presents returns net of management fees. (4) Equity Fund market benchmark is 5% DEX 91-Day T-Bill Index, 50% TSX, and 45% S&P 500 (C$); rebalanced monthly.

A Proven Approach

As of October 31, 2012

.

7.6% 6.7% 5.9% 5.2% Nexus Balanced Fund (1) Market Benchmark (2) Median Canadian Balanced Fund (3) Top Quartile Canadian Balanced Fund (3)

.

7.8% 6.2% 4.5% 2.8% Nexus Equity Fund (1) Market Benchmark (4) Median

• N. American

Equity Fund (3) Top Quartile

• N. American

Equity Fund (3)

28

Avoid the madness of crowds – stick to a long-term investment plan and strategy

CONCLUSION

 Investor psychology has been damaged  Investors naturally overreact  Equities have strong long-term prospects – as part of an appropriate investment plan and strategy

The World Doesn’t End Every Day