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Transcript - 7 Secrets of Successful Investors


Yervant Aredjian: Good evening everyone, and welcome to tonight’s webinar entitled, “The 7 Secrets of Successful Investors.” My name is Yervant Aredjian and I’m joined by my college, David Keenan. We’re both Portfolio Managers with MD Private Investment Counsel, our high net worth discretionary portfolio management team and based in Ottawa. The presentation portion of today’s webinar should take around 30 minutes, and there will be a dedicated Q&A period at the end, but you can submit questions anytime. As always, there are no bad questions. We may not be able to answer all of your questions, but we certainly welcome all of them.

David and I are very excited to be here today and to share with you what we believe are seven essential tools to becoming successful investors. These seven secrets were put together by my Portfolio Manager colleagues and I, following two alarming observations from reading investment studies. The first observation is that the average investor manages to achieve returns much lower than any of the asset classes that are available to them. This slide displays returns on various asset classes for the 20-year period spanning 1995 to 2014. You’ll notice that the average investor managed to realize returns that are far lower than any of the returns on the individual asset classes. Some of the reasons for this are due to fees and taxes. However, the primary factors attributing to such low returns are behavioural traps and poor attempts at market timing. The second observation is that investors who work with financial advisors achieve greater levels of wealth compared to those who don’t. And this wealth gap only increases with time. We noticed here that an advised client, an advised investor, over a span of 15 years or more, realizes a net worth or assets, accumulates assets more than 2.7 times of those of his non-advised counterparts. It’s not that financial advisors are smarter or necessarily better at forecasting trends or returns. Good financial advisors will put together a plan, get a good understanding of an investor’s goals and tie-in investment strategies to achieve those goals. An advised investor is more likely to stick to this plan and not stray by making emotional decisions that are detrimental to his or her financial well-being.

So, what are these seven secrets that we’re talking about? We will obviously tackle each one of these in sequence, but here I want to share with you the summary of the seven secrets that we have identified when applied consistently, which will tilt the odds in your favour and lead to successful investment outcomes. The first, stay invested; the second, make rational decisions; third, value fee transparency; fourth, manage taxes effectively; fifth, manage debt effectively; sixth, make appropriate asset allocation decisions; and finally, seven, have an investment plan.

So, let’s jump right in and start with secret number 1: Stay invested. In other words, don’t try to time the market. Investors lose more of their potential returns not during, but after market decline. Investors typically sell out of assets or sell out of the market near the market’s bottom and typically do not return until much later on, having missed some of the opportunities on the eventual market rebound, when the markets have recovered. We notice this poor market timing phenomenon on the following slide, on this slide here, which tracks the return on the Canadian asset class from January 2003 to December 2013, a period which obviously spans the financial crisis. The blue line represents the returns on the TSX, or the Toronto Stock Exchange. The grey line represents fund flows into the asset class. Whenever the grey line is above the horizontal line which plots at zero, it means that there are net flows coming into the asset category, meaning investors are buying into the asset class. And when the grey line plots below the horizontal line, there are net outflows, meaning investors are selling. There are several things that become clear when we look at this slide. First, fund flows, the grey line, peaked in 2007 just before the financial crisis, after several years of strong gain on the Toronto Stock Exchange in early to mid-2000s. Then, the ensuing financial crisis and its sharp drops on the TSX, the blue line, which really goes into negative territory. Not surprisingly and in typical fashion, investors, at this point, at the worst possible time, bailed out on the market, sold their holdings and stayed out of the markets for an extended period of time. As the markets recovered, as the TSX recovered and rallied sharply starting in early 2009 and then generally stayed positive for a number of years—which, in hindsight, marked the beginning of a seven-year cyclical bull market—investors missed the first powerful section of that bull market and didn’t return until three years later, in late 2013, having missed three years of the six-year bull market. The following slide shows the opportunity cost of staying on the sidelines, i.e., missed returns. The investor who did nothing and rode out all the ups and downs of the markets through good times and bad, you can see, generated the highest ending wealth value relative to his counterparts, those who missed either some or potentially most of the rebounds. Investors who stayed out and missed the best week, the best five weeks, the best 10 weeks, did progressively worse, ending with the market value—the investor which had missed the best 10 weeks realized only a fraction of the investor who stayed in it over long term. The next slide shows us that yes, although investors generally miss out as a result of poor market timing—I mean, here we can see that investors have in fact fallen behind or lagged the returns that had been available to them across the board on all asset classes—we can see that investors do particularly worse in pure play sectors, where money is set to be more hot, chasing investment returns, than say, in balanced type funds which we see on the left-hand side of the graph. Balanced type investors, though have sacrificed some returns, have generally not sacrificed nearly as much as some of their other counterparts in other sectors of the market. The chief reason for this is that balanced investors have normally bought in to a portfolio construct and view their portfolio as a whole and are less vulnerable to falling victim of the perils of market timing. At this point, I will pass it on to David who will present secret number 2.

David Keenan: Thank you, Yervant, for kicking us off. By way of further introduction—like, the way you know that I’m originally from Scotland, you may have been able to tell that already. And I came over to Canada to attend university at the University of New Brunswick on the east coast, intending to be here for a year to do a master’s degree in economics. That was 25 years, one wife, three kids, one big dog and two cats ago. But I very much enjoy being here and love being in this wonderful country. In terms of secret number 2, one of the fundamental basics of economics is that people make rational decisions. However, we know that people make irrational decisions fairly commonly. And nowadays, there’s an overwhelming number of news and media sources. You have traditional media, social media—Twitter, Facebook, Gawker, to name a few—and they’re all competing for our attention. And this can lead to blurred lines between what is actual news and planted stories and advertisements, which can lead to sensationalism and inaccurate information. So “it must be true, I read it on the Internet” probably shouldn’t apply.

This next slide looks at the signs of irrational investment and these are emotions that we see constantly as we meet with clients. Ultimately, investing is easy in theory: you buy low and you sell high. But unfortunately, individual investors tend to do the opposite. And we can think back to an earlier period in history: the 1999-2000 period. Nortel represented 40% of the Toronto Stock Exchange index and investment was easy in the dot-com boom either, until the dot-com boom turned into the dot-com bust. So, when we look at the emotions of investing, as investments rise, we see optimism, excitement, thrill, euphoria, oftentimes at the top of the market is when investors think that they have it figured out and they can manage their own investments. And typically, they’re comfortable with a small downturn, but then when the markets really start to have a negative episode, then we see the strong emotions kicking in, the denial, fear, desperation, panic, capitulation, even potentially leading to despondency and the fear that the client’s portfolio value is going to disappear completely.

So, moving to the next slide, we’ll look at why investors are influenced by emotion. And this slide talks the behaviour of finance, which has become a huge growth area in the investment environment and is now a fundamental part of the curriculum of the chartered financial analyst designation, which is a designation which investment professionals like myself and Yervant have. And so, there’s a focus on cognitive and emotional biases and whether they should be accommodated for or educated around. So, behavioural finance seeks to explain a set of psychological biases that affect people’s investment decisions and to explain why market participants systematically make irrational errors contrary to the assumptions of rationality and profit maximization widely accepted in traditional finance. So, we have a few examples of common behavioural finance mistakes. So, anchoring is when investors cling to prior beliefs in the face of new information. A good example would be Nortel, which I mentioned previously. So, originally when Nortel spun out from Bell Canada, it was at a stock price of $76, it rapidly increased to $124 and people had that stock price anchored in their minds even as it continued to fall and it became evident that the fundamentals of the business were really quite weak. Recency effect is when investors overstep and extrapolate the probabilities of recently observed or experienced events because the memory is fresh. So, when we see a global incident like a terrorist attack, people can develop the mentality that the world is going to end and have the feeling that they need to sell everything and get out of the markets. Loss aversion is when investors make decisions in a way that allows them to avoid feeling emotional pain in the event of an adverse outcome. And we can see a tendency for investors to hold on to stocks that have lost significant amounts of value, because psychologically they feel if they never sell the stock they’ve never actually lost the money. Overconfidence is when investors overstate their ability and the accuracy of the information they have, whether that be from a next-door neighbour who has a hot stock tip or from feelings that we may have about an individual stock. Herding is when investors have a tendency to mimic the actions of a larger group because it feels safe, so that can be the thought process that “everybody’s getting out of the market, I’d better do the same and follow the herd.”

The next slide looks at the impact of this emotional decision-making on your returns. For most investors, downward pressure is more powerful than upward. So, negative events tend to elicit stronger and quicker emotional behaviour and cognitive responses than positive events. Hence, when market investments go sour, the so-called contagion of panic is even worse than the pressure to buy when markets are booming and overheated. So, this explains why investments can lose their value so fast. The sheer blind panic as people guess which side to avoid the loss on is often an irresistible and disastrous force. So, this chart illustrates the impact of fleeing the stock market during the bear market of 2008-2009. So, in this example, if an investor moved out of equities at the bottom of the correction around January 2009, then the difficulty becomes the postponing of the decision of when to get back into the markets and thereby clearing the portfolio recovery. So, the green line in the chart represents an investor getting out at the bottom of the market and investing fully in interest-bearing investments. So, by the end of the period around January 2015, having invested $100,000 in January 2007, it would barely be above $70,000 in portfolio value by the end of January 2015. Alternatively, the grey dotted line, if you exited the market for a year and then fully reinvested, it would still be below the original $100,000 value in January 2015. However, if you followed the ups and downs of the market and the volatility of the market and stayed invested, it would be well over $140,000 by the end of the period. And ultimately, we still see clients who got out of the market in the 2008-2009 period and have never reinvested and thereby have missed a significant period of growth in the markets from which they would ultimately have benefited. So, I will pass it back to Yervant for secret number 3.

Yervant Aredjian: Thank you, David. So, secret number 3: Value fee transparency. Know what you’re paying and try to keep your costs low. Fees expressed as a percentage seem pretty low but they are not, especially over long periods of time through the effect of compounding. A dollar paid in fees is a dollar that will not grow and participate over time. Also, for most asset classes, the fee hurdle is the single reason for underperformance relative to benchmarks. Of course, like any other product or service, there’s a cost to managing your money. Keep your fees low and make sure you’re getting value for what you’re paying. Let’s take a look at an example. This slide shows the growth of an assumed million-dollar investment growing at 4% over 20 years, which is plotted by the orange line, the top line. Though a 1% fee differential seems small, it is huge through the effect of compounding and this gap only grows over time and it grows exponentially. Over 20 years, the impact of having an extra 1% fee translates into a $392,000 reduction in ending wealth value.

So, what to look for in investment solutions when it comes to fees? Look for solutions with fees that are fully disclosed and transparent. With new regulations taking effect January 2017, called CRM2, the regulatory landscape when it comes to reporting fees will be highly standardized and uniform. In many cases, investors will see their fees expressed in dollars for the first time and in some cases, for certain investors, this will translate into sticker shock. Second, look for solutions where the management fees are competitive. In other words, don’t overpay. And third, look for solutions with management fees that decrease as assets under management increase. Get rewarded for your higher level of assets. The investment industry benefits from scale; make sure your solutions do, too. So, let me pass it back to David who will speak to secrets 5 and 6 before we continue with the rest of the presentation.

David Keenan: Thanks, Yervant. So, I think we’re actually on secret number 4. So, secret number 4 is: Managing taxes effectively. So ultimately, to hold on to even more of your return, investors need to manage for tax efficiency. So, for many investors it may be possible to reduce the impact of taxes by allocating investments strategically among taxable accounts and tax-advantaged accounts, such as tax-free savings accounts and RSPs. So ultimately, when we look at constructing an investment portfolio, we look at asset allocation but also from a tax-efficiency perspective, we look at asset location. So, at MD, we work with your accountant to try to minimize the impact of taxes and take advantage of tax-reduction opportunities. The key here is the tax reduction is legal, tax avoidance and tax evasion are illegal. On occasion, we do hear of some wacky tax and investment schemes which we strongly counsel against. So, if you ever hear the words “offshore” or “Panama Papers,” we would strongly advise that you avoid such considerations or options like the plague.

So ultimately, different investments have different tax treatments. So, for interest income in a non-registered account in the high-tax bracket, the tax will be around 50% whether that’s in a corporate account or a non-registered account. However, there is preferential treatment for dividend income and for capital gains income. So, you will often find that we recommend that clients orient their corporate accounts and non-registered accounts towards dividend-producing investments and capital gains-oriented investments. So, part of the rule basis there would be that registered accounts should be tilted towards investments and fixed income; non-registered and corporate accounts should be tilted towards equity investments. We can also consider the use of corporately owned universal life insurance for more conservative corporate investments and invest in tax-free savings accounts as a priority. Even though the Liberal government reduced the limit on tax-free savings accounts from $10,000 in 2015 to $5,500 in 2016, they are still very good options and very flexible accounts to take advantage of.

Secret number 5 is: Managing debt effectively. I will add the caveat that as a Scotsman, I am hugely averse to debt, so we like to say that Scotsmen are frugal rather than cheap. So, in terms of debt considerations, looking at the following debt decisions, we are looking at buying outright versus financing. So, paying in cash isn’t always the best, particularly for large capital expenses like homes or cottages or cars that need to be financed over a period of time. With interest rates being as low as they are, it can oftentimes be advantageous to borrow rather than to use cash that could be otherwise invested. For example, myself, my wife recently bought a new car at a financed rate of 0.9%, on the basis that we figured that we could do a lot better on the investment front with that money than we could…than 0.9%. When it comes to mortgages and considering variable rates as opposed to fixed rates, ultimately as long as you can tolerate some variability, history tells us that a variable rate mortgage will be better in the long term. When we consider savings versus debt repayment, again in a low interest rate environment, we don’t have to be in a rush to pay off debt. And ultimately, you can do both, so you can save and pay down debt at the same time and ultimately both saving and debt repayment achieve the objective of increasing net worth over the long term. This slide looks at the rolling three-year investment returns of different portfolios versus three-year mortgage rates. So, in this context, opportunity cost is the lost opportunity to earn investment returns in excess of debt service costs. So, from the graph, we can see that over the period 2009 to present, any form of investment, whether it be a balanced portfolio or even a conservative portfolio, would have exceeded the cost of financing regardless of the type of portfolio. So essentially, a three-year investment return has pretty much consistently beat three-year mortgage rates. So theoretically, in this example, it is better to invest than pay down debt. And again, I would add the caveat that I’m not necessarily a fan of running out and borrowing money to invest, but if you do have debt and it’s low interest debt, you don’t have to be in too big a rush in the current environment to pay it down. So, I’m going to pass it back to Yervant for secret number 6.

Yervant Aredjian: Wow, we’re already on secret number 6: Make appropriate asset allocation decisions. Your situation is unique; make sure your asset allocation reflects it. Choose an asset mix that aligns your capacity for risk, your willingness for risk and your need for risk. Capacity for risk refers to your ability to take on risk, other things being equal, meaning time horizon. An investor with a longer time horizon generally has a higher ability to take on risk than an investor with a shorter time horizon. The investor with a longer time horizon has more opportunities to recover from temporary market volatility and downside movement, has more flexibility and time to recover from temporary negative events. Willingness for risk refers to your risk tolerance, meaning your comfort level with short-term volatility, particularly downside volatility. And your need for risk refers to the returns you need to generate to meet your financial goals. If the return assumption in your retirement projections calls for a higher rate of return, then all things being equal, your asset allocation will need to be tilted towards a more growth orientation, i.e., more equities, in order to generate the types of higher returns to meet those goals. Goals-based investing takes into account the different purposes being sought and tailors a unique investment strategy to meet those goals. Your retirement money has a different purpose and timeline than your kids’ education money and should reflect these differences. Your asset allocations should reflect these differences. Also, make sure your portfolio is properly constructed, in other words that your portfolio is what we call “efficient.” An efficient portfolio is one that is diversified and adds additional asset classes that are less than perfectly correlated in order to produce a better risk-return outcome. We can see graphically here that portfolios B and C are superior to portfolio A. Portfolio B produces the same expected return as portfolio A with less risk, while portfolio C produces a higher level of return for the same level of risk. Make sure that your portfolio is efficient and optimized and lies on the efficient frontier, such as portfolios that are plotted as portfolios B and C. With that, I will hand it back over to David for secret number 7 and final comments before we open it up for Q&A.

David Keenan: Thanks, Yervant. So, secret number 7 seems quite fundamental. It’s to have an investment plan. So, without a plan, investors often build their portfolios bottom-up, focusing on investments piecemeal rather than on how the portfolio as a whole is serving their objectives. Investors can be going to evaluate a particular fund and if it seems attractive, they buy it, often without thinking about how or where it may fit within the overall allocation. While paying close attention to each individual investment may seem logical, this process may lead investors into making common mistakes such as chasing returns, market timing and reacting to market noise. An appropriate investment goal should be measurable and obtainable. Success should not depend on unrealistic investment returns or unrealistic saving and spending requirements. Without a plan, you wouldn’t have well-structured financial goals. Without well-structured financial goals, you wouldn’t have well-defined investment objectives. And without well-defined investment objectives, how can you invest successfully? As a wise person once told me: Fail to plan, plan to fail.

This next slide reminds us that markets are cyclical. They always have been and always will be. So, in order to invest successfully, you need to factor this into your plan. So it’s key to establish an idea to limits with respect to risky assets. Expanding exposure to risky assets during an expansion phase of the market cycle is fine, within set limits, and subject to disciplined rebalancing to avoid unwanted asset allocation drift. Rebalancing into risky assets is just as important at the bottom of the cycle as it becomes rich territory for early cycle gains. So, if we look at the chart, the point at which clients often want to increase investments to the market, when they’re euphoric about the performance of the market, is pretty much the point of maximum financial risk. And the point at which clients become despondent can be the point of maximum financial opportunity. A plan keeps investors anchored and allows investors to focus on the factors within their control. The most significant ways to derail your plans are behavioural: failure to rebalance, the allure of market timing and the temptation to chase returns. So, if we look at 144 years of market returns, markets have followed approximately what we would consider to be statistically a normal distribution. So, the chart shows us that over a quarter of the time, markets have had negative returns. So, we can’t ignore that markets are cyclical. A naïve investment approach would be to say: Well, let’s avoid the negative years. However, it’s impossible to do so and no market participant has ever been able to consistently time the market. Ultimately, the key to successful investing is time in the market, not timing the market. So, you want to ensure that you benefit from long-term average returns. And studies have shown that 10 of the best days of the market follow 20 of the worst days. So ultimately, to benefit from those 10 best days, you have to be invested even through the 20 worst days.

This slide talks about the elements of a successful investment plan, so having clear, measurable objectives and timelines; established constraints, especially in relation to risk-taking; realistic saving and spending targets; asset allocation targets; a well-defined rebalancing strategy; regular monitoring and evaluation. So, all of these components are key to the approach at MD Management and key to the construction of investment policy statements in the Private Investment Counsel. So, a strong financial plan keeps investors anchored and allows them to focus on the factors within their control. So, as stated earlier, the most significant ways to derail a plan are behavioural, so again: failure to rebalance, the allure of market timing and the temptation to chase returns. One of the key responsibilities of an MD Advisor is to build a customized financial plan for you, with a focus on your individual risk profile and time horizon and then monitor this plan and adjust it as your circumstances need it to change.

This slide shows what we refer to as the MD Expert Office. So, your financial consultant is at the center of the pie and the other quarterback, to use a sporting analogy, or a general practitioner, to use a medical analogy, and they’re then able to pull in experts and specialist as required, in addition to coordinating with external experts such as your lawyer and accountant. MD has a very robust process. We are the only company in Canada focused exclusively on understanding the needs of doctors and their families. We have a fantastic client base, a fantastic team that cares deeply about their clients and we look forward to continuing to help you with your financial and investment success. So, at this point, I’d like to thank you for joining in and for listening to us, and to invite questions and also to let you know that there will be a recording available of this presentation in the near future.

Yervant Aredjian: OK, so David, some questions are trickling in. We have received some questions. One of the questions is: Can you delve or get more into what we can expect from MD with the roll out of CRM2? CRM2, as I was saying earlier, is the new fee reporting regulation. In fact, there’s a fee component and there’s a return component to CRM2. Starting January 2017, fund firms will be required to report fees in a very standardized and uniform fashion, meaning all mutual fund companies will report fees in an identical fashion and the content of those reports will be identical, the flow of the reports will be identical. And investors will be able to compare very easily the fees on one offer vis-à-vis another. A key difference with CRM2 will also be the fact that fees will be broken out by dollar value as opposed to currently, where mutual fund fees are simply expressed as an MER percentage, as an annual percentage. So, fees going forward will be broken up as line items so you can see on an annual basis, based on the management expense ratio, how much a fund is costing you in dollars as well as percentage. The second component of CRM2, as I was saying, other than the fee reporting is as it relates to performance. Up to this point, investment companies have reported performance on what we call using a time-weighted basis, meaning mutual fund companies present the performance that the investments have produced, not necessarily the performance that the investor has realized. As we saw earlier, through market timing, either good or bad, investors, most times than not, generate returns that are below the returns available on the respective investments. So, going forward, CRM2 will stipulate that a money-weighted or dollar-weighted return needs to be presented, which is the true rate of return that the investor had experienced in that particular fund or product.

David Keenan: Yeah, thank you, Yervant. And just to add to that point about CRM2. There’s something we’re actually very happy about, from an investment industry perspective, because MD has always been very transparent in disclosure of the fees. For any clients that already deal with Private Investment Counsel, they’ve all already been aware of the dollar amount that they pay. So, we’re really looking forward to this, because it’s going to level the playing field in the investment industry, because some of our outside competitors haven’t been as good with their disclosure of fees. So, we do have some other questions coming in. One question we have is: What is the difference between eligible or non-eligible dividends? And I’ll maybe see if I can go back to this slide and the presentation in terms of taxes. So, eligible dividends are essentially dividends that are paid by Canadian publicly traded companies. So, dividends, you would receive from TD Bank or Royal Bank, dividends like that. Non-eligible dividends are essentially from non-publicly traded companies, so, for example, if you’re paying yourself a dividend from your corporation, that is considered a non-eligible dividend. So ultimately, CRA wants to integrate the tax treatment of income that comes from your corporation and income that you receive personally. So, that’s why non-eligible dividends have a higher tax rate than dividends from Canadian public companies, such as the big banks.

Yervant Aredjian: So questions are still coming in, there’s lots of questions coming in. One question being asked is the following: Other than reviewing a specific investment need, how varied are your investment portfolios? The investment portfolios at MD are truly global in nature, meaning we invest in a fully diversified portfolio of not only traditional asset classes, such as stocks and bonds, but also in alternative asset classes. By alternative asset classes, I mean complementary asset classes, such as infrastructure, real estate, private equity, global sovereign bonds. So, asset classes that don’t behave in a similar fashion to traditional investments. And again, this is—and we touched upon this in secret number 6—the goal here is to build efficient portfolios by combining some of these less than correlated asset classes to produce these efficient portfolio combinations. Also, recently we launched—due to member demand mostly, some investors are…I mean, there is a clear industry trend towards reducing carbon footprint and so on—we recently introduced earlier this year what we call our triple F, or Fossil Fuel Free Funds, which are carbon-neutral funds, with an opportunistic sleeve also, that invests a certain percentage into clean energy industries, which we believe presents very interesting opportunities going forward.

David Keenan: Thanks, Yervant. So, we have another question: Do we need to be a continuing CMA member to take advantage of MD financial advice, and if a member retires, can they continue to have assets in MD funds? So, the answer is MD advice is a component of CMA membership. However, when a member retires, I believe, the CMA member fee is significantly reduced. And we also have in place a program now where if a retired doctor has been a member of the CMA for, I believe, 30-35 years, that the fee is waived. So certainly, CMA membership is very important and is a component of receiving your advice.

Yervant Aredjian: OK, thanks, David. So, another question here coming in, that’s come in: Please review again what assets should be in an RSP versus a corporate account. And we have a slide we can go back to for this. Let me position the slide screen here to the right slide. OK. So generally speaking, what we want to do is for each individual investor, through our discovery process we want to make sure that we’re tailoring an asset mix or an asset allocation that suits—what we called earlier—their capacity, their tolerance, their willingness and their need for risk. Once we do that and we land at the appropriate asset allocation, then the next layer is what we call “asset location.” Generally speaking, we favour more tax-inefficient, or asset classes that are taxed more heavily, such as fixed income, inside the RSP and we generally favour asset classes that get more favourable tax treatment such as dividend income and capital gains inside the corporation, again keeping the overall asset mix within that suitable target. The important thing is to have a suitable target overall and as a second consideration, use asset location strategies wherever possible to shelter more of the interest income inside the RSPs and the capital gains and dividends inside the corp.

David Keenan: Thanks, Yervant. So we have great questions coming in. So, another question: Do we still have time to invest corporate assets into universal or whole life insurance, and should we? So, there was a slight change in the budget in the treatment of corporately owned universal life insurance policies. So, without either of us being insurance experts, I can answer that there is a slight change. So, it can be beneficial, if in you’re in the process of getting corporately owned life insurance to do it before year-end. However, corporately owned universal life insurance or whole life, it’s still going to be advantageous going into the future, post-January 1, 2017. It’ll be slightly more advantageous if you’re able to put a policy in place, and we’ve seen a lot of clients putting policies in place, before the end of the year, recognizing that we’re getting to the end of the year. But it doesn’t mean that it’s not advantageous after January 1, 2017. So, we’d recommend that you talk with your MD Financial Consultant and bring the MD Insurance Consultant into that picture as well.

Yervant Aredjian: OK, so lots of questions here. Another question that just came in: With the expectation of rising interest rates in bond yields, what’s your advice for fixed income holdings short, mid- and long term? Bond holdings are a key component of our portfolios and our interest rate outlook regardless we will always have an important allocation to bonds and to fixed income. They form an important component of our portfolios. They provide capital preservation and stability, and again correlation offsets to equities. So, bonds will always be a part of our portfolios. However, that being said, there are some short-term risks to bonds, meaning bonds will decline in value if we see a spike in interest rates. But we expect those declines to be temporary. I mean, the value of a bond will react negatively when interest rates rise, but as those bonds mature, barring a default, those bonds will keep appreciating and will mature or—at face value, in which case the bonds will be reinvested with a higher coupon or higher yield when they’re rolled over. So yes, there is a short-term risk to bonds with rising interest rates, but we expect that risk to be short and temporary as bonds recover as they near maturity and then they’re rolled over.

David Keenan: And the other component of that, Yervant, is that bonds really provide that safety cushion to a portfolio. And we saw that recently when the Brexit vote happened in the United Kingdom, all of the equity assets across the globe took a sharp drop but the value of bonds actually went up. So, we’ve actually seen really a type of returns on bonds over the last two years. So, it wouldn’t be appropriate for the client to completely exit bonds, even if we’re going to go through a period of slightly increasing interest rates.

Yervant Aredjian: OK, yes, thanks, David. There are lots of questions here. Let’s take a question on another topic, this comes up very often: What are ETFs or exchange-traded funds? This is a short answer to a long one, but exchange-traded funds are passive vehicles that aim to mimic or mirror the returns on a stock index or a benchmark, as opposed to an active manager whose goal is to beat or surpass the benchmark. For example, if we take the Canadian or the American example, in Canada the standard benchmark against which investment managers are measured is the TSX, or the Toronto Stock Exchange; in the U.S., it’s the S&P 500. An ETF, broadly speaking, aims to simply mimic the return on those benchmarks and on a net-of-fee basis will always track, the returns will track close to those benchmarks, less the fees. For an active manager who’s trying to beat those respective benchmarks, at times there will be higher tracking error, with the goal of adding value over the long term.

David Keenan: Yes, and I think the key there is that we believe in an active management approach. Part of the rationale for the recent growth in exchange-traded funds has been it’s well documented that more than 50% of mutual fund managers do not manage to outperform the index. So, our advice in that regard would be to avoid those fund managers who don’t outperform the index. And it’s going to vary over time, because it’s not always possible for the manager to consistently track above the index, but the guarantee with an exchange-traded fund, even though they can be relatively cheaper, is that they’re going to consistently track behind the index.

Yervant Aredjian: The cost is definitely a factor. When it comes to the ETFs, they’re generally much cheaper, but they’re also much cheaper for a reason: they’re designed for the do-it-yourself investor that’s going to do their own research and their own trading and build their own asset allocation and build their own portfolio. So, it’s definitely not for everyone. ETFs are really mostly geared towards the do-it-yourself investors.

David Keenan: And that’s an interesting point, Yervant, because part of what we’ve seen recently in some of the financial media is ETFs where you can add on an extra cost, an asset allocation or advice component, which kind of defeats the original purpose of having an ETF and really speaks to the value of actually having active management. So, one of the questions we have as well is: Are you preparing for a market correction in the near future? So, it’s an interesting question. The short answer would be no. Even though equities have done very well in the past six or seven months of the year, we’re not overly concerned about evaluations. If we look at the U.S., more than 70% of companies recently reporting earnings have come in with earnings above analyst expectations. So, we continue to be quite optimistic about the outlook for the US. Ultimately, there was some volatility around the market with the presidential election. We would have fully expected to see a drop in the markets post the U.S. election, an immediate reaction to the outcome of the election. But we haven’t actually seen that. If anything, we’ve seen the opposite, we’ve seen what they’ve been referring to in the financial media as a “Trump bump.” So, even though we’re not really sure of what the policies of President-Elect Trump are going to be, he has stated that he’s looking to increase infrastructure spending and potentially lower taxes. So, there is a feeling of relative continued optimism around the outlook for U.S. equities. So, we remain confident in the outlook both for U.S. equities and Canadian equities, less so international equities, they will continue to struggle, but we’re not overly concerned currently about market evaluations.

Yervant Aredjian: We’re nearing the end of the questions. We’ve tackled many of them. Here’s another one. It’s a little ambiguous, but I think I know what the question is trying to get at: Can I convert my MDM mutual funds in a RRIF to an annuity? MD mutual funds can be held in all types of accounts. They can be held in RSPs, in RRIFs, in TFSAs, in non-registered accounts, in all types of accounts. And if you hold an account that’s an RRSP, that account can, in fact, at age 71, must be converted into a RRIF, meaning a Registered Retirement Income Fund and yes, you can continue to hold your MD mutual funds inside a RRIF just like you held those in your RRSP. It’s simply a conversion whereby you’re not contributing anymore and you will be required to start drawing money in the RRIF in retirement. So yes, MD funds are eligible and can be held in all types of different accounts.

David Keenan: Yes, and I think part of the question here was about conversion to an annuity, so receiving a fixed income stream. So, annuities can play a role in a retirement portfolio. I would say the challenge in the current environment is that we continue to be in a very low interest rate environment, which makes it less attractive to go into an investment like an annuity. But essentially, you’re not going to benefit from market growth and you’re tying in at a very low rate of guaranteed retirement in the current environment. We have another question which we’re going to tackle: Why do we continue to have such a significant focus on Canadian equities versus U.S.A. or others? So, we do have an inherent Canadian equity bias because we live in Canada, we work in Canada, we deal in Canadian dollars and you know, for this year, that has actually worked out very well and we’re actually even overweight relative to the normal Canadian bias at the moment. So, the Canadian equity market is one of the leading equity markets on the globe this year. It’s up around 15 or 16% year-to-date, having got off to a very negative start for the year, as most of the equity markets do. So, we’re still committed at this point to that bias. And we still have a firm belief in the outlook for Canada. And I should also say that we’re actually overweight to normal position for the U.S. equities just now, so as I said earlier, we continue to be quite favorable on the outlook for U.S. equities at the moment as well.

Yervant Aredjian: And this whole country bias that you talk about, David, is a global portfolio construction phenomenon. It’s not something that’s only specific to MD. Investors all over the globe favour their home country when it comes to asset allocation, because as you said, their assets, their liabilities are all denominated in their local currency, so whether you’re in Canada or in other relatively small economies around the world, whether you’re in Sweden or Norway or Belgium, you would have a disproportionate amount of your portfolio allocated to your home country just because of those factors.

David Keenan: Yes, that’s a great point. And also, as we compared investors’ portfolios at other institutions, as we bring those statements in for review, I am oftentimes surprised that some investors have close to 100% Canadian exposure in the right-side investments. So really, at-home bias isn’t necessarily as strong as we may believe or as clients may have on a self-managed basis.

Yervant Aredjian: So let’s take one final question before we wrap up. And the question asks: In general, and because of how they’re structured, should a TFSA be invested more aggressively and an RSP more conservatively? The answer here is: It depends. And it depends what the purpose and the goals are for the TFSA. If it’s a short-term savings vehicle where you’re accumulating cash for unforeseen or short-term purposes, like a purchase of a car or a vacation or an emergency fund, then you want to have your TFSA in safer investments. However, if the TFSA’s goal is long term and it’s part of your retirement portfolio, then it makes all the sense to be extremely aggressive in the TFSA and to grow the TFSA as much as possible, because drawing from the TFSA later on is completely tax-free as opposed to the RSP which is considered income when you begin drawing. So, any growth of the TFSA, as much as an investor is able to grow it—for example, the current lifetime limit on the TFSA is $46,500. If you grow that $46,500 to, let’s say, $100,000, $150,000, by some very high growth investment strategy, all of that growth becomes tax free when you’re taking the money out.

David Keenan: So thank you everybody for the questions. It was great to see such interaction and to know that we’ve got such engaged participants and clients. So, thank you for joining us this evening. We hope you found this webinar interesting and useful. It will be recorded and available in the future and again, thank you very much, from myself and Yervant. It’s been a pleasure talking to you this evening.