Annual Presentation to Clients. November 2009

Transcription

1 Annual Presentation to Clients November 2009

2 AGENDA 1. Retrospective on a Turbulent Time 2. Where We Are Now Economic Issues 3. The Path Forward Investment Implications 4. Investment Performance 1

3 RETROSPECTIVE A Series of Unfortunate Events Investors have faced many challenges over the last two years Credit crisis Near collapse of global financial system Deep global recession; rising unemployment Concern over US$ stability Unprecedented government intervention 2

4 RETROSPECTIVE A Series of Unfortunate Events The U.S. market has suffered one of its worst declines on record Dow Jones Industrial Average Global Financial Crisis: Jul Jun Bursting of Tech Bubble: Jul Jun The Great Crash: Jul Jul Mos. 6 Mos. 12 Mos. 18 Mos. 24 Mos. 30 Mos. 36 Mos. 3

5 RETROSPECTIVE Stocks for the Long Run? For ten long years, stocks have provided little return S&P 500 Total Return TSX Composite Total Return Oct-99 Oct-01 Oct-03 Oct-05 Oct-07 Oct Oct-99 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Annual return of -1.0% in US$, and -4.0% in C$ Annual return of 6.4% S&P 500 Total Return shown in US$. 4

6 RETROSPECTIVE Stocks for the Long Run? Many former blue chip stocks have been disasters Some are effectively dead Some on life support Some remain healthy $2500 $60 $70 $2000 $50 $60 $1500 $40 $50 $40 $30 $1000 $30 $20 $20 $500 AIG Group $10 Citigroup $10 General Electric $0 Oct-99 Oct-02 Oct-05 Oct-08 $0 Oct-99 Oct-02 Oct-05 Oct-08 $0 Oct-99 Oct-02 Oct-05 Oct-08 5

7 RETROSPECTIVE Recovery at Hand? Recently, a number of economic data points have improved noticeably U.S. Institute of Supply Management Survey Canadian Business Outlook Survey (2) Survey of U.S. business conditions based on the outlook of purchasing managers. (2) Quarterly survey of Canadian business conditions conducted by the Bank of Canada. 6

8 RETROSPECTIVE Recovery at Hand? Fear has subsided in both credit and equity markets TED Spread VIX (2) Oct-07 Apr-08 Oct-08 Apr-09 Oct Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Spread between the yield on U.S. dollar LIBOR and 3-month Treasury Bills, measured in basis points (hundreths of a percentage). 7 (2) Measure of the volatility of the S&P 500 Index.

9 RETROSPECTIVE Recovery at Hand? Since the March low, stock markets have soared S&P 500 Total Return Index TSX Composite Total Return Index % % 1000 Feb-09 Apr-09 Jun-09 Aug-09 Oct Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 8

10 RETROSPECTIVE The $64,000 Question Is the economic recovery and stock market rally sustainable? Investors and policy makers both hope that it is This is an unanswerable question uncertainty is the norm an investor must face It ain t what you don t know that gets you into trouble. It s what you know for sure that just ain t so. - Mark Twain 9

11 ECONOMIC ISSUES The risks to a smooth recovery are elevated Unemployment Government regulation Government deficits Environmental costs Inflation/Deflation Aging populations Housing Consumer indebtedness Trade protectionism Geo-political instability 10

12 ECONOMIC ISSUES Unemployment Unemployment has risen dramatically across the globe Global Unemployment Rates 12% 10% 10.2% % 8% 8.6% 7.9% 6.3% 6.6% 6% 5.3% 4% 3.8% 2% 0% Canada U.S. Japan Europe (3) Source: Bloomberg. 11

13 ECONOMIC ISSUES Unemployment Although a lagging indicator of recovery, unemployment in the U.S. remains worrisome Over 8 million people have lost their jobs since the beginning of million unemployed with little sign of recovery Rising unemployment reflects structural forces Official unemployment understates the gravity of the problem Improvement in employment necessary for a durable recovery 12

14 ECONOMIC ISSUES Unemployment Permanent layoffs have increased U.S. Unemployment Attributed to Permanent Layoffs Permanent Layoffs (millions) Factory closings are a feature of this recession Some jobs are never returning Workers will need re-training Time spent unemployed is increasing 0.0 Oct. '08 Oct. '09 Source: Bureau of Labor Statistics. 13

15 ECONOMIC ISSUES Unemployment Official unemployment understates the depth of the problem U.S. Unemployment 18% 15% Shadow Unemployment Unemployment Rate Almost 1 in 5 American workers has less work than they want 12% 9% 6% Gap between official and shadow unemployment has never been as large 3% Source: Bureau of Labor Statistics. Shadow unemployment is a broad measure, that includes the unemployed, those working part-time who want full-time work, and people who have stopped looking due to discouragement. 14

16 ECONOMIC ISSUES Unemployment Distress exists in Canada s labour force Employment in Canada Nature of Employment No. of workers (millions) Employee Self-employed Total No. of workers (millions) Services 3.7 Goodsproducing 16.8 Total Source: Statistics Canada. 15

17 ECONOMIC ISSUES Unemployment Good quality jobs have been lost Nature of Jobs Lost in Canada Nature of Jobs Lost in Canada Jobs Lost (thousands) Jobs Lost (thousands) Full-time Part-time Total 0 Manuf. Constr. Nat. Res. Services Total Source: Statistics Canada. 16

18 ECONOMIC ISSUES Unemployment Unemployment is likely to stay high muting the recovery Employment conditions continue to worsen The nature of jobs lost is worrisome Permanent layoffs Goods producing/full-time Structural changes to the economy suggest some workers will need re-training Employment drives consumer spending Low interest rates or demographic trends hardly matter in comparison Economic recovery needs participation from consumers Government spending not sufficient 17

19 ECONOMIC ISSUES Inflation/Deflation The long-term effects of either inflation or deflation are harmful Inflation: A broad rise in the price of goods and services Primary impact is erosion in the purchasing power of money Deflation: A broad decline in the price of goods and services Much less common than inflation, but much more disruptive 18

20 ECONOMIC ISSUES Inflation/Deflation The forces of supply and demand are at work inflation is negative Consumers are spending less (and saving more), reducing demand Rising unemployment leads to reduced labour costs Lower industrial activity has meant lower commodity and energy prices Businesses are cutting prices 19

21 ECONOMIC ISSUES Inflation/Deflation Inflation has been in steep decline across the developed world Inflation Rates in the Major Economies 6% 5% 4% 3% 2% 1% 0% % -2% -3% U.S. Japan Canada Europe Source: Bloomberg. 20

22 ECONOMIC ISSUES Inflation/Deflation Despite deflationary conditions, future inflation concerns abound Inflation worries are based on future concerns Debts and deficits are growing Monetary conditions are highly stimulative 21

23 ECONOMIC ISSUES Inflation/Deflation The pace of spending and borrowing is unsustainable Debt Levels in the Developed World 120% 108% Gross Debt / GDP 100% 80% 60% 40% 71% 63% 67% 69% 89% High debt burdens may create incentives for governments to tolerate inflation Foreign capital and confidence is now a necessity 20% 0% U.S. Canada Europe U.S. Canada Europe Interest costs will escalate if lenders anticipate currencies will devalue Source: International Monetary Fund. 22

24 ECONOMIC ISSUES Inflation/Deflation Monetary stimulus is extreme U.S. Reserve Bank Credit Monetary Policy Rates $2.5 $2.0 9% 8% 7% U.S. Federal Funds Rate Bank of Canada Rate (US$ trillions) $1.5 $1.0 $0.5 $ % 5% 4% 3% 2% 1% 0% Central Banks have injected liquidity Official rates can go no lower Source: Federal Reserve Board; Bloomberg. 23

25 ECONOMIC ISSUES Inflation/Deflation For now, policies seem appropriate CRB Index Growth in U.S. Consumer Credit % 12% % 400 8% 6% 350 4% 300 2% 0% 250-2% % Sep-07 Mar-08 Sep-08 Mar-09 Sep-09-6% Commodity prices show little evidence of accelerating inflation Credit is shrinking, not growing Index of a basket of commodity prices measured in US$. 24

26 ECONOMIC ISSUES Inflation/Deflation The inflation outlook remains unclear Large structural government deficits are unsustainable Foreign confidence in the US$ is waning Unsettled conditions to remain for years Removing the extreme stimulus the next big policy decision Will require global co-ordination There are risks of being too late or too early 25

27 PORTFOLIO IMPLICATIONS Now, more than ever, a disciplined investment approach is required Economy Wide range of outcomes possible Fixed Income Disciplined Investment Management Required Low returns, but offers capital preservation Equities Tax-efficient growth, but risky 26

28 PORTFOLIO IMPLICATIONS Fixed Income Fixed income returns have been excellent Annual Bond Real Return 1980's 6.4% 1990's 9.3% Last 10 Years 4.6% Source: Triumph of the Optimists, TD Newcrest. Real return is the nominal (actual) return less the inflation rate on a pre-tax basis. 27

29 PORTFOLIO IMPLICATIONS Fixed Income but future returns will be low Estimated Next 10 Year Annual Bond Return Pre-tax Nominal Bond Portfolio YTM 4.5% Tax Payable (2) (2.1%) After-tax Nominal Return 2.4% If inflation is Real after-tax return will be 2.0% (3) 0.4% 4.1% (4) (1.6%) The yield to maturity of a diversified portfolio of 10-year term bonds. The nominal return is the return before the impact of inflation. (2) Assumes a marginal tax rate of 46%. (3) Average inflation rate for the last 10 years. (4) Average inflation rate for the last 50 years. 28

30 PORTFOLIO IMPLICATIONS Fixed Income and there has been ample precedent Annual Bond Real Return -0.6% 1940's -2.1% 1950's 0.1% 1960's -1.6% 1970's Source: Triumph of the Optimists. Real return is the nominal (actual) return less the inflation rate on a pre-tax basis. 29

31 PORTFOLIO IMPLICATIONS Equities Even conservative equities should do better Bonds Estimated 10 Year Annual Return Conservative Equity Pre-tax Nominal YTM 4.5% Pre-tax Nominal Return 3.0% 1.5% 4.5% Yield Growth Tax Payable (2.1%) Tax Payable (1.0%) After-tax Nominal Return 2.4% After-tax Nominal Return 3.5% Assumes marginal tax rate on bonds of 46% and on dividends and capital gains of 23%. 30

32 PORTFOLIO IMPLICATIONS Disciplined Approach The risks and benefits of equities can be managed with a disciplined approach Equity Characteristics Positives Long-term growth Lower tax rate on returns Inflation protection Adaptability Negatives Risk of permanent loss Company problem Valuation decline Volatile return range Investment Management Approach Asset mix Use equities and bonds Valuation discipline Diversification Quality equities 31

33 PORTFOLIO IMPLICATIONS Disciplined Approach Diversification reduces volatility Annual Return Range 40% 30% 20% 10% 0% -10% -20% S&P EAFE TSX Diversified Equity Bonds Balanced -30% -40% -50% Based on the past 20 years. TSX & Bonds in C$, others in US$. Diversified Equity portfolio is 60% TSX, 30% S&P and 10% EAFE, all in C$. Balanced portfolio is 40% Bonds, 30% TSX, 20% S&P and 10% EAFE, all in C$. 32

34 PORTFOLIO IMPLICATIONS Disciplined Approach Quality equities outperform Risk and Return 11.0% 10.0% Theoretical Annual Total Return 9.0% 8.0% 7.0% 6.0% Actual 5.0% 4.0% 13% 15% 17% 19% 21% 23% 25% Standard Deviation (Risk) Source: Russell Investment Group, JPMorgan Asset Management. Points represent actual data points of 9 Russell indices. Returns are cumulative annualized total return for 20 years to Dec. 31,

35 PORTFOLIO IMPLICATIONS Disciplined Approach Nexus holds a diversified portfolio of quality equities Equity Sector Allocation 100% 100% 100% 20% 18% Commodity 42% 25% 20% 22% Interest Sensitive 32% 27% Cyclical Defensive 13% 13% 28% 40% TSX Index Nexus Cdn Equities Nexus N. Amer. Equity Fund 34

36 INVESTMENT PERFORMANCE Nexus has performed well in a tumultuous time and over the long term Recent history has produced very unusual market returns Nexus has successfully managed through this difficult period Nexus approach delivers capital preservation and long-term growth 35

37 INVESTMENT PERFORMANCE After a wild ride, the TSX is still down 20.5% over the past two years TSX Total Return Oct. '07 to Jun. '08 Jun. '08 to Dec. '08 Dec. '08 to Feb. '09 Feb. '09 to Oct. '09 2 years to Oct. '09 0.7% -36.8% -20.5% The U.S. market return over the 2 years was the same 37.3% -9.1% The total return for the period not annualized. 36

38 INVESTMENT PERFORMANCE Compound Average Annual Return As at October 31, 2009 Events over the past two decades have produced unusual returns Annualized Market Returns Last 10 Years Last 20 Years TSX 6.4% 6.4% 7.7% -1.0% S&P 500 (US$) -1.0% 8.0% -4.0% S&P 500 (C$) -4.0% 7.6% 6.7% DEX Universe Bond 6.7% 8.4% 37

39 INVESTMENT PERFORMANCE Equity Fund Compound Average Annual Return As at October 31, Year Equity Fund Annualized Return Nexus Equity Fund Benchmark Median N. Amer. Equity Fund Top Quartile N. Amer. Equity Fund (2) (3) (3) -4.8% -5.2% -9.7% -9.8% Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. (2) Market benchmark is 5% DEX 91-Day T-Bill Index, 50% TSX, and 45% S&P 500 (C$); rebalanced monthly. (3) Mutual fund returns from Morningstar Canada. Morningstar presents returns net of management fees. 38

40 INVESTMENT PERFORMANCE Balanced Fund Compound Average Annual Return As at October 31, Year Balanced Fund Annualized Return Nexus Balanced Fund Benchmark Median Cdn Balanced Fund Top Quartile Cdn Balanced Fund (2) (3) (3) -1.7% -4.5% -4.2% -5.7% Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. (2) Market benchmark is 5% DEX 91-Day T-Bill Index, 30% DEX Universe Bond Index, 40% TSX, and 25% S&P 500 (C$); rebalanced monthly. (3) Mutual fund returns from Morningstar Canada. Morningstar presents returns net of management fees. 39

41 INVESTMENT PERFORMANCE Fund Returns Compound Average Annual Return As at October 31, Year Fund Returns Equity Fund Balanced Fund 6.8% 5.8% 4.0% 1.7% Nexus Equity Fund Benchmark (2) Nexus Balanced Fund Benchmark (3) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. (2) Equity Fund market benchmark is 5% DEX 91-Day T-Bill Index, 50% TSX, and 45% S&P 500 (C$); rebalanced monthly. (3) Balanced Fund market benchmark is 5% DEX 91-Day T-Bill Index, 30% DEX Universe Bond Index, 40% TSX, and 25% S&P 500 (C$); rebalanced monthly. 40

42 CONCLUSION Investors have experienced a very difficult period This, along with earlier events, has resulted in an unusual pattern of returns The path to the future remains uncertain Wide range of unknowns More than ever, a disciplined investment approach is required Emphasize asset mix, diversification, valuation and quality Our approach works Capital preservation and long-term growth 41