Benefit Taxation Top Of Mind For Advisors
Commission disclosure and benefit taxation are top of mind for group insurance brokers, says a survey by DJG and the Canadian Group Insurance Brokers (CGIB). Brokers who responded to the survey say the impact of making employer-paid benefits taxable income in Canada will likely have a dramatic impact on their business ‒ as well as the employees covered by these plans ‒ with 67 per cent of respondents saying that the taxation of benefits would shrink their book of business. “After the government’s statement against it in February 2017, this issue appeared to be dead. However, the Parliamentary Budget Office released ‘The Taxation of Employer Provided Health Benefits’ report in May of this year. This leaves the Canadian broker community uncertain about this issue. The taxation of benefits will cause lost jobs across the industry, increased costs to taxpayers, and a reduction in benefits for many,” says Dave Patriarche, founder CGIB. Brokers are open to commission guideline, but unsure who regulates this as the survey found the majority of brokers who responded (74.8 per cent) were open to a standardized commission guideline, with only a minority (13 per cent) saying they withhold the commission they charge. Compensation disclosure arose as an issue after the Canadian Life and Health Association (CLHIA) first announced the G19 initiative in November 2016. “While brokers are supportive of compensation disclosure, a standard commission guideline is a best practice used in other areas of the insurance industry, such as life, home and auto insurance. The broker industry is open to discussing what this could look like,” says Patriarche. Surprisingly, one-third of respondents thought the CLHIA could regulate this. “This response was a shock,” he says. “The CLHIA is a trade association ‒ not a regulator. I worry this confusion creates an adversarial environment between brokers and other industry partners, which could negatively impact employers and their employees.”
Gridlock Good For Equities
With the Democrats capturing the U.S. House and the Republicans expanding their Senate majority, this split Congress may bring gridlock, says Dec Mullarkey, managing director in the investment strategy group at Sun Life Investment Management. However, “the stock market has historically fared well with divided government. More balance prevents political overreach, resulting in a stable backdrop. Therefore, expect the result to be broadly bullish for equities as it supports the status quo,” he says. The long-term growth outlook should remain unchanged as the Republican ambitions to make individual tax cuts permanent are unlikely to materialize. While these tax cuts may have boosted short-term growth, they would have also risked overheating the economy, resulting in more aggressive Fed hikes, he says. Expanding the tax cuts would have further added to the debt burden, eventually weighing on borrowing costs. And as President Donald Trump plans his 2020 re-election campaign, a gridlocked Congress is unlikely to deliver any notable wins to help expand his agenda. Therefore, Trump will likely focus on his broad executive powers to impact trade and national security. Oliver Marciot, investment manager of Unigestion’s Multi Asset Navigator fund, says “On the back of the election results, U.S. and European equity futures are up about one per cent, as one source of political uncertainty has been resolved. In our estimation, this reflects a market refocus on fundamentals that remain positive for equities, especially in the U.S., and will not meaningfully change with a Democratic House.” He too expects political gridlock for the next couple of years, which will likely keep any additional significant fiscal spending at bay.
Generic Use Requires Aggressive Action
Plan sponsors need to require an adverse drug reaction report when a patient is a given a ‘no substitution’ prescription, says Jim Lee, president of the Canadian Generic Pharmaceutical Association. Speaking on ‘The Value of Generic Medicines’ at the Canadian Group Insurance Brokers (CGIB) and Benefits Breakfast Club November Seminar, he said this is one way to institute a generic plan. He said while generics account for 70.8 per cent of the 687 million prescriptions written in the 12 months ending June 30, they account for only 21 per cent of the spend of $28.1 billion. However, this is still well below the 85 per cent generic use in the U.S. where plans aggressively enforce the use of generics to improve cost efficiencies. He cited a Patented Medicine Prices Review Board (PMPRB) report which confirmed the largest ‘pull effect’ – the largest factor that controls prescription costs and contributes to the sustainability of plans ‒ is substitution with generics. Public sector plans make greater use of generics with 75.6 per cent of plans using them compared to only 62.5 per cent in the public sector due mostly because there is less enforcement of generic substitution requirements in private plans. Which is why strategies to increase their use requires explanation for ‘no substitution’ requests on prescriptions. He also recommended the removal from benefit status of any brand-name drug that offers a coupon card, higher net mark-ups of brand name drugs, and different co-pays for generics and brand name drugs. In the U.S., for example, he said a $5 co-pay may be required for a generic drug and a $75 for the brand name.
Alarm Raised for Financial Wellness
In support of Financial Literacy Month, the Canadian Payroll Association (CPA) is raising the alarm for employers, encouraging them to get involved in supporting their employee’s financial wellness. Results from its ‘2018 Employee Research Survey’ show that 46 per cent of Canadian workers say that financial stress is impacting their workplace performance. “Decreased productivity, absenteeism, and high turnover are just some of the negative ways that stress arising from finances can affect employees,” says Peter Tzanetakis, president of the CPA. “Employers are uniquely positioned to support employee financial wellness, either by offering them financial resources or methods to help employees save.” Currently, 53 per cent of employees say their employer offers a ‘Pay Yourself First’ option, enabling workers to use automatic payroll deductions to divert source income into a separate savings or retirement account. Of those who have this option available, only 56 per cent take advantage.
Source Of Alternative Capital Changing
Alternative asset fund managers are anticipating that over the next five years, there will be significant changes in where they source their capital, says Preqin. Banks and fund of funds managers are set to play less important roles, while almost two-thirds predict that family offices will become more prominent. Investors based in emerging markets, particularly in Asia, are also likely to contribute proportionally more capital to the industry, even as a third of firms say that they expect the share of capital coming from North America to decline. When they do commit capital, investors in 2023 are less likely to focus on pooled funds and more likely to want to access the industry through co-investments, separate accounts and joint ventures. Almost half of fund managers anticipate less capital flowing to pooled funds, while more than a third of both fund managers and investors expect to see more capital being invested through co-investments.
PSP Sells Paris Property
The Public Sector Pension Investment Board (PSP) and Tishman Speyer, a global owner, developer, operator, and fund manager of first-class real estate around the world, have sold Tour Pacific to Société Générale Insurance. They acquired the 53,000 square metre office building, located in the La Défense business district of Paris, France, in 2013. Following an extensive renovation and refurbishment program that transformed this 20-year-old office tower into a modern and efficient building, they have successfully leased to over 30 tenants including CA Technologies, McAfee, Whirlpool, Manhattan Associates, RSA, NTT, and Accenture. Tour Pacific’s tenants benefit from an iconic and modern design, direct access to natural light, and a rooftop garden, in addition to new amenities such as a lounge, conference centre, and fitness space.
RBC Provides Custody To Picton Mahoney Funds
RBC Investor & Treasury Services has been appointed custodian by Picton Mahoney Asset Management on three liquid alternative mutual funds added to its Fortified Fund family. It will also provide fund administration and shareholder services. The three liquid alternative mutual funds provide Canadian retail investors access to sophisticated hedging expertise, improved diversification, and additional tools for risk mitigation. Liquid alternatives are strategies used through alternative investment vehicles including derivatives, leveraging, and shorting.
Sears: What Happened?
‘Sears: What happened, How it happened, and Key Takeaways’ will be the focus of a CPBI Southern Alberta Region session. Amy Tang, an associate at Koskie Minsky, will discuss the history of the case, the legal background, the key arguments by the pensioners, and key takeaways for the pension industry. It takes place November 22 in Calgary, AB. For information visit, Sears: What Happened
Modest Increase Expected For Benefit Costs
Employer-provided healthcare benefit costs are expected to increase modestly around the globe in 2019, says a survey of medical insurers by Willis Towers Watson. The ‘2019 Global Medical Trends Survey’ found insurers blame the high cost of medical technology and the overuse and overprescribing of services as the major cost-driving factors and caution that soaring pharmacy costs will become a significant factor over the next five years. Medical insurers globally are projecting healthcare benefit costs to rise 7.6 per cent in 2019, a slight increase over 7.1 per cent this year. The smallest increases (five per cent) are projected in Europe while the largest increases are expected in the Middle East and Africa, where costs are projected to jump 12.4 per cent. Cost increases in the Americas, excluding the U.S., are expected to decline slightly, but still increase at double-digit levels (10.7 per cent). The outlook for cost increases over the next three years varies greatly by region. Only a third of insurers in the Americas (34 per cent) expect higher or significantly higher medical trend costs over the next three years. However, 60 per cent of Middle East and African insurers and 54 per cent of insurers in Europe anticipate higher costs. Globally, nearly half of insurers (49 per cent) expect cost increases will be higher or significantly higher.
More Allocated To Private Equity Than Hedge Funds
More institutional investors plan to allocate more to private equity than to hedge funds over the next three years, says ‘s ‘2018 Global Alternative Fund Survey.’ It shows 21 per cent expect to decrease their hedge fund allocations, while only seven per cent plan to increase them, says ‘At the Tipping Point.’ Meanwhile, 34 per cent of investors plan to increase their private equity investments over the next three years, while just nine per cent expect to cut those allocations. Seventy-two per cent of institutional investors plan on maintaining their current hedge fund allocations, while 57 per cent plan to keep their private equity allocations unchanged. The hedge fund and private equity managers surveyed found a combined 57 per cent said asset growth was their top strategic priority, while 25 per cent said talent management was their top priority.
Plan Review Myths Refuted
The OMERS Sponsors Corporation is addressing some of misunderstandings or inaccuracies that are circulating about its ‘Comprehensive Plan Review.’ In an edition of ‘Straight Talk,’ it refutes myths that OMERS is manufacturing a crisis and exaggerating the challenges facing the plan today, OMERS is doing better than any other major pension plan, and if conditional indexing is adopted, indexing will only be provided if the plan is fully funded or in surplus.
UTAM Posts Gains In Portfolios
The pension and endowment portfolios managed by UTAM gained 2.2 per cent net of all investment-related fees and expenses during the first six months of 2018. This return was 0.9 per cent lower than the university’s target return of 3.1 per cent (inflation + four per cent per year). Over the same period, its active management approach outperformed the passive reference portfolio benchmark and contributed 0.6 per cent of value added. The short-term working capital fund (EFIP) returned 0.9 per cent during the first six months of 2018, which was 0.2 per cent lower than the target return for this portfolio (365 day T-bill return + 0.5 per cent per year). Daren Smith, UTAM’s president and chief investment officer, says its active management approach for pension and endowment had outperformed the passive approach embedded in the reference portfolio by approximately 1.8 per cent per year over the last five years and by approximately 0.6 per cent per year over the last 10 years (net of all investment-related fees and expenses, including UTAM costs). The 1.8 per cent outperformance per year over the last five years equated to over $550 million of value added to the portfolios on a combined basis.
Central Counterparty For Repo Improves Efficiency
Since its launch in 2012, Canada’s clearing and netting system for repurchase transactions (repo) has contributed to improved transactional efficiency and market liquidity while better positioning domestic repo markets in future stressed market conditions, says the Investment Industry Association of Canada (IIAC) and the Canadian Derivatives Clearing Corporation (CDCC). Their study, ‘The Development & Evolution of Canada’s Central Counterparty for Repo’ shows the solution, led by the street, is the first of its kind globally to integrate direct participation from the buy and sell side. “It is a win not only for debt markets, but for the broader financial system and growth of the Canadian economy,” says Ian Russell, president and CEO of the IIAC. The need for a clearing body became urgent during the 2008 financial crisis when the lack of liquidity in debt trading precipitated the end of two large U.S. investment dealers. Canadian organizations such as the CDCC, its regulators, and the IIAC came together and created a system that would provide the liquidity needed to avoid this type of crisis in the future.” However, to continue to evolve and enhance its operations and infrastructure, the CDCC is in the process of addressing the volume of cleared repos which needs to increase for its stakeholders to realize full benefits and making the operations robust and efficient under all conditions to retain the trust of the members who rely on the utility as an integral part of their own operations.
DB Plans Post Uptick
Private Market Managers Aware Of ESG Opportunities
Most managers in the private markets industry are keenly aware of risks and opportunities associated with investing with environmental, social, and governance (ESG) issues in mind and have begun incorporating these factors into their due diligence processes, says a survey by Makena Capital Management. It identified a few key trends. ESG implementation is going up across the board 70 per cent of those surveyed incorporating ESG factors into their investment process. General partners with an ESG policy grew 10 per cent year-over-year, with 45 per cent of managers having an ESG policy and four per cent in the process of implementing one. Of the managers with a policy, 70 per cent of them adopted or formalized their policy after 2013. Larger firms are more likely to have an ESG policy as 68 per cent of managers with more than $20 billion in assets under management have an ESG policy in place. In addition, real estate managers represented the largest increase across the asset classes surveyed, with such managers having a 30 per cent year-over-year increase in ESG policies.
Northern Trust Processes Capital Call With Blockchain
Northern Trust has processed the first live capital call using distributed ledger technology for Emerald Cleantech Fund III LP, adding a new capability to its blockchain solution for private equity fund administration. The fully automated capital call administration functionality was deployed for the fund, a venture capital fund focused on technology companies. It utilized Northern Trust’s private equity blockchain for the fund’s capital call administration. Northern Trust launched the first commercial blockchain solution for private equity fund administration in 2017.
Three Have New Roles
Stephen McLennan is senior managing director of the Ontario Teachers’ Pension Plan’s newly-created total fund management department. The department will form the nucleus of the chief investment officer’s office as it integrates its portfolio construction approach with treasury and funding capabilities. McLennan was most recently head of natural resources and during his long tenure at Ontario Teachers’ he has held positions of increasing responsibility in both capital market and private asset related groups. Steve Saldanha is managing director, portfolio management and asset allocation, and Jacky Lee is managing director, portfolio analytics and modelling. Saldanha joined Ontario Teachers’ in 2006 and was most recently director, global tactical asset allocation, in capital markets. Lee joined Ontario Teachers’ in 2007 and has more than a decade of experience in quantitative research, portfolio construction techniques, and investment risk modelling.
CFA Forum Dives Into Expectations
The CFA Society Toronto’s ‘Institutional Investment Practitioners’ Forum’ will dive deep into both capital market expectations as well as practical implementation of asset allocation for both large and small plans. Attendees will better understand current market conditions in the context of the asset allocation framework and receive implementable ideas from leading Canadian and U.S. experts regarding their strategies and insights. Speakers include Caroline Grandoit, assistant vice-president, LDI and multi asset, and senior analyst, liability driven investment, at Fiera Capital; Kevin Zhu, managing director and head of portfolio construction at OPTrust; and Frances Donald, head of macroeconomic strategy within the asset allocation team at Manulife Asset Management. It takes place November 29 in Toronto, ON. For information, visit CFA Forum
Hub Acquires Proteus
Hub International Limited has acquired Proteus Performance Management Inc. Proteus provides specialized pension plan governance and investment consulting to corporate plan sponsors, not-for-profit organizations, trusteed plans, public plans, foundations, and endowments. It ranked in the top decile for overall quality of investment consulting services in the 2017 Greenwich Associates Survey for U.S. and Canadian Institutional Investors Research. The move further demonstrates Hub’s ongoing Canadian employee benefits and pension consulting growth strategy to assemble best-in-class capabilities and entrepreneurial talent across Canada to develop a complete employee benefits and pension solution.
Responsible Investing In U.S. Grows
Sustainable, responsible, and impact investing assets now total $12 trillion in the U.S., a 38 per cent increase from 2016, says the US SIF Foundation. Its 2018 biennial ‘Report on US Sustainable, Responsible, and Impact Investing Trends’ found $11.6 trillion assets under management that incorporate environmental, social, and governance (ESG) factors at the outset of 2018 held by 496 institutional investors, 365 money managers, and 1,145 community investing financial institutions. In addition, 165 institutional investors and 54 investment managers collectively controlling nearly $1.8 trillion in assets filed or co-filed shareholder resolutions on ESG issues between 2016 and the first half of 2018. Eliminating double counting for assets involved in both ESG incorporation and filing shareholder resolutions produces the net total of $12 trillion in SRI strategies at the start of 2018.
New DB Plans Available
“Secure, predictable, pensions for life” ‒ something that was, until recently, only accorded to civil servants and those few in the private sector with a defined benefit (DB) pension plan ‒ is now on offer to all working Canadians through two new pension plan programs, says Cara MacDonald, regional director of education in Canada for the International Foundation of Employee Benefit Plans. The launch of DBplus and by OPTrust make tPensions For Life
Redington Launches Endgame
Redington has launched its ‘Destination Endgame’ whitepaper to provide UK schemes with a framework to help navigate an increasingly complex environment of endgame options and products. It says a raft of regulatory, competitive, and market developments have drastically altered the environment for the trustees and sponsors of DB pension schemes, offering substantially more options for how to approach the “endgame” of running off the scheme and delivering pension promises to members. While increased choice is positive, it argues that what schemes now need is a decision-making framework to assess the different options available against each other fairly, so they can ensure they’re making the best choices for members. A number of high-profile corporate failures including Carillion and House of Fraser, coupled with better-than-expected funding level progress since 2016, has highlighted the need for schemes to act swiftly when it comes to making the right choices and implementing de-risking strategies. In the first half of 2018, there was a substantial increase in the number of schemes placing endgame planning as the number one priority for trustee boards and investment committees, with 40 per cent of clients considering this. The space has also seen entrants from a number of new providers and products, including more providers of bulk annuity buy-in and buy-out products, new cashflow-driven investing solutions, and alternative consolidation vehicles.
MiFID II Reduces Earnings
Brokers will be earning about 20 per cent less on European equity research as of the end of 2019 as a result of MiFID II ‒ a reduction of about $300 million, says a report from Greenwich Associates. ‘he largest European institutional investors cut budgets for external European equity research by 19 per cent in 2018, the first full year the new “unbundling” rules established under MiFID II were in effect. These investors are planning another five to six per cent reduction in 2019. Under MiFID II, institutional investment managers are required to show clients an overall research budget in anticipation of the coming year. From there, they can negotiate preliminary broker budgets with their counterparties, but not necessarily the full amount of their budget. Its research shows that intuitional investors are holding back about 30 per cent of their total annual research budget for allocation over the course of the year. With about 70 per cent of the total budget pre-allocated, it means some $300 million in unallocated research budget is up for grabs intra-year and it will likely be used to top off and award current providers for additional service throughout the year.
Strategies Address Care Delivery
Following five years of relatively modest healthcare cost growth, more midsize and large employers are foregoing the short-term savings offered by cost-shifting and turning to strategies addressing care delivery and health management, says a survey of U.S. employer-sponsored health plans for 2018. Employers continued to add telemedicine services (80 per cent, up from 71 per cent) and the average utilization rate for 2017 inched up to eight per cent of eligible employees from seven per cent the prior year. About half (51 per cent) provide employees with an expert medical opinion service, which makes it easy for them to get a second opinion from a highly qualified specialist. Targeted programs that provide support for people with chronic conditions and other health issues (such as diabetes, infertility, and cancer) are offered by 56 per cent. Enhanced care management programs, featuring medical professionals who provide support throughout the entire care episode and help resolve claims issues, are offered by 36 per cent of employers.
Wealth Assets Increase
The U.S. professionally managed wealth market surpassed $46 trillion in total assets during 2017, increasing 14.9 per cent year over year, says a report from Cerulli Associates. However, the split of assets between institutional and retail clients continues to shift toward retail, closing 2017 with 47.8 per cent attributed to retail channels. Retail assets have largely outpaced institutional client assets in terms of growth over the last decade. This can be attributed to greater equity exposure in retail channels and to increasing amounts of assets migrating from institutional channels to retail channels (individual retirement account rollovers). In addition, institutional asset owners (corporate defined benefit and state and local defined benefit plans) hold a significant amount of fixed income assets which have not performed as well as equities due to extended periods of low interest rates. Opportunity continues to exist in the institutional channels, but asset managers cannot afford to ignore the development and distribution of retail products, it says.
Median Return Positive
The median return of the BNY Mellon Canadian Master Trust Universe, a BNY Mellon Global Risk Solutions fund-level tracking service, was +0.42 per cent for the third quarter of 2018, marking the 10th straight quarter of positive results. The one-year median return was +7.37 per cent, while the median 10-year annualized return was +8.22 per cent. Of the Canadian investment plans, Canadian universities achieved the strongest performance, posting a median return in the third quarter of +1.1 per cent, and +3.45 per cent for the year-to-date. Canadian foundations and endowments posted a positive median return of +0.63 per cent in the third quarter and +2.92 per cent since the start of 2018.
OMERS Sells MatrixCare
OMERS Private Equity, the private equity arm of OMERS, is selling MatrixCare Holdings Inc. to ResMed Operations Inc. MatrixCare is an SaaS-based, long-term post-acute care (LTPAC) technology provider used in more than 13,000 facility-based care settings and 2,500 home care, home health and hospice organizations. OMERS acquired it as part of a larger acquisition in 2010.
Millar Has New Role
Rose Discusses Economy
John Rose will discuss recent developments in Alberta and Edmonton in areas such as employment, inflation, and the housing market at the CPBI Alberta North ‘Economic Forecast 2019.’ The city of Edmonton, AB, economist will also review the medium-term outlook and the risks to that forecast. It takes place December 12 in Edmonton, AB. For information, visit Economic Update
Willis Towers Watson Acquires Integra
Willis Towers Watson has entered into a definitive agreement to acquire Integra Capital Limited, a Canadian investment management company. The two companies have had a strategic alliance the last three years with Integra providing portfolio management, dealer, and back office services for Willis Towers Watson’s Canadian delegated investment solutions business. They jointly serve 20 Canadian clients with $6.3 billion in assets under management. Upon completion of the transaction, Integra will become a wholly-owned subsidiary of Willis Towers Watson and act as a registered company with responsibility for its Canadian delegated investment business.
CPPIB Deepens Knowledge Of Emerging Technologies
The Canada Pension Plan Investment Board (CPPIB) is forming a partnership with the Creative Destruction Lab (CDL) to deepen its knowledge of emerging technologies and extend its partnership network with leading entrepreneurs and ventures. The CDL is a seed-stage program, founded by Professor Ajay Agrawal at the University of Toronto’s Rotman School of Management, which connects deep science-based ventures with serial entrepreneurs, angel investors, and venture capitalists to build massively scalable companies. This new partnership with the CDL will help inform CPPIB’s view of emerging technologies in the artificial intelligence and energy sectors and their application to both existing portfolio companies and future investment opportunities. “At CPPIB, we’re in the business of the future,” says Mark Machin, president and CEO of the CPPIB. “To fund pensions for decades, we need to be immersed in the sectors and ideas that will come to define the economies of the times. Future benefits will be paid in part by investments in companies that are only now being founded, just as today’s pensions are being paid by many companies that were nascent when contributions were beginning. By learning from entrepreneurs who are leading the evolution in such industries as energy, and others who are forging emerging industries such as AI, we can help build and support that future.”
Asset Managers Face Insurer Competition
Asset managers in Europe face increasing competition from insurer-owned asset management businesses, says Cerulli Associates. With underwriting margins under pressure, the management of external assets including pension business offers a source of low-risk profits for insurers. As liability-driven investors with long track records in low-risk, income-generating strategies, insurers are a natural fit for many pension schemes and these cash-rich companies have the capacity to seed new products, deliver them to market, and distribute them via their own platforms. “The top insurer-owned managers are now on an even footing with the big asset management houses when it comes to winning pension money. One executive told us that firms are losing ‘huge volumes’ of business ‒ and investment talent ‒ to insurers,” says Justina Deveikyte, associate director, European institutional research at Cerulli Associates. Insurers are among the most innovative players in the fixed income space due to their long track records in the corporate bond space and growing experience in private and alternative debt. Although their products are often initially pitched at fellow insurers, they also appeal to defined benefit schemes seeking steady cashflow-generating strategies to help fund them into maturity. Insurers’ products have often been developed in-house to generate returns for the parent company. This means the products usually come to market with demonstrable track records. Traditional asset managers, on the other hand, must rely more on strong reputations, persuasive marketing, and distribution networks to build scale. Cerulli believes that managers should focus on employing targeted marketing and developing products that meet clients’ specific needs, while striking a balance in terms of scalability and cost efficiency.
New Tools Not Based On Academics
New factor box tools are not based on an academic state of the art and their use can lead to serious misalignment between an investor’s factor diversification objectives and the measured and realized allocation, says a research publication by ERI Scientific Beta and Scientific Analytics, the EDHEC Business School’s venture dedicated to factor analysis and allocation. Promoted by investment market leaders as factor risk analysis standards, ‘Measuring Factor Exposure Better to Manage Factor Allocation Better: A Critical Approach to Popular Factor Box Initiatives’ the analytic tools do not employ academically-grounded factors and their factor-finding process maximizes the risk of ending up with false factors; non-standard factors lead to mismeasurement of exposures and may capture exposure to redundant factors; and the use of factor scores instead of factor betas for the measurement of portfolio factor exposures is a cause for concern because factor investing literature uses beta-based models for factor premia tests and for portfolio style analysis. The major drawback of factor scores is “double counting” of exposures, which is due to their lack of regard for the correlation structure of factors. This makes factor scores a very poor proxy for factor betas. These limitations can lead to investors being unable to translate their risk allocation choices into a consistent allocation, with fairly severe financial consequences.
Inflation-Link Needs Examination
While property falls under the under the label of a ‘real asset’ when it comes to investing, pension schemes need to determine if it is also an inflation-linked asset, says Dan Banks, director at River and Mercantile Solutions. For many investors, the first answer to this question is ‘yes’ and on the face of it this seems reasonable. Everyone knows that many property rental leases are linked to inflation, so when inflation goes up, so does the property portfolio. As with so many ‘assertions’ in investing, though, this isn’t the full picture. Decomposing property returns into the return on capital (i.e. the change in value of the buildings owned) and the income from those buildings shows that although capital values outpaced inflation prior to 2008, they fell severely in 2008. More surprisingly for many, the income growth has been close to flat and has in no way kept up with inflation. He says their analysis has shown that there is a much stronger relationship to GDP and, more interestingly, GDP geared by the addition of debt rents are paid out of revenue, when voids rise the control is with the occupier; and revenue and voids are often related to GDP. So even though rental agreements may have inflation-linked prospective increases in them, if the economy turns negative, companies will be less able to pay increased rents while the stronger tenants may have more bargaining value to keep rents lower. This doesn’t mean that property is never an inflation-linked asset, but indicates investors should always test even the most strongly held beliefs in investment markets and build portfolios on what the data says.
Northleaf Completes Acquisition
Northleaf Capital Partners has completed a financing for an affiliate of Kidd & Company, LLC (KCO), a family office private equity investor based in Old Greenwich, CT. The investment will be used to refinance KCO’s existing credit facilities, support the growth of the current portfolio, and invest in new platform opportunities. The portfolio consists of five U.S.-based companies ‒ a multi-location dealership of new and used RVs, parts and accessories, and related services; a manufacturer of precision metal components and assemblies for the aerospace industry; a provider of end-to-end parcel shipping software and solutions to manufacturers, retailers/eRetailers, and third-party logistics companies; a contract manufacturer of electro-mechanical capital equipment and single-use disposables to the medical device industry; and a manufacturer of high precision parts for use in gas turbine engines in the aerospace industry.
Currency ETFs See Inflows
Currency hedged ETFs and ETPs listed globally gathered net inflows of US$506 billion during September 2018, says ETFGI. Total assets decreased to US$146 billion at the end of September 2018, down 0.52 per cent from US$147 billion at the end of August. Year-to-date, assets invested in currency Hedged ETFs & ETPs have remained unchanged.
Watson Joins HOOPP
John Watson is director, operations support, at HOOPP (Healthcare of Ontario Pension Plan). Most recently, he was executive director at the Alberta Pension Services Division. He has also worked at the Multi-Sector Non Profit Benefit Plan, the CAAT Pension Plan, the Ontario Pension Board, and OMERS (Ontario Municipal Employees’ Retirement System).
Investing In Age Of Disruption Key Theme
Canada Has Range Of Pharmacare Options
There are a range of options available to Canadian policymakers, says a Conference Board of Canada report on national pharmacare. “Each model has its pros and cons and can have different implications for access to medicines, public, and private costs and the implementation challenges that would accompany them,” says Greg Sutherland, principal economist at the Conference Board of Canada. “The best model depends on the goals of the public and policymakers and the budget they are willing to commit to fund it.” It says Canada is among a handful of Organisation for Economic Co-operation and Development (OECD) countries that does not provide comprehensive publicly-funded prescription drug coverage for all its citizens. But, almost every Canadian is enrolled in or eligible for some form of publicly-funded prescription drug insurance. This coverage, however, varies considerably across regions and can be confusing for all involved. ‘Assessing the Options for Pharmacare Reform in Canada’ profiles five pharmacare models and assesses how well they might improve access to medicines, value for money, and the patient and provider experience. These include comprehensive public coverage where all Canadians have public coverage of a comprehensive formulary of medicines. This option potentially improves access to medicines for Canadians who are currently underinsured. It means a substantial increase in public spending as the government pays for all drug costs. Public coverage of essential medicines consists of a small formulary of essential medications (potentially the 125 medications on the World Health Organization’s essential medicines lists) for everyone in Canada. A targeted public coverage model provides everyone with coverage for drug expenses based on household income. This plan design is currently in place in several provinces, including Ontario and British Columbia. The individual mandate requires that each Canadian has either public or private insurance that meets a specified standard. With optional public coverage, Canadians have the option of purchasing public coverage should they desire it. This option likely does not have much of an impact on improving access to medicines or value for money. Yet, it is comparatively less expensive for the government and is the least disruptive option to implement.
Every Investment Decision Active
There’s no such thing as passive investing, says Mark Wiseman, senior managing director and global head of active equities at BlackRock. Speaking at the CFA Society Toronto’ ‘2018 Annual Investment Dinner,’ he said every investment decision, whether it is buying an index fund or stashing cash under a mattress, is an active decision. Investment returns are driven by long-term asset allocation to get access to markets, strategic tilts to move away from the long-term allocation, dynamic allocation, and security selection. This means investors have to determine how to use their investments to achieve the outcomes they want in the long run. The basis of these decisions was risk tolerance, investment horizon, and liquidity needs. Now, the prudent investor needs to think more about diversification to get higher or lower risk, across geographies, and even within asset classes. “The debate over active and passive is a false dichotomy,” he said.
TD Completes Greystone Acquisition
The Toronto-Dominion Bank has completed the previously announced acquisition of Greystone Capital Management Inc., the parent company of Greystone Managed Investments Inc. The transaction makes TD Asset Management (TDAM), combined with Greystone, the largest money manager in Canada. Greystone will operate as TD Greystone Asset Management with offices in Regina, SK; Winnipeg, MB; Toronto, ON; and Hong Kong.
Workplace Disputes Migrate Into LTD
Workplace issues and disputes are migrating into LTD claims and, if left unchecked, these will have a huge cost to society, says Claude Freeman, of C.M.A. (Claims Management Alliance). Speaking at the ‘Beneplan HR Conference’ on ‘Dispute Resolution for Business,’ he said employers need to invest more and act earlier on employee issues to prevent the unhappiness which can result from a toxic work environment and result in LTD claims. And EAP may not be the solution as it doesn’t address some of the issues or intervene in the same way. Instead, employers may need to offer workplace conflict resolution, arbitration, and workplace assessments/audits and restoration. Of employers, 80 per cent say mental health issues are top drivers of STD/LTD claims and 47 per cent of disability claims were related to mental health in 2010, double what they were in 2000. This is having an impact on life and health insurance costs which are expected to increase from $4,980 in 2011 to $11,060 in 2019. While most claims are legitimate, he did say that in some cases employees are using mental health issues just to get on LTD. However, 84 per cent of employers have no process to address significant changes in employee productivity and behaviour even though costs are being punitive in the damages awarded for failing to act correctly There are benefits to having a good organization. It becomes easier to recruit new employees and retain existing ones. The number of claims overall is reduced and workplace morale and engagement improve.
Women Poised To Manage Wealth
Women are poised to become key clients for wealth managers over the next 25 years, says Shelly O’Connor, managing director and co-head of Morgan Stanley Wealth Management. In ‘The Future of Wealth Management’ session at the CFA Society Toronto’ ‘2018 Annual Investment Dinner,’ she said they now control 50 per cent of the $35 trillion in assets currently under management. As well, $3 trillion in wealth will be transferred over the next decade in the U.S. and spouses are first in line for these assets. The role of women as decision-makers is growing and the industry needs to be aware of this, she said. And while demographics and technology do pose some threats, she said there are more opportunities because what doesn’t change is that advice matters, “maybe now more than ever.” Technology like machine learning and predictive analysis will provide information to advisors faster and clients will receive a higher standard of care as a result of holistic and meaningful relationships with their advisors. The human touch will be more valuable than ever and the heart of wealth management business will continue to lie in the dialogue between humans ‒ advisors and clients ‒ to reach financial and wealth goals, she said.
WSIB Changes Among Top HR Issues
WSIB changes and legal cannabis are among the top issues facing employers, says Joel Gomes, senior human resources manager at Beneplan. He told the ‘What’s Changing? What’s New? HR Best Practice Awareness’ session at its ‘HR Conference’ that changes at the WSIB will allow benefits in some cases of mental health stress due to workplaces and employer accountability for injured temporary workers. The changes to Bill 127, Schedule 33, have been in effect since January. It applies to worker claims made since then for work-related chronic stress disorders. Three conditions must be satisfied. The employee must have an appropriate diagnosis that they have experienced substantial work related stressors like bullying or harassment and the work related stressor must have caused or significantly contributed to their chronic mental stress. However, employer decisions/actions that are part of managerial function ‒ terminations, demotions, transfers, discipline, changes in work hours, and changes in productivity expectations ‒ are not considered causes of this stress. Bill 18 allows the WSIB to hold client employers financially responsible for premiums and accident costs associated with workplace injuries to temporary agency workers. Formerly, they were let off the hook and the agency was responsible. ‘This makes the employer financially responsible for these people even though they are not direct employees. The legalization of cannabis doesn’t require employers to reinvent the wheel if they already have policies. There is also legislation which prevents employees from showing up to work impaired and, for safety-sensitive positions, drug tests can be done. However, he said these policies need to be communicated clearly with clear acknowledgement that the employee is aware of the policies.
Global Appetite For Real Estate Remains Strong
Global appetite for investment in commercial real estate remains strong, particularly among institutions in the Asia-Pacific (APAC) and Europe, the Middle East and Africa (EMEA) regions, says Hodes Weill & Associates and Cornell University’s sixth annual ‘Institutional Real Estate Allocations Monitor.’ After exceeding the 10 per cent threshold for the first time ever in 2017, the average target allocation to real estate increased 30 basis points among global institutional investors to reach 10.4 per cent in 2018. Moreover, institutions are forecasting a further increase of 20 basis points over the next 12 months. “Real estate as an asset class continues to grow as more institutions seek to diversify their portfolios through greater exposure to alternatives. Interestingly, while the U.S. is still the preferred destination for investment, institutions are increasingly favouring investments in Europe and Asia as attractive opportunities in the U.S. become harder to find. We expect allocations to real estate will continue to rise steadily given the growing number of institutions that are expressing confidence in the many benefits of the asset class,” says Douglas Weill, managing partner at Hodes Weill & Associates. The growth in investor sentiment was consistent across all regions including the Americas, APAC, and EMEA. Sentiment among APAC-based institutions increased by the widest margin at 0.5 points following a meaningful decline between 2016 and 2017. This confidence can likely be attributed to APAC institutions achieving the highest average annual returns over the past three years at 10 per cent. Among the range of institutions surveyed, public pensions increased their target allocations by 30 basis points. This was primarily driven by European pension plans, which increased target allocations by 70 basis points year-over-year.
Finding Right Medication Challenging
Prescription medications to treat mental health issues can be an expensive challenge for employer benefit plans, says Sanjida Ahmed, of Personalized Prescribing. Medication is the primary treatment for the mental health issues which come from stress, often caused by the workplace, and costs the Canadian economy $51 billion a year. However, the trial and error approach to finding the right medication doesn’t always succeed as 40 per cent of prescriptions fail the first time they are prescribed, she said at the ‘Beneplan HR Conference’ session ‘The P3 Solution: Part of XAP@ Beneplan.’ The wrong medication can cause adverse reactions like obesity and thoughts of suicide and one in four hospital admittances are due to medication reactions with 10,000 to 22,000 people dying as a result each year. Pharmacogenomic testing can identify how people will respond to a drug and can identify the right drug at the right dose and at the onset of the disease. These tests do not predict disease, just which drugs are best with the fewest side effects. The testing can be offered as part of an employee benefit plan or on a pay-as-you-go basis. There is no employer liability as employees have to request the test and their privacy and confidentiality are assured because employers are kept at arm’s length. Employers can see reduced costs as there is less medication waste. As well, they will have fewer people on disability and less absenteeism, she said.
Three Become Fellows
Ashwin Balmri, a benefits associate at Capital One; Carla Chung, director of disability claims operations at Manion Wilkins & Associates; and Andrew A. W. MacKay are the newest ISCEBS Fellows. They were recognized for their achievement at the ‘CEBS Graduates Recognition.’ One year of fellowship status is awarded to CEBS graduate members who pass one track of the continuing education examination or two years for both tracks. It recognizes members who are committed to continuing their professional development by broadening their knowledge in employee benefits, compensation, and key related areas. A total of 201 benefits industry professionals were recognized at the event for achieving their CEBS designation. Three others became Compensation Management Specialists (CMS), four became Retirement Plan Associates (RPA), and three were designated Group Benefits Associates (GBA). Lisa M. Watts, an account executive at Manion Wilkins & Associates and a committee member at the CEBS Toronto chapter, said all the graduates should be proud of earning this “wonderful designation.” There are six CEBS chapters in Canada.
Investment Performance Positive
Institutional plan sponsors saw continued positive investment performance in the third quarter of 2018, says Northern Trust Universe data. The median return of 2.4 per cent for institutional asset owners brought year-to-date gains to 3.3 per cent at the median. “Third-quarter performance rolled along nicely, with solid returns from domestic equities and alternative asset classes driving results for institutional plan sponsors,” says Mark Bovier, regional head of investment risk and analytical services at Northern Trust.
Benefits Alliance Adds Members
BenefitLink Resource Group Inc. and SBW Wealth Management and Employee Benefits are the newest members of the Benefits Alliance Group. BenefitLink is based in Edmonton AB, and SBW is located in Dartmouth, NS. With the addition of these partners, the alliance now has 30 member firms and administers over 7,500 employee benefits plans with $1.4 billion of group insurance premium, 1,500 group retirement plans, and over $3.5 billion in retirement plan assets.
ETF Assets Reach New High
Assets invested in smart beta ETFs and ETPs listed globally reached a new high of US$687 billion, following net inflows of US$9.15 billion and market moves during September, says ETFGI. The trend towards products providing exposure to the U.S. continued, with equity-based products tracking the core U.S. indices seeing substantial inflows.
LeBlanc Joins IMCO
Kevin LeBlanc (CFA) is chief operating officer for the Investment Management Corporation of Ontario (IMCO). Most recently, he was managing director, operations, at Jarislowsky Fraser. Prior to that, he was chief administrative officer at Epoch Investment Partners, a subsidiary of TD Bank.
Session Looks At Investment Opportunities
The continuing low interest rate environment is prompting pension plans to seek new investment opportunities to generate the returns they need to match their liabilities. Wilfred Hahn, founder and global strategic advisor from Forstrong Asset Management Inc.; Kelly Hastings, chief risk officer from CIBC Mellon; and Julie Cays, chief investment officer from the CAAT Pension Plan; will provide their insights on how pension funds are investing their money now and what they will be considering in the future at the Benefits and Pensions Monitor ‘Pension Investment Trends’ session. It takes place November 13 in Toronto, ON. For information, visit Investment Trends