Radius ETF Forum Panel Discussion: Getting Active with Income

Transcription

1 ETF solutions for every investor TM Radius ETF Forum Panel Discussion: Getting Active with Income June 2014

2 Horizons ETFs Canada AUM Summary 25 Actively Managed ETF listings 51% AUM 18 Benchmark ETF listings 26% AUM 71 ETFs $4.6 Billion AUM 28 Leveraged, Inverse, and Volatility ETF listings 23% AUM As at April 30, 2015 Horizons ETFs is a member of Mirae Asset Global Investments 2

3 Horizons ETFs Canada 2014 Awards 2014 FUNDGRADE A+ AWARDS Winner of 2014 FundGrade A+ Horizons S&P 500 Index ETF (HXS) Winner of 2014 FundGrade A+ Horizons Active Corporate Bond ETF (HAB) 2014 MORNINGSTAR AWARDS* Best Fixed Income ETF Horizons Active Preferred Share ETF (HPR) Best Equity ETF Horizons Active Global Dividend ETF (HAZ) 2014 LIPPER AWARDS Best U.S. Equity ETF Horizons S&P 500 Index ETF (HXS) Best Commodity ETF Horizons NYMEX Crude Oil ETF (HUC) *Morningstar Awards Morningstar, Inc. All Rights Reserved. Awarded to Horizons Exchange Traded Funds for the Horizons Active Global Dividend ETF ( HAZ ) named Best Equity ETF and the Horizons Active Preferred Share ETF ( HPR ) named Best Fixed Income ETF. The Morningstar fund category awards are based on both quantitative and qualitative criteria and are not solely based on performance. For more information on the Morningstar criteria, methodology and how winners are selected, please visit Horizons ETFs is a member of Mirae Asset Global Investments 3

4 Fiona Wilson Fiona Wilson, MBA, CFA Portfolio Manager - Systematic Strategies Fiona Wilson joined Guardian Capital LP in 2011 as a Portfolio Manager in our systematic strategies team. Fiona began her career as an options trader at CIBC and progressed to become Head of Currency Options Marketing, South East Asia for Societe Generale with postings in Tokyo, Singapore and London. Her experiences included structuring classical and exotic option trading and hedging strategies for central banks, corporate and institutional clients throughout Asia. She subsequently took on the role of Portfolio Manager, Global Derivative Instruments with Ontario Municipal Employees Retirement System (OMERS). Fiona graduated with a Bachelor of Arts from the University of Western Ontario and obtained her Honours Bachelor of Commerce and MBA from the University of Windsor. Fiona is also a CFA Charterholder. 4

5 DEREK BROWN Derek Brown, CFA Assistant Portfolio Manager 12 years of industry experience 5 years with the firm, Manages Fiera s Tactical Fixed Income Strategy -- $3 billion AUM with institutional clients Mercer, the pension consulting firm, has ranked Fiera s tactical fixed income strategy as the #1 performing Canadian fixed income strategy of the past decade in its Survey of institutional investment strategies 5 A Member of Mirae Asset Financial Group

6 Investment Philosophy > Sources of Alpha: Corporate Bonds Fund HY Bonds Fund 6

7 Historical Performance > HY bonds have historically outperformed other fixed income asset classes. > HY bonds have displayed a negative correlation to interest rates over the past 20 years. Sources: Bloomberg, Merrill Lynch 7

8 Historical Risk-Adjusted Returns > HY bonds have outperformed equities, on a risk-adjusted basis, over the past 20 years. > Within the HY universe, BBs have provided the highest level of return per unit of risk. Risk-Adjusted Returns - Annualized (1995 to YTD) Annualized Return Standard Deviation * Sharpe Ratio ** FTSE TMX Canada All Corporate Bond Index 7.66% 4.12% 1.16 FTSE TMX Canada Universe Bond Index 7.23% 4.33% 1.01 FTSE TMX Canada Federal Bond Index 6.63% 4.10% 0.91 High Yield Index 8.23% 6.67% 0.84 BB 8.56% 5.65% 1.05 B 7.61% 7.07% 0.71 CCC 7.30% 10.48% 0.45 S&P % 17.58% 0.39 * Calculated using weekly returns. ** Risk-free returns calculated using US and CAD 3m T-Bill. Sources: Bloomberg, Merrill Lynch, FTSE TMX 8

9 UST Curves at Credit Cycle Peaks > While each interest rate cycle had STYLE some distinctive traits, one OBJECTIVE notable takeaway was that each credit cycle downturn was preceded by a flattening trend in the yield curve. Sources: Bloomberg, CreditSights 9

10 Annual Default Rates > By carefully monitoring the credit STYLE cycle and reducing exposure OBJECTIVE to riskier issuers when appropriate, active managers can minimize the impact of a default cycle on their portfolios. Source: S&P (2014 Annual U.S. Corporate Default Study and Rating Transitions) 10

11 S&P 500 Company FV of Debt Outstanding (M) Market Cap (M) Apple Inc 39, ,773 Exxon Mobil 18, ,549 Microsoft Corp 30, ,484 Johnson & Johnson 14, ,717 Berkshire Hathaway'B' 22, ,195 Wells Fargo 135, ,059 General Electric 222, ,710 JPMorgan Chase & Co 204, ,861 Procter & Gamble 20, ,280 Pfizer, Inc 29, ,223 *Ranked by Market Cap Index Composition High Yield Universe Company Investment Grade Universe Company FV of Debt Outstanding (M) Market Cap (M) Bank of America 190, ,433 Verizon Comm. 109, ,532 JP Morgan & Chase Co 204, ,024 General Electric 222, ,587 Goldman Sachs 168,452 87,131 Morgan Stanley 139,262 71,574 Citigroup 159, ,272 Wells Fargo & Co 135, ,376 AT&T 95, ,563 HSBC 111, ,943 *Ranked by Amount of Debt Outstanding in the The BofA Merrill Lynch US Corporate Index FV of Debt Outstanding (M) Market Cap (M) Sprint 79,513 19,433 HCA Holdings 29,310 32,352 Valeant Pharma 33,050 87,198 General Motors 21,611 57,917 Ally Financial 31,922 9,871 T-Mobile 42,219 26,483 Charter Comm. 21,077 21,377 Navient Corp. 17,773 8,093 Aercap Holdings 22,025 9,694 First Data Corp. 20,749 N/A *Ranked by Amount of Debt Outstanding in the The BofA Merrill Lynch US High Yield Index

12 Portfolio Composition

13 Globalization: Convergence Region, country, size, style diminished as alpha sources Industry group and sector now at the forefront of alpha generation Bottom-up stock selection is key Monthly Top-Down Dispersion as Fraction of Total Dispersion 40% 35% 30% 25% 20% 15% 10% 5% 0% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Industry Group Sector Style Size Country Region Sources: MSCI World - Morgan Stanley 13

14 Dividends Outperform and Reduce Volatility: U.S. Total Portfolio Returns Standard Deviation Source: All data from Ned Davis Research Inc. Jan 1972 Feb 2015, Equal Weighted,% 14 Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to

15 Philosophy: How to capture the jump from bonds to stocks Yield carry and stock selection as alpha drivers rowth Dividend growth is a significant factor for long term returns and depends on consistent earnings growth Emphasis on dividend growth and sustainability through a combination of relative and intrinsic valuations across different Global factor buckets Avoid yield for yield sake by looking at a stocks cash flow visibility and estimation risk of terminal value ayout ustainability Traditional GPS Early Stage Quality over Quantity through balance sheet management A Globally competitive revenue stream and margin efficiency to sustain strong ROE and dividends Steady Growth Rapidly Increasing Growth Mature Growth Investable Universe: All stocks in MSCI ACWI and REITs that pay dividends regardless of where they are on the evolutionary chart 15

16 GPS: Empirical evidence Performance of dividend payers within Broad U.S Market Index Cumulative performance Earnings growth coupled with Dividends performs best Factor Rank IC Top Quintile Dividend Growers (red) out performed Top quintile Earnings growers (green) investors reward a growing and stable payout of earnings strategies ( Orange and Blue) that combine top quartile dividend and earnings growth significantly out perform single factor approaches Companies with high payout ratios almost uniformly underperform avoiding payout tails is important for sustainability of dividends 16

17 Three Primary Dividend Classes High Yield Dividend Achievers Dividend Growers Dividend Payers Low Yield High Growth Low Growth 1. Dividend Payers High yield, stable cash flow, modest dividend growth Cash flow allocated primarily to dividends and balance for debt re-placement and capex 2. Dividend Growers Low to Median yield, good cash flow growth, solid dividend growth Cash flow allocated evenly to dividends and re-investment for further growth, uses buybacks also Dividend Achievers Lower yields, steady cash flow growth, residual policy for dividends Cash flow allocated primarilyto re-investment for growth and meet payout targets, uses buybacks significantly

18 18 Portfolio Positioning - HAZ

19 Fed is not everything, it s the only thing? Fwd. 12 m P/E of High Quality by earnings variability VS Low Quality stocks B+ or Better B or Worse Fed rate cut Fiscal Stimulus Gov't bailout 1.2 QE2 LTRO QE When bad quality fell, external stimulus through rate cuts, QE has always caused the valuation gap to widen, keeping bad companies afloat longer than necessary. When stimulus cycle subsides quality stocks will see a higher re-rating as they can fund their own growth and sustain their cash flows. 19 It s based on the BofAMLUS Coverage Universe and we pull the S&P Quality Rank for each stock. (These ranks are based on a 10 year history of earningsand dividend stability; B+ or better we consider high quality and B or worse we consider low quality). We take the relative forward P/E for each bucket. The calculation is (Average Market Cap for B+ or Better Stocks/Average Market Cap for BofAMLUniverse ) divided by (Average Net Income for B+ or Better Bucket/ Average Net Income for BofAMLUniverse ). That s to get blue line (relative PE for B+ or Better ), then the same is done for B or worse universe.

20 Volatility Could Continue To Increase Yield Curve (Inverted, with 2- year lead) vs. VIX 20 Source: BofA Merrill Lynch US Equity & US Quant Strategy, CBOE, S&P

21 Quality: Hedge against equity volatility Correlation of BofAML Quality Indices 12-month returns to 12-month changes in VIX 21 Source: BofA Merrill Lynch US Equity & US Quant Strategy, CBOE, S&P

22 A fundamental mispricing of risk Price Beta vs. Earnings risk for S&P 500 Sectors 22 Source: BofA Merrill Lynch US Equity & US Quant Strategy

23 Tech Stocks are the New Dividend Payers Tech Companies Are Cash Rich Source: Cornerstone Macro, January 2015, Benchmark: S&P 500 Tech Dividends Are Fairly Reliable Source: Cornerstone Macro, January 2015, Benchmark: S&P Source: Cornerstone Macro, January 2015, Benchmark: S&P 500

24 Disclaimer Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by AlphaPro Management Inc and Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. Certain Horizons Exchange Traded Products may have exposure to leveraged investment techniques that magnify gains and losses which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk, which are described in their respective prospectuses. The Prospectuses contain important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing. The indicated rates of return shown are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends and distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Standard & Poor s and S&P are registered trademarks of Standard and Poor s Financial Services LLC ( S&P ) and TSX is a registered trademark of TSX Inc. ( TSX ). These marks have been licensed for use by AlphaPro Management Inc. and Horizons ETFs Management (Canada) Inc., where applicable. The Horizons Exchange Traded Products are not sponsored, endorsed, sold, or promoted by S&P or TSX and their affiliated companies and none of these parties make any representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in the Horizons Exchange Traded Products. All trademarks/service marks are registered by their respective owners. None of the owners thereof or any of their affiliates sponsor, endorse, sell, promote or make any representation regarding the advisability of investing in the Horizons Exchange Traded Products. Complete trademark and service-mark information is available at Horizons ETFs is a member of Mirae Asset Global Investments 24