Equity Markets Only Alternative
When U.S. Federal Reserve Chairman Jerome Powell cut interest rates to zero last March, he said they are likely to keep interest rates at zero for the next couple of years. In a zero bound interest rate environment, says Phil Orlando, chief equity strategist at Federated Hermes, the only alternative for investors looking for yield or for performance is equity markets. He told its ‘2021 U.S. market outlook: Post-Election Post-Mortem’ this has been a driving force of 75 per cent increase in stock prices since the bottom of the market last March. In the second quarter last year, the U.S. was in the depths of the deepest recession in its history. “We started to come out of that in spades in the third quarter,” he said. The strong equity market returns over the course of this year will continue. However, “we were going to measure inflation differently now than in the old days.” In the past, when core inflation reached two per cent, the Fed would start to raise interest rates. Now it has said it will wait for core PC inflation to average two per cent for at least a year before it starts to increase interest rates as it wants to stay lower for longer to allow “the economy to run hotter for longer to ultimately stimulate the labour market get back to where it was before the pandemic.” The one problem, he said, is that Powell’s term as chairman of the Federal Reserve expires at the end of January next year. If a new chairman comes in, will they maintain the same approach, he asked.
ETFs Have Record Breaking Year
Canadian ETFs experienced record breaking flows in 2020 as $41 billion in assets poured into the industry, eclipsing the record established in 2019 in just seven months, says Mackenzie Investments’ ‘2021 ETF Outlook Report.’ At year’s end, total assets under management (AUM) stood at a record $257 billion, up from $192 billion in 2019. It says more than 115 new ETFs were launched in Canada in 2020. There are now more than 1,000 Canadian-listed ETFs available from 39 providers. Equity ETFs continued to be the most popular asset class in Canada, taking in more than $23 billion in AUM in 2020. Fixed income also performed well, bringing in more than $13 billion in AUM in 2020. The report noted that, as the world celebrated the 30th anniversary of the first ETF in 2020, a growing awareness among Canadian investors about the advantages ETFs provide fueled continued adoption. While compared to the U.S., the Canadian ETF market is relatively smaller and still maturing, demand from investment professionals and investors will inevitably result in larger allocations from more investors as the benefits of ETFs become more apparent. As well, more products designed for the needs of Canadian investors will give them more reason to use Canadian-listed ETFs instead of U.S.-listed ETFs. Canadian-listed funds offer investors many advantages such as the choice of currency exposure and therefore may not be impacted by currency fluctuations. As well, other factors such as the timing of currency conversion and withholding taxes applied to specific asset classes make U.S.-listed ETFs suboptimal for certain investment accounts as compared to Canadian-listed ETFs. However, this means investors will be looking for providers that offer a full suite of ETFs. This will put pressure on investment firms to provide a variety of well-priced products that fit a wide range of investor needs. Michael Cooke, senior vice-president and head of ETFs at Mackenzie Investments, says, “With their transparency, cost effectiveness, and flexible passive portfolio tools, we expect ETFs will continue to help both retail and institutional investors navigate uncertain markets in 2021.”
Pension Fund Solvency Improves
In the fourth quarter of 2020, diversified pooled fund managers posted a median return of 5.7 per cent before management fees and 9.3 per cent since the beginning of the year, says Morneau Shepell’s ‘Performance Universe of Pension Managers’ Pooled Funds’ for the fourth quarter of 2020. Managers obtained a median return of 5.7 per cent, which was 0.3 per cent higher than the benchmark portfolio (with an allocation of 55 per cent in equity and 45 per cent in fixed income) used by many pension funds. Since the beginning of the year, the median pension fund return was 9.3 per cent, which was 1.3 per cent lower than the benchmark portfolio. Jean Bergeron, partner for the Morneau Shepell asset and risk management consulting team, says, “The good returns obtained in the fourth quarter enabled pension funds to improve their financial position. We estimate that the solvency ratio of an average pension fund has increased by around 2.3 per cent to 5.5 per cent in 2020.”
Capitalism And Impact Interdependent
One problem the investment industry faces when attempting to integrate ESG (environmental, social, and governance) considerations into their investment decision making is an unwavering belief in shareholder supremacy. This belief has fueled the idea that capitalism and impact are at odds, when in fact they are completely interdependent, say Paula Glick and Liz Simmie, co-founders of Honeytree Investment Management. Companies that put employees, customers, communities, and the environment first practice stakeholder governance, they say, and in 2020, the COVID pandemic brought a singular focus to those companies that were able to demonstrate care for their stakeholders. Others disregarded it flagrantly (and advocated against it publicly) with a misguided and singular focus on short-term earnings.
Passive Funds Weather Volatility
Passively managed funds weathered the market volatility of 2020, highlighting the need for active funds to deliver better and more consistent performances in order to slow the erosion of market share, says Cerulli Associates. As it became clear that COVID-19 was spreading around the world, global equity markets fell by more than 30 per cent in March, sparking unprecedented volatility for index-tracking funds and passive investors. Both strategies posted net outflows for the month. However, whereas actives lost three per cent of starting-year assets under management (AUM), their passively managed counterparts lost only one per cent. “Although stock market declines early in 2020 tested passive strategies, the swift recovery in global equity markets meant there was little threat of an exodus to active vehicles,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates. It expects passive funds to continue gaining market share in 2021.
Wealth Team Adds Two
Geoffrey Melbourne is growth leader for the Canadian wealth team and Neil Lloyd is western Canada wealth leader at Mercer Canada. Melbourne, an actuary, retirement consultant, and client relationship manager with over 25 years of experience, moves to the firm after nearly 15 years in retirement consulting at a global advisory, broking, and solutions company. Lloyd is an actuary with more than 30 years of actuarial, investments, and international expertise working with both defined benefit and defined contribution clients. He is returning to the Canadian wealth business after five years working with clients in the U.S. as the national expert in defined contribution strategies and leading its financial wellness research group.
COVID Impact Examined
‘Impacts to Employer Benefits Plans Due to COVID-19’ will be discussed February 24 at a CPBI Southern Alberta Region. Featured speakers are Victoria Shaw, a drug benefit manager at Alberta Blue Cross, Cynthia Keys, a certified Canadian counsellor and art therapist, and Ilana Korble, an organizational health consultant at Canada Life. Information is at Impacts to Employer Benefits Plans Due to Covid-19 (cpbi-icra.ca)
Employees Want Employers’ Help
Roughly half of U.S. employees want more help from their employers to save for retirement, balance their work and life issues, and get the most value from their employee benefits, says the ‘Global Benefits Attitudes Survey’ by Willis Towers Watson. More than a third of respondents cited reducing benefit costs as their top benefits priority for 2021, followed by receiving greater benefits security from their employer. Roughly two in 10 employees identified receiving more benefit choices and having more flexibility in where, when, and how often they work as top priorities. Over half identified saving for retirement as the area in which they would most like help from their employers. To best meet their needs to save for retirement, over half cited a guaranteed retirement benefit and four in 10 said receiving more generous retirement benefits in exchange for other benefits and less pay would help meet their needs. The survey also found retirement security is important to employees of all ages, although their priorities vary. Younger employees desire more flexibility, such as having access to retirement savings for emergencies or other financial needs. Older employees are mostly interested in guaranteed retirement and medical benefits.
Robust Markets Provide Foundation
Robust equity markets provided a solid foundation for Canadian pension plans during the fourth quarter of 2020, with the median Canadian plan returning five per cent for the quarter and closing a volatile year with a 10 per cent gain, says the Northern Trust Canada Universe. During the last quarter of the year, major global economies continued to feel the impact as the coronavirus renewed its path around the world. Despite the headwinds of the pandemic, global equity markets generated healthy positive returns as investors welcomed the relief of further fiscal stimulus and the long-awaited approval of vaccines. Pockets of uncertainty marked the fourth quarter, ranging from a U.S. presidential election and Brexit negotiations to the growing need for further stimulus and the second wave of the coronavirus. Equity markets navigated through these obstacles, as optimism surrounding additional fiscal stimulus and the approval and roll-out of vaccines ultimately prevailed. Major central banks around the globe continued to maintain an accommodative stance which further complemented this optimism. Despite the year beginning with a very weak and volatile first quarter, major equity indices closed 2020 with strength and momentum, generating attractive positive returns.
Impact Of Natural Events Evaluated
Aon plc has launched its global ‘Weather, Climate & Catastrophe Insight: 2020 Annual Report.’ The report evaluates the impact of global natural disaster events to identify trends, manage volatility, and enhance resilience. It reveals that the 416 natural catastrophe events of 2020 resulted in economic losses of US$268 billion – eight per cent above the average annual losses for this century. Of this total, private sector and government-sponsored insurance programs covered US$97 billion, creating a protection gap of 64 per cent, which is the portion of economic losses not covered by insurance. This highlights the importance of addressing the underserved by ensuring that there is increased access to affordable insurance products in the future.
Sun Life Builds Digital Mental Health Strategy
Sun Life has built a free, digital mental health strategy tool kit for companies of all sizes – no matter where they are in their support of employee mental health. While employers have the opportunity and responsibility to take action, many don’t have the resources or know where to start, it says. The tool kit simplifies the process of tackling mental health. It walks employers through the stages of building a strategy, with integrated access to its tools, information, and resources.
Pandemic Impacts Savings
One in three (35 per cent) Canadians say the pandemic has impacted their savings and retirement plans, says a TD survey, with one quarter (25 per cent) of those affected needing to cut back on contributions or stop them altogether. It also shows one in three (35 per cent) agree they need financial advice now more than ever. As well, despite 70 per cent saying they feel confident managing their finances during this time, six in 10 (59 per cent) are worried about the effect of COVID-19 on their savings and retirement plans.
Yih Explains Retiring Happy
‘Retire Happy: How to Make Retirement the Best Years of Your Life’ will be the focus of a CPBI Saskatchewan session. February 11, Jim Yih, one of Canada’s leading experts on money, retirement, investing, and personal finance, will share his insights on the most important issues when it comes to having a successful retirement. He believes that the most successful retirees are not the ones with the most money. Information is at http://www.cpbi-icra.ca/Events/Details/Saskatchewan/2021/02-11-Retire-Happy-How-to-Make-Retirement-the
Ontario Teachers’ Commits To Low Carbon
Building on over a decade of climate change efforts, Ontario Teachers’ Pension Plan Board (Ontario Teachers’) has made a commitment to achieve net-zero greenhouse gas emissions by 2050. This is a meaningful decision that advances Ontario Teachers’ mission to deliver retirement security for its members, while creating a positive impact for its partners and the communities where it operates. “As a global pension plan, we will leverage our scale and influence to transition to a low-carbon economy and create a sustainable climate future,” says Jo Taylor, its president and CEO. Over the coming months, it will establish concrete targets for portfolio emissions and investments in climate solutions. Key elements of its net-zero approach will include increasing investments in climate-friendly investments and solutions; ensuring portfolio companies manage and report their emissions annually; working with portfolio companies to achieve net zero emissions by 2050; and using the proceeds from its green bond offering to invest in climate friendly opportunities.
Infrastructure Attributes Drive Proliferation
Although the pandemic is likely to negatively impact 2020-year-end fundraising, the attractive attributes that private infrastructure offers investors will drive assets under management to higher levels and new strategies will proliferate, says Cerulli Associates. The distinctive characteristics of infrastructure assets result in a unique risk and return profile, it says. While returns are generally lower and less volatile, advocates perceive real assets as safe and defensive and less correlated with other asset classes. Their long asset lives and often large investment sizes make them particularly attractive to larger investors, such as insurance general accounts, pensions, and sovereign wealth funds (SWFs) that seek to put substantial capital to work in long-life assets that match their long-term liabilities. Digital infrastructure ‒ which includes fiber networks, telecommunication towers, and data centres ‒ was one of the fastest-growing segments of infrastructure investment in 2020. By prompting a dramatic shift to work- and school-at-home, the pandemic highlighted the need for connectivity. The demand for sustainable investments is also a key driver shaping infrastructure investing. Specifically, clean energy, water, and waste water assets have become increasingly attractive to a growing pool of investors seeking sustainable or socially responsible investments.
Markets Start Year With Positive Momentum
Financial markets entered 2021 with strong positive momentum, on the back of vaccine breakthroughs followed by nearly instantaneous rollout around the world. As a result, says Alessio de Longis, senior portfolio manager and head of tactical asset allocation for Invesco Investment Solutions, the global recovery continues. Overall, there is strong evidence for a “clockwise” evolution in the global business cycle. It is expected to move forward into an expansion regime, rather than backward into a contraction, barring any exogenous shock. Hence, the U.S. is moving into an expansion regime, joining China and the rest of emerging markets. While other developed economies are still improving at a slower pace given renewed lockdown measures in the fourth quarter of 2020, they are expected to catch up to the rest of the world over the next few quarters. Furthermore, economic and financial market volatility tend to decline as the economy moves into an expansion phase, which should further support risk taking and investor confidence over the next few months.
FORUM Seeks Speakers
The CPBI is looking for speakers for its ‘CPBI FORUM 2021.’ This is an opportunity to share research, expertise, or experience to share with CPBI members. To submit a proposal, complete this form attached here and return it to email@example.com by February 8. All submissions will receive a reply by March 1 to confirm if a proposal has been accepted, is in consideration, or has been declined. CPBI FORUM 2021 takes place June 14 to the 18. Registration opens February 1.
ESG ETFs Reach Milestone
Assets invested in ESG (environmental, social, and governance) ETFs and ETPs reached a new milestone of US$187 billion at the end of 2020, says ETFGI, increasing by 206 per cent in 2020. During December, ESG ETFs and ETPs gathered net inflows of US$18.46 billion bringing 2020 net inflows to US$88.95 billion which significantly greater than the US$27.79 billion gathered in 2019.
Generating 2x Discussed
‘Hunting for 2x/25 per cent IRR in the Secondary Market’ will be examined February 2 at a Unigestion session. A panel of private equity experts will provide a market update, identify the key ingredients for a good secondary deal, and generating 2x while maintaining a risk aware approach. Information is at https://www.unigestion.com/event/hunting-for-2x-25-irr-in-the-secondary-market/
High Cost Drug Claims Growing
Measured as a percentage of overall drug benefits paid by insurers, high-cost drugs (including rare disease drugs) associated with EP3-based insurance plans accounted for less than two per cent of claimants. but grew from 35 per cent to 42 per cent of costs in the three years leading up to 2019, says the Canadian Drug Insurance Pooling Corporation. In 2019, its high-cost drug sharing framework provided coverage to 27,000 Canadians whose annual drug costs exceed $10,000, an increase of 17 per cent over 2018. Since 2017, there have been 210 new drugs where paid claims per employee exceeded $10,000. In 2019, employees or their dependents using these new drugs represented 11.3 per cent of the total high-cost drug claims paid. “The financial impact of high-cost drugs on private insurance plans continues to significantly grow year-over-year adding more financial pressure to these plans. Canadians now pay some of the highest patented drug costs in the world,” says Dan Berty, its executive director. However, implementation of the long-planned reforms to the federal Patent Medicines Prices Review Board would further assist in reducing cost pressures. The reduction in prescription drug prices resulting from the PMPRB changes is expected to save Canadian employers hundreds of millions of dollars per year.
Plan Overview Section Expanded Without Value
The plan overview section in the ‘Updated CAPSA Guideline No. 7 on Funding Policies’ has been significantly expanded without necessarily adding any additional value to the policy, says the Association of Canadian Pension Management (ACPM). Many of the items listed are disclosed elsewhere and will frequently change, increasing the risk that the funding policy becomes out of date with new information. In addition, it says some of the information could be problematic to share in a public document. For example, in the key risks faced by plans, some potential risks have been included that could be addressed in the policy and not all will be relevant in all situations. In fact, some may be problematic in disclosing in a public document. For example, on the plan’s funded status or required contributions, the text “on the plan sponsor’s financial statements or cash flow” should be deleted. The comment on a deterioration of the “financial strength of the plan sponsor or employers” may also be problematic.
Markets Living Two Stories
Currently in the markets, there are two stories going on, says Jas Thandi, a partner, global asset allocation, at Aon. He told its ‘Investing in 2021: The Real Risk/Reward Challenge’ that the first is recovery. The S&P 500 is rising rapidly market and reaching all-time highs. This is driven by a disconnect between markets and the economies of the U.S. and emerging and other markets. At the same time, the U.S. dollar is weakening and this is also indicative of a recovery story. Typically when markets move into more risk taking posture, the dollar weakens, equities rally, and risk capital generally does quite well and “we see this play out,” he said. The other story is reflation. “This is the idea that are we going to see inflation come back and move higher,” said Thandi. However, there is a risk element to this as well because if people are thinking that there is a larger risk premium out there for inflation, market price inflation increases. Russ Ivinjack, head of fund management at Aon, said, investors need to take a second to reassess diversifying their portfolios to see if there are other return drivers that can be added such as treasuries or investment grade corporate bonds. “Look for other diversified strategies that can help balance the portfolio. This goes to what we’ve called the resiliency theme,” he said. As well, investors need to seek risk premiums in markets that are not accessible from ETFs or index funds. “What this really is sourcing unique returns from manager skill,” he said.
Transition In U.S. Shows Some Direction
The transition of power in the U.S. brings with it many uncertainties, but already there is some idea of which direction certain policy matters will take, says Michael White, portfolio manager and head of multi-asset strategy at Picton Mahoney Asset Management. While many of these are simply a mirror image reversal of some of former President Donald Trump’s controversial initiatives, others are more substantive and some may play a key role in relations with Canada. To start, there was the revocation of the Keystone XL pipeline permit, which gets things off to a bad start with Canadian officials who have worked for many years to get it approved. Higher emission standards as well as other pro-green energy initiatives will be back on the menu. These policy moves may actually help buoy global oil prices as they will undoubtedly hamper new oil supply from the U.S. In addition to friction on energy policy, the U.S. administration may also be picking a new battle over currency. It will support a “market-based” currency policy, which is a statement widely interpreted as allowing the U.S. dollar to depreciate. While no one wants a currency in free-fall, a weaker currency does generally help a country’s economy by making its exports cheaper. A stronger Canadian dollar might be welcome by some (such as consumers buying imported goods), but may hamper the export industry in Canada, especially on the commodity side. A weaker U.S. dollar is likely pro-inflationary as well, given most commodities are priced in U.S. dollars.
CDPQ Buys Road In India
Bharat Road Network Limited, a road developer in India, along with its partners, will sell a BOT road project in the state of Odisha to the India Highway Concession Trust, an infrastructure investment trust set up by the Caisse de dépôt et placement du Québec (CDPQ). The agreement provides for the complete transfer of ownership of Shree Jagannath Expressway Private Limited, the special purpose vehicle (SPV) engaged in the development, operation, and maintenance of a 67-kilometre toll road project from Bhubaneswar to Chandikhole in Odisha. Project operations started in December 2011 with an initial concession period of 26 years.
Lee Joins George & Bell
J.J. Lee has joined the pension team at George & Bell Consulting. He has worked in the pension field since 2009 and has experience providing solutions for clients with various retirement arrangements, including individual pension plans, supplemental arrangements, single-employer pension plans and large multi-employer pension plans. Prior to joining the firm, he worked at a national human resource consulting firm with various levels of responsibilities, including managing client relationships, as well as leading and providing comprehensive support for client teams.
Session Looks At AI And Governance
January 28, the Industry Relations & Corporate Governance Committee at CFA Society Toronto has organized an event on ‘Artificial Intelligence and Corporate Governance,’ AI in a governance context is an emerging field that will have a significant impact on the financial services industry. Information is at https://www.cvent.com/events/ai-and-corporate-governance/event-summary-327ce9ef0ec042e88dda04b0b6bddde9.aspx
Confidence In Retirement Plans Holds Steady
Canadian confidence in retirement plans has remained relatively steady despite the financial challenges of 2020, says a BMO annual retirement study. In all Canadians believe they will have enough money to retire at their desired age, with findings indicating a four per cent decrease in confidence nationally compared to 2019. Provincially, Canadians in Ontario and the Prairie provinces were the most confident in their existing retirement plans at 58 and 57 per cent, respectively. Confidence levels were lowest among residents in the country’s Atlantic provinces. Amid the pandemic, 64 per cent of Canadians have or still plan to contribute to their registered retirement savings plans (RRSPs) – a number consistent with last year’s findings. Respondents from Ontario and British Columbia had the highest contribution rates, with Quebec and the Atlantic provinces having the lowest rates. The study also shows the average amount Canadians think they need to retire has increased six per cent since 2019 to $1.4 million. However, 53 per cent of respondents do not have a dollar amount estimate for what they need to retire. A third plan to retire between the ages of 60 to 69 years, with an average age of 62.
VPLA Proposal Limiting
The Canadian Life and Health Insurance Association (CLHIA) is concerned the federal government’s proposed approach of requiring that the variable payment life annuities (VPLA) be within a registered plan will limit the offering to only the largest of DC plans. In its submission to the department of finance on federally regulated private pension plans, it says the proposed VPLA solution of keeping it within a defined contribution plan or PRPP (pooled registered pension plan) would mean only plans with tens of thousands of employees would be able to benefit. This is due to the need for a large enough group within a cohort to achieve the beneficial aspects of risk pooling without significant volatility and prohibitive administrative costs. This reality will effectively prevent millions of members of smaller plans, and other Canadians who save through RRSPs (registered retirement savings plans) and TFSAs (tax-free savings accounts), from accessing the benefits of VPLAs. The requirement for VPLAs to be operational within a pension plan may even further curtail large employers that operate multiple DC/PRPP plans from having the scale to offer VPLAs as currently proposed. It wants the federal government to expand on the proposed tax legislative changes to enable free-standing VPLAs. This would allow a “pool-of-pools” approach where Canadians can transfer their accumulated DC and PRPP balances to a centralized source responsible for the administration of the VPLA, allowing for a larger pool of participants to benefit from lower fees per participant and larger diversification of risks that would be expected to reduce volatility of benefits.
Investors Embrace Impact
As a sign of a maturing industry, investors are embracing impact investing with a multi-directional approach to their decisions, says a report from the Global Impact Investors Network (GIIN). It says to understand what success looks like, impact investors are looking at how they can most efficiently achieve the best impact and financial performance ‒ the most optimal performance point ‒ for the least amount of capital deployed. More experienced impact investors are considering impact objectives and impact risk alongside traditional factors such as financial returns, financial risk, liquidity constraints, and resource capacity to drive impact and financial performance. The research focuses on the three most common asset classes in impact investing: private equity (70 per cent of investors), private debt (58 per cent), and real assets (17 per cent). It found that private debt impact funds generate stable financial returns on a risk-adjusted basis and financial returns across private debt investments tend to align with investor expectations. Impact debt funds can also play an important role in risk reduction and diversification. Private equity impact investors can generate market rate returns on a risk-adjusted basis, yet financial returns vary significantly, reflecting how different strategies and investors’ objectives can shape financial performance; and smaller funds tend to outperform market and investor expectations.
Hobday Chairs ACPM Quebec
Basic Insurance Principles Explained
Developing a benefits plan tailored to the needs of a business in Quebec will be discussed February 9 and 10 at a CPBI Quebec session. It is aimed at people who wish to familiarize themselves with the basic principles of insurance and group annuities and establishing a plan tailored to the needs of their business. They will learn how to design and implement a plan based on a company’s culture, budget, and desired impact on its employer brand. Information is at http://www.cpbi-icra.ca/fr/Activit%C3%A9s/D%C3%A9tails/Qu%C3%A9bec/2021/02-09-%C3%89laborer-un-r%C3%A9gime-d-avantages-sociaux