Download Canadians Hop Aboard Strategic-Beta Bandwagon

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Q3 2015
September 2014
Canadians Hop Aboard Strategic-Beta Bandwagon
Contents
12
10
8
6
4
2
Mar-15
Jul-14
Nov-14
Nov-13
Mar-14
Jul-13
Mar-13
Jul-12
Nov-12
Nov-11
Mar-12
Jul-11
Nov-10
Mar-11
Jul-10
Mar-10
0
Jul-09
39 Market, category, and fund data
Exhibit 1: Canadian Strategic Beta ETF Assets, CAD billions
Nov-09
35 Stewardship report: RBC Global Asset
Management
11.5% from 11.1%.
Nov-08
34 Analyst Rating updates
Strategic-beta’s share of the nearly $85 billion invested in Canada listed ETFs ticked up modestly to
Mar-09
30 Analyst Report: Sionna Canadian Small
Cap
approximately $2.1 billion flowed into strategic-beta ETFs over the period—a 26% organic growth rate.
Jul-08
24 Floating-rate funds: Weapon against
rising rates?
growth owes more to strong investor interest rather than performance, which was weak overall. Indeed,
Mar-08
20 When are target-date funds the right
choice?
30, 2015, rising from 88 over the 12-month period. Assets rose 23% to $9.8 billion from $8 billion. Such
Jul-07
11 How conservative are "conservative"
target-risk funds?
beta") ETFs in Canada. The number of such offerings stood at 122 (including all share classes) on June
Nov-07
7 Indexes can be passive and active, but
passive can't be active
Over the past year, asset managers raced to launch strategic-beta (commonly referred to as "smart
Mar-07
1 Canadians hopping on the strategic-beta
bandwagon
Source: Morningstar Direct, Data as of June 30, 2015
Long-term asset growth has been strong, also thanks to burgeoning investor interest. Of the $8.2 billion
increase in assets over the five-year period, $7.2 billion, or 87%, stems from inflows. In all, strategicbeta assets rose 38% annually over the period, more than twice as quickly as the 17% growth rate for
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ETFs overall. With much faster growth, strategic-beta’s share of the ETF pie has more than doubled from
4.8% in June 2010.
It is important to note that these numbers understate Canadian investment in ETFs. Canadian investors
commonly hold U.S.-listed ETFs either to lower costs or to gain access to strategies not available at
home. We don’t know the exact dollar value, though, or the extent that Canadians choose strategic-beta
strategies listed south of their border.
Exhibit 2 Strategic beta ETF monthly flows, CAD billions
500
400
300
200
100
0
-100
Apr-15
Dec-14
Apr-14
Aug-14
Dec-13
Apr-13
Aug-13
Dec-12
Apr-12
Aug-12
Dec-11
Apr-11
Aug-11
Dec-10
Apr-10
Aug-10
Dec-09
Apr-09
Aug-09
Dec-08
Apr-08
Aug-08
Dec-07
Apr-07
-200
Aug-07
Christopher Davis
Director, Manager Research, Canada
+1 416-484-7823
[email protected]
Source: Morningstar Direct, Data as of June 30, 2015
Dividend-Oriented ETFs lose altitude; equal-weighted approaches gain steam
In all, 13 of 18 of strategic-beta subcategories are represented in Canada. The launch of four new ETFs
over the past year brought three subcategories—nontraditional fixed income, multiasset, and
buyback/shareholder yield—to the Canadian strategic-beta universe for the first time. Exhibit 4 (next
page) depicts the number of strategic-beta ETF launches by calendar year.
The dividend-screened/weighted group remains the largest subcategory (see Exhibit 5 on page 4 and
Exhibit 6 on page 6) of the Canadian strategic-beta universe at 37% of the assets. That’s a far smaller
share than in June 2014, when it stood at 47%. (See Exhibit 3 on next page.) This isn’t because investors
fled from the group, however; inflows grew less quickly than the strategic-beta strategies as a whole, if
at a still-healthy 7% rate. iShares S&P/TSX Canadian Dividend Aristocrats CDZ was the only one to
shrink meaningfully, with $48 million in outflows, though it remains the second-largest strategic-beta
ETF in the country, along with the largest, sibling iShares Canadian Select Dividend XDV. The iShares
offering’s loss was Vanguard’s gain, as Vanguard FTSE Canadian High Dividend Yield VDY took in $60
million.
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Exhibit 3: Strategic Beta ETFs' Share of the Overall Canadian ETF Market
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
Nov-14
Mar-15
Jul-14
Nov-13
Mar-14
Jul-13
Mar-13
Jul-12
Nov-12
Mar-12
Jul-11
Nov-11
Mar-11
Jul-10
Nov-10
Mar-10
Jul-09
Nov-09
Mar-09
Jul-08
Nov-08
Nov-07
Mar-08
Jul-07
Mar-07
0.0%
Source: Morningstar Direct, Data as of June 30, 2015
The gap between equal-weighted and fundamentally weighted ETFs, which vied for a distant second
place in June 2014, widened over the ensuing year. The former’s share of strategic-beta assets grew to
24% from 21%, while the latter’s shrunk to 16% from 22%. Fund-of-funds managers appear to have
driven much of the shift. Fund of ETFs BMO Global Tactical ETF bulked up its stake in equal-weighted
strategies like BMO Equal Weight US Banks ETF ZBK, for example. BMO fund-of-funds' investments in
other equally weighted ETFs, such as BMO S&P/TSX Equal Weight Banks ETF ZEB, explain why such
offerings account for four of the largest 10 strategic-beta ETFs.
Exhibit 4: Number of Surviving Canadian Strategic-Beta ETFs by Vintage
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
5
10
15
20
25
30
35
40
Source: Morningstar Direct, Data as of June 30, 2015
Meanwhile, the largest holders of fundamentally weighted iShares US Fundamental (CAD-hedged) CLU
and iShares Canada Fundamental pared their exposure to the strategies, pushing the fund out of the top
10. IShares dominated the fundamentals group along with Invesco, who launched three FTSE RAFItracking ETFs in late 2014. Its suite of RAFI ETFs has enjoyed strong inflows over the past year.
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Exhibit 5: Canadian Market Share by Strategic Beta Attribute
2.9% 0.6%
36.4%
Dividend Screened/Weighted
Equal-Weighted
Fundamental
0.7%
Growth
Multi-Asset
10.5%
5.8%
0.5%
Multi-Factor
Non-Traditional Fixed Income
Quality
Risk-Weighted
Value
24.0%
Source: Morningstar Direct, Data as of June 30, 2015
Lastly, the relatively young minimum volatility/variance and risk-weighted subcategories approximately
doubled their market shares, albeit from low levels, over the 12-month period. Risk-weighted assets
went to 1.3% from 0.6% of the strategic-beta universe, all to the benefit of First Asset, the only
Canadian asset manager offering risk-weighted ETFs. The firm took in $137 million across the sevenstrategy suite of its ETFs that it launched in 2014. The share of strategic-beta assets in minimum
volatility/variance ETFs went to 5.8% from 3.2%, with the spoils split between iShares and PowerShares.
iShares slips; BMO, First Asset, and Vanguard gain
All seven Canadian providers of strategic-beta ETFs enjoyed asset growth in the 12-month period.
IShares continued to dominate the space, though to a lesser extent, with its share falling sharply to 49%
from 60% despite healthy asset growth. Its lead over second-place competitor BMO narrowed as its
share of strategic-beta assets rose 4 percentage points to 26% in large part thanks to strong flows into
funds of ETFs. First Asset’s share went to 11% from 9% as investors streamed into a mix of value,
momentum, and risk-weighted ETFs. Despite its strong emphasis on conventional market-cap-weighted
benchmarks, Vanguard made inroads in the strategic-beta arena; its three Canada-domiciled dividendscreened strategies rose to 4% of strategic-beta assets, up from 2% the year before. Exhibit 7 (next page)
ranks firms by strategic-beta assets.
It is worth noting that our tally doesn’t include BMO’s domestic and U.S. low-volatility and dividend
strategies. It also excludes Royal Bank of Canada’s broad lineup of dividend ETFs, which it launched in
late 2014. These funds are designed to follow rules-based strategies, but because they do not track a
published public benchmark, Morningstar considers those ETFs actively managed. If included, they
would add another $780 million to BMO’s strategic-beta asset pile and $290 million to RBC’s.
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Exhibit 6: Canadian Ranking of Strategic Beta ETFs by Secondary Attribute
Secondary Attribute
# of ETFs
Assets (CAD)
% of Assets
Buyback/Shareholder Yield
1
4,013,654
0.0%
Dividend Screened/Weighted
21
3,531,088,914
36.4%
Earnings Weighted
0
0
0.0%
Equal-Weighted
15
2,325,870,580
24.0%
Expected Returns
0
0
0.0%
Fundamental
21
1,564,859,186
16.1%
Growth
2
48,304,580
0.5%
Low/High Beta
0
0
0.0%
Low/Minimum Volatility/Variance
10
559,729,931
5.8%
Momentum
0
0
0.0%
Multi-Asset
2
68,526,367
0.7%
Multi-Factor
9
1,021,820,017
10.5%
Non-Traditional Commodity
0
0
0.0%
Non-Traditional Fixed Income
1
124,685,283
1.3%
Quality
3
280,091,438
2.9%
Revenue Weighted
0
0
0.0%
Risk-Weighted
14
121,816,862
1.3%
Value
12
58,984,420
0.6%
Source: Morningstar Direct, Data as of June 30, 2015
Exhibit 7: Canadian Largest Strategic-Beta ETP Providers
Provider
AUM ($)
# of ETPs
Market Share (%)
iShares
4,782,228,851
28
45.4%
BMO
2,594,021,657
13
24.7%
First Asset Investment Management
1,110,849,975
40
10.6%
Invesco
855,655,914
18
8.1%
Vanguard
369,943,858
3
3.5%
First Trust
796,571,041
14
7.6%
Questrade
12,859,658
6
0.1%
Source: Morningstar, Inc., Data as of June 30, 2015
Discount broker Questrade became the seventh Canadian asset manager to join the strategic-beta
bandwagon with the launch of a handful of equally weighted sector funds, though, with $12.8 million in
assets, its share is minuscule.
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Exhibit 8 Canadian Largest Strategic-Beta ETFs
Name
Ticker
Inception
Secondary Attribute
MER
AUM (CAD)
iShares Canadian Select Dividend
XDV
12/19/2005
Dividend Screened/Weighted;
0.55
1,411,620,587
iShares S&P/TSX Cdn Div Aristocrats
CDZ
9/8/2006
Dividend Screened/Weighted;
0.66
1,075,870,878
BMO S&P/TSX Equal Weight Banks ETF
ZEB
10/20/2009
Equal Weighted;
0.62
689,712,337
iShares US Dividend Growers(CAD-Hdg)
CUD
9/13/2011
Dividend Screened/Weighted;
0.67
434,299,240
BMO Equal Weight REITs ETF
ZRE
5/19/2010
Equal Weighted;
0.62
384,265,433
BMO Equal Weight US Banks ETF
ZBK
2/10/2014
Equal Weighted;
0.39
346,259,892
BMO Eq Wght US HlthCare Hdgd to CAD
ZUH
5/19/2010
Equal Weighted;
0.4
311,039,978
First Asset Mstar US Value ETF CADH
XXM
10/11/2013
Value;
0.68
265,083,867
First Asset Mstar US Value ETF Uhgd
XXM.B
10/11/2013
Value;
0.68
264,239,089
iShares International Fundamental
CIE
2/14/2007
Fundamentals Weighted;
0.72
255,338,316
Source: Morningstar Direct, June 30, 2015
For strategic-beta investors, costs matter less
One would expect strategic-beta ETFs to charge a premium price tag, and that’s the case in Canada. The
equal-weighted average management expense ratio for the strategic-beta universe clocks in at 0.86%,
versus 0.62% for the broad ETF universe. The many leveraged and exotic ETFs, which tend to be
relatively expensive and light in assets, skew the broad universe average upward. The asset-weighted
MERs are lower, with non-strategic-beta ETFs remaining far cheaper. The average MER for the broad
universe falls to 0.33% on an asset-weighted basis and to 0.59% for strategic-beta ETFs
Exhibit 9: Canadian Fees Under the Microscope
All ETPs
ETPs without Strategic Beta
Strategic Beta
Average
Combined (%)
Equity (%)
Fixed
Income
(%)
Weighted Average
0.33
0.32
0.26
0.51
0.96
Simple Average
0.62
0.55
0.34
0.82
0.93
Weighted Average
0.34
0.32
0.26
0.51
0.96
Simple Average
0.65
0.59
0.33
0.82
0.93
Weighted Average
0.59
0.59
0.67
NA
NA
Simple Average
0.86
0.84
0.67
NA
NA
Commodities
(%)
Alternative
(%)
Source: Morningstar Direct, Data as of June 30, 2015
The averages are distorted by higher-cost “advisor” share classes, which tack on an additional
0.50% to 0.75% fee as an ongoing sales commission to the MER. Excluding these share classes,
strategic-beta investors don’t appear especially price-conscious. These ETFs average 0.54% MERs on an
asset-weighted basis, only a touch lower than the 0.56% equal-weighted average. The universe of nonstrategic-beta funds is about as expensive as their strategic-beta counterparts on an equal-weighted
basis, averaging 0.60% MERs. Investors favor cheaper offerings in this case, however; the assetweighted MER weighs in at 0.33%. K
?
Indexes can be Active and Passive, but Passive can't be Active
Indexing: From One to Two
Historically, active and index investing have been viewed as binary events. A fund is one or the other.
And for some purposes, that simplicity suffices. If we wish to measure the public's dissatisfaction with
traditional fund management, then the active/index dichotomy works well. It is fine to place exchangetraded funds and indexed mutual funds into the index group, put all remaining mutual funds into the
John Rekenthaler
Vice President, Research
+1 312-696-6350
[email protected]
active group, and calculate the flows.
Although even then, a third set is helpful. There's a difference between indexes that weight securities
according to market capitalization, such as Vanguard's offerings or any company's S&P 500 funds, and
indexes that incorporate viewpoints. One example of the latter is Research Affiliates' Fundamental
indexes, which allocate to companies according to economic attributes rather than stock-market worth.
Another would be a low-volatility index that favors an investment sector's less-risky securities.
Companies that sponsor such funds make arguments for their superiority that sound suspiciously active.
The suspicion increases with the funds' self-described label: smart beta. Ummm, ... no. That's a name
even a fund marketer should be ashamed to use. At Morningstar, smart beta is redubbed strategic beta.
By our reckoning, the active/index duo should expand to three: 1) actively managed funds, 2) index
funds weighted by market cap, and 3) strategic-beta index funds.
(There is some gray area between the second and third items. Specialized indexes, such as U.S. small
value or high-dividend stock, use market-cap schemes but are active in intent; the funds are sold as
being better than index funds that invest more broadly. Morningstar currently calls these funds strategic
beta, but they could reasonably be categorized as market-cap indexes.)
This is what the 20-year U.S. stock-fund flows look like for the three groups, as well as the current
assets, shown in the pie chart.
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Exhibit 1: Canadian Strategic Beta ETF Asset Growth
Source: Morningstar
Active: From One to Three
Let's switch from discussing active/passive to active/index. Those are not the same things, because
passive is not a synonym for indexing. A passive fund is a fund that does not express a viewpoint. An
index fund is a fund that mimics a list of securities. Those are two different things. Thus, a strategic-beta
fund is an index fund, but it is not a passive fund.
Exhibit 2: Flavours of active and passive management
Source: Morningstar
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(This formal distinction between passive and index is new at Morningstar, at least from the sense of
being consistently applied, so if you look through our materials, you may see the term "passive" used
otherwise.)
By Morningstar's definitions, there is one flavor of active and two flavors of index (that is, market-cap
and strategic-beta) with the active/index classification, but three varieties of active and only one of
passive with the active/passive classification. Yes, that sounds confusing. (And it does suggest that the
word "active" is being stretched to cover too many meanings.) But a picture, created by Morningstar's
Tom Idzorek based on a commentary by Don Phillips, should clarify.
Think of green as meaning neutral and orange as meaning an active attempt at improvement.
Passive funds are green across the board, because they start with the neutral position of weighting by
market capitalization, and then implement passively, by copying that weighting without attempting to
improve upon it. The other three fund types are either partially or totally orange, meaning that they
cannot qualify as passive..
Strategic-beta funds echo passive funds in their implementation, so they score green on that column
(and qualify as index funds). However, their weighting schemes are active, as befits a group that touts
itself as "smart." Strategic-beta funds are the modern equivalent of the quantitative fund. Popular in the
1970s and 1980s, quantitative funds mined databases in the attempt to pick stocks. Strategic-beta
funds similarly mine databases, but to select factors--or betas, as they call them.
Traditionally active funds also echo passive funds, but with their weightings rather than in their
implementation. Traditional active funds begin with the market's capitalizations. From there, they will
deviate based on the managers' decisions, sometimes fairly substantially but often not. Examples of the
latter include "closet index" stock funds that ape the market without admitting to the fact; "enhancedindex" funds that explicitly control for industry exposure but give the manager the freedom to pick
stocks; and many plain-vanilla bond funds.
Alternative active funds have no green. (They may also end up with a new name; this label is
provisional.) They do not begin with a common, market-cap-weighted benchmark, as they either limit
their investment universes or mix their assets so as to create unusual starting points. (A fund that
invests solely in U.S. small-value stocks is an example of the former--at least provisionally, as
Morningstar mulls over this gray area--while a long-short equity fund is one of the latter.) They then
implement actively. These funds are pure orange, and they charge accordingly, typically levying the
industry's highest management fees.
Summary
And now, why you should care. For one, it's nice to speak the same language. Most people have only a
vague idea what is intended by the term "smart beta." Morningstar would like to nail that concept down
with precision (as well as change the name). If we all write about strategic beta, indexing, passive, and
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active using the same meanings, we'll have much better conversations. We won't be talking past each
other, as so often happens today.
Also, this taxonomy demonstrates that strategic beta substitutes for active management, not passive.
Strategic-beta funds cost more than passive index funds and have greater ambition. They are purchased
by investors--or recommended by advisors--to do what active managers have traditionally been hired to
do, but who no longer are fully entrusted with the task: to add value. Strategic-beta funds will not slip
between the lip and the cup, in the sense that they will deliver what they promise. But what they
promise is far from a neutral event. K
?
How conservative are "conservative" target-risk funds?
Investors must look beyond the label to judge risk
Like carmakers that produce zippy sports cars, trusty mid-sized vehicles, and roomy sedans, more than
two dozen Canadian asset managers offer one-stop solutions in some variation of aggressive, moderate,
and conservative flavours. Usually referred to as target-risk funds, investors select the investment
package coinciding with their risk tolerance.
Christopher Davis
Director, Manager Research, Canada
+1 416-484-7823
[email protected]
This isn’t as simple as it sounds. Investors are imperfect judges of their ability to cope with losses. Their
choice of target-risk fund will depend upon when you asked them: The same person may define
themselves as an aggressive in the midst of a bull market but conservative after suffering wounds they
thought they could handle. Supposing they identified themselves as the latter from the get-go, they
would find the 50-plus conservative target-risk funds aren’t painted with the same brush.
As you’d expect, conservative target-risk strategies are designed more for capital preservation than
growth. Their portfolios universally favour bonds and cash over stocks. But beyond this generalization,
the funds make up a diverse lot. With varying stock/bond and domestic/foreign exposures, they span
four Morningstar categories. As such, investors must look beyond labels to evaluate these funds. One
provider’s “very conservative” offering can be more aggressive than another’s merely “conservative”
one: CIBC Conservative holds 24% in stocks, versus RBC Select Very Conservative’s 28% stake.
Of course, there’s no single approach that works for all. Even among loss-averse investors, there’s bound
to be differences in their willingness to hold stocks or foreign investments—underscoring the
importance of knowing what’s under the hood of conservative target-risk funds before embracing one of
them.
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Same label, different ingredients
How a fund splits its portfolio across stocks, bonds, cash and other asset classes will likely have a bigger
impact on performance than any other decision its management makes. On the whole, conservative
target-risk funds' asset allocation looks like what you'd expect. The median fund holds just under 30% in
stocks, with the balance mostly in bonds and some cash. Somewhat surprisingly, the funds only
modestly favour Canadian stocks, with slightly smaller U.S. and international stakes of roughly equal
weight.
There's no typical asset allocation, though. In exhibit one, we show asset allocations across the
conservative target-risk universe. Funds' stock and bond exposures range from 14% to 51% and 29% to
74%, respectively. One fund holds no cash, while another keeps 36%. Stock-heavy, bond- and cash-light
portfolios are more vulnerable to losses during downturns--a turn-off for conservative investors. Nearretirees may be able to take more risk than they realize, however. A steady stream of pension income
could give some more room to hold stocks. Longer life spans also means they may have decades of life
ahead of them, and stocks' higher growth potential improves their odds of beating inflation. A too-tame
asset allocation could result in the worst possible outcome: Outliving one's savings.
Other conservative target-risk funds play more cautiously, holding larger bond and cash weightings.
These funds will likely fare better in market swoons, though these aren’t immune from turbulence either,
as bond-heavy portfolios are susceptible to rising interest rates. CIBC Very Conservative, for example, is
as its name implies geared toward the most risk-averse investor and its shows: Its 14% equity stake is
the lowest in the universe, its 60% bond weighting well above median, and its 28% cash exposure is
nearly the highest.
Within asset classes, conservative target-risk funds also take different approaches. AGF Elements
Conservative, for example, sports one of the smallest Canadian equity weightings but the largest and
second largest U.S. and international stakes, respectively. Foreign fixed income also predominates,
representing 40% of the portfolio, versus 15% in Canadian bonds. Such positioning reflects economic
reality: Canada accounts for a small portion of the global stock and bond markets. Canada’s heavy
reliance on financials, energy, and mining firms makes home-country bias potentially dangerous. NonCanadian securities also offer currency diversification, though many target-risk funds hedge their
Canadian dollar exposure or hold funds that do, at least in part mitigating this benefit.
Investors with shorter time horizons may find heavy foreign exposure more curse than benefit, as
currency volatility can more than offset the returns earned from the security itself, especially in bonds.
Holding the bulk of your investments in the local currency makes sense if most of your financial
obligations are priced in Canadian dollars. TD Target Risk Conservative draws upon this reasoning with
its overwhelmingly Canadian portfolio; it holds 30% in domestic equities, versus a combined 11% in the
U.S. and international bucket. Sentry’s conservative target-risk offering ignores international stocks
altogether, with 29% in Canada and 15% in the U.S. Pairing Canadian and U.S. dollars together, as the
Sentry fund does, has appeal from a diversification perspective—one currency tends to zig when the
other zags.
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Not only do target-risk funds’ asset allocations vary across funds, it varies over time. While the median
equity stake has ranged between 26% and 29% over the past five years, most funds’ allocations have
shifted meaningfully around the median, as exhibit 2 demonstrates. Overall, the median conservative
target-risk funds’ equity weighting fluctuated between 20% and 33% over the period.
Exhibit 2: Conservative target-risk equity exposure, 5-year range
CIBC Very Conservative Portfolio
CIBC Very Conservative Index Portfolio
MD Precision Conservative Portfolio
Compass Conservative Portfolio
SEI Conservative Monthly Income Class P
RBC Select Conservative Portfolio Sr A
Compass Conservative Balanced Portfolio
CIBC Conservative Portfolio
National Bank Conservative Strat Port
National Bank Conservative Diversified
Allegro Conservative Portfolio C
Meritage Conservative Income Portfolio
Standard Life Conservative Port A
Desjardins SocieTerra Conservative A
Manulife Simplicity Conservative Adv
RBC Select Very Conservative Port Adv
Harmony Conservative Portfolio Embed Ser
Allegro Moderate Conservative Port C
Meritage Conservative Portfolio
NEI Ethical Select Conservative Port A
Counsel Conservative Portfolio
Distinction Conservative Class Sr A
AGF Elements Conservative Portfolio
Alto Conservative Portfolio Ser A
NEI Select Conservative Port A
CIBC Conservative Index Portfolio
La Capitale Conservative Profile AGF
CI Portfolio Series Conservative
Quadrus Conservative Folio
Alto Moderate Conservative Port Ser A
BMO SelectTrust Conservative Port F
Jov Hahn Conservative ETF Portfolio
0
10
20
30
% Equity Exposure
Source: Morningstar Direct, Data as of September 30, 2015 and only includes funds with a five-plus year track record.
40
50
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Even where there are modest fluctuations at the asset class level, there can be sizable shifts in subasset class weightings. Sentry Canadian Income’s overall equity exposure didn’t change much over the
five-year period, but its composition did: The fund’s Canadian equity stake stood at 43% at its early 2011
launch and has fallen to a low of 25%, while its U.S. equity holdings have risen from an 8% low to an
18% high. Meanwhile, RBC Conservative broadened its fixed income holdings to include small
weightings in global corporate and high yield bond funds while maintain consistent exposure to the asset
class overall.
Same label, different ingredients
Not surprisingly, the group’s diverse approaches to asset allocation lead to a wide dispersion of
risk/reward profiles, as the scatterplot in Exhibit 3 illustrates. Not surprisingly, funds with the highest
volatility (as measured by standard deviation) and returns over the five-year period, such as BMO Select
Conservative, also had among the highest equity weightings. Others performed according to script as
well. CIBC Very Conservative historically has had the smallest stock weighting in the group, and it
would’ve mapped further southwest on the scatterplot.
Exhibit 3: Conservative target-risk funds risk/reward profile, 5-year period
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Source: Morningstar Data as of Sep 30, 2015
It’s also not surprising funds with higher volatility/higher return profiles were more vulnerable to losses in
down markets. BMO SelectTrust Conservative Portfolio turned in the worst bear-market showing of any
conservative target-risk fund, suffering a 22% cumulative loss from October 2007 to March 2009. The
fund has rallied 90% since then--the second best return in the conservative camp. Meanwhile, CIBC Very
Conservative, which had the best bear market showing with a 1.2% cumulative loss, has been the
biggest laggard since then, with a modest 25% cumulative gain. This tale of two records is easy to
explain: BMO's equity exposure, currently at 40%, is among the highest in the group and four times
CIBC's, giving it more ammo in up markets but making it vulnerable in down ones. But the CIBC fund has
consistently held 14% in stocks--the lowest weighting in the group--providing ballast in down markets.
Page 15 of 50
Manager Research Canada Observer | Q3 2015
Investors shouldn't take the BMO fund's strength in up markets and the CIBC fund's resilience in
downturns as signs of manager skill. Such performance is the natural outcome of how differently the
funds were built. Yes, you'll probably get better long-term returns from the BMO offering given its much
higher equity weighting, but the approach leads to much higher volatility. Indeed, its five-year standard
deviation, a measure of volatility, is 80% higher. Conservative investors with shorter time horizons may
find such volatility difficult to stomach. The BMO offering still outperforms the conservative target-risk
universe once volatility is taken into account (using the Sharpe Ratio), but so does the CIBC fund. Which
approach you choose should be driven more by your risk appetite than returns alone.
Other asset allocation decisions also drive performance. TD Target Return Conservative has been the
poorest performer in the conservative target-risk lot this year. One big reason why is its Canada-heavy
portfolio, which has put it at a disadvantage recently given the Canadian market's weakness. By
contrast, Sun Life Granite Conservative has been one of the strongest performers even with nearly the
same equity allocation as the TD fund. The Sun Life fund, though, has nearly three times the U.S.
exposure. With already decent U.S. returns getting an added boost from the falling loonie, U.S.-heavy
portfolios have a built-in advantage. You'd likely see the opposite performance pattern when Canadian
stocks outperform.
Exhibit 4 (page x) features the performance of funds in the conservative target risk grouping.
Same label, different ingredients
Of course, past isn’t always prologue. Just because a fund’s risk has yet to materialize doesn’t mean it’s
not there. A seemingly-safe portfolio heavy with high-quality bonds (which generally are the most
sensitive to interest rate fluctuations) will have benefited handsomely from historically low interest rates,
for instance. In a rising rate environment, these funds may not offer the same kind of downside
protection as they have in prior downturns (though they should still outperform equity-heavy portfolios).
Lastly, nearly half of our sample launched in 2009 or later. Younger funds will not have been tested by a
downturn. Success, especially over shorter time periods, may simply be an artifact of the fund’s asset
allocation, not management strength. K
Page 16 of 50
Manager Research Canada Observer | Q3 2015
Exhibit 1: Conservative Target-Risk Funds Asset Allocation
Name
Net Assets ($)
% Candian Equity
% US
Equity
%
International
Equity
% Total
Equity
% Cash
% Fixed
Income
% Other
AGF Elements Conservative Portfolio
280,148,576
8.80
18.94
15.18
42.93
3.64
52.89
0.54
Allegro Conservative Portfolio C
451,047,001
6.19
8.25
10.69
25.12
18.16
50.34
6.39
Allegro Moderate Conservative Port C
479,229,000
10.16
15.94
13.62
39.72
14.86
38.68
6.74
Alto Conservative Portfolio Ser A
282,836,000
11.72
7.04
7.84
26.60
14.48
52.02
6.90
Alto Moderate Conservative Port Ser A
261,712,000
14.64
17.30
9.17
41.11
11.54
40.31
7.04
BlackRock Conservative Portfolio A
18,543,536
20.96
7.46
11.47
39.89
1.45
53.88
4.78
BMO Conservative ETF Portfolio A
155,049,000
9.66
19.41
9.95
39.02
4.60
54.34
2.04
BMO Retirement Conservative Port Srs A
14,790,000
7.21
6.88
0.80
14.89
0.80
0.00
85.74
BMO SelectTrust Conservative Port F
1,113,015,000
11.65
17.74
12.12
41.51
7.53
45.14
5.82
CI Portfolio Series Conservative
1,293,087,179
10.20
18.92
13.40
42.53
9.79
45.18
2.50
CIBC Conservative Index Portfolio
-
19.85
4.88
0.24
24.98
24.58
50.31
0.13
CIBC Conservative Portfolio
-
17.58
5.99
0.14
23.72
29.41
46.11
0.77
CIBC Very Conservative Index Portfolio
-
14.90
0.05
0.07
15.02
24.54
60.33
0.11
CIBC Very Conservative Portfolio
-
14.37
0.00
0.00
14.37
28.43
56.97
0.23
Compass Conservative Balanced Portfolio
3,370,644,636
16.82
13.65
8.84
39.31
1.82
56.38
2.50
Compass Conservative Portfolio
1,488,944,787
10.45
6.54
6.93
23.92
1.88
71.00
3.21
Counsel Conservative Portfolio
324,652,354
7.72
9.52
11.21
28.45
27.07
43.80
0.68
Desjardins Chorus II Conservative
1,012,898,190
7.74
7.03
9.85
24.62
4.60
66.39
4.39
Desjardins SocieTerra Conservative A
309,408,780
8.08
10.12
9.58
27.78
2.02
0.00
70.20
Distinction Conservative Class Sr A
70,921,115
26.24
13.84
11.96
52.03
10.55
29.85
7.56
Dynamic Edge Conservative Cl Port Ser I
174,364,073
7.78
18.15
9.72
35.64
11.26
52.71
0.38
Empire Life Emblem Conservative Port A
15,669,112
17.57
15.16
6.16
38.89
6.43
54.56
0.12
Fidelity Conservative Income Fund A
184,620,470
5.40
8.74
6.40
20.53
5.50
73.52
0.44
FMOQ Conservative balanced Fund
85,349,147
15.32
12.41
4.02
31.75
11.49
54.20
2.56
Harmony Conservative Portfolio Embed Ser
101,063,157
13.04
10.53
4.42
27.99
5.32
66.66
0.03
Jov Hahn Conservative ETF Portfolio
50,418
11.33
5.14
18.70
35.17
5.68
58.25
0.90
La Capitale Conservative Profile (NBSI)
3,389,080
12.02
3.93
0.88
16.83
7.13
73.30
2.74
La Capitale Conservative Profile AGF
25,569,127
4.46
11.71
12.05
28.22
6.27
65.10
0.41
Manulife Cdn Conservative Balanced Adv
35,377,021
19.98
7.29
0.00
27.27
7.15
64.94
0.64
Manulife Simplicity Conservative Adv
434,164,004
5.69
6.76
5.29
17.74
8.80
71.70
1.76
MD Precision Conservative Portfolio
460,165,631
18.65
0.75
10.15
29.56
5.60
55.77
9.07
Meritage Conservative Income Portfolio
304,922,289
12.02
3.95
0.88
16.85
7.12
73.27
2.76
Meritage Conservative Portfolio
147,206,971
10.01
4.69
5.36
20.06
6.33
72.72
0.88
National Bank Conservative Diversified
140,526,604
8.58
5.57
5.06
19.20
19.51
59.65
1.64
National Bank Conservative Strat Port
--
11.61
5.33
4.40
21.34
17.37
55.54
5.75
NEI Ethical Select Conservative Port A
137,598,663
11.37
15.46
11.85
38.67
7.03
54.17
0.12
NEI Select Conservative CC Portfolio A
24,311,743
7.32
11.45
11.72
30.49
18.86
50.54
0.11
Page 17 of 50
Manager Research Canada Observer | Q3 2015
Name
Net Assets ($)
% Candian Equity
% US
Equity
%
International
Equity
% Total
Equity
% Cash
% Fixed
Income
% Other
NEI Select Conservative Port A
154,268,734
8.68
13.98
13.03
35.69
6.29
57.90
0.12
O'Leary Conservative Income Sr A
96,129,204
23.40
4.34
0.46
28.20
21.56
49.39
0.85
Quadrus Conservative Folio
230,164,967
10.92
6.34
5.97
23.23
5.08
70.86
0.82
RBC Conservative Growth & Inc Ser A
82,684,442
9.49
8.03
7.55
25.08
6.38
66.76
1.79
RBC Select Conservative Portfolio Sr A
19,267,987,518
15.77
12.06
14.98
42.80
5.74
51.08
0.38
RBC Select Very Conservative Port Adv
9,708,598,797
11.47
7.12
9.14
27.72
7.98
63.95
0.35
SEI Conservative Class E
1,666,600
6.05
6.75
5.50
18.30
35.57
45.99
0.14
SEI Conservative Monthly Income Class P
486,948,054
9.75
7.41
5.88
23.04
26.72
50.06
0.18
Sentry Conservative Balanced Income
1,934,502,560
28.75
0.51
0.00
29.26
8.28
46.80
0.51
Standard Life Conservative Port A
171,472,096
12.39
13.16
9.31
34.87
5.28
59.66
0.19
Sun Life Granite Conservative Class A
71,976,439
6.16
14.91
10.30
31.37
12.29
51.44
4.90
Sun Life Managed Conservative Port A
418,056,406
6.51
15.14
10.66
32.31
16.29
46.95
4.45
TD Comfort Conservative Income
1,379,693,911
8.46
6.02
3.42
17.90
4.73
71.89
5.48
TD Target Return Conservative I
2,513,994,635
11.93
11.14
3.57
26.64
0.75
30.19
42.42
11.33
8.03
7.84
27.20
7.15
54.20
1.64
Median
Source: Morningstar Direct, Data as of August 31, 2015
Page 18 of 50
Manager Research Canada Observer | Q3 2015
Exhibit 4 Conservative Target-Risk Fund Performance
Name
Return
(1YR)
Return
(3YR)
Return
(5YR)
AGF Elements Conservative Portfolio
5.16
6.48
4.87
Allegro Conservative Portfolio C
4.51
4.98
4.18
Allegro Moderate Conservative Port C
5.02
6.99
Alto Conservative Portfolio Ser A
1.98
3.77
Alto Moderate Conservative Port Ser A
2.40
BlackRock Conservative Portfolio A
1.89
BMO Conservative ETF Portfolio A
4.71
Return
(10YR)
Sharpe
Ratio (3
Yr)
Sharpe
Ratio
(5YR)
1.10
0.91
2.95
1.18
1.07
5.43
3.14
1.36
3.28
2.67
0.95
5.95
4.86
3.14
Sharpe
Ratio
(10YR)
Max
Drawdown
(3YR)
Max
Drawdown
(5YR)
Max
Drawdown
10YR
-3.94
-4.03
0.35
-2.76
-2.76
-9.49
1.02
0.29
-3.98
-5.49
-18.32
0.85
0.28
-2.85
-2.85
-11.13
1.37
1.07
0.31
-3.74
-4.25
-16.23
1.42
1.50
-3.69
-3.69
BMO Retirement Conservative Port Srs A
BMO SelectTrust Conservative Port F
5.41
7.62
6.94
CI Portfolio Series Conservative
3.81
7.61
6.27
4.48
1.45
1.18
0.47
-3.99
-6.09
-20.90
CIBC Conservative Index Portfolio
0.56
3.13
3.02
3.29
0.87
0.89
0.48
-3.18
-3.18
-10.27
CIBC Conservative Portfolio
1.42
3.22
3.40
3.13
0.89
1.06
0.44
-2.66
-2.66
-11.56
CIBC Very Conservative Index Portfolio
0.33
1.91
2.06
2.91
0.52
0.66
0.50
-2.40
-2.40
-5.39
CIBC Very Conservative Portfolio
0.35
2.01
2.18
2.61
0.57
0.73
0.38
-2.18
-2.18
-6.65
Compass Conservative Balanced Portfolio
2.78
7.18
6.71
5.57
1.65
1.52
0.74
-3.76
-4.24
-16.45
Compass Conservative Portfolio
1.59
4.90
5.19
4.66
1.33
1.48
0.76
-3.33
-3.33
-9.90
Counsel Conservative Portfolio
2.60
5.87
4.87
3.43
1.07
0.86
0.32
-4.03
-5.87
-19.68
Desjardins Chorus II Conservative
1.94
4.45
Desjardins SocieTerra Conservative A
3.18
4.11
Distinction Conservative Class Sr A
-0.42
Dynamic Edge Conservative Cl Port Ser I
5.85
7.88
1.73
-3.36
Empire Life Emblem Conservative Port A
2.63
5.69
1.20
-3.92
0.89
4.00
0.75
-3.86
0.84
-3.85
-3.85
Fidelity Conservative Income Fund A
FMOQ Conservative balanced Fund
2.37
Harmony Conservative Portfolio Embed Ser
1.77
3.89
3.50
Jov Hahn Conservative ETF Portfolio
8.50
4.96
La Capitale Conservative Profile (NBSI)
0.61
La Capitale Conservative Profile AGF
2.87
Manulife Simplicity Conservative Adv
MD Precision Conservative Portfolio
2.70
0.75
0.78
3.82
0.84
0.72
4.98
4.35
0.89
0.89
3.12
4.17
3.91
0.83
0.88
1.18
5.15
4.18
1.07
0.89
Meritage Conservative Income Portfolio
0.61
2.07
3.20
0.39
Meritage Conservative Portfolio
2.39
3.81
3.72
National Bank Conservative Diversified
2.14
3.22
3.20
National Bank Conservative Strat Port
0.49
3.36
3.41
NEI Ethical Select Conservative Port A
3.16
4.99
4.25
NEI Select Conservative CC Portfolio A
3.28
4.18
NEI Select Conservative Port A
3.44
4.31
O'Leary Conservative Income Sr A
-1.87
4.18
0.25
-4.19
-4.19
-14.06
-2.98
-2.98
-3.61
-3.61
-4.18
-4.18
0.84
-3.39
-3.39
0.86
0.93
-2.90
-2.90
2.78
0.73
0.86
0.35
-3.16
-3.16
-6.49
2.87
0.79
0.93
0.32
-3.96
-3.96
-11.11
0.96
0.88
-4.09
-4.09
Manulife Cdn Conservative Balanced Adv
3.59
0.78
4.32
0.81
0.87
0.46
-3.72
0.92
-3.66
-4.68
-3.66
-10.81
Page 19 of 50
Manager Research Canada Observer | Q3 2015
Name
Return
(1YR)
Return
(3YR)
Return
(5YR)
Return
(10YR)
Sharpe
Ratio (3
Yr)
Sharpe
Ratio
(5YR)
Sharpe
Ratio
(10YR)
Max
Drawdown
(3YR)
Max
Drawdown
(5YR)
Max
Drawdown
10YR
Quadrus Conservative Folio
1.19
3.35
3.30
2.91
0.68
0.78
0.32
-4.17
-4.17
-10.19
RBC Select Conservative Portfolio Sr A
3.69
6.65
5.41
4.12
1.36
1.18
0.49
-3.65
-3.73
-16.34
RBC Select Very Conservative Port Adv
3.02
4.60
4.15
1.10
1.14
-2.91
-2.91
SEI Conservative Monthly Income Class P
1.78
4.39
4.04
0.96
0.95
-3.68
-3.68
Sentry Conservative Balanced Income
-2.27
6.40
7.23
1.29
1.62
-5.72
-5.72
Sentry Conservative Balanced Income Cl A
-2.28
6.23
Standard Life Conservative Port A
2.53
5.12
Sun Life Granite Conservative Class A
3.86
Sun Life Managed Conservative Port A
3.86
5.97
1.17
-3.63
TD Comfort Conservative Income
1.61
3.45
0.86
-3.33
TD Target Return Conservative I
-5.44
-0.64
-0.50
-7.17
RBC Conservative Growth & Inc Ser A
SEI Conservative Class E
Source: Morningstar Direct, Data as of September 30, 2015
1.27
4.67
3.66
1.02
-5.74
1.09
0.47
-3.62
-3.62
-10.60
?
When are Target-Date Funds the Right Choice?
Investors taking their first steps on the road that will eventually lead to retirement have myriad choices
at their disposal. One increasingly popular form of saving for retirement is investing in target-date funds.
Indeed, many employers now offer target-date funds as an option within defined contribution plans and
further, many plans are using them as the default option when employees enroll. Gaining a better
understanding of this retirement option will help you decide if it can help you reach your retirement
Jeffrey Bunce
Analyst, Manager Research, Canada
+1 416-484-7821
[email protected]
goals.
The growth and appeal of target-date funds is easy to understand. These professionally managed funds
represent an all-in-one, diversified mix of stocks and bonds, the asset allocation and overall portfolio risk
of which evolves over time as the fund's "target-date" approaches. Target-date funds typically include a
year in their name to indicate that it is suitable for an investor expecting to retire in that year. For
example, if you envision retiring in the year 2040, you may select a fund like BMO LifeStage 2040. As
your retirement date is 25 years away, the fund will have a growth focus, holding mostly stocks to help
you build capital.
The fund gradually shifts to bonds and other lower-risk assets such as real estate and mortgages as the
need for stable retirement income nears. This evolution is automatic and occurs without your
involvement. As such, it represents a simple, low-maintenance approach, especially if you don't want to
monitor and adjust your asset allocation throughout your working life. Nevertheless, investors need to
do their homework before diving in.
Breaking the buy high, sell low cycle
A benefit of target-date funds is that they’ll likely protect you from yourself. Frequently, investors are
their own worst enemy, buying securities at market tops and selling in downturns. Often, this leads to
subpar returns compared with a buy and hold strategy. Because changes in the asset mix of a target-
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Manager Research Canada Observer | Q3 2015
Page 2 of 4
date fund is done for you on a gradual basis over a number of years, the risk in timing asset allocation
changes is reduced. A key finding in Morningstar’s 2015 Target-Date Fund Landscape report on U.S.
target-date funds showed that their asset-weighted average investor returns, which take fund flows into
account to estimate a typical investor’s experience in a fund, are 1.1% higher than the funds’ average
total returns. Investor returns typically lag total returns in other investment categories, suggesting that
target-date funds do improve investor behavior.
A one-size-fits-all option
While target-date funds are a relatively simple and complete retirement option, they aren’t for everyone.
The biggest shortcoming is the lack of customization available within them. They are an all-in-one, onesize fits all proposition and because of that there is no ability to adjust the asset allocation to align with
your specific risk tolerance. Just because you are 25 years away from retirement and theoretically
possess a high risk capacity, doesn’t mean you are personally comfortable or willing to accept a volatile
asset mix that may be as high as or higher than 90% equity.
For instance, at the end of July, the MFS LifePlan Retirement 2040 fund is entirely invested in equities.
An aggressive mix such as this could lose 20-30% or more in another scenario like 2008. If that possibility
makes you sick to your stomach, then a more customized solution with less risk makes more sense.
Certain investment managers have attempted to address this concern with the launch of target-risk,
target-date funds. For example, with Franklin LifeSmart funds you can choose between a Conservative,
Moderate or Aggressive version of its 2040 fund.
Further, if your financial situation changes due to a change in career or health, starting a family,
receiving an inheritance, going through a divorce, etc., there is no way to reflect your changing life
circumstances with a target-date fund. Say in five to ten years you realize you’ll likely need to work
another five to ten years beyond your original target retirement date to reach your goals. In that case,
the 2040 fund that you chose, may no longer be appropriate. It will likely shift into a conservative asset
mix too soon for your revised retirement outlook and the risk of possibility outliving your retirement
savings becomes a real concern.
Same target date, different allocations
It’s important to note that not all target-date funds with the same end year have the same asset mix. The
glide path, defined as the rate at which the asset mix shifts from predominately stocks to a greater mix
of bonds, varies across managers/target-date series. For instance, the rate at which equity is
transitioned to fixed income may start out slowly and accelerate as the target-date approaches or it may
gradually and consistently decline through time. Similarly, the split of equity vs fixed income will also
vary across managers at different points along the glide path. Some funds will have a consistently
higher allocation to equity through time than others and some will start out with a lower allocation but
maintain a higher level at the end of the glide path.
Refer to the chart below to see the differences in the equity glide paths for a sample of target-date fund
managers. MFS LifePlan, for example, has a glide path characterized by an all-stock approach early on
(100/0 split between stocks and bonds) but rapidly transitions into bonds by retirement (30/70 split). In
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Manager Research Canada Observer | Q3 2015
Page 3 of 4
contrast, PH&N LifeTime starts out more conservatively (80/20 split) but maintains a higher level of
stocks at retirement (40/60).
Exhibit 1: Equity glide paths for a sample of target-date managers
Source: Morningstar
These allocation differences have consequences. A fund with more equity will be more volatile than
another fund with the same target-date but it will also potentially generate greater returns. For the one
year ending July 31, 2015, MFS LifePlan Retirement 2040 returned 21.0% gross of fees versus Manulife
Retirement Date 2040 which returned 11.8%. What this illustrates is that two funds with the same
target date will not necessarily provide the same results nor have the same risk profile, especially over
shorter time periods.
Another drawback of target-date funds is that it is very difficult to benchmark performance. Each
manager has their own glide path so peer comparison is tough and because the asset mix is always
changing, calculating a custom benchmark quickly becomes a nightmare. With this challenge, it’s easier
for the manager to get a free-pass of sorts as it relates to the performance of the funds. However,
because most funds are in a fund-of-fund structure, you can look up the underlying holdings to see if the
manager has held strong or poor performing funds. That should provide insight into whether the
manager has added or detracted value. If the underlying funds have done well but the fund itself stills
lags peers, then the asset mix may be to blame.
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Manager Research Canada Observer | Q3 2015
Page 4 of 4
Fees matter
Fees are another issue to watch out for as a 1% difference in fees over a long time horizon will have a
big impact. For instance, assume you’ve chosen your 2040 fund and put $10,000 into it initially and
didn’t contribute any further amount and that the fund earns 8% annually, gross of fees. If you pay 1% in
fees per year, your stake will grow to just over $58,000 by the end of 2040. However, if you pay 2% per
year, you’ll end up with about $45,500 or $12,500 less. This gap widens over larger sums and longer
time horizons so don’t underestimate the impact of fees.
If you’re interested in target-date mutual funds, fees vary depending on the distribution channel. For doit-yourself investors, PH&N offers its LifeTime target-date series and fees range from 0.96% for the 2015
fund to 1.31% for the 2045 fund. Funds sold through fee-based advisors carry similar charges and funds
available from commission-based advisors will cost roughly 1.00% more, reflecting the embedded trailer
fee. These fees are not cheap by any means but are not out-of-line with pricing in other balanced
categories.
The best deal on these funds may be available through your employer’s defined contribution platform (if
applicable) where the fees have been negotiated on your behalf by your employer. Typically, on these
platforms there will only be one target-date series available to choose from. If this is the case, try to
ensure the management fees on the target-date funds are consistent with the other balanced or targetrisk funds offered in the plan. Be aware though that the fees for each fund in the series is usually the
same, meaning that fees will represent a larger portion of your return through time as the allocation to
lower returning fixed income increases. Lastly, some managers, such as the BlackRock, build their funds
using passively managed strategies and should provide a cost advantage over a manager like Fidelity,
which uses its own actively managed strategies within its funds.
Stewardship counts
One of the most important things to keep in mind when selecting a target-date fund is the manager’s
reputation as a steward of investor’s capital. Remember, you could possibly own your target-date fund
for twenty-five years or more and that means your investor experience is an important consideration and
shouldn’t be taken lightly. If possible, try to invest with a manager who has experience running these
funds, is in the business for the long term and has a history of putting investor interests ahead of its
own. To gauge this, you can refer to Morningstar’s stewardship grades which rate, on a grade from A to
F, some of the largest fund managers in Canada, many of whom have target-date funds. Examples of
good stewardship practices include manager co-investment alongside unitholders, closing funds to new
investments when they become large and compensation practices that reward long-term performance.
Just do it for me
The structure of target-date funds and the differences between series are important to understand to so
you can gain comfort in the investment you make and assess the likelihood it will help you reach your
retirement goals. To determine whether they are right for you though, the real question you have to ask
yourself is whether or not you’re unlikely to monitor your investments and adjust your asset mix through
time. If the answer is no and you fall into the do-it-for-me camp, then a target-date fund is an
appropriate option for you. K
?
Floating Rate Funds: Answer to Rising Rate Threat?
A prevalent theme among fixed-income managers in recent years has been the expectation that interest
rates will rise. Contrary to those expectations, rates have remained low for longer than anticipated, and
the short-duration positions taken by the majority of active managers have been a significant driver of
their underperformance relative to passive index trackers. Although the industry’s anticipation of higher
interest rates may have been premature, the truth is that rates cannot go much lower than where they
stand today, though it’s possible for them to stay where they are for a while. Because their coupons
Achilleas Taxildaris
Analyst, Manager Research
+1 416 484-7013
[email protected]
fluctuate along with interest rates, floating-rate loans have garnered increasing attention in recent years.
Since funds that invest in floating-rate loans have almost no interest-rate risk, they have experienced
significant inflows since early 2013. (See Exhibits 1 and 2.) Assets have almost doubled in the United
States and increased several-fold in Canada compared with three years ago, though the recent pullback
could suggest investor fear of rising rates has fallen. (It is instructive to look in the U.S., as this asset
class involves mainly loans issued for U.S.-based corporations. These funds, which fall into the Bank
Loan category, also have a longer history in the U.S. Only in 2015 was the group large enough in Canada
to warrant a separate category.)
What Are Floating-Rate Loans?
Floating-rate or bank loans are denoted high-yield because the firms issuing them are highly leveraged.
Companies with this kind of debt profile can get there either intentionally (because of a leveraged
buyout, debt-fuelled acquisition, or recapitalization) or unintentionally (because of a deterioration of the
underlying business of an erstwhile investment-grade firm). Some examples of top holdings in the widely
used bank loan benchmark S&P/LSTA Leveraged Loan Index include widely-held names such as Valeant
Pharmaceuticals and Burger King, but also more challenged ones like TXU and Dell. Either way, the risk
from leverage is the same, even if the businesses may be moving in different directions. With increased
leverage comes the increased probability of default and bankruptcy.
Page 25 of 50
Manager Research Canada Observer | Q3 2015
Page 2 of 7
Healthcare Observer | 28 October 2015
Exhibit 1 After 2013 surge, assets float out of Canadian floating rate offerings (CAD billions)
250
200
150
100
50
(50)
(100)
2010-10
2010-12
2011-02
2011-04
2011-06
2011-08
2011-10
2011-12
2012-02
2012-04
2012-06
2012-08
2012-10
2012-12
2013-02
2013-04
2013-06
2013-08
2013-10
2013-12
2014-02
2014-04
2014-06
2014-08
2014-10
2014-12
2015-02
2015-04
2015-06
2015-08
(150)
Source: Morningstar Direct, Data as of August 31, 2015
Exhibit 2 After 2013 surge, assets float out of US floating rate offerings (USD billions)
500
400
300
200
100
0
-100
Apr-15
Dec-14
Apr-14
Aug-14
Dec-13
Apr-13
Aug-13
Dec-12
Apr-12
Aug-12
Dec-11
Apr-11
Aug-11
Dec-10
Apr-10
Aug-10
Dec-09
Apr-09
Aug-09
Dec-08
Apr-08
Aug-08
Dec-07
Apr-07
Aug-07
-200
Source: Morningstar Direct, Data of August 31, 2015
What Are Floating-Rate Loans?
Bank loans have a variable interest rate that is reset every 30 to 90 days; since it is reset so frequently,
the interest-rate sensitivity of the loan is near zero. The interest rate paid on the loan is a predetermined
premium over the current floating base rate being used--typically, the London Interbank Offered Rate, or
Libor. More recently issued bank loans include a "Libor floor," and rates are set to a spread above the
Page 26 of 50
Manager Research Canada Observer | Q3 2015
Page 3 of 7
Healthcare Observer | 28 October 2015
greater of that floor or Libor; eventually, though, a sustained increase in Libor would translate into rising
yields. Bank loan holders receive the highest priority in the case of a bankruptcy and are secured by
collateral such as equipment, real estate, or accounts receivable. As a result, bank loans are considered
safer than traditional high-yield bonds because this secured collateral protects the investor more than
bonds in the event of a default.
This higher safety comes with a slightly lower yield. As of the end of June 2015 the S&P/LSTA Leveraged
Loan Index had a 5.35% yield, versus 6.76% for the Barclays U.S. Corporate High Yield Index. That is still
a lot higher than the U.S. broad bond benchmark Barclays U.S. Aggregate Index 2.39% yield or the
Canadian FTSE TMX Canada Universe Bond Index 2% yield.
What Are the Risks?
Floating-rate loan funds have considerable appeal in our low-rate environment given their attractive
yields and low interest-rate sensitivity. Beyond the positives of this type of product, investors still need
to understand the risks behind these funds and invest in them for the right reasons.
Credit Risk
Despite their seniority in the capital structure, floating-rate funds are still a long way from cash or even
high-quality bonds. Even so, their seniority in the capital structure means they tend to have better
recovery rates than typical high-yield bonds (on average around 70% versus below 50% for high-yield
unsecured bonds). These firms can still default. Since the early 2000s, the default rate in the index has
been above the relatively high 5% mark twice. They will suffer more during a prolonged economic
downturn compared with investment-grade government or even corporate bonds. Therefore, investors
should consider these funds as part of their high-yield fixed-income exposure.
Liquidity Risk
Bank loans don’t have the liquidity of standard corporate debt. The market for floating-rate loans has
experienced significant growth in the past decade and now, with more than USD 800 billion in assets, is
about half the size of the more established high-yield bond market. Despite the increased size of the
market and the number of participants, bank loans don’t trade as much. Liquidity has become a general
issue in the fixed-income space since the 2007-08 crisis, as tighter capital requirements for dealers
mean smaller inventories. That raises a problem for floating-rate managers to find buyers for a position
that wouldn’t affect the price negatively.
Another concern with bank loans is that they can have long settlement times, up to six or eight weeks.
That poses a significant risk in managing a fund, especially if there are large redemptions at any given
time. This problem was particularly apparent during late 2014 in the U.S., when bank-loan funds'
performance sagged; combined with general “risk-off” mentality, this led to rapid redemptions from the
asset class. Many of the larger bank-loan funds that faced heavy redemptions had to use lines of credit
to meet those redemptions, which illustrates the challenges of managing a limited-liquidity asset class in
a daily liquidity format. In fact, Morningstar analysts in the U.S. downgraded recently two of the largest
funds in the category because of these concerns.
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Manager Research Canada Observer | Q3 2015
Page 4 of 7
Healthcare Observer | 28 October 2015
Interest-Rate Risk
This is the one risk that investors are trying to avoid when investing in floating-rate loan funds, and
generally they will, but they may be negatively surprised on the short term if they don’t read the fine
print. Because of "Libor floors,” which set rates to levels to the greater of the floor or Libor (the overnight
bank lending rate), many loans won’t have an increase in yield until short-term yields rise by more than
75 basis points. Thus, there will be a lag that may surprise investors who thought they were getting
greater protection against rising rates than they are.
Morningstar strategist John Gabriel discussed Libor floors in May 2015 and noted that, at the end of
2014, the weighted average Libor floor on the S&P/LSTA U.S. Leveraged Loan 100 Index was 0.85%.
This essentially creates a fixed coupon on a floating-rate security until Libor exceeds many bank loans'
Libor floors and introduces some, albeit limited, rate risk to bank-loan funds.
Currency Risk
For Canadian investors, the effect of currency changes is also an important risk they need to consider. In
recent years, the returns of an unhedged strategy invested in U.S. floating-rate loans would be
dominated by the currency movements. Over the long term, the impact could be smaller, but the
volatility in unhedged fixed-income strategies tends to be much higher than in hedged ones. Investors
looking only to decrease the duration of their fixed-income exposure should consider strategies that are
hedged to the Canadian dollar.
How Have Floating-Rate Funds Behaved?
In the past decade, except for a short period in its start, there hasn’t been a sustained increasing
interest-rate environment during which floating-rate funds could prove their worth. It is still instructive to
look the past decade and see how the different asset classes in the U.S. bond market behaved. Exhibit 3
measures the floating-rate (leveraged loan) index against broader bond benchmarks over trailing periods.
Exhibit 4 on page X puts the index's performance into a broader context on a year-by-year basis.
From this small sample, we can identify that floating-rate loans seem to do well when the economy is
strong and rates are rising or there is heightened concern about rising rates (2005, 2013), but they will
struggle when economic conditions are worsening, resulting in raised corporate spreads (2007, 2008,
2011, and 2014). We can also see the high correlation with high-yield bonds, but despite the higher
seniority in the capital structure they failed to provide better capital preservation when needed, mainly
because of illiquidity issues.
In fact, the only year that bank loans have posted a negative return in the past decade was in 2008,
when they lost 29%. The losses suffered by the sector that year stemmed from overissuance of new
loans in the wake of the leveraged buyout boom of 2006 and 2007. During that period, USD 667 billion in
deals were completed, which is more than 4 times the USD 164 billion in bank-loan issuance tied to LBO
deals struck during the past year and a half. Deals today are being completed at lower purchase price
multiples and with a larger amount of equity than those in 2007. In the past, to help secure lucrative
underwriting deals, banks regularly committed capital in the form of bridge loans. Bridge loans are a form
Page 28 of 50
Manager Research Canada Observer | Q3 2015
Page 5 of 7
Healthcare Observer | 28 October 2015
Exhibit 3: Floating-rate (leveraged loan) versus other bond benchmarks
Annualized trailing returns (USD)
Name
YTD
1 Yr
2 Yr
3 Yr
5 Yr
10 Yr
Barclays US Aggregate Bond TR
1.38
2.17
3.6
1.74
3.02
4.72
S&P/LSTA Leveraged Loan TR
1.31
0.84
2.21
3.07
4.31
4.64
Barclays US Corporate High Yield TR
-0.48
-1.25
2.38
3.98
6.21
7.63
Source: Morningstar Inc., Data as of August 31, 2015
Exhibit 4 Periodic table of bond market returns, 2005-2015 (USD)
Source: Morningstar Direct, Data as of June 30, 2015
of short-term financing that bridges the gap between the time a deal is completed and the point at
which more permanent funding is secured. According to J.P. Morgan, at the buyout boom's peak in in
2007, banks had committed USD 330 billion in the form of such bridge loans. When the crisis hit, the
banks were unable to raise long-term financing to redeem these bridge loans. Regulatory concerns led
the banks to dump the bridge loans onto the market at the height of the crisis. This served in part to
Page 29 of 50
Manager Research Canada Observer | Q3 2015
Page 6 of 7
Healthcare Observer | 28 October 2015
push bank-loan prices down nearly 40%. Today, bridge loans are a minor part of the overall bank-loan
market.
We will inevitably move through a normal economic cycle in the coming years, and bank-loan defaults
will rise if economic activity softens. That said, we are unlikely to see a dramatic collapse in prices in the
bank-loan sector similar to that witnessed in 2008. This is because there is dramatically less leverage
within the system given that LBO deals are much smaller in size today, bridge loans now play a relatively
minor part in the financing market, and many leveraged hedge funds have retreated (or disappeared)
from the market.
Available options
In Canada, investors looking to invest in floating-rate loans had only two options available before the
financial crisis: Trimark Floating Rate Income and BMO Floating Rate Advisor. Both have been around
since 2005, though they each got new management teams in 2013. The majority of the funds were
launched in 2013 or later.
That is not to say that the managers of these funds are rookies in managing the asset class. Shops like
Fidelity and Manulife leveraged their U.S.-based expertise and have put managers in place that have
considerable experience and supporting resources in the space. Fidelity’s Eric Mollenhauer manages the
U.S. fund Fidelity Advisor Floating Rate High Income, which has a Morningstar Analyst Rating of Bronze.
Other firms chose to out-source the expertise, partnering with specialists in the space. For example, AGF
Floating Rate Income is managed by Eaton Vance and run by a team that has decades of experience in
the asset class; the team also manages Bronze-rated Eaton Vance Floating Rate. Finally, there are the
firms that, by bolstering their fixed-income capabilities with bank-loan expertise, appear adequately
resourced to provide market-beating returns for their shareholders. Trimark, IA Clarington, and
Mackenzie Investments have chosen that path.
Exhibit 5 (next page) is a good representation of the available options in the commission-based
distribution channel suitable for purchase through an advisor. Most of the funds are either mostly hedged
to the Canadian dollar or have a fully hedged version (Fidelity, O'Leary). Renaissance Floating Rate
Income is mostly unhedged. Additionally, most of the funds have U.S. dollar versions, available for
investors that maintain U.S. dollar accounts.
For do-it-yourself investors, there are three funds that have a D series and four exchange-traded funds
(see Exhibit 6 on next page), only one of which aims to replicate the performance of an index:
PowerShares Senior Loan CAD Hdg ETF (BKL) provides exposure to the U.S.-domiciled BKLN, the most
widely held ETF in the space with close to USD 5 billion of assets, negating the currency impacts. BKLN
seeks to replicate the performance of the S&P/LSTA U.S. Leveraged Loan Index by investing in its largest
100 loans. Exhibit 5 lists options in this group.
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Manager Research Canada Observer | Q3 2015
Page 7 of 7
Healthcare Observer | 28 October 2015
Exhibit 5 Sampling of advisor-sold floating-rate funds
Name
AUM
MER
Return 1 Yr
Inception Date
AGF Floating Rate Income
365,799,257
1.83
-1.02
5/1/2012
BMO Floating Rate Income Sr A*
71,415,000
1.63
2.28
8/16/2015
Fidelity Floating Rate Hi Inc B
150,875,559
1.62
16.31
10/16/2013
IA Clarington Floating Rate Inc A
461,969,498
1.82
3.77
11/11/2013
IG Mackenzie Floating Rate Inc A
147,343,000
1.96
0.98
7/16/2014
Mackenzie Floating Rate Income A
463,141,357
2
-0.59
5/6/2013
Manulife Floating Rate Income Adv
423,807,940
1.73
-2.26
8/20/2010
O'Leary Floating Rate Income Series A
128,761,600
1.91
15.82
6/25/2013
Renaissance Floating Rate Income
704,884,189
1.83
16.02
9/16/2013
Trimark Floating Rate Income
274,905,540
1.66
4.82
1/25/2005
*The series with the oldest inception date is BMO Floating Rate Income Advisor, which has a slightly higher MER
Exhibit 5 Do-it-yourself floating-rate funds
Name
AUM
MER
Return 1 Yr
Inception Date
BMO Floating Rate Income D
71,415,000
1.54
2.2
4/7/2014
Mackenzie Floating Rate Income D
463,141,357
1.29
0.15
3/19/2014
Trimark Floating Rate Income Ser D
274,905,540
1.35
5.16
12/9/2013
BMO Floating Rate High Yield ETF
499,959,027
0.45
3.41
2/10/2014
FT Senior Loan ETF CAD Hdg ETF
101,552,893
0.95
2.9
8/27/2013
Horizons Active Floating Rt Sr Ln ETF
53,093,333
0.83
N/A
10/14/2014
PowerShares Senior Loan CAD Hdg ETF
43,665,196
0.82
-0.45
4/13/2012
Source: Morningstar Direct, Data as of August 31, 2015
The FT Senior Loan and Horizon Active Floating Rate ETFs are both actively managed but have a
significant leg up on their competition when it comes to fees. The BMO Floating Rate High Yield ETF at
0.45% is by far the cheapest in the category, but it is structured very differently from its peers. Instead of
buying floating-rate loans, it buys 90-day treasuries and rolls them over to shield against interest-rate
moves. Then it writes credit default swaps on high-yield bonds to provide the exposure and higher
income that comes with the underlying securities. This is not a passive fund, as it doesn’t track an index,
even though it has the ability to sell insurance, or write CDS for an index (CDX). This structure is
untested in a down market, and, as with all decisions, investors need understand the risks before
including this fund in their portfolio. This is a tougher exercise with this fund given the minimal disclosure
of the underlying firms that the CDS are written for. K
Page 31 of 50
Manager Research Canada Observer | Q3 2015
Sionna Cdn Small Cap Eq Cl A
Analysis
A hidden gem in the small-cap category.
By Jeffrey Bunce, CFA 9/23/2015
As is sometimes the case in the small-cap realm,
promising companies with strong management
teams that are focused on executing over the long
term can go unnoticed and unloved for extended
periods of time. The stocks of these companies
likely offer compelling risk/reward opportunities.
Similarly, this appears to be the case with Sionna
Canadian Small Cap Equity. A consistent and repeatable investment process executed by an experienced team has resulted in solid performance
since the fund's inception at the end of 2006.
What's puzzling is the fund's relatively small asset
base, especially considering the capacity-constrained nature of the asset class and the closed
status of many of the fund's top peers. While the
fund has gone mostly unnoticed, a sound process
executed by a strong team earns it a Silver Morningstar Analyst Rating.
The fund is run by Sionna Investment Managers
using a value investing philosophy. The firm targets underpriced companies with the expectation
that stock prices will return to their intrinsic fair
value over the long term. The team, led by industry veteran Kim Shannon, narrows its focus by
first quantitatively screening the Canadian market
for potentially mispriced stocks and then delving
into the fundamentals of names that appear attractive and possess defensive traits. The team
uses a standard questionnaire to evaluate a company's competitive position and its ability to generate steady earnings and cash flows, providing
for consistency and repeatability in the research.
At the portfolio level, they build a benchmark-agnostic portfolio with an emphasis on quality metrics, believing that stable companies will lead to
compounding growth over time. The team is disciplined, though, and captures value by actively
trimming or adding to names as they move closer
to or further from intrinsic value.
The fund can lag its more aggressive peers in up
markets but should protect value in falling markets. Its 31.2% loss in 2008 was less severe than
what the majority of its peers suffered, stacking up
nicely against the median manager's 42.1% decline. Similarly, the portfolio performed well when
the benchmark experienced negative returns in
2011 and 2014 and has only experienced 45.7% of
the benchmark's downside since the fund's inception. Further, the strategy has been a consistent
performer. Over rolling 36 month periods, the fund
has outperformed the benchmark 73% of the time
and finished in the first or second quartile in the
Canadian small/mid-cap equity category 78% of
the time. It has achieved these results with a low
standard deviation that ranks in the bottom quartile.
Process Pillar: ∞ Positive
While there isn't one part of the process that
sticks out as having a competitive advantage,
Sionna gets its edge from the consistency with
which it plies its trade, earning it a Positive for
Process. The team employs an intrinsic value model which screens and ranks the Canadian universe
on the basis of book value, historical return on
equity, and relative price/earnings ratios. The
team then focuses its attention on those stocks
trading 30% below their intrinsic value. Despite
the model being fairly basic, it is effective at focusing the team's attention on the most attractive
opportunities. Sionna typically embraces companies experiencing cyclical or operational troubles as
they claim these firms are often misunderstood by
the broader market. The team eschews high levels
of financial risk and will avoid companies with too
much debt, resulting in a portfolio with a quality
bent.
Morningstar’s Take
„
Morningstar Analyst Rating
Morningstar Pillars
∞ Positive
∞ Positive
Process
Performance
People
Parent
Price
∞ Positive
∞ Positive
¶ Neutral
Morningstar Analyst Rating
Morningstar evaluates mutual funds based on five key
pillars, which its analysts believe lead to funds that are
more likely to outperform over the long term on a riskadjusted basis.
Analyst Rating Spectrum
Œ
„
´
‰
Á
Fund Performance
YTD
Total Return %
+/- Category
—
—
Stocks that screen well are examined under a fundamental lens to develop a full understanding of a
company's prospects and risks. Importantly, the
team leverages a singular research questionnaire
and seeks to answer the same questions about
each company providing consistency and comparability. The whole team then debates potential
buys in a group setting and strives for consensus
before making a decision. Notable in this process
is Sionna's desire to avoid common behavioural biases that can undermine group decision-making.
©2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The
information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security.
Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
®
ß
Page 32 of 50
Manager Research Canada Observer | Q3 2015
Sionna Cdn Small Cap Eq Cl A
Analysis
In a category mixed with mid- and small-cap funds,
Sionna builds a true small-cap portfolio of 30 to 55
names. The weighted average market cap of the
fund as of June 30, 2015, was $768 million, which
was less than the BMO Small Cap Index and
among the lowest in the category. The large majority of positions have a market cap less than $2
billion; solidly in the small cap arena. Even though
Sionna generates and researches ideas in the
same manner as its large-cap names, the smallcap portfolio looks slightly different. While the
fund will have value characteristics because of its
process, the team emphasizes quality over value in
the small-cap space. This results in the portfolio
easily exhibiting higher returns on equity, returns
on invested capital, and lower debt/capital than
the benchmark and category average. For example,
the fund's return on invested capital is 10.1%,
which compares favourably to the Index at 3.0%
and the category average at 7.1%. Meanwhile,
value characteristics are less prominent. The
price/earnings ratio of 16.5 is less than the benchmark's 18.6 but price/book and price/sales ratios
are higher than the benchmark.
In another departure from its large-cap sibling, the
team constructs the portfolio in a benchmark-agnostic manner; avoiding exposure to junior oil and
gold companies with little to no revenue and instead concentrating on companies with morestable, long-term track records. This corresponds
to a greater than 20% overweighting in the financials sector and close to a 6% overweighting in
the industrials sector while underweight positions
in the materials and energy sectors amount to approximately 12% and 4%, respectively. The portfolio is also absent holdings in health care and utilities.
Further, Sionna prizes owner-operators where
management has a significant ownership stake in
the business and has a history of growing shareholder wealth. These management teams are also
more likely to be conservative and have a longterm orientation; aligned with investors. Examples
of owner-operator stocks in the portfolio include
Home Capital Group and FirstService Corp both of
which are in the top 10 holdings.
Performance Pillar: ∞ Positive
The appeal of the small-cap strategy comes from
its low volatility, which ranks in the lowest quartile of the category. Further, the fund has consistently outperformed the category and benchmark in
down markets such as 2008, 2011, and 2014. The
defensive, quality-oriented approach has worked
well in the small-cap space during the last number of years.
Since inception in late December 2006, the fund
has an annualized return of 7.2%, outperforming
the BMO Small Cap Index by 5.9% and the category average by 2.7%. During this period, Morningstar's attribution shows that stock selection in
the materials, energy, and financials sectors has
been a strong contributor of outperformance, a
credit to the team's bottom-up, fundamental process.
Investors should keep in mind that this performance record was achieved in an environment that
has generally been conducive to Sionna's strategy,
so expectations going forward should be
tempered. Indeed, the fund's up-capture ratio of
67% ranks in the bottom quartile, so expect the
fund to lag the benchmark and peers if low-quality
stocks or commodities rally. Despite this, returns
on an absolute basis should remain attractive.
joining Sionna in 2003, Lee ran a small-cap value
strategy for seven years at Royal & Sun Alliance.
Shannon and Lee are also supported by portfolio
managers Marian Hoffmann, Mel Mariampillai,
and David Britton. Further, Sionna adds to its
depth by hiring analysts fresh out of school or with
only a few years of experience to be groomed in
the Sionna discipline. With the exception of Shannon, all investment team members conduct research. Analysts start off as generalists before
settling on specific sector coverage that spans the
entire market-cap spectrum. Shannon remains the
gatekeeper of the firm’s culture, philosophy, and
process, so we would be concerned with any
change in her role. However, a strong cast of talent is emerging to eventually take the reins of the
firm.
Shannon's experience and her deep and growing
team, all of whom share in the same value discipline, result in a Positive for People.
Parent Pillar: ∞ Positive
Bridgehouse Asset Managers is fully owned by
San Diego-based Brandes Investment Partners--an
independent advisory firm founded by Charles
Brandes in 1974. The firm first launched a suite of
mutual funds in Canada in 2003. Bridgehouse distributes funds run by Brandes, Sionna Investment
Managers, Lazard Asset Management, and Greystone Managed Investments.
People Pillar: ∞ Positive
President and CIO Kim Shannon oversees the investment team. She is the face of Sionna and is
highly engaged in the portfolio management process. Shannon's 30-plus years in the industry and
experience managing portfolios through numerous
market cycles is invaluable. Prior to founding
Sionna in 2002, she built a solid track record as
CIO at Merrill Lynch Canada. Shannon's wealth of
experience provides her with a long-term perspective that not many in the industry can match. Because of this, she has a good appreciation of market mispricing and how it tends to revert to historical averages over time.
Teresa Lee is the lead portfolio manager for the
fund, having managed it since inception. Prior to
Brandes' Graham-and-Dodd value approach has
had some bumps along the way. While the execution of this strategy historically has been consistent, the firm's large-cap committee appeared reluctant to make the aggressive moves that we
would have expected given the opportunities that
abounded through the market downturn in 200809. The firm has experienced a dramatic slide in its
asset base since then, primarily because of market performance, but client outflows have also
been hefty.
The Canadian fund lineup was strengthened following an alliance in December 2006 with Sionna,
an employee-owned boutique manager focused on
Canadian equity. Sionna's investment style is also
©2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The
information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security.
Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
®
ß
Page 33 of 50
Manager Research Canada Observer | Q3 2015
Sionna Cdn Small Cap Eq Cl A
Analysis
value-oriented, although its products could be
characterized as more mainstream. Bridgehouse
further expanded its lineup in 2013 and 2014,
adding alliances with Lazard and Greystone.
Overall, Bridgehouse and its strategic partners
seem to put a greater focus on performance than
product creation or marketing. The firm has also
shown discipline by closing funds to new investment in periods where their asset bases have
grown.
Price Pillar: ¶ Neutral
The fund falls in the middle of the pack in the Canadian small/mid-cap equity category, resulting in
a Neutral rating for Price. The A share class, with
a 2.56% management expense ratio, is 0.08%
cheaper than the median. The F share class
though, with an MER of 1.51%, is slightly more expensive relative to its distribution channel.
Portfolio turnover has ranged between 30% and
60%. This modest level of turnover gives the fund
one of the lowest trading expense ratios in the
category, averaging 0.12% during the last five
years. Ranking MER and TER together, the fund
looks more attractive, placing in the secondcheapest quintile.
Bridgehouse has absorbed fees and expenses during the past few years, making the MER more
competitive. As the fund has grown, the amount
the manager has absorbed has declined but still
amounted to 0.22% in 2014.
©2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The
information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security.
Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
®
ß
?
Manager Research Canada Ratings Update
Recent Analyst Rating Changes
Source: Morningstar Direct, Morningstar Research
?
Better Disclosure, Low Fees Earn RBC an A Stewardship Grade
Corporate culture: B
The 2008 purchase of Vancouver-based Phillips, Hager & North (PH&N) signalled the start of a new era at
RBCGAM. Prior to its purchase by the Royal Bank of Canada-owned investment firm, PH&N was one of
Canada's largest independent investment managers and had established itself as one of the premier
Canadian fixed-income managers.
Shehryar Khan
Analyst, Manager Research
+1 416-484-7015
[email protected]
Stewardship Grade Scorecard
RBC Global Asset Management
Corporate Culture: B
Fund Manager Incentives: A
Fees: A
Regulatory History: Neutral
Overall Stewardship Grade: A
Despite some initial personnel turnover immediately before and during the aftermath of the acquisition,
both RBC AM and PH&N's investment teams have largely stabilized and grown since 2010. Additionally,
over 2012 and 2013, RBCGAM continued to build its U.K.-based emerging-markets investment team,
adding five new members, and in early 2014 it added 10 new members to its U.K.-based global equity
team.
RBCGAM also purchased U.K.-based BlueBay Asset Management toward the end of 2010, which helped
it further broaden its lineup. BlueBay manages global investment-grade, high-yield, convertible, and
emerging-markets bonds, as well as alternative strategies.
RBC also hasn’t been afraid to take talent from the firms it acquires and place them in senior positions at
GAM. Indeed, members of the senior PH&N and BlueBay leadership now occupy prominent roles at
RBCGAM: Both co-CEO’s of GAM, Alex Khein and Damon Williams, joined the firm via the BlueBay and
PH&N acquisitions, respectively, and Hanif Mamdani, who was PH&N's chief investment officer, is head
of alternatives.
RBC gets credit for not just retaining the talent and processes of many areas of PH&N but also sharing
many of the practises with other groups within RBCGAM. RBC's domestic-bond managers, for example,
now use PH&N's proprietary risk management and attribution tool, BondLab, though not to the same
extent as PH&N managers, and are building out the capability to be able to use the software globally.IN
Page 36 of 50
Manager Research Canada Observer | Q3 2015
Page 2 of 4
Healthcare Observer | 28 October 2015
In 2011, the firm also hired Bill Tilford, who helped build Connor Clark & Lunn Investment Management's
quantitative team and process and was later at Canadian Pension Plan's Investment Board. Tilford
strengthened RBC’s quantitative resources; he is the engine behind RBC's quantitative screening tools
such as QUBE and its in-house quantitative funds, including its ETF lineup of low-volatility and dividendoriented ETFs.
To serve its broad clientèle, RBCGAM takes a supermarket approach to its lineup, offering funds in most
asset classes. It is tough to be good at everything, however. While the firm is strong in fixed income,
through both RBC funds and PH&N funds, as well as in foreign equities through its U.K. teams, its
domestically focused RBC funds generally are a lacklustre bunch.
While there isn't a unifying theme across RBCGAM's funds, it has also generally stayed away from
gimmicky products. The firm’s recent initiatives in launching a suite of low-volatility and dividend-focused
funds and ETFs are driven by Tilford’s quantitative expertise, which is well-established, and all have longterm investment merit.
RBCGAM also has improved areas of weaknesses at the firms it has acquired. PH&N’s Canadian equity
team went through an overhaul in 2010 after a period of mixed performance, for example. The team,
now led by Doug Stadelman, has made strides to make the investment process repeatable by bringing in
elements of the RBC equity team's quantitative screening tool to help with idea generation. PH&N
Canadian Equity's resource sleeve is also managed by RBC's Chris Beer and Brahm Spilfogel rather than
PH&N's own equity team. Beer and Spilfogel specialize in resource stocks and have built an enviable
record on their funds.
Most of RBC’s assets reside in the advisor channel, though, with the lion’s share of its retail assets
distributed in-house. The firm leverages its wide lineup and the Royal Bank's coast-to-coast bank branch
network to bring in new money, helping it become the largest asset manager in Canada; RBCGAM
manages more than $260 billion of assets in Canada, making capacity management crucial. RBC’s track
record on this front is mixed. It has carefully managed capacity at $3.5 billion PH&N High Yield; aside
from a brief reopening in late 2014 to allow management to take advantage of market turbulence, the
fund has been closed to new investments since November 2010.
Unfortunately, the same could not be said for RBC’s flagship Canadian equity offering, RBC Canadian
Dividend, whose $16.7 billion asset base makes it the single largest mutual fund in the country. With
limited flexibility, the fund has little room to make meaningful bets against its benchmark, leading to
middling performance. A similar story has played out at RBC Equity Income. Thanks to rapid asset
growth in recent years, the fund can no longer hold the small- and micro-cap stocks that fueled its early
success, contributing to its mediocre returns ever since.
RBC’s domestic-equity lineup could face additional capacity strains thanks to the success of funds of
funds like RBC Select Conservative and Select Balanced, which have $19 billion and $17.7 billion in
assets, respectively. These funds’ rapid growth could mean more new money flows into already-bloated
underlying holdings like Canadian Dividend, though by broadening its lineup to include a larger number of
Page 37 of 50
Manager Research Canada Observer | Q3 2015
Page 3 of 4
Healthcare Observer | 28 October 2015
underlying holdings, RBC can blunt the impact. RBCGAM aspires to join the ranks of the global elite, but
the firm’s mixed record in capacity management undermines this goal.
Capacity management is just one part of an assessment of a firm's culture, though, and overall
RBCGAM’s strengths outweigh their weaknesses, earning it a B on corporate culture.
Fund Manager Incentives: A
Portfolio managers who invest alongside their fundholders not only show a conviction in their investment
approach and portfolios but also are better able to share in a true fundholder experience as they endure
the same consequences as their investors. For these reasons, Morningstar's Manager Incentives grade
is determined primarily by how heavily and predominantly a fund family's managers own the funds
offered by their firm. According to RBCGAM, 60% of its managers have at least two years' base salary
invested in either RBC or PH&N funds--an industry-leading level of coinvestment.
A manager's bonus is based on one-, three-, and five-year performance, with the three- and five-year
numbers more heavily weighted. The performance is measured gross of fees and on a before-tax basis.
Morningstar considers net-of-fees performance and aftertax assessment to be a best practise.
Managers are also assessed qualitatively on things like communication and attitude toward colleagues.
Senior investment members are also eligible for the profit-sharing plan. Bonuses and PSP are subject to
a mandatory three-year deferral.
Until this year, RBCGAM had disclosed its coinvestment levels as percentage of an individual’s
investable assets, which did not provide us with the opportunity to make an apples-to-apples
comparison with peers, resulting in a C grade in the past. Encouragingly, its disclosure has improved and
can now be compared with competitors, resulting in firm getting an A grade for Manager Incentives.
That upgrade pushed its overall Stewardship Grade to A from B.
Fees: A
Morningstar calculates a fund family's Fees grade based on the straight average and asset-weighted
average percentile of all the family's funds. These percentiles compare each fund share class with similar
distribution channels, ranging from 1 (for the cheapest in each group) to 100 (for the most expensive).
RBCGAM offers funds targeted to investors using the services of an advisor or buying funds themselves
through discount brokers. At first glance, the D series are not especially cheap--they land in the 40th
percentile on an average basis. Encouragingly, RBC has made its biggest funds much cheaper--on an
asset-weighted basis, the funds land in the 18th percentile, though this is a small universe in which
RBCGAM is the biggest player. RBCGAM also has a low minimum initial investment on this series,
generally $500.
The bulk of RBC’s funds are sold through advisors. The firm’s pricing is competitive in the commissionbased channel, where most of its assets reside, ranking in the top quintile on an asset-weighted and
equal-weighted basis. As in the DIY channel, RBC’s fee-only funds land in the 40th percentile on an
equal-weighted basis, but, with the biggest funds relatively cheap, they fall in the 26th percentile on an
asset-weighted basis. As formerly more-expensive rivals like Manulife and BMO slash prices in the fee-
Page 38 of 50
Manager Research Canada Observer | Q3 2015
Page 4 of 4
Healthcare Observer | 28 October 2015
only channel in anticipation of increased advisory fee disclosure requirements, RBC will have to work
harder to remain competitive. Overall though, most of RBCGAM's funds boast attractive prices, resulting
in an A grade on Fees.
Regulatory History: Neutral
Because investors should expect fund companies to comply with laws and regulations, the highest
Regulatory History rating a firm can receive is Neutral.
Because RBC GAM has not had material regulatory infractions in the recent past, it gets full credit for
Regulatory History. K
?
Market Performance
3 Month
YTD
1 Year
3 Yr
5 Yr
10 Yr
15 Yr
S&P/TSX 60 TR CAD
-6.74
-6.16
-6.50
6.89
4.88
5.14
4.08
S&P/TSX Capped Composite TR CAD
-7.86
-7.02
-8.38
5.71
4.46
4.83
5.21
BMO Small Cap Blended (Weighted) CAD
-14.74
-13.93
-20.18
-2.88
-0.49
2.78
5.46
S&P/TSX Completion TR
-11.24
-9.64
-13.84
2.34
3.20
4.26
4.29
S&P/TSX Small Cap TR
-15.17
-14.27
-21.75
-4.07
-2.74
0.10
2.61
S&P 500 TR CAD
0.47
9.63
19.23
24.61
19.57
8.35
Russell 2000 TR CAD
-5.41
6.80
21.46
23.08
17.88
8.10
MSCI ACWI NR CAD
-2.76
7.60
11.98
18.57
12.70
6.10
2.55
MSCI World GR CAD
-1.56
9.24
14.49
21.04
14.88
6.84
2.97
MSCI EAFE GR CAD
-3.55
10.07
10.05
17.61
10.19
4.94
2.68
MSCI EM GR CAD
-11.70
-1.86
-2.81
5.39
2.07
6.12
6.96
FTSE TMX Canada Universe Bond
0.15
2.52
5.29
3.39
4.45
5.00
5.95
FTSE TMX Canada All Government Bond
0.27
2.70
5.82
3.26
4.30
4.85
5.80
FTSE TMX Canada All Corp Bond
-0.16
2.07
3.98
3.73
4.85
5.45
6.39
FTSE TMX Canada ST Bond
0.00
2.11
3.05
2.42
2.66
3.79
4.59
FTSE TMX Canada MT Bond
0.79
3.84
6.64
4.19
5.27
5.73
6.61
FTSE TMX Canada LT Bond
-0.12
2.13
7.49
4.08
6.70
6.53
7.72
FTSE TMX Canada Real Return Bond
-1.26
2.05
3.40
0.14
4.41
4.79
7.24
S&P/TSX Preferred Share TR
-12.89
-20.38
-19.64
-5.67
-1.21
0.37
Canadian Equity Market Indexes
U.S. Equity Market Indexes
Global Equity Market Indexes
Canadian Fixed Income Market
Source: Morningstar Direct, Data as of September 30, 2015
Page 40 of 50
Manager Research Canada Observer | Q3 2015
Page 2 of 3
Periodic Table of Historical Asset Class Returns
Source: Morningstar Direct
Page 41 of 50
Manager Research Canada Observer | Q3 2015
Page 3 of 3
Correlation Matrix Major Market Indexes
October 2005-September 2015
Investment Name
1
2
3
4
5
6
7
8
9
10
11
12
13
1
S&P/TSX Composite TR
2
S&P/TSX Completion TR
93%
3
S&P/TSX Composite Dividend TR
99%
91%
4
S&P/TSX Small Cap TR
90%
96%
87%
5
S&P 500 TR CAD
47%
33%
44%
28%
6
Russell 2000 TR CAD
51%
47%
47%
44%
80%
7
MSCI ACWI NR CAD
64%
52%
61%
47%
89%
73%
8
MSCI EAFE GR CAD
57%
47%
54%
42%
72%
55%
94%
9
MSCI EM NR CAD
66%
63%
66%
60%
44%
47%
72%
67%
10
FTSE TMX Canada Universe Bond
-15%
-14%
-18%
-17%
11%
-5%
13%
15%
9%
11
FTSE TMX Canada All Government Bond
-18%
-17%
-21%
-19%
10%
-6%
10%
12%
7%
100%
12
FTSE TMX Canada ST Bond
-17%
-16%
-21%
-17%
13%
-2%
17%
20%
12%
92%
91%
13
FTSE TMX Canada LT Bond
-16%
-14%
-19%
-18%
8%
-8%
7%
8%
5%
98%
98%
84%
14
FTSE TMX Canada All Corp Bond
-5%
-2%
-8%
-6%
17%
-1%
22%
24%
18%
97%
94%
90%
94%
15
FTSE TMX Canada Cdn Trsy Bill 91 Day
-4%
-10%
-5%
-12%
30%
25%
29%
30%
12%
47%
48%
55%
43%
Source: Morningstar Direct, Data as of September 30, 2015
14
44%
?
Morningstar Category Performance
Name
3 month
YTD
1YR
3YR
5YR
10YR
15YR
Canada US Money Market
7.42
15.85
20.10
10.97
5.59
2.63
0.50
Canada Real Estate Equity
3.13
7.69
17.53
14.29
11.55
6.95
8.90
Canada Global Fixed Income
1.43
4.11
5.62
4.40
4.20
4.44
3.45
Canada Canadian Synthetic Money Market
0.00
0.17
0.26
0.29
0.30
1.15
Canada Canadian Long Term Fixed Income
-0.07
1.52
6.24
2.78
5.93
5.24
6.48
Canada Canadian Short Term Fixed Income
-0.11
1.43
2.05
1.82
1.83
2.55
3.03
Canada Canadian Fixed Income
-0.22
1.68
3.50
2.66
3.40
3.90
4.63
Canada European Equity
-0.27
13.00
13.44
16.77
9.92
5.04
2.55
Canada Floating Rate Loans
-0.37
3.87
4.26
2.68
3.59
1.57
Canada Global Fixed Income Balanced
-1.21
1.95
3.88
5.99
5.46
4.37
Canada 2015 Target Date Portfolio
-1.35
1.84
4.00
6.46
6.01
Canada 2020 Target Date Portfolio
-1.58
0.74
2.17
4.20
3.87
3.44
Canada Canadian Inflation-Protected Fixed Inc
-1.64
0.70
1.79
-0.71
3.13
3.09
3.70
Canada Canadian Fixed Income Balanced
-1.68
0.50
1.89
4.64
4.50
3.72
3.79
Canada US Equity
-2.00
5.08
13.05
20.17
15.33
6.19
1.69
Canada Global Neutral Balanced
-2.10
2.35
4.63
8.31
6.60
4.43
3.82
Canada 2025 Target Date Portfolio
-2.19
0.20
2.35
5.68
4.91
4.09
Canada High Yield Fixed Income
-2.63
1.07
0.69
3.93
4.99
4.60
4.72
Canada Financial Services Equity
-3.10
2.88
6.37
16.53
10.00
3.20
3.55
Canada Global Equity Balanced
-3.14
2.46
4.71
10.68
7.74
4.48
3.29
Canada Canadian Neutral Balanced
-3.26
-1.27
-0.27
6.21
5.45
4.48
4.62
Canada 2025+ Target Date Portfolio
-3.41
-0.15
2.22
7.07
5.79
Canada Global Equity
-3.43
4.80
8.57
15.22
10.52
5.09
1.94
Canada Tactical Balanced
-3.78
-0.96
-0.28
6.38
5.22
3.99
4.03
Canada North American Equity
-4.07
1.62
4.82
13.41
10.11
5.06
3.16
Canada International Equity
-4.68
7.90
8.24
14.39
7.90
3.31
1.13
3.61
Page 43 of 50
Manager Research Canada Observer | Q3 2015
Page 2 of 2
Name
3 month
YTD
1YR
3YR
5YR
10YR
15YR
Canada Canadian Equity Balanced
-4.80
-3.42
-2.90
6.38
4.83
3.95
4.92
Canada US Small/Mid Cap Equity
-4.95
3.95
13.66
18.71
15.19
7.21
3.71
Canada Global Small/Mid Cap Equity
-5.03
6.30
8.95
17.34
11.05
5.63
3.56
Canada Canadian Dividend & Income Equity
-5.77
-6.09
-6.80
6.73
6.19
4.86
6.64
Canada Canadian Focused Equity
-6.20
-3.08
-1.86
10.00
6.73
4.43
5.11
Canada Canadian Equity
-6.22
-5.87
-6.29
7.45
5.14
4.10
4.17
Canada Asia Pacific Equity
-7.62
6.35
7.23
12.37
5.55
4.33
1.36
Canada Canadian Focused Small/Mid Cap Equity
-9.21
-3.76
-2.54
7.82
6.73
3.75
5.62
Canada Asia Pacific ex-Japan Equity
-9.56
3.31
5.89
7.99
4.40
6.71
3.92
Canada Preferred Share Fixed Income
-10.50
-15.84
-14.30
-4.85
-1.45
Canada Canadian Small/Mid Cap Equity
-11.01
-8.08
-11.52
6.18
6.13
4.47
7.18
Canada Emerging Markets Equity
-11.11
-4.33
-5.86
3.41
-1.02
3.78
3.94
Canada Precious Metals Equity
-15.30
-9.23
-17.40
-24.72
-17.81
0.38
8.09
Canada Greater China Equity
-16.63
3.79
16.39
14.67
3.90
8.44
4.84
Canada Natural Resources Equity
-19.57
-18.89
-33.81
-14.39
-12.87
-1.88
6.07
Canada Energy Equity
-20.39
-22.55
-39.25
-5.78
-2.23
-1.93
5.73
Data as of September 30, 2015, Return ranking over 3 month period
?
Largest Mutual Fund Performance
Name
AUM ($)
Morningstar Category
Morningstar Rating
Overall
% Rank
Cat 1 Yr
% Rank
Cat 3 Yr
% Rank
Cat 5 Yr
% Rank
Cat 10 Yr
% Rank
Cat 15 Yr
RBC Select Conservative Portfolio Sr A
19,660,596,320
Global Neutral Balanced
ÙÙÙ
51
75
81
54
19
RBC Select Balanced Portfolio Sr A
18,479,872,037
Global Neutral Balanced
ÙÙÙÙ
39
30
36
43
22
RBC Canadian Dividend Sr A
17,378,059,423
Canadian Dividend & Income Equity
ÙÙÙ
52
26
40
38
20
Investors Dividend C
16,192,450,000
Canadian Equity Balanced
ÙÙÙ
73
51
48
70
40
RBC Bond Sr A
13,139,643,418
Canadian Fixed Income
ÙÙÙ
25
32
28
34
51
TD Canadian Bond - I
12,627,892,450
Canadian Fixed Income
ÙÙÙ
28
49
42
36
13
Fidelity Monthly Income Series A
12,223,031,195
Canadian Neutral Balanced
ÙÙÙÙ
30
34
17
10
TD Canadian Core Plus Bond - A
11,373,371,908
Canadian Fixed Income
ÙÙÙ
46
50
32
Fidelity Canadian Bond Sr A
9,866,193,430
Canadian Fixed Income
ÙÙÙ
39
70
59
RBC Select Very Conservative Port Adv
9,848,106,404
Canadian Fixed Income Balanced
ÙÙÙ
37
53
68
CI Signature High Income
9,661,772,574
Global Neutral Balanced
ÙÙÙ
91
85
Manulife Monthly High Income Adv
9,517,274,995
Canadian Neutral Balanced
ÙÙÙÙÙ
14
RBC Monthly Income Sr A
8,718,263,067
Canadian Neutral Balanced
ÙÙÙ
71
PH&N Bond Sr D
8,704,344,425
Canadian Fixed Income
ÙÙÙÙÙ
TD Mgd Income Portfolio I
7,928,018,477
Fixed Income Balanced
TD Monthly Income - I
7,794,215,084
PIMCO Monthly Income A
7,765,311,736
PH&N Total Return Bond Sr D
60
47
39
12
1
3
6
21
1
83
71
39
8
7
13
15
6
6
ÙÙÙÙ
15
16
37
52
34
Canadian Neutral Balanced
ÙÙÙÙ
78
60
40
28
6
Global Fixed Income
ÙÙÙÙ
60
32
7,356,977,609
Canadian Fixed Income
ÙÙÙÙÙ
9
10
12
7
2
Fidelity Canadian Balanced Sr A
7,258,124,522
Canadian Neutral Balanced
ÙÙÙÙÙ
12
16
15
18
18
CI Income Class A
6,648,851,570
Global Fixed Income Balanced
ÙÙ
68
83
Fidelity Canadian Asset Alloc Sr B
6,576,828,451
Canadian Equity Balanced
ÙÙÙ
44
57
65
33
49
TD Comfort Balanced Port - I
6,442,529,559
Global Neutral Balanced
ÙÙ
79
83
76
RBC Balanced Sr A
6,384,791,532
Canadian Neutral Balanced
ÙÙ
48
54
75
81
77
RBC Select Growth Portfolio Sr A
6,312,349,796
Global Equity Balanced
ÙÙÙ
38
43
49
53
24
TD Dividend Growth - I
6,171,242,937
Canadian Dividend & Income Equity
ÙÙÙ
54
29
44
47
30
Manager Research Canada Observer | Q3 2015
Page 45 of 50
Page 2 of 2
TD Income Advantage Portfolio - I
6,052,653,524
Fixed Income Balanced
ÙÙÙ
69
75
74
25
Investors Income Plus Portfolio C
5,973,624,999
Fixed Income Balanced
ÙÙ
83
74
88
74
TD Global Low Volatility A
5,865,319,839
Global Equity
ÙÙÙ
42
51
CI Signature Income & Growth
5,683,890,916
Global Neutral Balanced
ÙÙÙÙ
89
61
50
17
Manulife Strategic Income Adv
5,611,388,085
High Yield Fixed Income
ÙÙÙÙ
14
13
14
RBC European Equity Sr A
5,563,610,430
European Equity
ÙÙÙÙ
30
20
28
70
Sentry Canadian Income
5,458,260,981
Canadian Focused Equity
ÙÙÙÙ
26
41
14
9
Dynamic Strategic Yield Sr A
5,428,560,912
Global Neutral Balanced
ÙÙÙ
73
78
40
Investors Real Property C
5,414,388,000
Income and Real Property
TD Comfort Balanced Growth Portfolio - I
5,271,688,065
Global Neutral Balanced
ÙÙÙ
77
65
64
RBC Global Corporate Bond Adv
5,260,277,618
Global Fixed Income
ÙÙÙ
73
68
61
38
Investors Mortgage & Short Term Income
5,220,121,001
Canadian Short Term Fixed Income
ÙÙ
73
88
84
79
78
Beutel Goodman Canadian Equity Class D
5,106,778,223
Canadian Equity
ÙÙÙÙÙ
44
15
19
8
3
PH&N Short Term Bond & Mortgage Sr D
5,094,015,157
Canadian Short Term Fixed Income
ÙÙÙÙ
16
17
22
11
1
CIBC Monthly Income
4,972,980,125
Canadian Neutral Balanced
ÙÙ
92
95
91
82
21
TD Mgd Inc & Mod Growth Port I
4,916,301,190
Global Neutral Balanced
ÙÙÙ
42
51
69
80
34
Scotia Canadian Dividend
4,911,231,954
Canadian Dividend & Income Equity
ÙÙÙÙ
12
12
27
43
35
Fidelity True North Sr A
4,817,184,406
Canadian Equity
ÙÙÙÙÙ
12
10
15
14
16
RBC Canadian Short Term Income Sr A
4,695,319,930
Canadian Short Term Fixed Income
ÙÙÙ
46
57
53
53
48
CI Harbour Growth & Income
4,501,834,164
Tactical Balanced
ÙÙ
69
68
64
83
1
TD Comfort Balanced Income Portfolio - I
4,472,908,636
Fixed Income Balanced
ÙÙÙ
73
55
54
EdgePoint Global Portfolio Series A
4,398,667,109
Global Equity
ÙÙÙÙÙ
9
1
2
TD Short Term Bond - I
4,336,824,610
Canadian Short Term Fixed Income
ÙÙÙÙ
36
48
49
29
9
TD Dividend Income - I
4,293,143,384
Canadian Equity Balanced
ÙÙÙ
62
38
32
30
4
Fidelity Canadian Large Cap Sr A
4,207,292,889
Canadian Focused Equity
ÙÙÙÙÙ
16
10
9
4
4
Source: Morningstar Direct, Data as of June 30, 2015
24
83
?
Largest ETF Performance
Name
AUM ($)
Morningstar Category
Morningstar Rating
Overall
%
Rank
Cat 1
Yr
%
Rank
Cat 3
Yr
%
Rank
Cat 5
Yr
iShares Canadian Select Dividend
1,370,165,958
Dividend & Income Equity
ÙÙÙ
83
66
64
iShares S&P/TSX Cdn Div Aristocrats Adv
1,014,898,742
Dividend & Income Equity
ÙÙÙ
58
68
54
BMO Canadian Dividend ETF
552,365,546
Dividend & Income Equity
ÙÙ
88
85
%
Rank
Cat
10 Yr
%
Rank
Cat
15 Yr
57
iShares S&P/TSX 60
10,018,082,677
Canadian Equity
ÙÙÙÙ
47
60
57
25
iShares Core S&P/TSX Capped Composite
1,980,849,408
Canadian Equity
ÙÙÙ
57
71
62
34
BMO S&P/TSX Capped Composite ETF
1,142,069,298
Canadian Equity
ÙÙÙ
57
69
70
BMO Low Volatility Canadian Equity ETF
612,668,859
Canadian Equity
ÙÙÙÙÙ
1
1
Horizons S&P/TSX 60 ETF
525,607,932
Canadian Equity
ÙÙÙ
46
58
55
iShares CAN Fincl Monthly Inc Adv
429,411,827
Canadian Equity Balanced
ÙÙ
83
48
41
86
iShares Canadian Universe Bond
1,928,882,964
Canadian Fixed Income
ÙÙÙÙ
9
19
17
14
iShares Canadian Corporate Bond
1,555,887,692
Canadian Fixed Income
ÙÙÙÙ
42
15
10
BMO Mid Corporate Bond ETF
829,572,555
Canadian Fixed Income
ÙÙÙÙÙ
6
5
1
BMO Aggregate Bond ETF
804,805,479
Canadian Fixed Income
ÙÙÙÙ
8
19
16
BMO Mid Federal Bond ETF
594,924,765
Canadian Fixed Income
ÙÙÙÙ
3
14
8
Horizons Active Corporate Bond ETF Comm
545,018,352
Canadian Fixed Income
ÙÙÙÙÙ
30
7
3
Vanguard Canadian Aggregate Bond ETF
454,252,989
Canadian Fixed Income
ÙÙÙÙ
6
19
iShares Diversified Monthly Income
670,803,822
Canadian Fixed Income Balanced
ÙÙ
95
95
PowerShares Ultra Liquid LT Govt Bd ETF
746,348,282
Canadian Long Term Fixed Income
ÙÙÙ
25
23
iShares 1-5 Year Laddered Corp Bd Adv
2,269,906,958
Canadian Short Term Fixed Income
ÙÙÙÙ
37
27
18
67
iShares Canadian Short Term Bond
2,172,588,794
Canadian Short Term Fixed Income
ÙÙÙÙÙ
13
21
20
iShares 1-5 Year Laddered Govt Bd Adv
1,065,349,427
Canadian Short Term Fixed Income
ÙÙÙ
17
40
36
BMO Short Corporate Bond ETF
936,219,968
Canadian Short Term Fixed Income
ÙÙÙÙÙ
10
10
7
PowerShares 1-5 Yr Lad InvGr CorpBd ETF
736,937,064
Canadian Short Term Fixed Income
ÙÙÙÙÙ
8
6
Vanguard Canadian Short-Term Corp Bd ETF
631,625,037
Canadian Short Term Fixed Income
11
6
Page 47 of 50
Manager Research Canada Observer | Q3 2015
Page 2 of 2
Vanguard Canadian Short-Term Bond ETF
582,785,457
Canadian Short Term Fixed Income
ÙÙÙÙ
11
18
iShares S&P/TSX Capped Energy
860,559,975
Energy Equity
ÙÙÙ
57
80
BMO Covered Call Canadian Banks ETF
1,043,858,311
Financial Services Equity
ÙÙ
87
88
iShares S&P/TSX Capped Financials
991,673,605
Financial Services Equity
ÙÙÙÙ
78
ÙÙÙ
95
97
84
67
57
7
76
81
BMO S&P/TSX Equal Weight Banks ETF
728,697,786
Financial Services Equity
BMO Equal Weight US Banks ETF
434,392,872
Financial Services Equity
22
BMO Floating Rate High Yield ETF
505,869,184
Floating Rate Loans
56
BMO Mid-Term US IG Corp Bond ETF (CAD)
1,236,545,698
Global Fixed Income
2
BMO ST US IG Corp Bond Hedged to CAD ETF
430,769,332
Global Fixed Income
BMO High Yld US Corp Bd Hdgd to CAD ETF
1,174,435,600
High Yield Fixed Income
ÙÙÙ
93
73
43
iShares US High Yield Bond CAD-Hedged
592,902,275
High Yield Fixed Income
ÙÙÙ
85
61
31
iShares MSCI EAFE CAD-Hedged
1,243,880,208
International Equity
ÙÙ
88
75
57
ÙÙÙ
87
67
46
58
BMO MSCI EAFE Hdg to CAD ETF
956,280,553
International Equity
BMO MSCI EAFE ETF
943,002,719
International Equity
37
iShares Core MSCI EAFE IMI
465,904,379
International Equity
28
iShares S&P/TSX Global Gold
465,450,300
Precious Metals Equity
Ù
94
97
93
ÙÙÙ
94
67
60
75
100
iShares S&P/TSX Canadian Pref Share Adv
1,298,556,924
Preferred Share Fixed Income
BMO Laddered Preferred Share ETF
1,043,243,359
Preferred Share Fixed Income
iShares S&P/TSX Capped REIT
1,196,401,563
Real Estate Equity
Ù
94
98
98
20
iShares Core S&P 500 (CAD-Hedged)
3,048,486,198
US Equity
ÙÙ
91
89
81
65
BMO S&P 500 ETF (CAD)
2,341,615,280
US Equity
BMO S&P 500 Hedged to CAD ETF
918,237,135
US Equity
90
82
Vanguard S&P 500 ETF
682,268,599
US Equity
25
iShares Core S&P 500
575,750,383
US Equity
19
Vanguard US Total Market ETF
569,650,271
US Equity
25
Source: Morningstar Direct, Data as of September 30, 2015
100
25
ÙÙ
91
?
Largest Pooled Fund Performance
Name
AUM ($)
Morningstar Category
Morningstar
Rating Overall
%
Ran
k
Cat
1 Yr
%
Rank
Cat 3
Yr
%
Rank
Cat 5
Yr
%
Rank
Cat 10
Yr
%
Rank
Cat 15
Yr
State Street S&P 500® Idx NL Comm Trust
12,101,760,773
US Equity
SSGA MSCI EMkts Index NL QP Cmmon Trust
11,598,715,368
Emerging Markets Equity
RBC Bond Series O
11,409,629,527
Canadian Fixed Income
BlackRock CDN Long Bond Index Cl A
9,812,383,584
Canadian Long Term Fixed Income
ÙÙ
46
73
80
83
62
BlackRock EAFE Equity Index B
PH&N Bond Sr O
8,480,783,752
International Equity
ÙÙÙ
60
57
59
69
56
7,741,939,598
Canadian Fixed Income
ÙÙÙÙ
8
16
28
10
8
1832 Canadian Dividend
7,621,000,000
Canadian Dividend & Income Equity
SSGA MSCI EAFE Index NL QP Common Trust
7,203,771,805
International Equity
Manulife MMF Monthly High Income
6,257,582,000
Canadian Equity Balanced
ÙÙÙÙÙ
7
1
5
3
BlackRock US Equity Index B
5,993,384,026
US Equity
ÙÙÙÙ
33
37
24
34
38
PH&N Total Return Bond Sr O
5,846,794,840
Canadian Fixed Income
ÙÙÙÙ
14
13
17
18
7
CI Signature Income & Growth
5,837,409,000
Global Neutral Balanced
ÙÙÙÙ
90
60
29
3
Greystone Real Estate Fund
5,615,010,000
Income and Real Property
TD Emerald Cdn Long Bond Broad Mkt PF
5,546,257,963
Canadian Long Term Fixed Income
ÙÙÙ
50
46
61
Sprucegrove International Pool
5,451,100,000
International Equity
ÙÙÙ
90
88
80
RBC Canadian Dividend Series O
5,213,281,600
Canadian Dividend & Income Equity
RBC European Equity Ser O
5,185,688,039
European Equity
ÙÙÙ
80
1
25
Beutel Goodman Canadian Equity-PF
5,105,528,564
Canadian Equity
ÙÙÙÙÙ
53
12
TD Emerald Canadian Equity Index Fund
4,977,475,332
Canadian Equity
ÙÙ
72
RBC Global Corporate Bond-O
4,811,860,169
Global Fixed Income
ÙÙÙ
TD Emerald Canadian Bond Index Fund
4,781,111,183
Canadian Fixed Income
TD Emerald Canadian Bond PFT
4,739,761,541
Canadian Fixed Income
JF Canadian Equity Fund
4,726,900,000
Canadian Equity
34
5
15
9
3
85
83
83
80
83
52
38
ÙÙ
31
71
77
88
84
ÙÙ
26
56
69
76
70
ÙÙÙÙ
39
26
27
38
7
Page 49 nof 50
Manager Research Canada Observer | Q3 2015
Page 2 of 2
PH&N Long Bond Pension Trust Sr O
4,676,700,000
Canadian Long Term Fixed Income
ÙÙÙÙ
22
22
26
17
1
BlackRock CDN US Equity Index Class D
4,551,640,909
US Equity
ÙÙÙ
43
54
37
51
57
PH&N Short Term Bond & Mortgage Sr O
4,385,297,655
Canadian Short Term Fixed Income
ÙÙÙ
26
25
47
31
34
BLK CDN US Equity Index Non-Tax Cl A
4,136,143,017
US Equity
ÙÙÙ
36
39
24
42
43
PH&N Long Investment Grade Corp Bd Trust
4,116,819,999
Canadian Long Term Fixed Income
ÙÙÙÙ
91
7
16
39
BlackRock Universe Bond Index D
4,067,814,554
Canadian Fixed Income
ÙÙ
29
58
67
78
73
PH&N US Multi-Style All-Cap Equity Ser O
4,000,274,947
US Equity
GWL Canadian Real Estate
3,941,072,000
Income and Real Property
GWL Real Estate (GRA)100/100 (PS2)
3,941,072,000
Income and Real Property
GWL Real Estate (GRA)75/100 (PS2)
3,941,072,000
Income and Real Property
GWL Real Estate (GRA)75/75 (PS2)
3,941,072,000
Income and Real Property
BlackRock Canadian Equity Index Class D
3,911,797,378
Canadian Equity
ÙÙ
74
88
85
73
84
Hexavest World
3,858,090,000
Global Equity
ÙÙÙÙ
29
56
59
13
Mawer International Equity Series O
3,780,400,000
International Equity
ÙÙÙÙÙ
9
21
9
3
Standard Life Canadian Bond Index
3,745,831,115
Canadian Fixed Income
ÙÙ
34
68
76
82
79
CI Signature Select Canadian
3,742,834,000
Canadian Focused Equity
ÙÙÙÙ
58
56
46
23
12
RBC Canadian Short-Term Income Series O
3,648,013,249
Canadian Short Term Fixed Income
PH&N Investment Grade Corp Bond Tr Sr O
3,580,090,000
Global Fixed Income
ÙÙ
70
61
95
78
13
Beutel Goodman Balanced-PF
3,481,590,452
Canadian Equity Balanced
ÙÙÙÙ
41
40
39
20
25
Trimark Fund
3,475,394,000
Global Equity
ÙÙÙÙ
58
72
22
21
10
CI Portfolio Series Balanced Series I
3,441,139,000
Global Equity Balanced
ÙÙÙÙ
29
59
35
21
25
BlackRock Universe Bond Index A
3,382,626,763
Canadian Fixed Income
ÙÙ
28
58
66
74
67
BlackRock CDN MSCI EAFE Equity Index D
3,355,868,857
International Equity
ÙÙÙ
57
53
56
73
65
RBC Global Bond Ser O
3,345,397,195
Global Fixed Income
ÙÙÙ
43
39
62
Sun Life Money Market Series I
3,174,100,000
Canadian Money Market
57
61
58
CI Signature Corporate Bond
3,173,645,000
High Yield Fixed Income
ÙÙÙ
32
38
58
CI Signature Global Income & Growth
3,160,952,000
Global Neutral Balanced
ÙÙÙÙ
2
1
7
Source: Morningstar, Inc. Data as of September 30, 2015
38
page 50 of 50
Morningstar Manager Research Canada Observer | Q3 2015
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