Smart Beta Adoption Hits New High
FTSE Russell has found a new high in global smart beta index adoption and continued strong interest in smart sustainability and multi-factor indexes from global institutional asset owners. The ‘Smart beta: 2017′ global survey found that the percentage of asset owners reporting an existing smart beta index allocation has reached a new peak of 46 per cent, up from 36 per cent last year. The trend over the past three years shows that increasing global growth and adoption of smart beta is continuing in 2017. Adoption in Europe is still greater than North America and Asia Pacific, with 60 per cent of asset owners reporting an allocation. Notably, the largest rise in smart beta adoption this year is among asset owners with $1 to $10 billion in assets under management (AUM). This contrasts with last year, when the largest rise in smart beta adoption came from asset owners with less than $1 billion.
Outlook Urges Caution
Despite their high levels of optimism on the current trajectory of the Canadian economy, Segal Rogerscasey Canada’s ‘2017 Investment Outlook’ urges caution. “There was a lot of positive news this quarter, including increased spending in the energy sector and stronger-than-anticipated employment data. However, this positive news was tempered by uncertainties that remain in the Canadian economy,” says Ruo Tan, president of Segal Rogerscasey Canada. “Chief among these is the potential negative impact from U.S. President Donald Trump’s proposed changes to U.S. trade policies, including the recently discussed border adjustment tax, which many believe would hurt economic growth in Canada.” Another sign that may give investors pause was the huge 30 per cent-plus increase in housing prices in Toronto and the surrounding area, year over year, ending March 2017 ‒ the largest increase recorded globally for all major cities. All levels of Canadian government are examining options to cool the housing market in the area.
Cost-effectiveness Consideration Not Encouraged
The current methods of paying healthcare providers do not encourage systematic consideration of cost-effectiveness in the selection of treatment or new technologies, says a report from the C.D. Howe Institute. In ‘The Paradox of Productivity, Technology, and Innovation in Canadian Healthcare,’ it finds that a more efficient healthcare sector could be an important source of productivity growth for Canada. It says there is evidence to suggest that a substantial share of healthcare resources are wasted, being used for tests and interventions of no or little value. If ways could be found to gradually reduce this waste, productivity growth in healthcare could be boosted substantially. It recommends provincial governments, with support from Ottawa, should experiment with new models of provider payment that strengthen their incentive to adopt cost-effective drugs, treatment methods, and diagnostic tests. As well, patients should be empowered with information – including access to their personal health records as well as health outcomes measures for services provided – to enable more informed choices. Governments should also work on creating a system of health technology assessment that discourages new technology that is too costly, yet is nimble enough to not impede the adoption of efficient innovations.
Focus Should Not Be On Trump
Investors need to focus on what the Republicans in the U.S. are doing, not what President Donald Trump is, says Daniel Morris, senior investment strategist at BNP Paribas Investment Partners. He told its ‘Global Investment Strategy Themes’ session, however, he is concerned the chaos in White House will distract Republicans. For example, tax cuts will be harder to do after the mid-term elections so they need to be made now. As well, waiting and focusing on tax cuts heading into that election may be dangerous as there is risk of too much stimulus which could drive up inflation prompting the fed to take action to keep it down. However, the size of the cuts is also important. Cutting $1 trillion is not enough to stimulate the economy and won’t change fundamentally the fed plans for two interest rate hikes this year.
Panel Examines Mental Health
An expert panel in workplace mental health that included Jeane Day, director general for groupe enterprises et sante Canada; Dr. Marie-Helene Pelletier, assistant vice-president at Sun Life Financial; Clement Allanic, of PSYA France; Joseph Riccuiti, co-founder of Mental Health International; and Stephen O’Sick, of the Bricklayers Union Local 2; led an informed discussion on the tools available to employers, employees, and unions for education about mental health at the 9th annual transatlantic conference hosted by MEBCO (Multi-Employer Benefit Council of Canada). Partners in the conference were the European Association for Paritarian Institutions of Social Protection (AEIP) and the United States’ National Coordinating Committee for Multiemployer Plans (NCCMP). Day reviewed the training tools available to Quebec employers including multi-level certification in mental health training. Dr. Pelletier illustrated the link between financial wellness and mental health. Allanic reviewed the services provided by PSYA France and shared recent statistics from French employer groups. Riccuiti provided an overview of mental health issues in Canada and challenged the conference attendees to explore workplace issues more deeply. In particular, he encouraged thinking about how mental health issues do impact the workplace whether or not the issue is founded in the workplace. O’Sick informed about his union’s experiences with drug addiction and especially the misuse of opiods. Papers delivered on this topic can be found at mebco.org
Fixed Income More Lucrative
In light of looming interest rate hikes, the current environment could make active fixed income strategies more lucrative, says PIMCO. Even though some plan sponsors are moving away from active management to avoid high fees particularly with stocks, the firm notes that bonds are different. ‘Take Action: Five Ideas for DC Plan Sponsors’ cites research by Morningstar indicating 84 per cent of active managers in three of the most common DC bond categories beat their median passive peers over the last five years, whereas only 41 per cent of active equity managers outperformed their median passive peers. However, investors should rethink how they invest in bonds by employing diversified bond allocations representative of the broadest global bond opportunity set. They should also increase tactical duration flexibility to mitigate downside risk and allocate dynamically across credit markets to capture a premium above government bonds.
DC Allocations To Alternatives Increase
UK defined contribution fund allocations to fixed income and alternative assets have increased at the expense of developed markets equities over the 12 months ended March 31, says Schroders’ ‘2017 FTSE DC report.’ The average fixed income exposure of DC plans to FTSE 350 companies plans grew to 21 per cent from 16 per cent last year, while the average exposure to alternatives increased to 13 per cent from seven per cent. Over the 12-month period, the typical FTSE 350 DC plan’s exposure to developed markets equities, which comprises global and UK equities, fell to 62 per cent from 67 per cent.
Multi-asset Solutions Expanded
Russell Investments Canada Limited has expanded its outcome-oriented multi-asset solutions to include the multi-asset income strategy (MAIS) fund, a multi-asset offering for Canadian investors that seeks to provide long-term capital growth while minimizing drawdowns. It targets a specific long-term objective, providing diversified exposure to both traditional and non-traditional asset classes including equities, fixed income, real assets, and absolute return portfolio segments. The investment portfolio’s asset allocation, strategies, and exposures are tactically managed to control risk and respond nimbly to market opportunities.
UCITS Thrive Outside Europe
UCITS continue to thrive in markets outside Europe, says research from Cerulli Associates. ‘European Distribution Dynamics 2017: Managing Complexity as Opportunities Evolve’ says as the first region outside Europe to embrace UCITS, Asia, remains an important focus for UCITS providers. As of September 2016, cross-border fund assets in Asia ex-Japan, which are a proxy for UCITS, increased to US$198 billion compared to US$128.3 billion a year earlier. At the same time, the number of UCITS fund registrations across Asia increased at double-digit rates. It is also optimistic about the outlook of UCITS in Latin America. Andean AFPs remain the most addressable market in the region and comprise a gradually growing opportunity. “The Chilean securities’ regulator has simplified the process of registering UCITS from foreign jurisdictions, making it less expensive. This has allowed Chilean brokers, dealers, and life insurers to distribute UCITS to their client base,” says Angelos Gousios, director at Cerulli and lead author of the report.
Summer Perks Boost Morale
Companies can leverage summer perks to boost morale, says a survey by Office Team. It found 46 per cent of employees would like to have a flexible schedule during the summer, but only 27 per cent of Canadian human resources (HR) managers reported their organization offers them at this time of year. As well, one in five HR managers (20 per cent) feel workers are less productive during the summer months and unexpected absences (28 per cent) and being overly distracted or checked out at work (20 per cent) were identified as the most common negative employee behaviours at this time of year, ahead of dressing too casually (18 per cent), not planning well for vacations (17 per cent), and sneaking in late or leaving early (14 per cent). To help staff make the most of summer at work, employers can give employees more control over how they spend their time by offering flexible schedules and occasionally letting them leave early on Fridays. Holding meetings outdoors is one way to get fresh air while accomplishing business objectives and employers can plan an ice cream break, picnic, or group outing. Finally, they can allow staff who aren’t customer- or client-facing to wear more casual attire, as long as it doesn’t detract from work.
Arora Joins Sun Life
Anjila Arora is director of pharmaceutical benefits, group benefits, at Sun Life Financial. She works with the central and western Canada teams to ensure a seamless experience for plan sponsors and members. Most recently, she was manager of market access at Galderma, firm she joined in 2017 after seven years with Actavis.
Divesting From Carbon Examined
Jean Michaud, managing director and senior commodity strategist at Core Commodity Management, will examine ‘Should Institutional Investors Divest From Carbon?’ at ‘CPBI FORUM 2017.’ In another session, Tyler Amell, of Morneau Shepell Work & Health, will look at ‘The Impact of Chronic Disease on Health, Productivity and Engagement.’ It takes place June 5 to 7 in Winnipeg, MB. For information, visit FORUM 2017
Medical Marijuana Explained
The Employee Assistance Program Association of Toronto (EAPAT) will look at ‘Medical Marijuana in the Workplace.’ Amanda Daley, vice-president, medical, at Canopy Growth Corporation, will review the definition of medical marijuana, its clinical applications, and what it can do for patients. The presentation will include a summary of Health Canada’s Medical Marijuana Regulations and highlight the impact of those regulations on healthcare professionals, the employer, the worker, and safety in the workplace. He will also discuss the anticipated impact on the medical cannabis system if recreational marijuana becomes legal. It takes place June 9 in Toronto, ON. For information, visit Medical Marijuana
Ontario Moving To Going Concern
Ontario will move to a going concern funding basis for defined benefit pension plans which are at least 85 per cent funded. In moving forward with changes that will help ensure workers’ retirement benefits are protected and maintained, the ministry of finance says employers will be given greater flexibility in managing their pension contributions, allowing them to plan for their pension costs more easily. It will rThere will be no impact on the pensions that retirees now receive as a result of these changes. Along with new funding requirements, additional measures will protect benefit security for plan members and retirees. As well, the monthly guarantee provided by the Pension Benefits Guarantee Fund will be increased by 50 per cent, from $1,000 a month to $1,500 a month. The government intends to introduce legislation in the fall to enable these changes and will be consulting on the details of new regulations. More information is at DB Funding
U.S. Equities Have Solid Performance
Trump Effect Discussed
‘What the Heck Happened? A mid-year review of the economy and capital markets after the Trump effect’ is the topic of a CPBI Atlantic session. Sébastien McMahon, senior economist at Industrial Alliance Financial Group, will look back at some of the headlines and present an overview of the current economic background and the markets, including the impact of the Donald Trump administration on Canada and the world over the next few years? It takes place June 14 in Halifax, NS. For information, visit Trump Effect
Government Seeks Lower Drug Prices
The federal government is planning the most significant suite of changes in over two decades to protect Canadians from excessive drug prices. As a key part of its plan, the government is proposing changes to the way patented drug prices are regulated in Canada. Through amending the ‘Patented Medicines Regulations’ to change the list of countries used for price comparison, the government will be in a better position to take advantage of lower drug prices in other countries and consider value for money and affordability when setting the bar on excessive pricing. Canada’s patented drug prices are the third highest among countries in the Organisation for Economic Co-operation and Development (OECD). OECD median prices are, on average, 22 per cent below those in Canada. To help inform the development of these regulatory improvements, Health Canada is currently seeking input. This online consultation will run to June 28.
Life Expectancy Higher
Assumed life expectancy with the Canadian Institute of Actuaries (CIA) draft ‘Task Force Report on Mortality Improvement’ combined with the base mortality table CPM2014 is about one per cent to 1½ per cent higher than the life expectancy calculated using the more common CPM-B scale, for both males and females, says a Morneau Shepell ‘News & Views.’ The impact on pension values would be about 0.5 per cent. Using the new scale would result in a similar increase in the value of plan liabilities. This means that sponsors of pension plans that are not fully funded on a going-concern basis could see an increase in their amortization payments and in their current service contributions. A similar impact could also be expected on liabilities and current service cost for accounting purposes if the new scale is also considered the best estimate on that basis. However, for the time being, the new scale would not be used to calculate transfer values payable upon member termination since the assumptions used for these calculations are prescribed and based on CIA recommendations.
Plan Solvency Improves
The median solvency ratio for defined benefit pension plans is 93 per cent, compared to 91 per cent as at December 31, 2016, says the Financial Services Commission of Ontario (FSCO) ‘Quarterly Update on Estimated Solvency Funded Status of Defined Benefit Plans in Ontario’ as at March 31. The two per cent increase in the estimated median solvency ratio since December 31 is attributable to robust first-quarter 2017 model pension fund investment returns that led to a one per cent increase in the ratio and a reduction in solvency liabilities due to an increase in commuted value interest rates which resulted in a one per cent increase in the ratio. The solvency ratio of 93 per cent at the end of the first quarter of 2017 continued the upward trend that began in late 2016. The last time solvency ratios reached these levels was in early 2014, when they peaked to 93 per cent, falling quickly thereafter. It also found 63 per cent of plans had a solvency ratio between 85 per cent and 100 per cent and 22 per cent of plans had a solvency ratio greater than 100 per cent.
ETF Edge Over Hedge Funds Widens
The global ETF/ETP industry with US$3.913 trillion in assets at the end of the first quarter of 2017 was US$847 billion larger than the global hedge fund industry which had assets of US$3.066 trillion, says ETFGI. The assets invested in the global ETF/ETP industry have continued to grow faster than assets in the global hedge fund industry since the end of the second quarter of 2015 when they first surpassed the assets in the global hedge fund. Although the assets in ETFs were larger than the assets invested in hedge funds, the hedge fund industry remains larger than the ETF industry based on number of funds: 8,216 hedge funds versus 6,771 ETFs/ETPs.
Hendershot Joins Mercer
Kevin Hendershot is a principal and client manager in the Toronto, ON, office of Mercer Canada. He brings more than 23 years of cross-industry work experience in professional services and enterprise sales, including previous client management roles at Accenture, Allstream, and Microsoft.
Alternative Alternatives Examined
‘Alternative to Alternatives ‒ Going beyond RE, PE, and Infrastructure’ will be examined at a Toronto CFA Society session. Antoine Bisson-McLernon, partner and chief executive officer at Fiera Comox Partners; Glenn Smith, managing director and president of Hancock Renewable Energy Group; and Ian Fowler, managing director and co-head of North American private finance – private lending at Barings LLC; will share their views on the present and future landscape of global agriculture, renewable energy, and private lending investing. It takes place May 31 in Toronto, ON. For information, visit Alternative Alternatives
Above Average Growth Predicted
A record 34 per cent of money managers predict above-trend growth and below-trend inflation over the next 12 months, says Bank of America Merrill Lynch‘s monthly fund manager survey. Additionally, a net 56 per cent of investors surveyed believe global profits will improve over the next 12 months, the highest reading in three years and up from a net 50 per cent in April. A net two per cent also believe corporate earnings will rise 10 per cent or more over the next year, the highest reading since July 2011. The survey also found a net 37 per cent of managers believe global equities are overvalued, the highest reading since January 2000, and up from a net 32 per cent in April. Meanwhile, a net 20 per cent of investors think European equities and a net 44 per cent think emerging markets equities are undervalued, compared to a net 19 per cent and 47 per cent, respectively, last month.
External Asset Management Grew
Insurance company assets managed by external money managers in North America grew 10.2 per cent in 2016 and globally by 8.1 per cent, says a report by the Insurance Asset Outsourcing Exchange and Insurance AUM. Low fixed income rates are driving insurers to external managers that can provide more specialized investments such as high-yield fixed income, emerging markets equities and debt, secured loans, structured products, and private debt.
Expense Ratio Downward Trend Continues
The average expense ratios of long-term mutual funds declined in 2016, continuing a 20-year downward trend, says the Investment Company Institute. Investors on average paid 39 per cent less for equity mutual fund expense ratios in 2016 than in 1996. The average expense ratios of equity, bond, and hybrid mutual funds all showed an overall decline, including both active and passive funds. For example, the average expense ratio of active mutual funds in 2016 was 24 per cent less than in 1996. “In recent years, economies of scale and intense competition put downward pressure on fund expense ratios. The fund industry continues to meet investor demand for lower-cost investment options, such as through no-load share classes,” says Sean Collins, ICI’s senior director of industry and financial analysis. “Funds are adapting to a paradigm shift in the industry’s business model ‒ a growing number of investors are paying their investment professionals for investment advice and assistance directly out of their pockets, rather than paying indirectly for advice through funds.”
Integrated Closes Loan
Integrated Asset Management Corp. and its private corporate debt group, IAM Private Debt Group, have closed of a $28 million senior term loan to S.M. Group International Inc. (SMi). The capital raised by SMi will replace current bank facilities and support the company’s ongoing growth. Founded in 1972, SMi is a privately-owned engineering, integration, and construction management company. It focuses on the deployment of safe, sustainable, and high level integrated solutions for various types of infrastructure projects to ensure future generations a better quality of life.
Pratt Speaking At Session
Laura Pratt, national practice leader, organizational health at the Centre for Mental Health in the Workplace at Great-West Life, will share ideas on how Canadian workplaces can and have engaged tools to support psychological health and safety in the workplace at the Benefits and Pensions Monitor Meetings & Events ‘The Realities of Workplace Mental Health’ session. She joins Richard Heinzl, global medical director from WorldCare International Inc., who will examine ‘Future Solutions for Mental Health in the Workplace; and Renee Couture, owner of UC Consulting, who will present solutions as to what can then be done to create a thriving workplace, improving mental health, and, in doing so, reducing benefit costs. It takes place June 6 in Toronto, ON. For information, visit Mental Health Realities
Men Discuss Mental Health
Hansell Consulting Group will present the first annual ‘Men’s Breakfast for Mental Health.’ It is an opportunity to discuss, learn, and share on what is being called a silent crisis: men’s mental health. It takes place June 13 in Burlington, ON. For information, visit Men’s Mental Health
Proper Planning Key To Alternative Allocations
Alternative assets are an essential component for institutional investors looking to diversify from traditional asset classes and enhance risk adjusted returns, says David Rogers, partner, Caledon Capital Management. Speaking at ‘The Lifecycle of an Alternatives Allocation’ seminar held by Blakes, CIBC Mellon, and Caledon, he said investors interested in allocating to alternatives assets need to think about the way they want to build a program and how they want to build it over time. There are several implementation options for institutional investors that include using an in-house team, general consultants, or partnering with a specialist. Each comes with its advantages and challenges and investors may be limited in their choices based on the size of their plan. The elements of the portfolio must also be considered for each alternative type. Elements will include such things as the allocation details, investment strategy, the capital structure, and investment liquidity. Communication at every level and stage is the key to a successful implementation, said Rogers. Upfront planning and communication, together with an annual review of the implementation plan, will impact the long-term success of an alternatives investment program.
Costs Could Climb By 2025
Health benefits costs to employers could climb by 130 per cent by 2025, says Mercer. Announced at its inaugural ‘Future of Healthcare: Evolution to Revolution’ event series, it says the higher costs are expected to be driven by specialty drugs, higher rates of chronic and mental illness, increased benefits fraud, and increased health pooling costs. Along with an increasingly diverse and mobile workforce, this highlights the challenges employers will face as they compete for talent in a challenging healthcare world. However, employers that understand the issues will be able to plan for, and succeed in, the long term. “As costs rise, employers need to step up to remain competitive,” says Brian Lindenberg, partner and leader of Mercer Canada’s health practice. “This means embracing the personalization of benefits enabled by technology, leveraging innovative funding models, and offering more flexible plans in keeping with the needs of a more diverse and ever-changing workforce.”
CRA Clarifies 10 Per Cent Rule
The Canada Revenue Agency (CRA) has clarified its position on the preamble to subparagraph 149(1)(o.2)(iii) of the Income Tax Act as it pertains to pension investment corporations and CRA’s response to Question 42 at the 2007 Canadian Tax Foundation Conference, says an Aon Hewitt ‘Radar.’ Paragraph 149(1)(o.2) of the act exempts certain pension corporations from Part I tax where the relevant conditions listed therein are satisfied. One of these conditions is that a pension investment corporation make no investments other than investments that a pension fund or plan is permitted to make under the Pension Benefits Standards Act, 1985 (PBSA) or a similar law of a province. In general, the PBSA and the pension benefits legislation of certain provinces contain a rule that states that a pension plan cannot invest more than 10 per cent of the pension plan’s assets in any one investment. CRA’s understanding is that the 10 per cent rule is applied at the level of a pension plan and not at the level of a pension corporation. However, since it believes that the wording of the preamble to subparagraph 149(1)(o.2)(iii) of the act is not clear and unambiguous, its view that it is appropriate to interpret this provision in a manner that is consistent with the manner in which the 10 per cent rule is interpreted and applied for purposes of the PBSA and provincial pension benefits legislation. Therefore, the 10 per cent rule will be applied at the pension plan level rather than at the pension corporation level.
Attention Turning Back To Fundamentals
With President Trump’s first 100 days and the French presidential election in the rearview mirror, attention is turning back to fundamentals, says AB’s ‘Global Macro Outlook.’ In recent months, the global economy has moved onto firmer ground and, with policy still highly accommodative, it expects this to continue, forecasting 2.8 per cent global growth both this year and next. With inflation expected to decline (to 2.5 per cent in 2018 from 2.7 per cent this year), this should provide a benign backdrop for global financial markets because developed-market central banks are likely to withdraw extraordinary monetary-policy stimulus very gradually. However, this process is unlikely to be uniform. The U.S. Fed is likely to continue raising rates slowly and adopt a passive approach to normalizing its balance sheet. At the ECB, tapering will probably move onto the agenda in the second half of the year, However, it expect the Bank of Japan to remain broadly committed to its current program. These differences are reflected in its bond yield forecasts, which show Japanese yields anchored close to zero, a modest rise in the U.S., and a more material increase in the euro area, where the disconnect with fair value is wider.
Factor Investing Attracts Inflows
Factor investing, often referred to as smart beta, attracted over €3.6 billion of inflows at the end of April into ETFs in Europe, says Amundi. The size factor (which refers to companies in the small and mid-cap sector) and value have attracted the largest inflows since January, with over €1.35 billion and €1.34 billion each. In April alone, investors preferred the size factor, which attracted over €288 million of inflows, followed by high dividends with €235 million. Amundi says the figures showed that factor investing “keeps its strong traction with investors.” Overall European ETF market flows at the end of April were over €34 billion, led by equity ETFs with €22.3 billion.
Conference Focuses On Cybersecurity
A new International Foundation of Employee Benefit Plans conference will share the latest in cybersecurity and deterrence of data breaches and provide guidance for internal controls and risk prevention for employee benefit plans and their sensitive information on individuals, members, and dependents. It takes place July 17 to 18 in Chicago, IL. For information, visit Cybersecurity