Returns Possible In Disrupted World

It is possible to achieve long-term double digit returns from traditional, liquid equities in a world full of disruption, says Michael Hughes, senior vice-president, client portfolio manager, at Guardian Capital Advisors. Speaking on ‘Patient Equity Investing In A World Full Of Disruption’ at Benefits and Pensions Monitor’s Meeting & Events’ ‘Pension Investment Strategies’ session, he said investors need to find the right managers and take a closer, smarter look at their portfolios. There are clear pointers to the kinds of managers that can achieve double-digit returns; high active share and long-terminism are key ingredients. “Passive investing is just not good enough and the closer your manager is to the index, the worse it will be.” As well, when it comes to what to invest in, disruption must be taken into account. Hughes said investors must be selective and look a little bit into the future and think their way through disruption. For example, retail is one of the most disrupted industries. However, there are retailers that are doing the disrupting versus being disrupted. “Retail is being disrupted from two ends, because it’s accompanied by a major bifurcation in income,” said Hughes. People at the lower level of the income spectrum have less money to spend on discretionary items than they did 10 years ago, while people at the top end have increased disposable income. As a result, “retailers at the two ends of the spectrum are doing perfectly well. The high-end boutiques and the dollar/thrift stores are increasing their space; it’s the middle ground where problems are arising.”

OPTrust Makes Progress On Climate

OPTrust made tangible progress in measuring total fund exposure to climate risk during the first year of reporting on its climate action framework and year two reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Its ‘2018 Responsible Investing Report,’ details its RI results and philosophy directing the integration of environmental, social, and governance (ESG) factors into its investment strategy. This year, it joined the Investor Leadership to promote gender diversity, develop infrastructure investment in emerging economies, and improve financial reporting related to climate change. In response to its divestment from public market tobacco firms the previous year, it endorsed the Tobacco-Free Finance Pledge, among other advocacy priorities outlined in the report. “Our members need to know they can count on their pension to be there when they retire. With an investment horizon that spans several decades, we cannot ignore ESG factors that could affect our performance,” says James C. Davis, its chief investment officer. “Our responsible investing strategy is aligned with members’ interests to keep the plan fully funded at the lowest risk level while recognizing global events and market forces.” Its RI philosophy is applied across the fund’s globally diversified portfolio. Regardless of the investment size and type – roads, railways, office towers, or renewable energy – the impact of material ESG issues are considered as part of the due diligence process for every investment decision.

Managers Must Manage Around Volatility

Volatility may be here to stay and investors will need to address it and manage around it, says Christopher Marx, senior investment strategist – equities, at AllianceBernstein. Speaking at the Benefits and Pensions Monitor’s Meeting & Events’ ‘Pension Investment Strategies’ session on ‘Volatility And Its Discontents,’ he said “it feels better when the market goes up, but that’s volatility too.” Marx said investors must manage their portfolios and their emotional state because the fear of loss can be very costly. There are many things that cause volatility, from politics and exposure to government policies to a company’s business model. “You don’t just have to accept it, you can solve some of that volatility in the construction of your portfolio; be active and manage around it,” he said. He added that there are methods of analysis to measure the impacts of certain risks. For example, different industry sectors are more or less sensitive to exogenous factors such as falling markets or rising interest rates. Portfolio managers can also invest in asset classes that are linked to certain economic cycles. As well, they can select securities which have a better chance of reducing volatility. “Knowing how the pieces add together is really important in managing a portfolio.”

Investors Remain Bearish

Investors remain bearish on the economy despite the recent rally in equity markets, says the Bank of America Merrill Lynch’s monthly fund manager survey. A net 46 per cent of surveyed investors this month expect global growth to weaken over the next 12 months, down from 60 per cent the previous month. Meanwhile, 55 per cent of investors are saying they expect secular stagnation over the next year, up from 14 per cent in January. This month saw a slight uptick in inflation expectations, with a net 21 per cent expecting the global consumer price index to rise over the next year, up two percentage points from January. Last month saw the second biggest two-month collapse in inflation expectations on record, down 51 percentage points to just a net 19 per cent. This month’s survey saw investors move from equities into cash, bringing the cash allocation to a net 44 per cent, up six percentage points from January, the biggest overweight since the middle of the global financial crisis in January 2009.A possible trade war remains the biggest tail risk for managers, with a net 29 per cent of respondents putting it at the top of a list of concerns, up from the 27 per cent that cited it as the biggest concern in January. Rounding out the top three are a China slowdown (21 per cent) and a corporate credit crunch (12 per cent).

Diversification Needed To Navigate Markets

Volatility is expected to return to normalized levels which will make navigating markets even more challenging. This means investors will need to identify true sources of diversification of risk and return in their portfolio and think about that from an optimal perspective, says Neil Blundell, global head of client solutions at Invesco Ltd. Speaking at the Benefits and Pensions Monitor’s Meeting & Events’ ‘Pension Investment Strategies’ session, he said the place to begin is to determine whether the current portfolio aligns to the investor’s expectations. A decomposition of the existing portfolio can determine what drives the portfolio, the intended bets, the unintended bets, and the factor biases. There are many considerations to determine the right asset mix and navigate the asset allocation based on the current market cycle. Blundell said it can be helpful to look at shorter- and longer-term horizons to compare forecast returns. One area of investing that comes up often in conversations is factor investing, he said. Investors need to look at what factor investing means to them and which ones are rewarded versus unrewarded. The portfolio should be tilted towards more rewarded factors where an investor can capture a little more premia over the general market over a longer horizon. Some rewarded factors include quality, value, and momentum. “In many cases, blending factors that have reward premium in an equal risk-balanced way will get you in a better position and closer to the efficient frontier than potentially cap-weighted indices.”

Negative Fee ETF ‘A Gimmick’

A new ETF in the U.S. shouldn’t be seen as a negative fee product, says Hector McNeil, co-founder of HANetf. Approved by the SEC, he says this is simply a waiver to encourage early investors and more markedly grab news headlines. The ETF actually has a management fee of 29bps (basis points), with a six month fee waiver of 34bps, something investors may not actually be aware of. “That is a gimmick,” he says, and it won’t create much value for investors as ETFs and funds generally often start with low assets under management (AUM) and don’t operate at breakeven, so they aren’t giving away much.” It is just marketing spend and if “someone took an established $10 billion AUM ETF and dropped the fee to be minus 5bps then that would be good news for investors.”

Nestlé Canada Earns EAP Award

Nestlé Canada, whose EAP (employee assistance program) is LifeWorks by Morneau Shepell, won the 15th Annual Corporate Award of Excellence for innovation and the impact of its EAP in the workplace. Nestlé expanded its focus on the physical safety of its employees to an integrated EAP strategy that prioritized both mental and physical well-being in and out of the workplace. They also focused on improving financial health, with the goal of helping to reduce personal debt ratios of Canadians who carry high debt. “Focusing on the mental, physical, and financial health of our employees has demonstrably improved the well-being of our EAP users,” says Alastair MacDonald, senior vice-president of human resources at Nestlé Canada. “Absenteeism is down by more than half and more than three-quarters of our EAP users report higher resiliency to job stressors. More importantly, we’re seeing an increase in our EAP usage, meaning improved health, well-being, and productivity for more of our people.”

BFL Acquires Summit

BFL CANADA has acquired Summit Insurance Brokers Inc., located in Prince George, BC. Founded in the late 1990s, this firm serves clients in central and northern British Columbia and brings expertise in industrial, commercial, and farm risks to BFL CANADA. It specializes in services for the forestry, logging, agriculture, and transportation, as well as suppliers to the oil and gas and mining industries. In addition, clients include small type or hobby farms and auto businesses.

Pharmacare Options Explored

The CPBI Southern Alberta Region will look at ‘Exploring Pharmacare Options: A Critical Analysis’ with Warren Xu, public policy analyst at GlaxoSmithKline. He will summarize some of the pharmacare options and assess each according to four pharmacare principals. It takes place June 13 in Calgary, AB. For information, visit Pharmacare Options