Managed Money Report Fall 2013 Edition Mutual Funds & ETFs Inside this Report Industry Happenings ..................... 4 New Product Launches ................. 4 Fund Spotlight: Invesco European Growth Class ................................. 5 ETF Trader .................................... 7 Off the Cuff .................................... 8 Quarterly UPDATE: Focus List of Mutual Funds................................. 8 Appendix A: Raymond James Ltd. Mutual Fund Focus List ................. 9 Appendix B: Fund Selection Process ....................................... 11 Appendix C: ETF Reference Sheets ......................................... 13 Appendix D: Flows, Assets, and Performance ................................ 14 Jordan Benincasa, LL.B, MBA Mutual Fund & ETF Research Dude, Where’s My Alpha? Known as the steel curtain, the front four defensive linemen guided the Pittsburgh Steelers to four Super Bowl wins during their dynasty years of the 1970s. A decade later, the Washington Redskins won three championships thanks to clever coaching by Joe Gibbs. Led by all-star quarterback John Elway, the Denver Broncos’ super-charged offense secured back-to-back Super Bowls in 1998 and 1999. Like football, there’s more than one way to win at investing. However, a key factor is to identify your alpha proposition (i.e. the ability to outperform the market) and then apply it consistently throughout the investment process. In this report, we highlight three investment funds that have outperformed their respective benchmark and peer group by sticking to their alpha-generating strategy. Greek Symbol for Alpha Source: Shutterstock.com Cont’d to Page 2 Words of Wisdom “Well, it's no trick to make a lot of money... if all you want to do is make a lot of money.” - Mr. Bernstein (Citizen Kane, 1941) 3 Stats That Matter Now 1. According to Statistics Canada, Wood Buffalo, Alberta, which includes Fort McMurray, has by far the highest total median family income in Canada, at C$175,230. Conversely, the lowest median income in Canada is Campbellton, New Brunswick, at C$52,160. 2. The first tweet was sent in San Francisco, California, by Twitter creator Jack Dorsey on March 21, 2006. 500 million tweets are now sent daily. Twitter is scheduled to IPO on November 15 th . 3. The United States has overtaken Saudi Arabia to become the world's biggest oil and gas producer this year, averaging 12.1 million barrels per day thanks to technological advancements in fracking and increased output from its shale plays.
Transcript
Managed Money Report
Fall 2013 Edition Mutual Funds & ETFs
Inside this Report
Industry Happenings ..................... 4
New Product Launches ................. 4
Fund Spotlight: Invesco European Growth Class ................................. 5
ETF Trader .................................... 7
Off the Cuff .................................... 8
Quarterly UPDATE: Focus List of Mutual Funds ................................. 8
Appendix A: Raymond James Ltd. Mutual Fund Focus List ................. 9
Appendix B: Fund Selection Process ....................................... 11
Appendix D: Flows, Assets, and Performance ................................ 14
Jordan Benincasa, LL.B, MBA Mutual Fund & ETF Research
Dude, Where’s My Alpha? Known as the steel curtain, the front four defensive linemen guided the Pittsburgh Steelers to four Super Bowl wins during their dynasty years of the 1970s. A decade later, the Washington Redskins won three championships thanks to clever coaching by Joe Gibbs. Led by all-star quarterback John Elway, the Denver Broncos’ super-charged offense secured back-to-back Super Bowls in 1998 and 1999.
Like football, there’s more than one way to win at investing. However, a key factor is to identify your alpha proposition (i.e. the ability to outperform the market) and then apply it consistently throughout the investment process. In this report, we highlight three investment funds that have outperformed their respective benchmark and peer group by sticking to their alpha-generating strategy.
Greek Symbol for Alpha
Source: Shutterstock.com
Cont’d to Page 2
Words of Wisdom
“Well, it's no trick to make a lot of money... if all you want to do is make a lot of money.”
- Mr. Bernstein (Citizen Kane, 1941)
3 Stats That Matter Now
1. According to Statistics Canada, Wood Buffalo, Alberta, which includes Fort McMurray, has by far the highest total median family income in Canada, at C$175,230. Conversely, the lowest median income in Canada is Campbellton, New Brunswick, at C$52,160.
2. The first tweet was sent in San Francisco, California, by Twitter creator Jack Dorsey on March 21, 2006. 500 million tweets are now sent daily. Twitter is scheduled to IPO on November 15
th.
3. The United States has overtaken Saudi Arabia to become the world's biggest oil and gas producer this year, averaging 12.1 million barrels per day thanks to technological advancements in fracking and increased output from its shale plays.
Managed Money Report Fall 2013 | Page 2 of 16
Mackenzie Ivy Foreign Equity
Abiding by a high-quality and low-turnover approach, the research team at Ivy favours large-cap companies with clean balance sheets, sustainable competitive advantages, and high profit margins. In addition, management maintains an overweight to defensive sectors. Almost one-third of the portfolio is comprised of consumer staple and healthcare stocks, making the fund a nice complement to a resource-heavy Canadian equity fund.
As a result of this conservative investment approach, Mackenzie Ivy Foreign Equity has exhibited low beta throughout its 23-year history and, in turn, has weathered past market downturns with relative equanimity. 2008 is a case-in-point. The fund posted only a small loss of 6.7% while the MSCI World CAD Index and category median hemorrhaged badly, suffering losses of 25.4% and 29.5%, respectively.
Maintaining a high-quality bias has not only kept the fund’s volatility in check but has propelled it into first quartile territory over the long term, trouncing its peers and the market. From the market’s former peak in May 2000, Mackenzie Ivy Foreign Equity has generated a cumulative return of 89.1% versus the Index’s tepid 7.4% gain. To top it off, the fund’s 10-year beta and standard deviation of 0.58 and 8.9, respectively, is among the lowest among 163 funds in the global equity category.
Dynamic Power American Growth
Noah Blackstein, lead manager of Dynamic Power American Growth since its July 1998 inception, employs an aggressive growth strategy that has delivered superior results versus the S&P 500 Index. Unlike many portfolio managers who rely on a buy-and-hold approach, Blackstein trades aggressively around core positions to add additional alpha. Over the past five fiscal years, turnover has averaged 390%.
In assessing individual securities, valuation considerations are secondary to a company’s ability to grow its top and bottom line. In particular, Blackstein screens for companies that show positive momentum with respect to earnings, sales, and earnings surprises. Once a short list has been created, Blackstein will model each company to determine its intrinsic value and invest if there is substantial upside opportunity. Blackstein runs a high-conviction portfolio with 20 to 35 stocks and heavy exposures in a few sectors. For instance, information technology and consumer discretionary currently represent 76% of total assets.
Despite exhibiting higher volatility, Dynamic Power American Growth has produced excellent long term relative and absolute results. For example, a $10,000 investment at the fund’s July 23rd 1998 inception would be worth $27,430 (ended September 30, 2013). In contrast, an investment in the S&P 500 Index over the same period would be worth $13,710.
Since Inception C$ Growth Chart
Source: Morningstar Inc.
Mackenzie Ivy Foreign Equity - Top 10 Holdings
Company Country Sector %
Hyundai Motor Co South Korea Automobile Manufacturers 5.5
Pearson PLC United Kingdom Publishing 4.8
Bed Bath & Beyond Inc United States Home Furnishing Retail 4.0
Omnicom Group Inc United States Advertising 4.0
Admiral Group PLC United Kingdom Property & Casualty Insurance 3.9
Danone SA France Packaged Foods & Meats 3.9
WM Morrison
Supermarkets PLCUnited Kingdom Food Retail 3.7
Becton Dickinson and Co United States Health Care Equipment 3.5
Danaher Corp United States Industrial Conglomerates 3.5
Progressive Corp/The United States Property & Casualty Insurance 3.5
Source: Mackenzie Investments
As of September 30, 2013
Managed Money Report Fall 2013 | Page 3 of 16
Manulife Strategic Income
Tactical asset allocation and currency selection are the primary alpha drivers for Manulife Strategic Income, a bond fund with a wide mandate to invest in high-yield debt, investment-grade credit, foreign sovereign debt, emerging markets bonds, US government securities, and floating rate notes.
Lead manager Dan Janis takes a macro approach in determining the fund’s foreign currency exposure and allocation to the aforementioned fixed income asset classes. In particular, Janis evaluates macro factors such as inflation, the cyclical factors of the business cycle, monetary and fiscal policy, capital structures, balance of payments, political stability and interest rate levels.
In terms of portfolio positioning, management believes that US high yield debt offers attractive returns given that corporate balance sheets are strong, cash balances are large and debt maturity schedules are favourable for the coming year. As a result, default rates should remain low, which bolsters the attractiveness of high yield bonds. In regards to currencies, Janis sees non-Japan Asia offering the most attractive opportunity set.
The fund has done well under this approach. As the table below indicates, the fund has outperformed its benchmark (Barclays Capital Multiverse Total Return Index) and delivered strong risk adjusted results over the short and long term.
Jordan Benincasa, LL.B, MBA Mutual Fund & ETF Research
Risk and Return Metrics
Name 1 Yr Ret %2 Yr Ret
Annl %
3 Yr Ret
Annl %
5 Yr Ret
Annl %
Since
Inception* %
3 Yr Standard
Deviation %
5 Yr Standard
Deviation %
Manulife Strategic Income 3.3 6.6 4.1 8.4 6.6 4.1 6.5
BlackRock Canada plans to enter mutual fund industry. BlackRock Canada, best known for managing the iShares ETF lineup, announced that it intends to launch a suite of mutual funds, including a diversified monthly income fund and an all-bond portfolio. Full Story
CI Financial scoops up Marret Asset Management. Mutual fund manufacturer CI Financial announced that it acquired a majority stake in boutique bond shop Marret Asset Management, founded by Barry Allan in 2001. In particular, CI purchased 65% of Marret along with an option to acquire the remaining stake after three years. Full Story
Dynamic Funds snags global equity manager from Sentry Investments. With only a year under his belt at Sentry, award-winning portfolio manager Dana Love left the firm to join Dynamic Funds in mid-September. While it’s unclear why Love left Sentry, Dynamic has openly stated that Love will be an integral part in growing the firm’s global equity platform. Full Story
New player in the Canadian ETF space. In September, Purpose Investments joined the fray by launching five ETFs, including a number of actively managed ETFs sub-advised by boutique hedge fund manager Breton Hill. Purpose’s founder is Som Seif, who headed Canadian ETF manufacturer Claymore before it was sold to iShares BlackRock Inc. in March 2012. Full Story
New & Notable Product Launches
Mutual Funds
Cambridge Global Dividend abides by a flexible mandate that invests in dividend-paying companies around the world. The fund is managed by Bob Swanson, principal and portfolio manager at Cambridge Global Asset Management, a Boston-based wealth management firm specializing in equity-based strategies.
Dynamic US Value Balanced focuses on the US by investing in a mix of equity and fixed income securities. Value manager Cecelia Mo will manage the stock sleeve while Marc-André Gaudréau is responsible for running the fund’s fixed income component. Currency hedging will be implemented to reduce volatility.
RBC Emerging Markets Small-Cap Equity invests primarily in equity securities of small-cap companies located or active in emerging markets. Philippe Langham is the lead manager of the fund. After a long stint at Société Générale Asset Management, Langham joined RBC in 2009 to run emerging markets strategies for both retail and institutional clients.
ETFs - Canada
First Trust Senior Loan ETF (CAD-Hedged) (FSL-T) seeks to provide a high level of income by investing primarily in a diversified portfolio of senior floating rate loans and debt securities rated below-investment grade. FSL is actively managed by Bill Housey, who runs a similar ETF listed in the US.
Horizons S&P/TSX Capped Financials Index ETF (HXF-T) seeks to replicate the performance of the S&P/TSX Capped Financials Index through a total return swap structure that allows for lower management fees and greater tax efficiency.
Purpose Tactical Hedged Equity Fund (PHE-T) uses a multi-factor, fundamental, rules-based portfolio selection strategy to select long portfolio securities from a universe of North American equities while dynamically hedging its equity exposure through futures contracts.
Vanguard U.S. Dividend Appreciation Index ETF (VGG-T) seeks to track the NASDAQ US Dividend Achievers Select Index, which provides exposure to US companies that have a record of increasing dividends over 10 consecutive years or more.
ETFs - US
FlexShares STOXX Global Broad Infrastructure (NFRA-US) is a global equity portfolio consisting of companies in traditional infrastructure industries such as utility, energy, and transportation. NFRA takes a more expansive approach to infrastructure as it holds companies in the telecom, healthcare, and waste management industries.
WisdomTree Emerging Markets Consumer Growth (EMCG-US) provides exposure to a portfolio of stocks selected that best exemplify growth trends for emerging market consumers and their local economies.
Focus List Spotlight: Invesco European Growth Class
Investment Objective
Invesco European Growth Class, constituent member of the Raymond James Mutual Funds Focus List, seeks to achieve long-term capital growth by investing primarily in a diversified portfolio of companies in developed European countries.
Portfolio Managers
Matt Dennis, Borge Endresen, Jason Holzer, Richard Nield, Clas Olsson
Key Points
The fund is managed by a cohesive and experienced investment team. All five managers have been running money together as a team for over a decade.
The investment team combines a fundamental bottom-up approach with top-down input in order to maximize its exposure to the most attractive countries, sectors and companies. In particular, management abides by an investment process coined as ‘Earnings Quality Valuation’ (EQV): identifying companies that have experienced, or exhibit the potential for accelerating or above-average earnings growth (E); analyzing the quality of the business and potential sustainability of earnings (Q); and looking for reasonable valuation (V).
The portfolio is typically comprised of 70 to 80 stocks, with each individual top holding representing roughly 3% of assets. Cash levels usually range from low to mid-single digits, but can increase at times if the managers can't find enough stocks that meet their standards.
The fund exhibits strong long-term performance, producing top quartile returns within the European equity category over the long term. Over the past five years, the fund has generated an annualized return of 7.2%, outpacing the MSCI Europe Index by 120 basis points annually. The fund matches the Index’s returns over the past 10 years but with less volatility.
Top Investment ideas:
Aryzta AG
Why they like it:
A well-diversified specialty bakery business in terms of regions (N. America and Europe account for approximately 45% of sales each) and channels (28% of sales are in quick service restaurants such as Tim Hortons/McDonalds/Starbucks; ~28% of sales are in large retail; ~17% of sales in convenience retail) and owns a majority stake in Origin Enterprises PLC, a leading agri-services business.
Aryzta's par-bake technology (baked goods prepared at a centralized location, frozen, and then shipped out to retailers) introduces industrial economics to retailers without compromising taste and quality for end consumers, which allows Aryzta to outgrow the overall baked-goods market. All told, Aryzta should outgrow the global bakery business by about 2-4% per year, for total organic sales growth in the 4-6% range. Over the past five years, Aryzta grew sales at 11%/yr.
While Aryzta has made many acquisitions over the past decade, its key focus now is on integrating these businesses to drive higher returns. The company is more than half-way through this process, so going forward it should see more of the benefits and less of the one-time optimization costs. This should lead to super-charged earnings over the next two years.
WPP PLC
Why they like it:
WPP is the number one advertising agency company in the world by billing and revenue with a highly diversified portfolio with greater than 30% exposure to fast growing markets and approx. 33% exposure to digital advertising. These two segments are growing in the high-single-digit to low-double-digit range which means that WPP is well positioned to post mid-single-digit organic growth over the next 3-5 years.
WPP has recently increased its target of generating revenue from fast growing and digital markets to 40%-45% of revenues vs 35%-40% of revenues over the next five years. They see potential for WPP to expand margins by roughly 50 bps/pa through a combination of operating leverage and solid cost controls.
Managed Money Report Fall 2013 | Page 6 of 16
Invesco European Growth Class: Portfolio Characteristics
Portfolio Multiples
Portfolio Stats Fund Benchmark
Dividend Yield % 3.5 3.7
P/E 12.9 12.6
P/B 2.0 1.6
P/S 1.0 1.2
ROE % 19.7 16.4
3 Year EPS Growth % 7.8 7.6
Performance
Time Periods Fund Benchmark
YTD % 18.7 19.8
1 Yr % 25.5 29.8
2 Yr Annl % 19.1 19.9
3 Yr Annl % 10.5 8.8
5 Yr Annl % 7.2 5.3
10 Yr Annl % 6.1 5.6
Top Five Holdings
Company Name Weighting %
ARYZTA AG 2.9
Compass Group PLC 2.1
MorphoSys AG 2.0
SAP AG 1.9
British American Tobacco PLC 1.9
Sector Allocation
GICS Sector Weightings %
Consumer discretionary 19.4
Industrials 18.1
Financials 15.6
Short-term investments, cash
and other net assets10.7
Consumer staples 10.4
Energy 8.8
Health care 7.8
Information technology 4.0
Materials 3.3
Telecommunication services 1.1
Utilities 0.9
Top Five Countries
Region Weightings %
United Kingdom 26.2
Switzerland 16.6
Germany 13.0
France 5.9
Sweden 5.6
Source: Invesco
Benchmark: MSCI Europe Index
As of September 30, 2013
Managed Money Report Fall 2013 | Page 7 of 16
ETF Trader
iShares U.S. Industrials ETF (IYJ-US) (US$93.29): A 5-10% Bounce?
iShares U.S. Industrials ETF (IYJ-US) tracks the components of the Dow Jones U.S. Industrial Sector Index. Top holdings include General Electric (GE-US), Boeing (BA-US), 3M (MMM-US) and Union Pacific (UNP-US).
Technical indicators point to a potential 5-10% rally from current levels. Typically, a breakdown of the MACD through the centerline is a bearish signal; however, IYJ has reliably bounced from near centerline levels (second panel) as it simultaneously hits support zones within an uptrending channel. The shares have also consistently rallied off the 100-day MA at least five times since December 2012 (top panel). The recent increase in volume (lowest panel) as well as the relative strength breakout vs. the S&P 500 (third panel) are also bullish.
The next move potentially targets US$96-97 if the shares can move towards the top-end of the channel range. Any break down through the 100-day MA or the channel bottom may negate this potential short-term rally.
Doug Rowat Equity Specialist, VP Research and Strategy
For your reading pleasure, we’ve compiled a list of timely and thought-provoking reports, articles, investor letters, white papers, and commentary from various third-party sources over the past quarter.
Assessing the Valuations in Various Emerging Market Strategies WisdomTree ETFs explores relative valuation and dividend yields of emerging markets securities.
Four Tips for Trading ETFs The Financial Post identifies four important things investors need to know when trading ETFs.
Inside the Fall of BlackBerry Globe and Mail’s Sean Silcoff takes an in-depth look at BlackBerry’s fall from grace. Over the past five years, the smartphone maker lost over C$75 bln of market value.
Julian Robertson on What He Looks for in Hedge Fund Talent Legendary hedge fund manager Julian Robertson of Tiger Management touches on some of the key traits he looks for in hiring talent.
Survival of the Fittest? Bond manager Bill Gross discusses his thoughts on Fed tapering and its impact on bond markets.
The Hardest Financial Question for Most People To Answer Ted Rechshaffen of the Financial Post proposes that investors take an introspective look at their spending habits.
Quarterly Update: Raymond James Focus List
The Raymond James Focus List of Mutual Funds is a compilation of best-in-class mutual funds among their respective category peers. A fund must adhere to specific criteria and undergo thorough due diligence in order to be added to the Focus List. Please refer to the Fund Selection Process document for more information on how funds are chosen for the Focus List.
Key Points
The Focus List is comprised of 32 funds. Six funds are rated five stars by Morningstar, 13 funds rated four stars, 8 funds rated three stars, and 4 funds rated two stars.
The average Focus List fund has outperformed its respective category by 256 basis points since being added to the Focus List.
Dynamic Power American Growth (Series A) is the best performing fund for the quarter, rallying 20.3% over the past three months ending September 30th. Buoyed by a strong US market, the fund benefitted from strong security selection in growth names such as network security provider Sourcefire (FIRE-US) and sportswear apparel maker Under Armour (UA-US).
Templeton Global Bond is the worst performing fund for the quarter, losing 1.4% in value. The fund’s above-average exposure to emerging market debt and FX hurt performance while an underweight position in the euro detracted from relative performance.
The following Focus List funds are members of the Freedom Enhanced Income Portfolios: BMO Global Dividend Class, IA Clarington Canadian Small Cap, TD High Yield Bond and Templeton Global Bond
Changes
• ADDED: Westwood Emerging Markets (advisor access only) For more information on the Focus List, click here to visit Mutual Funds & ETFs homepage (advisor access only).
Appendix A: Raymond James Ltd. Mutual Fund Focus List
The Raymond James Ltd. Mutual Fund Focus List is a collection of best-in-class mutual funds among their respective category peers. A fund must adhere to specific criteria and undergo thorough due diligence in order to be added to the Focus List. Please refer to Appendix B for more information on how funds are selected for the Focus List.
Fixed Income
Balanced
Domestic Equity
TYPE FUND MANAGER STYLE/STRATEGY FUND CODE (Front End/F Class)
Canadian Fixed Income Fidelity Canadian Bond Brian Miron, Jeff Moore Credit, Sector FID233/FID633
PH&N Total Return Bond William John, Stephen Burke Credit, Sector, Duration PHN6340/PHN5340
TD Canadian Bond Geoff Wilson, Satish Rai Credit, Sector, Duration TDB306/TDB406
Global Fixed Income BMO Global Strategic Bond Curtis Mewbourne (PIMCO) Credit, Sector, Duration, Currency GGF99736/GGF95736
Manulife Strategic Income Dan Janis, Tom Goggins, John Iles, Barry Evans Credit, Sector, Duration, Currency MMF559/MMF659
Templeton Global Bond Michael Hasenstab Credit, Sector, Duration, Currency TML704/TML257
High Yield TD High Yield Bond Gregory Kocik, Nicholas Leach Credit TDB822/TDB446
TYPE FUND MANAGER STYLE/STRATEGY FUND CODE (Front End/F Class)
Canadian Balanced Dynamic Dividend Income Oscar Belaiche, Michael McHugh Value DYN206/DYN254
Global Balanced CI Signature Income & Growth Eric Bushell Blend, Macro CIG6116/CIG6416
Emerging Markets Balanced Capital Int’l Emerging Markets Total Opportunities Laurentius Harrer, Luis Oliveira, Shaw Wagener Multi-manager CIF842/CIF822
TYPE FUND MANAGER STYLE/STRATEGY FUND CODE (Front End/F Class)
Canadian Equity - Dividend NEI Northwest Canadian Dividend Mark Thomson, Stephen Arpin, (Beutel, Goodman, & Co.) Value NWT128/NWT529
Canadian Equity – Pure Fidelity True North Max Lemieux Growth-at-a-Reasonable Price FID225/FID625
Sionna Canadian Equity Kim Shannon (Sionna Investment Managers) Relative Value BIP181/BIP581
Canadian Equity - Focused CI Synergy Canadian David Picton (Picton Mahoney Asset Management) Growth CIG6103/CIG6403
Cdn Equity - Small and Mid Cap IA Clarington Canadian Small Cap Ian Cooke, Joe Jugovic, Leigh Pullen (QV Investors) Value CCM520/CCM1450
Managed Money Report Fall 2013 | Page 10 of 16
Foreign Equity
Sector/Theme-Based
TYPE FUND MANAGER STYLE/STRATEGY FUND CODE (Front End/F Class)
US Equity - Large Cap CI American Value David Pearl, William M. Priest, (Epoch Investment Partners)
Value CIG7500/CIG7506
US Equity - All Cap Dynamic Power American Growth Noah Blackstein Aggressive Growth DYN004/DYN253
US Equity - Small and Mid Cap Mackenzie US Mid Cap Growth Class Philip Taller Growth MFC1564/MFC1802
Trimark US Small Companies Rob Mikalachki Value AIM5523/AIM5527
Global Equity BMO Global Dividend Class Sri Iyer, Sam Baldwin, Fiona Wilson Dividend-Oriented GGF87211/GGF88211
Capital International Global Equity Carl M. Kawaja, Dina N. Perry, Robert W. Lovelace Multi-Manager CIF843/CIF823
EdgePoint Global Portfolio Tye Bousada, Geoff MacDonald Blend EDG100/EDG500
Franklin Mutual Global Discovery A Peter Langerman, Philippe Brugere-Trelat Deep Value TML180/TML225
Mackenzie Ivy Foreign Equity Paul Musson, Matt Moody Value MFC081/MFC077
International Equity CI Black Creek International Equity Bill Kanko, Richard Jenkins Value CIG11118/CIG11018
Invesco International Growth Invesco Growth Investment Team Growth AIM633/AIM637
International Equity - Small and Mid Cap
Mackenzie Cundill Recovery James Morton Deep Value MFC742/MFC067
Asia BMO Asian Growth & Income Robert Horrocks, Kenneth Lowe, Taizo Ishida (Matthews International Capital Management)
Blend GGF620/GGF734
Dynamic Far East Value Chuk Wong Value DYN079/DYN251
Europe Invesco European Growth Invesco Growth Investment Team Growth AIM643/AIM647
Emerging Markets Westwood Emerging Markets Patricia Perez-Coutts, Thomas Pinto Basto Economic Value Added NBC469/NBC769
TYPE FUND MANAGER STYLE/STRATEGY FUND CODE (Front End/F Class)
Precious Metals RBC Global Precious Metals Chris Beer, Brahm Spilfogel Blend RBF774/RBF614
Managed Money Report Fall 2013 | Page 11 of 16
Appendix B: Fund Selection Process
Core Beliefs and Philosophy
Objective and unbiased research - We have the freedom to select funds from the entire universe of Canadian mutual funds without restriction or bias towards a particular fund family. In addition, we do not receive special compensation from fund companies to promote their funds. These combined factors allow us to conduct fund research in an objective and unbiased fashion.
Investment Horizon - Much like the tale of the tortoise that beat the hare, we select funds that are most likely to generate strong long term results versus its peers and respective benchmark.
Art and Science - Investing is both an art and a science. Likewise, our fund selection process incorporates both qualitative and quantitative elements.
Sustainable Competitive Advantage - We favour funds that possess a distinct competitive advantage over other similarly managed products. We define a competitive advantage as an attribute of the fund’s investment process that cannot be easily duplicated or imitated elsewhere and, in turn, enables the fund to outperform over the long term. There are a number of ways a fund can enjoy a competitive advantage. For example, the portfolio manager may retain an informational advantage through experience or by possessing a specialized skillset. Perhaps the fund benefits from extensive research capabilities such as a large team of experienced research analysts. Being the beneficiary of a sophisticated and well-equipped trading desk is another way a fund can have an edge over the competition.
Fund Selection Process
Step 1: Quantitative Screening The first step of the fund selection process is to identify funds that are worth further consideration. But with over 6000 offerings to choose from, distilling the unwieldy Canadian mutual fund universe can be a daunting task. This is where our quantitative screening tools come into play. In essence, they help pinpoint well managed funds.
Mutual funds that screen well are those that have outperformed with relatively low volatility. In others words, we’re looking for funds that exhibit strong risk-adjusted
returns. The table below illustrates several metrics that we screen for. It is important to note that we analyze these risk-adjusted metrics on a rolling basis over multiple periods in order to mitigate end-date bias, which is an error that occurs when analyzing performance over a single time period.
Performance Risk Metrics
Alpha Alpha is the value added by the manager as distinct from the market. We use the overall level of Alpha over time as an indicator of manager skill.
Rolling Alpha > 0 Indicates consistency of risk-adjusted outperformance over time in percentage terms. Must be well above 50%.
Up and Down Capture %
We look for funds that capture more market upside than market downside.
Omega This is the ratio of “up” periods to “down” periods. We prefer funds with Omega at least 20% greater than the benchmark’s.
Downside Volatility When performance is negative, how negative does it get? We prefer funds with lower downside risk.
Maximum Drawdown
The peak to trough percentage decline of a fund’s performance over a specified period of time. This metric helps determine a fund’s risk profile and the magnitude of future drawdowns.
Sharpe Ratio This ratio measures excess return per unit of standard deviation. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.
Treynor Ratio
Similar to Sharpe ratio, Treynor measures excess performance as a unit of risk. Unlike Sharpe, Treynor uses market risk (i.e. beta) instead of security risk (i.e. standard deviation) as the base unit of risk.
Information Ratio
This ratio measures a fund’s ability to generate excess returns relative to the standard deviation of its benchmark. A high ratio is achieved by producing strong returns and low volatility relative to the benchmark.
It is often the case that funds worth further consideration are those that don’t pop up on our radar through the initial screening process (e.g. limited track record). As such, we rely on our experience and network of industry contacts to uncover these hidden gems.
Before we conduct any further analysis, we need to ensure that the fund’s manufacturer or sub-advisor poses no reputation risk, is financially sound, follows
Managed Money Report Fall 2013 | Page 12 of 16
strict internal risk controls, and is not embroiled in disciplinary matters with securities regulators.
Funds worth further consideration must also meet the following criteria:
o The portfolio manager or investment team has several years of lead portfolio management experience.
o Available for sale to new and existing unitholders. o Competitively priced fees.
Step 2: Assessing Performance Drivers
Once a fund has been identified for further consideration and meets the above eligibility criteria, we analyze the fund’s performance drivers. While portfolio managers would love to have you believe that their fund’s five star rating or first quartile rankings are the manifestation of their investment acumen, there are many other factors outside the control of the portfolio manager that shape a fund’s track record.
Investment style is a key consideration as it strongly influences a fund’s returns. Investment style is defined as the overall strategy or theory that a money manager abides by when selecting securities. The two main investment styles are value and growth, both of which rotate in and out of favour for extended periods of time, consequently obscuring the validity of a fund’s track record. For example, by simply focusing on price and earnings momentum, even the most inept growth manager was able to greatly outperform the majority of value managers during the late 1990s. However, when the tech bubble imploded and growth fell off the rails, the reverse became true; a number of mediocre value funds were able to outperform growth funds by simply sticking to their investment strategy.
In order to control for style differentiation, we compare a fund’s performance to a customized peer group comprised of funds with similar investment styles. This way, we ensure that we’re making apples to apples comparisons when assessing fund performance.
Other factors that impact relative returns include sector and country weightings, currency exposure, and market capitalization. With respect to balanced funds, the largest determinant of a fund’s success is its asset mix. In fact, academic studies have shown that approximately 90% of the variability in performance can be attributed to asset allocation. The implications of this on balanced funds are huge.
That’s because balanced funds abide by different asset mix policies but their returns are often compared to one another on an indiscriminate basis. As a result, a slight difference in its asset mix policy will determine whether a fund is a first quartile hero or fourth quartile laggard. As such, we don’t put too much stock in relative performance metrics when assessing the performance of balanced funds.
Given that returns are heavily influenced by the aforementioned factors, we utilize holdings-based and style-based attribution techniques to determine how much value (i.e. alpha) the portfolio manager brings to the table. This also provides us with a better understanding of the strategy’s risks, the consistency of management’s investment approach, and whether outperformance is sustainable.
Step 3: Qualitative Assessment After assessing the fund’s returns and performance drivers, we require the portfolio manager to complete a detailed investment strategy questionnaire. Key aspects of the questionnaire include a synopsis of the manager’s investment philosophy and process, a description of the fund’s risk controls, and other material facts concerning the fund. Below is a sample set of questions from the questionnaire:
o Describe how the investment team is structured in terms of research and management responsibilities?
o List all departures and additions to the investment team over the past 12 months.
o How is the portfolio manager’s compensation aligned with unitholders of the fund?
o Has there been any material change to the fund’s investment strategy over the past 12 months?
o What is your buy and sell discipline? o How does the fund behave throughout a full market cycle? o What distinguishes the fund from its closest competitor? o What areas within the investment process require improvement?
It is mandatory that we interview the portfolio manager or investment team via conference call or face-to-face. The portfolio manager interview is an invaluable step of the fund selection process. That’s because it provides us with insights that cannot be gleaned from analyzing the fund’s performance or portfolio holdings.
Managed Money Report Fall 2013 | Page 13 of 16
The portfolio manager interview is structured much like a behavioural job interview, based on the belief that behavioural patterns that are identified during the meeting provide a good indication of conduct that happens behind the scenes.
In our experience, we have found that successful portfolio managers are those who are honest, passionate about investing, resolute, business-savvy, self-effacing, and competitive. They are calculated risk takers, knowing when to take chances to capture investment opportunities. They draw upon multiple educational disciplines that allow them to process information in a unique fashion. Lastly, they are independent thinkers, inclined to forge their own path rather than succumb to herd mentality.
Step 4: Investment Thesis and Portfolio Strategy After thoroughly analyzing all aspects of the fund, we formulate an investment thesis that answers the following question: What is the fund’s sustainable competitive advantage? As discussed earlier, a competitive advantage is an attribute of the fund’s investment process that cannot be easily duplicated or imitated elsewhere and, in turn, enables the fund to outperform over the long term. In order for a fund to be selected to the Focus List, we must be able to identify and clearly articulate a fund’s competitive advantage.
We also consider macro-economic factors, valuations, and the relative attractiveness of an asset class when selecting funds. In addition, we consider how well a fund fits into a diversified portfolio.
Step 5: Monitoring and Ongoing Due Diligence All funds on the Focus List are monitored on a continuous basis. Performance is reviewed monthly. We will contact portfolio managers of funds whose returns vary dramatically from their benchmark or category average, asking the manager to explain the fund’s performance variance in detail. While we would not remove a fund based on short-term underperformance, it’s imperative that we understand why a fund’s returns are lagging. We are equally concerned with funds that exhibit exceptionally strong performance as this may be an indication that the portfolio manager is assuming too much risk to generate excess returns.
A fund can be removed from the Focus List at any time. We would consider removing a fund for any of the following reasons:
1. If the fund experiences an adverse material change (e.g. manager departure, change in strategy, etc.).
2. If we determine that a comparable fund possesses better investment potential.
3. If our investment thesis no longer holds true (e.g. overestimate a manager’s competitive advantage).
Appendix C: ETF Reference Guides
ETF Reference Guides are updated on a monthly basis and can be accessed by visiting the ETF homepage within the Private Client Solutions site (advisor access only).
BMO S&P 500 Index ETF (CAD) $104,737,456 iShares S&P/TSX 60 Index -$645,942,839
BMO MSCI EAFE Hdg to CAD ETF $100,722,271 iShares DEX All Corporate Bond Index -$345,403,019
Horizons Active Floating Rate Bond ETF $81,249,606 iShares DEX Universe Bond Index -$246,552,699
Mutual Fund Inflows (3 Month) Mutual Fund Outflows (3 Month)
Mutual FundEstimated Net
Inflows (C$)Mutual Fund
Estimated Net
Outflows (C$)
Fidelity Monthly Income Series $477,121,867 TD Canadian Bond -$358,446,228
Fidelity US Monthly Income $401,534,200 Fidelity Canadian Asset Allocation -$294,756,146
Sentry US Growth and Income $295,279,317 Dynamic High Yield Bond -$283,049,300
Fund Category Inflows (3 Month) Fund Category Outflows (3 Month)
CategoryEstimated Net
Inflows (C$)Category
Estimated Net
Outflows (C$)
US Equity $1,550,839,637 Canadian Fixed Income -$3,484,415,073
Global Neutral Balanced $1,101,622,799 Canadian Equity Balanced -$732,081,241
Global Equity $458,717,744 Canadian Equity -$551,137,324
Largest ETFs by Assets Largest Mutual Funds by Assets
ETF Total Net Assets C$ Mutual Fund Total Net Assets C$
iShares S&P/TSX 60 Index $11,499,591,851 Investors Dividend $15,082,706,000
iShares DEX Short Term Bond Index $2,294,837,650 RBC Canadian Dividend $11,197,726,981
iShares S&P 500 Index C$-Hedged $1,899,134,760 Fidelity Monthly Income Series $8,519,191,808
Managed Money Report Fall 2013 | Page 15 of 16
Top Performers Bottom Performers
Top Three Best Performing ETFs (3 Month) Bottom Three Worst Performing ETFs (3 Month)
ETF TickerTotal 3 Month
Return %ETF Ticker
Total 3 Month
Return %
Horizons BetaPro S&P 500 VIX ST Fut Inv HVI 12.1 Horizons BetaPro S&P 500 VIX ST Fut ETF HUV -29.1
BMO China Equity Index ETF ZCH 10.6 iShares CNX Nifty India Index XID -8.2
iShares Silver Bullion Fund (CAD-Hedged) SVR 8.6 BMO India Equity Index ETF ZID -7.5
Top Three Best Performing Mutual Funds (3 Month) Bottom Three Worst Performing Mutual Funds (3 Month)
Mutual FundTotal 3 Month
Return %Mutual Fund
Total 3 Month
Return %
Dynamic Power American (Currency Neutral) 22.8 Front Street Energy Growth Fund Inc I -17.5
Dynamic Power Global Growth Class 21.6 HSBC Indian Equity Investor Series -11.9
Dynamic Power American Growth 20.3 Standard Life India Equity Focus A -8.3
Top Three Best Performing Categories (3 Month) Bottom Three Worst Performing Categories (3 Month)
CategoryTotal 3 Month
Return %Category
Total 3 Month
Return %
Health Care Equity 9.9 Real Estate Equity -2.3
Precious Metals Equity 9.3 Preferred Share Fixed Income -1.7
Greater China Equity 9.0 Cdn Long Term Fixed Income -1.4
As of September 30, 2013
Source: Morningstar, Raymond James Ltd.
(Leveraged products excluded)
Managed Money Report Fall 2013 | Page 16 of 16
Disclaimer
Complete disclosures for companies covered by Raymond James can be viewed at: www.raymondjames.ca/researchdisclosures
Raymond James Ltd. (RJL) prepared this newsletter. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. This document is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The securities discussed in this document may not be eligible for sale in some jurisdictions. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. RJL, its officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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