LDI in Canada: A distinct approach for a distinct landscape

Transcription

1 WHITE PAPER LDI in Canada: A distinct approach for a distinct landscape By Michael Augustine, CFA, FSA, FCIA, Vice President & Director, and Rachna de Koning, FCIA, FSA, Vice President & Director, TD Asset Management May 2014 Liability driven investing (LDI), in its broadest sense, is a framework for making investment decisions that makes a fundamental shift from merely tracking the market to actively managing to specific liabilities. Decisions are made with a view towards the ability to meet future obligations rather than from an asset-only lens. All assets that are implemented in this framework can then be seen as LDI tools be they the foundational fixed income tools, or equities and alternatives that are sometimes incorrectly perceived as non-ldi assets. This definition is broad enough that it can be considered an LDI anywhere definition. But when it comes to the details of implementation, then context matters, and the differences in LDI implementation can be significant from one jurisdiction to the next. Canada has a unique fixed income marketplace and distinct actuarial standards to measure liabilities this different terrain creates unique challenges and requires an appropriate approach to maneuver effectively. Succeeding in this setting demands smart and pragmatic action. Investors have to be willing to make trade-offs and remain outcome-focused to help them succeed. In this paper we will review the realities of LDI in Canada, focusing on the Canadian fixed income landscape, as this is where the LDI journey most often begins. We conclude by outlining an holistic approach to help investors achieve their goals in this environment. The Canadian fixed income landscape Canada s bond market is a dynamic one, with new and changing opportunities for investors. But it is also a unique market, with supply and demand challenges. Despite impressive recent growth, Canada s bond market remains small on a global scale. The entire investment grade universe in Canada had a market value of approximately $1.2 trillion at calendar year end 2013, representing less than 2% of overall bonds issued worldwide. Its small size can create supply and demand challenges. TD Asset Management LDI in Canada May 2014 Page 1 of 16

2 Demand and market segmentation The Canadian fixed income investor base is dominated by what market participants refer to as real money accounts. These are the institutional investors (pension funds, insurance companies and mutual funds), retail investors (households) and central banks. Real money accounts tend to have a strong preference for specific bond types and maturities often for reasons other than return (such as unique liability structures, capital considerations or diversification). For this reason they tend to provide a more stable source of demand, but at times can pursue the same pool of investments causing demand imbalances. In addition to domestic investors, Canada has become increasingly attractive to foreign investors. While initially drawn to Canadian government bonds as a fixed income safe-haven investment during the period following the 2008 financial crisis, five years later, Canada is the only country within the Group of Seven countries that continues to receive the highest possible credit rating from each of the major ratings agencies. These foreign investors, as shown in Figure A, have shifted their focus from government bonds to corporate bonds, as they search for yield in today s low interest rate environment. This foreign presence tightens supply even further. Figure A: Foreign investment in the Canadian bond market Source: Statistics Canada; TDAM Lastly, strong demand by the long duration investor base in Canada (pension plans and life insurance companies) affects outcomes. The term preference of these segments of the investor TD Asset Management LDI in Canada May 2014 Page 2 of 16

3 base results in both a relatively flat yield curve beyond the 20 year point and, sometimes overlooked, an inversion in long duration credit spreads. This means that investors can, all other market movements held constant, actually expect a market value loss for the first several years of a bond s holding period. In this way, an investor could potentially be negatively compensated for taking more risk when buying some of the longest maturity bonds. As shown on the chart below, long provincial bonds can offer less credit spread than some other shorter maturity provincial bonds. Figure B: Long Bond Spread Dynamics Source: PC-Bond Analytics & TDAM. Data as at March 31, For illustrative purposes only. PC-Bond is a business unit of TSX Inc. Copyright TSX Inc. All rights reserved. The information contained herein may not be redistributed sold or modified or used to create any derivative work without the prior written consent of TSX Inc. Market composition Along with its size, other characteristics of the Canadian bond market such as its unique term structure, credit quality and sector concentrations also provide challenges and opportunities, both in the government and corporate bond sectors. Federal government bonds: While making up approximately 40% of the investment grade universe at calendar year end 2013, declining federal government borrowing requirements mean that the federal government will likely plan to issue less debt over the medium term. Despite following the lead of the provincial bond issuers and planning to extend its average term of debt (including the recent first time issue of a 50-year bond), Canada has one of the shortest sovereign debt maturity schedules of the G-7 countries. Only the US has a shorter average term to maturity, as shown in Figure C. TD Asset Management LDI in Canada May 2014 Page 3 of 16

4 Figure C: Average term to maturity for sovereign debt in years (2012) Country Average term to maturity (years) U.K Japan 7.9 France 7.0 Italy 6.6 Germany 6.4 Canada 5.9 United States 5.4 Source: OECD Sovereign Borrowing Outlook 2013, TDAM In the larger G-7 bond markets such as the UK and US, longer duration synthetic instruments are readily available to fill voids left in the cash markets. In Canada however, these instruments are either non-existent (such as a 30-year Government of Canada futures contract) or very thinly traded (such as the 30-year interest rate swap). So LDI investors need to be mindful that long duration federal government bond supply constraints can affect bond prices and corresponding yields. Provincial government bonds: Unique to Canada, the provincial government bond market plays an important role in the Canadian fixed income landscape. At the end of 2013, provincial bonds made up approximately 30% of investment grade debt in Canada and are, in most instances, fairly liquid. To lock in lower funding costs and at the same time help satisfy institutional de-risking demand, over the last several years the provinces have extended the term of their debt maturity profiles by issuing ultra-long bonds with terms to maturity in the 50-year range. And the provincial strip bond market in Canada has grown over the past decade providing investors more customized instruments to better meet their interest rate risk management objectives. While these landscape changes have helped meet specific needs, LDI investors need to be aware that some of these customized instruments can be less liquid and can trade on scarcity value as opposed to credit fundamentals. Corporate bonds: With respect to corporate bonds, 2013 was a robust new issuance year with over $109 billion in new corporate bonds offered to investors, setting a new issuance high water TD Asset Management LDI in Canada May 2014 Page 4 of 16

5 mark. The abundance of supply was characterized by many corporate bond issuers, much like their federal and provincial government counterparts, looking to lock in longer-term financing at today s historically low borrowing levels. Figure D: Historical bond issuance Source: TDSI Even with a relatively large amount of new bond issuance in recent years, there remains a continued lack of long corporate bond supply for LDI investors. In 2013, more long-term bonds were offered to LDI investors, however issuance varied considerably by credit quality. Most supply came in the single A-rating category, followed by BBB-rated bonds. (See Figure E.) However, despite this growth in corporate new issuance, there was no new supply of long-term AA-rated bonds. Since demand for AA-rated bonds is high among LDI investors seeking to hedge their liabilities, this creates a supply challenge. As can be seen in Figure E, the long-term sector of the Canadian corporate bond market is heavily dominated by A-rated and BBB-rated bonds. Opportunities in this sector definitely exist, but LDI investors need to ensure proper credit research is performed and appropriate yield earned since lending money to a firm for up to fifty years is a long term proposition. The challenges of managing in this market are many, but a disciplined and intelligent manager who knows the terrain can help to deliver positive outcomes. TD Asset Management LDI in Canada May 2014 Page 5 of 16

6 Figure E: Long-term corporate bond issuance and index composition (2013) 2013 Long Term Corporate Bond Issuance DEX Long Term Corporate Bond Index Source: TDAM, TDSI, PC-Bond PC-Bond is a business unit of TSX Inc. Copyright TSX Inc. All rights reserved. The information contained herein may not be redistributed sold or modified or used to create any derivative work without the prior written consent of TSX Inc. Canadian actuarial practices Another distinct feature of Canada s LDI landscape is the actuarial standards and methodologies that lie beneath the LDI benchmarks. Some Canadian plan sponsors are subject to two very different mark-to-market measures of the plan liabilities solvency and accounting. This is particularly important when designing a hedge because the discount rate methodologies used for each of these measures are very different and do not always move in tandem. This is especially true in times of extreme market movements. Understanding the main drivers of the liability discounting methodologies provides interesting insights on the key sensitivities of the LDI benchmark. The following charts show the history of liability discount rates in Canada. 1 Figure F shows the movement in the economic basis or risk-free government of Canada rate (the duration driver) and the movement in three Canadian liability discount rate measures accounting, solvency annuity purchase and solvency lump sum. Figure G isolates the change in each discount rate methodology coming from the movement in the credit spreads (credit spread driver). 1 All analysis in this paper uses a set of liability cash flows of duration 16.7 years, when valued on a government of Canada curve (economic basis) at December 31, TD Asset Management LDI in Canada May 2014 Page 6 of 16

7 Figure F: History of liability discount rates in Canada Source: Canadian Institute of Actuaries, TDAM Portfolio Analytics Figure G: Credit spread assumed in liability discount rates Source: Canadian Institute of Actuaries, TDAM Portfolio Analytics TD Asset Management LDI in Canada May 2014 Page 7 of 16

8 The graphs show that while the duration driver has the biggest impact on the change in Canadian discount rates from one period to the next, there is a lot more to LDI than just extending duration. The credit spread driver is significant and, since 2007, of increasing importance as interest rates continued to decline. Credit spread-sensitive exposures, like provincial and corporate bonds, are a dominant part of LDI. An imprecise guidance In Canada, managing the duration and credit drivers is complicated by the fact that to overcome the realities of the Canadian market size and composition, Canadian actuaries are forced to make assumptions on how Canadian bond markets would behave if the supply of bonds and annuities were unconstrained. The actuarial discounting methodologies make very significant assumptions regarding hypothetical yield curve and corporate bond spreads, especially on the long end of the maturity spectrum where supply of bonds is limited and pension obligations are concentrated. True, these market assumptions are made by actuaries after careful data analysis to arrive at credible actuarial guidance and standards of practice. And this guidance is revisited regularly as new methodologies are considered and market conditions change. But the fact remains that these are assumptions. They are not adjusted daily, some market characteristics are not fully reflected (such as flat yield curves or credit spread inversion), and bonds do not exist that behave exactly as the hypothesis suggests. For example, consider the solvency annuity purchase measure and the accounting measure. Solvency and credit. The solvency measure has a focus on credit. The credit component assumed in the solvency annuity discount rate basis is meant to approximate the credit compensation, after expenses and profit margins, assumed in life insurance annuity pricing. While not exact, the credit compensation offered on a portfolio of provincial bonds can be similar and form an important part of a solvency basis solution, however actual annuity purchase pricing is much more complex. Accounting and AA-rated corporate bonds. For LDI investors focused on their accounting basis liability, there tends to be a focus on AA-rated corporate bonds given the assumptions made in the construction of the accounting liability discount curve. However, a very limited number of AA-rated corporate bonds exist in Canada, and in many years almost no new supply beyond 10 year maturities has been brought to market. Finally, the liability cash flows themselves are estimates that Canadian actuaries generate based on a number of other assumptions, and are revised when new data, models and methods seem more appropriate. For example, in 2013 Canadian actuaries changed the guidance on mortality tables based on a first-ever study on Canadian lifespans, rather than relying on data from the US. Estimates are that this revision could increase the liability cash flows by 5%-10% and some plans are facing potential adjustments to LDI fixed income portfolios that were implemented before the mortality change. TD Asset Management LDI in Canada May 2014 Page 8 of 16

9 Considering that the actuarial guidance is actually an imprecise combination of art and science and subject to change, it is perhaps prudent to consider that its implementation cannot be a precise undertaking but rather a balanced and flexible one. An holistic view: Balance, flexibility and pragmatism We have presented various challenges that Canadian investors face when implementing LDI. But a complex and dynamic environment is not necessarily a negative: these challenges can become opportunities if they are managed appropriately. There is a need for a holistic view of the landscape that sees all factors in an integrated way: a pragmatic, balanced and flexible approach to help investors achieve their goals in the unique Canadian environment. We believe that the factors leading to success include: 1. Balance and flexibility: Focus on pragmatic implementation that is not limited by a single methodology but responds and adapts to changing realities Allow for trade-offs within your risk budget. Use balance, not precision, as your implementation approach 2. Move beyond the basics: Focus on more than interest rate risk and extending duration; also look at managing credit and the benefits it can provide. 3. Widen the opportunity set: Open up to diversity Expand the investable universe beyond the basics Place fewer constraints on your manager to allow them to actively manage to your liabilities We shall examine each of these in turn. A pragmatic implementation A good risk budget should be your roadmap For many, successful LDI implementation reconciles an optimal long-term investment strategy with a short term risk budget. The risk budget is generally expressed as relative to a specific liability valuation basis and tolerance for a decline in funded status on that particular basis. Often a plan sponsor s focus may change from one basis to another or a plan sponsor may simply be concerned with multiple bases. A pragmatic approach recognizes this and develops a risk budget respecting the plan sponsor s risk tolerance level or their pension plan s interaction with their broader enterprise-wide risk TD Asset Management LDI in Canada May 2014 Page 9 of 16

10 management goals. It recognizes that investing in assets that differ from those assumed in the construction of the LDI benchmark introduces risk. With a good risk budget in hand, a plan sponsor can then confidently take intelligent risk, seeking to maximize expected outcomes and avoid adverse surprises. Balance not precision It is important to consider if the trend towards customization has gone too far for the realities of the Canadian market. Given the actuarial standards in Canada, precisely matching assets and liabilities in a narrow framework of prescribed rules like the solvency funding rules prescribed by the pension regulators, or the accounting rules prescribed by the generally accepted standards may not be an appropriate response. Investors need to consider that these rules are imprecise and change frequently, and flexibility is required to adjust to new and changing realities. We believe that as actuarial assumptions change, or markets present opportunity, an LDI program should be able to adjust and capitalize without exorbitant opportunity or trading costs. It is a balancing act of precision and pragmatism, and it is a key theme of successful implementation of LDI in Canada. It is important to strike the right balance. Moving beyond the basics: consider credit LDI is more than just extending the duration of your bonds LDI implementation should go beyond the most simplified approach of just shifting the fixed income assets to track longer duration bond industry benchmarks, like the DEX Long Bond or 20+ Strip indices. This duration matching approach serves to improve the overall hedge ratio relative to the liabilities, thereby reducing interest rate risk; but it does not fully consider the altered corporate credit profile. Credit spreads are a significant driver in each of the Canadian actuarial liability cash flow discounting methodologies. For example, the area between the curves in the graphs below show the amount of credit exposure required in an LDI portfolio to hedge the credit exposure assumed in determining the liability. The graphs show a significant exposure requirement and show that depending on the maturity of the liability cash flows, each plan sponsor s credit exposure sensitivity is different. TD Asset Management LDI in Canada May 2014 Page 10 of 16

11 Figure H: Credit exposure requirements Accounting Solvency (Lump Sum) Solvency (Annuity Purchase) Source: Canadian Institute of Actuaries, TDAM To help illustrate value of credit assumed in each actuarial discount basis, consider a set of liabilities discounted at risk-free rates. 2 In the chart below this is referred to as the economic liability and has a value $100mm. By discounting the same set of liability cash flows at each of the various discount curves, the respective differences between liability amounts and the economic liability indicate the value of credit assumed in each discount basis. This amount of credit compensation can also be expressed as a portion of the total level discount rate. For example, the credit exposure assumed on an accounting basis reduces the liability by $19.3mm representing a credit compensation spread of 134 bps. Figure I: Illustrative liability statistics Liability Basis Liability Value ($mm) Value of Credit ($mm) Yield Assumed Credit Compensation (bps) Economic $ % 0.00% Solvency (Annuity Purchase) Solvency (Lump Sum) $90.8 $ % 0.58% $90.4 $ % 0.61% Accounting $80.7 $ % 1.34% 2 All analysis in this paper uses a set of liability cash flows of duration 16.7 years, when valued on a government of Canada curve (economic basis) at December 31, TD Asset Management LDI in Canada May 2014 Page 11 of 16

12 Source: Canadian Institute of Actuaries, TDAM Clearly, constructing a liability hedge that simply seeks to manage interest rate risk ignores the significance of credit risk hedging and could lead to hedging underperformance and unintended outcomes. Credit blurs the lines between liability hedging and return-seeking assets Asset liability studies often separate assets into those designated to hedge the liability and those seeking to add additional returns. LDI investors must recognize that many assets serve a dual purpose. For this reason, the plan asset mix should also be viewed holistically recognizing total plan risk relative to the underlying liability benchmark or put differently, within a risk budget. For example, a plan should consider some of the advantages afforded by the general correlation between equities and credit spreads as there may be natural hedges within a plan sponsor s existing portfolio. In addition to seeking incremental returns, equity portfolios tend to move directionally with the credit component of corporate bonds and as a result, with the liability benchmark. In this way, an appropriate equity allocation can supplement the corporate bond allocation and improve the liability credit hedge. While this correlation may generally exist, care should be exercised around assuming correlations remain intact in all market conditions. As another example, high yield bonds are often considered liability hedging assets given their contribution to a portfolio s interest rate sensitivity. However, high yield bonds can also be considered a return seeking asset offering credit compensation significantly higher than investment grade bonds. So it is critical that the LDI investor more deeply considers the riskadjusted contribution of each asset class to the total liability hedge when allocating their risk budget. Widening the opportunity set Beyond AA corporate & provincial bonds For LDI investors focused on their accounting basis liability, there tends to be a heightened demand for AA rated corporate bonds given the assumptions made in the construction of the accounting liability discount curve. Similarly, for LDI investors focused on their solvency basis liability, there tends to be an emphasis on provincial bonds. However, other parts of the fixed income market warrant a look. There is a broad universe of securities with a high correlation to the underlying solvency and accounting basis liability that should be considered. Given the concentration of provincial issuers and the dearth of AA rated corporate bonds in the Canadian universe, when building either a solvency or an accounting basis liability hedging portfolio, other sectors of the bond market can be considered high-correlation substitutes for provincial or AA rated bonds. TD Asset Management LDI in Canada May 2014 Page 12 of 16

13 For example, over the 10 year period between 2004 and 2013, the correlation between the accounting liability returns in Figure I, and returns on long A-, long BBB-rated corporate bonds were approximately 94% and 88% respectively showing that these highly correlated securities are effective substitutes for scare supply AA-rated bonds. Not only can these bonds provide a good quality hedge, but the credit compensation found in the expanded opportunity set can, in many cases, lower the expected hedging costs as shown in Figure J. Figure J: Illustrative asset portfolio statistics Bond Portfolio Assets Required 3 Value of Credit Yield Credit Compensation Long Canada Bonds $ % 0.00% Long Bond Universe $88.4 $ % 0.82% Long A Corporate Bonds $80.0 $ % 1.52% Long BBB Corporate Bonds $75.1 $ % 1.99% Source: TDAM For example, simply moving from A-rated corporate bonds, one notch down the risk spectrum to BBB-rated bonds can decrease the dollars required in the liability hedging portfolio by up to approximately $4.9mm in this illustrative example by earning approximately 47 bps of incremental yield. These dollars can be used to reduce contributions or be allocated elsewhere within an organization. Going global Given the challenges that exist in Canada s fixed income market, it seems reasonable to consider markets outside of Canada, particularly the U.S. Going beyond our borders in search of investments that help to meet LDI objectives brings both opportunities and challenges. It clearly widens the opportunity set the US bond market itself is approximately a US $39 trillion market (SIFMA data) but the currency differential complicates the situation. Since Canadian liabilities 3 Assets required to meet liabilities where liability value is estimated by discounting liabilities and cash flows using bond portfolio yields. TD Asset Management LDI in Canada May 2014 Page 13 of 16

14 are in Canadian dollars, bringing in foreign investments adds an additional risk factor to be managed. There are other difficulties as well: Yield curve differences can complicate a portfolio as Canadian and American spreads do not necessarily move in tandem. And, despite the much larger market, even the US has supply issues as demand also outstrips supply at times. Perhaps it is because of these challenges that this approach is not widely used other than by the largest plans and insurance companies. Synthetic strategies To construct a good quality hedging portfolio investors need to either go out the credit risk spectrum in search of assets that will perform similar to their liabilities or introduce derivative overlays to achieve the degree of hedging required, especially if assets such as equities are being maintained. The derivative market in Canada requires special navigation. Unlike some other developed LDI markets where there may be access to long duration, liability matching bond derivatives, in Canada liquidity across the maturity spectrum is limited to ten years in some commonly used instruments, like interest rate swaps. Given these constraints, bond overlay strategies using bond forwards or repurchase agreements can be a much more pragmatic way for a plan sponsor to enhance their liability hedging portfolio in a cost-effective fashion. Synthetic bond overlays evolved as an important tool in LDI because of their ability to significantly increase the duration match to mark-to-market measures like solvency or accounting. Not as well understood, but beneficial, is the consideration that bond overlay strategies can also provide a very good source of additional income via coupon payments on the referenced bond, net of the financing cost (often referred to as the "positive carry"). In fact, some plans may use a higher going concern discount rate assumption to reflect this higher yield, which results in an immediate reduction in the current service cost and going concern liabilities. Allowing managers scope to actively add value In order to navigate the increasingly complex and uncertain future of plan risks, as they make the shift from tracking the market to actively managing to liabilities, sponsors will need asset managers that understand their businesses well and are able to translate that understanding to both the liability front and the investment front. This means working closely with a manager that is focused more on risk mitigation and less on traditional measures of performance, and who has the freedom to take advantage of the opportunities that the market provides as they arise. Such a manager can provide a deep analytic capability, a broad skill set, and a diverse suite of cost effective solutions. A manager who is less constrained may take advantage of varied active management tools to add value. For example, credit research and security selection, yield and credit curve analysis, and portfolio construction are areas where an experienced manager can make a significant difference to LDI outcomes. If investors can achieve a better return, adjusted for whatever risk is inherent in their own particular obligations, then they should expect to achieve a much more TD Asset Management LDI in Canada May 2014 Page 14 of 16

15 satisfactory and stable investment outcome, which can increase the degree of certainty that they ll be able to meet their obligations over time. A Canadian view of opportunity The Canadian LDI landscape is unique terrain. Trends in the underlying supply and demand dynamics can often cause the ground to shift. Finding the optimal path that gets investors to the place they want to go within the parameters of their particular situation is a challenge regardless of the environment, but it is even more so in a market as diverse, complex and nuanced as Canada s. Therefore, investors must use all tools at their disposal to find pragmatic, costeffective solutions while at the same time remaining focused on their specific objectives given their unique liability structures and risk budgets. LDI is, after all, a framework for making investment decisions. An integral part in designing this framework is ensuring one has a deep understanding of the entire opportunity set. An actively engaged investor that is open to possibilities and accepts the realities of trade-offs and balance is an investor that can thrive in our distinct market. This is the reason behind our emphasis on pragmatism: doing what works in the context of the on-the-ground realities, moving beyond the obvious options and embracing opportunity when it arises. As Canadians, we have unique challenges in our LDI market, but also unique opportunities, and a pragmatic implementation is most likely to find the right balance and arrive at a better outcome. We believe that this is ultimately a smart and sensible approach that accepts and appreciates the many benefits of diversity and that is very Canadian indeed. TD Asset Management LDI in Canada May 2014 Page 15 of 16

16 REFERENCES Organization for Economic Co-operation and Development statistical database (Central Government Debt, Average term to maturity and duration data) Real Money Investors and Sovereign Bond Yields; by Laura Jaramillo, Y. Sophia Zhang; IMF Working Paper No. 13/254; December 2013 Government Bonds and Their Investors: What Are the Facts and Do They Matter?; by Jochen R. Andritzky; IMF Working Paper 12/158; June 1, 2012 Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies; by Serkan Arslanalp and Tigran Poghosyan; IMF Working Paper No. 14/27; February 2014 Disclosure The statements contained herein are current as at April 30, 2014 and are based on material believed to be reliable. Where such statements are based in whole or in part on information provided by third parties, they are not guaranteed to be accurate or complete. The information does not provide individual financial, legal, tax or investment advice and is for information purposes only. Graphs and charts are used for illustrative purposes only and do not reflect future values or changes. Past performance is not indicative of future returns. TD Asset Management Inc., The Toronto-Dominion Bank and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. Certain statements in this document may contain forward-looking statements ( FLS ) that are predictive in nature and may include words such as expects, anticipates, intends, believes, estimates and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable and may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS. TDAM may not update any FLS. TD Asset Management Inc. (TDAM) is a wholly-owned subsidiary of The Toronto-Dominion Bank. The TD logo and other trade-marks are the property of The Toronto-Dominion Bank. TD Asset Management LDI in Canada May 2014 Page 16 of 16