Monthly Perspectives // February 2020

15 minutes

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MetamorphosisBrad Simpson, Chief Wealth Strategist and Head of PAIR

On January 20, we hosted our TD Wealth Annual Research Conference. This year’s event was entitled “Metamorphosis,” which we thought was the perfect name for an investment research conference held at the the dawn of a new decade. We are, after all, living in a new era of immense opportunities, and considerable challenges. Change, however, is a relative concept; things change when we stay the same — meaning that one cannot avoid the pitfalls or exploit the opportunities that tomorrrow will bring by standing still.

While attempting to predict, with any degree of certainty, what might happen in the future may be an exercise in futility, we should always endeavour to be prepared for what comes next. We human beings have the incredible ability to overcome our fears, seize our opportunities and accept the fact that almost everything is transitory. We are not, in other words, victims of fate.

That’s where Metamorphosis comes in. As we shed the skin of yesterday and don the cloak of tomorrow, there is immense power in gathering a broad range specialists to share their knowledge and wisdom. For this month’s Perspectives, we thought we would take the opportunity to share some

of those great ideas with a wider audience. Due to editorial constraints, we can’t provide a full recap of every presentation at this year’s event. However, we’ve tried to parse out the best snippets.

Photo: Four Seasons Hotel, Toronto

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Photo: Four Seasons Hotel, Toronto

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As believers in the power of “consilience” — that is, the power of a multidisciplinary approach — we grouped this recap in terms of economics, asset management, capital markets, behavioural finance and sustainable investing, along with my own presentation, which provides a sampling of the above, with a good dose of humanities mixed in for good measure.

We want to thank our presenters and participants alike, without whom this day would not happen. (We hope you enjoyed it as much as we did.) Before we roll out the highlights, though, let’s take a moment to review where we stand in terms of the financial environment.

Our Current Outlook

We on the Wealth Asset Allocation Committee have modestly reduced our view for Canadian equities, from “modest overweight” to “neutral.” Prospects for the energy sector remain uncertain. Economic growth is expected to lag that of the U.S. Consumers are overleveraged. And interest rates are expected to remain low. These factors underpin our shift in positioning. Valuations may be reasonable, but the current environment has created less favourable conditions for outperformance.

We have lifted our view on international equities, from “modest underweight” to “neutral.” Throughout 2019, we maintained a

Assets Class Underweight Neutral Overweight

Fixed Income Underweight

Domestic Gov't Bonds

Investment Grade Corp Bonds

Inflation Linked Bonds

High Yield Bonds

Global Bonds - Developed

Global Bonds - Emerging

Equities Overweight

Canadian

U.S.

International

Emerging Markets

Alternative / Real Assets Overweight

Commercial Mortgages

Commercial Real Estate

Core Infrastructure

Sub Classes Neutral

Gold

Canadian Dollar vs U.S. Dollar

U.S. Dollar vs Basket of Currencies

Cash

Strategic Positioning

Source: Wealth Asset Allocation Committee

modestly bearish stance, but now believe central bank policy actions have delivered successful outcomes. We expect the current environment to be more supportive of higher growth levels. Positive geopolitical developments — Brexit, namely — and expectations for reaccelerating growth in China should also bolster international equity performance.

We have reduced our view on gold, from “neutral” to “modest underweight.” The combination of prolonged low interest rates, low inflation and expectations for a weaker U.S. currency lead us to believe that the price of gold currently exceeds fair market value. In addition, the catalysts that drove the commodity higher — namely, global trade risks and inverted yield curves — have recently diminished.

Equities (Modest Overweight)

Headline risks remain, but global growth appears to be showing signs of reaccelerating. While the global geopolitical backdrop has been shaky for quite some time, the recent escalation between the U.S. and Iran does not materially change the investment landscape. Headlines may drive higher volatility, but this should not be a primary concern to equity investors. Central banks continue to support stimulant monetary policy. Growth appears to be reaccelerating after a couple of slow quarters. And governments around the world are retreating from fiscal austerity and spending more.

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Fixed Income (Modest Underweight)

High-yield bonds continue to offer a yield advantage over government bonds. Bond valuations remain on the full side of fair. Given the lessening of recession risk due to continued central bank support, corporate securities continue to provide increased income in a low-income environment. High-yield bonds continue to offer an incremental yield advantage over government bonds, and we continue to emphasize liquidity and quality in our portfolios. If economic conditions weaken, corporate spreads could widen, particularly for companies with weaker balance sheets.

Alternative/Real Assets (Modest Overweight)

Canada is expected to lead G7 countries in population growth and has shown sound property fundamentals across sectors. As the economic cycle matures, direct commercial mortgages that focus on high-quality real estate, along with experienced borrowers with proven execution capabilities, should drive value for mortgage investors. The Canadian real

estate market remains active across property types for core, multi-generational products. Given political and economic uncertainties in many international markets, there has been an increased demand for assets located in OECD countries. In particular, there has been strong interest in infrastructure assets located within Canada, given its relatively stable environment.

Sub-Classes (Modest Underweight)

The Canadian dollar (CAD) has kept within a relatively narrow range versus the U.S. dollar (USD). A reversal in oil prices from recent gains and positive U.S. sentiment around a phase-one trade deal with China fueled widespread USD demand against other major currencies, while placing pressure on the CAD. We retain a modest underweight view of the USD, as recent data from outside the U.S. has been coming in ahead of expectations. We believe this may signal a weakening of the USD in coming months, as growth differentials between the U.S. and other major economies narrow.

Photo: Darim Abdullah

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Figure 1: Rising insolvencies despite low interest rates

2020 Global Economic Outlook: Caranci

“For Canada, the good news is that population growth is supporting the job market, where we’ve had a banner year. Here’s the bad news: It has not been an even performance. Much of the bang came in the first six months of 2019, and we trailed off significantly in hiring in the second half of last year. … Are we in fact seeing recalibration of just a hot market back to a normal market, or is the trend not our friend here? We are still forming that answer, but I wouldn't read too much into it until we get a few more reports under our belts.”

“This is a bit of a conundrum. In Canada, you’re getting a rise in insolvencies in a period of solid job and wage growth [Figure 1]. That’s why we can’t be complacent, and why the Bank of Canada may have to deliver cuts because, if you end up with any compromised situation in income and employment growth, this is just going to balloon out even faster.”

“We have a leading indicator index for the U.S. business cycle and, within it, the household indicators are all green. The opposite is true for the business indicators, which are pink or red. So we have a very clear spread or dichotomy happening in the economy, and now the question is, does the business side transmit weakness to the household side? That is your gatekeeper. Once it goes to households, it’s game over. Source: Office of the Superintendent of Bankruptcy Canada, TD Economics

This year’s conference got off to a strong start. We dove right into the macro data with our lead presenter, TD Chief Economist Beata Caranci, who gave us a comprehensive overview of the global economic landscape. Caranci ran through a series of dense graphs that shed light on leading indicators, looming risks and nascent opportunities in the world of consumer demand, business investment and international trade. Here are a few of her valuable insights:

Photo: Beata Caranci

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Avg. Contribution to Y/Y Change in National Insolvencies (%-pts)

Consumer Insolvencies, Canada (12-month moving average)

8500

9500

10500

11500

12500

13500

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

-10

0

10

20

30

40

ON AB BC N&L MB SK NB QC PEI NS

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But we’re seeing no evidence of this. The household indicators are strengthening, especially in terms of consumption metrics, and with the employment numbers still looking pretty good. So that transmission has not occurred. It reminds us of 2015/2016, which was a false signal. Weakness in the business-cycle indicator didn’t correspond with a recession. Basically, if businesses decide not to react to the environment and risks they see by reducing their workforce, then you won’t get the negative feedback loop into household behaviours.”

“We know yield curves are really good predictors of recession, but the yield curve does not have magical properties that create recessions. … That’s why we look at the real economic indicators. If there’s transmission from a flat or inverted yield curve over to the real economic indicators, that’s what this graph is showing you [Figure 2]. … When this indicator is at one standard deviation below its historical performance, there’s a pretty good chance you’re already in a recession, so you want to yellow-flag it before that point at about 0.4 standard deviations. This is where it’s currently sitting. … Which basically means 50/50 chance that in the next 12 months we go to recession.”

Standard Deviations from Normal

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

TDE Leading Index*

+ 0.4 Standard Deviation

- 0.4 Standard Deviation

- 1.0 Standard Deviation

-5

-4

-2

0

1

-1

-3

2

* Index is comprised of eight leading economic indicators. Readings of 0 are consistent with historical average (1997-present) points in the business cycle. Readings of -0.4 are typically associated with a "warning" signal, whereas readings of -1.0 are consistent with a recessionary environment. Source: TD Economics

Figure 2: TD Economic Index deteriorates, but avoiding red-flag territory.

“Phase 1 is a tenuous deal, and we’ll see if China and the U.S. can live up to it. The U.S. may not be able to deliver on the magnitude of products that are in the deal, given that we are looking at a substantial increase from what they delivered in 2017 — basically a doubling of what they would have been able to deliver at that time [Figure 3].”

Figure 3: Is the China-U.S. trade deal the real deal?

Source: U.S. White House; TD Economics

0

10

2030

40

50

60

70

80

Agriculture Energy ManufacturedGoods

Services

U.S. Exports to China under Phase 1 (US$bil)

Year 1 Year 2

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2020 Market Outlook: Pemberton, Craig, Sykes

Sykes: “The world is complicated and in turmoil, but it always has been. We have been climbing this wall of worry, and I really have a hard time finding anybody who’s bullish. There are a few, but not many. There’s so much cash that isn’t being invested. Anecdotally, If you look at cash balances for individual investors, they are high, and everyone is worried. To me, the big difference over the last 10, 15 years has been technology, how technology is being used to make companies even more profitable. If you just think about what technology has done for Nike, as one example, they can now sell direct to the consumer thanks to their website and innovation. … Think about what that does to the margin expansion, how they cut out the middle man. … I think people are going back to history and saying, ‘Yeah, but equities always have to sell off to 15x.’

I mean, what if the sell-off is to 17x? What if rates stay this low for this long, because we’re caught in this cycle where you can’t raise interest rates or you head into a recession? If that’s the case, I think equities are the place to be for the next 2, 5, 7, 10 years. The markets have made a nice move, that’s great, but high-quality equities that generate and grow free cash flow should continue to be central to client portfolios.”

Pemberton: “If we have the same types of returns in fixed income in 2020 that we had in 2019, investors are not going to like what happens to the rest of their portfolios because it will not be a good outcome. We’re probably looking at returns in fixed income of 3%-ish, which would provide a volatility-reducing asset in a client portfolio.”

Photo (from left to right): Chris Lo, Rob Pemberton, Michael Craig, David Sykes

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Next up, a panel on the global market outlook with thought leaders from TD Asset Management. On stage were Rob Pemberton, Head of Fixed Income; Michael Craig, Head of Asset Allocation and Derivatives; and David Sykes, Head of Public Equities. In a wide-ranging discussion moderated by PAIR’s Head of Managed Investments, Christopher Lo, the panel gave us their take on what the new year holds for financial markets.

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Pemberton: “This isn't a single market, and there is idiosyncratic risk in multiple places. … In the oil and gas sector right now, the biggest challenges are in the high-yield space. Most of the ones driving around the CCC space are facing serious challenges. … One of the other ones that we’ve heard a lot of headline risk about is leveraged loans. … There are certain companies that can only issue leveraged loans to fund themselves. … If I think about the ones that only issue leveraged loans to fund themselves, there was a model in the ’05, ’06, ’07 era called collateralized debt obligations in the U.S., and I seem to remember that not ending well. So understanding the risks in that space is very, very important, and the depth of research we’re doing is allowing us to really think through where there are those opportunity sets and help us avoid the potholes."

Craig: “What’s the end game for all of this? The end game is that the era that we all lived in, with this idea of more trade and globalization, is probably done. The world is splintering somewhat into regional trading blocs. There’ll be the U.S.-led market, the China-led market, and Europe is still trying to figure out how they play into that world because they have huge exposure to both markets. And so we’re going into that bifurcated backdrop. … I think technology supply chains in

China and technology supply chains in the U.S. are going to be very centric to their domestic economies. China is absolutely seeing that there is a real risk to having dependence on U.S. suppliers for their technology, and so there are concerted efforts to become independent. From an investment standpoint, the way we’re thinking about it right now is, I want to own a bit of both. I want to hedge my bets a bit. Fortunately, by joining forces with Greystone, we have capabilities in the region to invest in the onshore China market.

Sykes: “If you use the historical playbook, this should be a good year for equities. But if you get a Democratic candidate on the left who really starts to gain momentum, we need to be careful. It’s pretty clear that there is, at least in my mind, a societal battle between left and right going on in the U.S. It’s not going to be just personal tax rates, it’s going to be corporate tax rates, it’s going to be carried interest. … I don’t see that happening. History would suggest that the incumbent wins in this scenario. And, whether you like him or not, many investors attribute the strong equity performance to the current president’s policies. His deregulation policies, his corporate tax cuts, his pro-business stance has been very supportive for markets.”

Photo (from left to right): Rob Pemberton, Michael Craig

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Metamorphosis: Simpson

“We are in an environmental shift in terms of the way markets work. We’re also in a very, very different position in terms of where markets are and where we’re going to. That’s the sober look, right? That’s the thing we’ve really got to look at. The wealth management firms that get this, we think, are really going to succeed. The ones that don't are going to be in trouble.

“Now, I’ve got to tell you, from TD Wealth’s perspective, we get it. The best way to frame this is with Risk Priority Management Principle No. 2, Invest like an owner: ‘The era of big data, low trading costs and massive product proliferation has created an environment where, far too often, client investment portfolios have more in common with casino-like statistical strategies than they do with a well-constructed foundation for wealth. A banker’s methodology towards credit, a prudent stance to fiscal policy and a visionary approach to products and services — these elements comprise the foundation of why, how, and with whom, we deploy capital.’”

“In the period since the credit crisis of 2008, the financial environment has created a challenging landscape for investors. First off, interest rates have fallen to historic lows and have, in many ways, altered the pricing mechanism of the system itself, greatly distorting financial markets. Global financial markets are larger, faster and often dominated by regulatory complexity and short-termism. And we also have an accelerating pace of innovation, which is driving investment

opportunities, but also creating challenges. Perhaps the only thing that has stayed the same is the fact that the majority of clients want to preserve and grow their savings. Faced with these challenges, we believe that many of the investment strategies that have worked so well for the past 30 years are going to be less effective going forward. If we looked today, and we looked at a client, most of them have a plan based on a needed 7% rate of return. Our 10-year forecast, or our capital-market assumption, for the return on a balanced portfolio is 4.1%. So that’s a 2.9% difference between what they have in their plan and what we think it’s going to be able to achieve. That’s the dividing line. … That is the conundrum.”

Photo: Brad Simpson

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Following up on our core economic and market analyses, yours truly took the stage for a high-level view of the market trends impacting investors and the wealth management industry.

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Photo: Four Seasons Hotel, Toronto

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“To prosper in the new environment, investors need a new way to manage their portfolios. They need a well thought out wealth plan and a contemporary portfolio approach with true diversification, balancing broad asset allocation and risk-factor diversification with a deep understanding of financial behaviour. True Diversification is the acknowledgement that there is no single asset class, risk factor or investor behaviour that can achieve consistent returns. That’s why we incorporate all three approaches.

“When it comes to asset class, we employ a greater spectrum including: equity, fixed income, absolute return and private capital. When TD Financial Group went out and purchased Greystone, that was unbelievably significant to us here at TD Wealth. This is a world-class asset manager that specializes in managing real assets for pensions and endowments. At TD Wealth we utilize a pension-style methodology to allocate capital. To have our peers over at TD Asset Management — who already had considerable expertise managing assets this way — add a specialty manager like this, it was a real boon. Private debt and private real assets are going to be a big part of our investment solutions in the decade ahead.

“We also look at risk factors. Just like biological organisms, investment portfolios have a kind of DNA, composed of numerous risk factors. Equity, fixed income, alpha, currency and illiquidity risk are some of the most important ones, and provide a new way to think about portfolio diversification.

“The final element of True Diversification is behaviour. How investors make decisions is a key determinant of long-term performance. We are rational, but sometimes we rationalize. We are overconfident with things that are familiar and

overcautious with things that are not. We call these behaviours, and many others, “blind spots” and we use discovery tools to help investors make better decisions by better understanding themselves.”

“128 months, 132 months — the longest economic expansion in history, the longest bull market in history. In November, we were talking about this as a late-stage economy. But you know how I always talk about how humans inflict their will on the investment world and how the investment world correspondingly adapts? Well, if you looked at all the stats that Beata was walking through today, you know what? It used to look like a late-stage economy, and now it looks like a mid-stage economy. What?! Just like that. You’re telling me you can go to a mid-stage economy at 128 months of expansion? It’s a very different world out there.”

“How to invest for the next decade is a conundrum for sure, but one we know we are ready for. Let's begin here by reading and sharing our most recent quarterly strategy report, Conundrum, and then checking back every three months to reflect, adapt and move forward.”

Why you need a new approachThe financial environment has created a challenging landscape for investors:

• Interest rates have fallen to historic lows• Financial markets have become increasingly volatile

• Global financial issues have become highly interconnected

Many of the investment strategies that have worked so well for the past thirty years are less likely to be effective going forward.

Hazard F riction

D i s t o r t e d F i n a n c i a lM a r k e t s

A c c e l e r a t i n gP a c e o f I n n o v a t i o n

P o l i c y / R e g u l a t o r y C o m p l e x i t y S h o r t - T e r m i s m

Change & Opportu nity

Conundrum: quarterly strategy report, Q1 2020

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Do well and good: Jantzi

“There’s a myriad of different terms out there: green investing, socially responsible, all the rest of it. I recognize the fact that, apart from being confusing, this can be downright distracting and annoying. But don’t get caught up in what to call it. … What I am talking about is a pretty simple construct. The way that we work with clients and how I understand sustainable investing is, integrating environmental, social and governance factors — risks and opportunities — into the investment decision-making process. It’s not about throwing out all the different things you’re doing on the financial side, all the good work that you guys are doing, all the smart people you have looking at the traditional things we look at. It’s simply about adding another tool.”

“Sustainable investing is growing exponentially. It’s growing in all corners of the world, and it’s driven by a couple of things

… The Principles for Responsible Investment is as good an example of global growth as any other [Figure 4]. You can think of the PRI … as sort of the industry association for ESG globally. There are six principles that commit signatories to embrace, in a practical and real sense, the integration of ESG into their investment decisions. When that launched in the mid-2000s, there were 19 signatories, including the Canada Pension Plan Investment Board. As of April last year, there are almost 2,500 signatories, and collectively they manage over $86 trillion of assets with ESG criteria in place.”

“ESG has a long history in Europe, and it’s the single largest market for sustainable investment on both the institutional and retail and wealth side. But we’re seeing growth there … slowing down. In fact, the growth drivers for sustainable finance are now in other places around the world [Figure 5]. Australia, on the retail and wealth side, is very interesting, and there are a lot of similarities between the Canadian and Australian markets. We’re seeing very robust growth down under. Japan, an incredibly robust market for ESG, starting from a smaller base. But more importantly for today’s discussion, North America is seeing an acceleration of interest and growth in the sustainable finance investing space. And as I say, I believe this provides you with an opportunity.”

“Until two or three years ago, I was spending all my time with institutional clients. That is changing, and it’s changing in a big way. It’s changing in all markets around the world, but most powerfully right here in North America, here in Canada and south of the border. And as assets are flowing in, as sustainable investing is growing exponentially, we are seeing the retail and wealth segment of the market garnering a bigger piece of the pie. Something is happening.”

“I’ve been in front of hundreds if not thousands of trustees and boards of directors and portfolio managers who tell me, ‘Jantzi, it’s really nice what you’re trying to do. You know, I like the idea of looking at environmental and social issues. I care about those things, but when it comes to investing, I’ve got to ignore that. It’s just the bottom line. If I look at those things, I’m transgressing my fiduciary duty. It’s against the law.’ Well, again, with the exception of maybe the United States, that’s flipped on its head almost entirely. And now I think that’s also changing south of the border in a fairly dramatic way.”

Source:Sustainalytics

Figure 4: Market Opportunities: Sustainable investing continues to grow globally

Total Assets Under ManagementAsset Owners’ Assets Under Management

Number of Asset OwnersNumber of Signatories

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

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PRI No SignatoriesPRI Assets Under Management (US$ Trillion)

Over the lunch hour, we were thrilled to welcome our guest speaker, Michael Jantzi — a legend in the world of ethical investing, who founded the Jantzi Social Index and Jantzi Research before merging it with Sustainalytics, where he currently serves as CEO. Jantzi’s presentation drove home a compelling argument about the rise of environmental, social and governance (ESG) criteria as part of fundamental investment analysis. Far from demanding a trade-off, ESG investing is being embraced by institutional and, increasingly, retail investors.

Photo: Michael Jantzi

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11% 38% 307% 46%42%Europe United States Japan

Australia and New ZealandCanada

Figure 5: ESG Asset Growth by Region

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“We all overestimate our willpower and self-control. We all do. At the beginning of the year, I was like, I’m going to be more fit this year. I’m going to eat better. I’m going to do all these things. I had willpower coming out of my ears. This weekend, I had a big Toblerone bar and I was binge-watching Peaky Blinders on Netflix. None of us have as much self-control as we think we do. So we need to outsource it, and we do it for many things: dietitians, nutritionists, fitness instructors, personal trainers, and advisors, right? You’re the outsourced. … We need somebody — a good advisor or a portfolio manager — to really hold us to our willpower, so we don’t overreact when the markets drop. No one can see their own blind spots.”

“The women we surveyed tended to be higher in conscientiousness than men — self-disciplined, sets a plan and sticks to it, efficient and organized. … So what do you do about it? For a couple, you get her to meetings. Get her there as best you can, because we know oftentimes women don’t come to all the meetings. … The downside is, women also tend to be more reactive — nervous, feels a little discomfort as soon as a market event happens. She should be on your call sheet, not him, when this happens. We all feel more comfortable talking to the person who is less reactive, but she’s the one you should be talking to. Women will live longer than their husbands, on average, by about eight to 10 years. In the first year after becoming a widow, 80% of those women are going to leave their advisor. Why? Because no one ever talked to them.”

“Older business owners tend not to think as much of you as younger ones do — a lot less confidence, a lot less value, not ready for my retirement. Why? It’s that retirement nest egg they thought they had with their business. They started their business 20 years ago, 30 years ago. ‘I’m feeling good. I have a business. I have a retirement nest egg, or I’m going to pass it on to my children, etc.’ And possibly that’s not coming true because businesses obviously have changed dramatically in the last while.”

Applying Behavioural Finance to Client Segments: Brenneman

“Young people tend to be less agreeable, more questioning. ‘Don’t tell me what to do; I know what to do.’ … So don’t tell. Discuss and collaborate. Let them be a bit of a voyeur. Split it apart for them and say, ‘All right, I’ll take care of your big savings, your long-term, all that kind of stuff. But let’s set aside some money and let you have that DI account. Play around, do what you want, but let’s not mess with your big stuff. Let’s not mess with the stuff that’s going to get you to your big goals.’”

ReflectiveCalm under Pressure

ConventionalIn the Moment

Questioning

SpontaneousQuick to ReactInnovativeSelf-DisciplinedAmenable

Women: More ReactiveNervous and feel discomfort during life events & market events

ReflectiveCalm under Pressure

ConventionalIn the Moment

Questioning

SpontaneousQuick to ReactInnovativeSelf-DisciplinedAmenable

Young People: Less ConscientiousIn the moment / Have trouble seeing the long view

ReflectiveCalm under Pressure

ConventionalIn the MomentQuestioning

SpontaneousQuick to ReactInnovativeSelf-DisciplinedAmenable

Men: Less AgreeableQuestion the value of your advice / Very direct

In our first break-out session after lunch, we switched gears to explore the more human side of investing. TD Wealth’s Head of Behavioural Finance, Lisa Brenneman, took the main stage, guiding her audience through the most up-to-date research on what drives investment decisions. Brenneman's presentation drilled into key findings from TD Wealth's comprehensive behavioural finance study of 1,600 affluent investors.

Photo: Lisa Brennaman

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Private Investments and Real Assets: Antonatos, Welter, BeckAlong with break-out sessions on equities and fixed income, we were sure to include a panel discussion on private investments and real assets, which have become the new standard for institutional investors and are also becoming an important allocation for individual portfolios. On stage were Ted Welter, Chief Investment Officer of Alternatives at TD Asset Management; Donna Beck, VP and Director of Private Debt at TDAM; and Larry Antonatos, Portfolio Manager of Real Asset Solutions at Brookfield Asset Management.

when rents are accelerating and occupancy is growing, you can grow your cash flows pretty fast. But it also has more downside, because the opposite is true. So I look to real estate as something I really want to overweight in the right part of the cycle and underweight in the wrong part of the cycle, and infrastructure as more of an all-weather constant allocation.”

Antonatos: “What we do at Brookfield is really focused on value creation. … Our private fund business is dominated by closed-end funds, and the reason for this is, we want to create a lot of value. If we’re going to lock your money up for 10 years, we want to give you a high return. … When we create value in our private funds, it’s about buying the asset at the right price, fixing the management, the capital structure, but most importantly rolling up our sleeves, getting our hands dirty and operating the asset better in order to grow the cash flow. … We can’t do that in an open-end fund. We need to do that in a closed-end fund where we have the luxury of time to create really significant returns. I would say that’s really where I would distinguish Brookfield’s strategy from many others.”

Beck: “We’ve been talking about owning real assets, but with TDAM's investment-grade private debt offering, we’re financing real assets. Usually when I’m asked to compare private debt to something, it’s to the public markets. One of the key differences is liquidity. Private debt investments are generally cradle-to-grave as there is no active market to trade in and out of the security. The key benefit, however, is enhanced yield without taking on greater risk.”

Photo: Ted Welter

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Welter: “The weighting of the real estate and infrastructure? … Both asset classes are expected to continue to provide positive return contributions with lower volatility. Alternative asset classes should be foundational to Client asset allocation. … But the question of market timing? … The first step is determining the implementation of alternatives in client asset allocation. The next step is the target weighting and the implementation strategy, working with the client learning, teaching and confirming the value the assets provide to client risk-adjusted returns. … Market timing is a tactical adjustment to client target weightings. … It is not about whether or not to be in the asset class. We fundamentally believe clients should be invested to their target weights.”

Antonatos: “It reminds me of New Coke. Michael Jordan was a spokesperson at the time, and at one point somebody asked Michael on TV, what do you like better? Old Coke or New Coke? And he smiled and said, ‘They both taste great.’ Well, I think real estate and infrastructure both taste great. … Canadian institutional portfolios typically have around 20% of their assets in real assets, and the bulk of that is real estate and infrastructure. I would not advocate 20% in real estate, nor would I advocate 20% in infrastructure. I would advocate 10% in each. They behave differently, even though they have a lot of the same drivers in terms of interest rates and valuation. The business models are so different. Real estate can be dramatically impacted by cycles of supply and demand. Infrastructure, much less so. So I think it’s nice to have both. … Real estate has a lot more upside potential, because

Photo (from left to right): Donna Beck, Larry Antonatos

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Antonatos: “Size makes a difference. We have very big private funds, and we believe we have some competitive advantage in going, particularly in infrastructure, where a lot of the assets are very, very large. I mean, think about real estate. Any two of us in this room could get together and buy a little office building or a little apartment building. But it’s very hard for any two of us to get together and buy the 407 toll road. You need a lot of money to buy the big infrastructure assets. So the larger the asset, the fewer players that are there. I don’t want to say that makes it any easier … but it allows us to do certain projects that other people can’t do.”

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Closing Remarks: Kelly, Simpson

Kelly: “We’re in the business of creating value for clients. We build long-term relationships and try to do great things for families, and I think more and more that anchors around the four pillars: building net worth; implementing tax-efficient strategies; protecting what matters; and leaving a legacy.”

Kelly: “I think it’s incredibly important to have a set of principles that matter, that you’re passionate about, and that you communicate. … There’s an opportunity in the investment philosophy space to really stand up and say, ‘This is what

we stand for. This is what we believe. This is how we invest for clients.’ … We need to be doing that at the firm level. We need to be super clear in terms of what we stand for, what we believe.”

Simpson: “What we have at TD Wealth now is a world-class platform. And I’d argue that we’re doing things now that very few other organizations are doing. To me, that is the vision for the future here.”

Photo (from left to right): Brad Simpson, Dave Kelly

Metamorphosis

Finally, in a brief fireside chat, we welcomed to the stage Dave Kelly, TD Wealth’s Head of Private Wealth Management and Financial Planning. Dave and I closed off the conference by pulling away from investment strategies and asset classes and returning our focus to the client — how we’ve improved our offering in recent years and where we’re going as an organization.

15

Canadian Indices ($CA) Return Index 1 Mo (%) 3 Mo (%) YTD (%) 1 Yr (%) 3 Yrs (%) 5 Yrs (%) 10 Yrs (%) 20 Yrs (%)

S&P/TSX Composite (TR) 61,515 1.74 5.88 1.74 14.98 7.21 6.53 7.68 6.30

S&P/TSX Composite (PR) 17,318 1.49 5.07 1.49 11.44 4.02 3.37 4.55 3.63

S&P/TSX 60 (TR) 2,974 2.05 5.54 2.05 14.80 7.64 7.04 7.93 6.36

S&P/TSX SmallCap (TR) 953 -2.88 5.13 -2.88 4.50 -2.01 2.48 3.10 0.04

U.S. Indices ($US) ReturnS&P 500 (TR) 6,551 -0.04 6.72 -0.04 21.68 14.54 12.37 13.97 6.33

S&P 500 (PR) 3,226 -0.16 6.19 -0.16 19.28 12.28 10.09 11.63 4.28

Dow Jones Industrial (PR) 28,256 -0.99 4.47 -0.99 13.03 12.46 10.48 10.87 4.86

NASDAQ Composite (PR) 9,151 1.99 10.35 1.99 25.67 17.68 14.57 15.60 4.30

Russell 2000 (TR) 8,167 -3.21 3.68 -3.21 9.21 7.28 8.23 11.88 7.50

U.S. Indices ($CA) ReturnS&P 500 (TR) 8,669 1.84 7.31 1.84 22.50 15.13 13.27 16.47 5.84

S&P 500 (PR) 4,268 1.71 6.78 1.71 20.09 12.86 10.96 14.08 3.80

Dow Jones Industrial (PR) 37,391 0.87 5.05 0.87 13.79 13.05 11.36 13.31 4.38

NASDAQ Composite (PR) 12,109 3.90 10.97 3.90 26.52 18.29 15.49 18.14 3.82

Russell 2000 (TR) 10,808 -1.39 4.26 -1.39 9.95 7.83 9.09 14.34 7.01

MSCI Indices ($US) Total ReturnWorld 9,921 -0.58 5.34 -0.58 18.40 12.08 9.62 10.48 5.32

EAFE (Europe, Australasia, Far East) 8,465 -2.08 2.27 -2.08 12.68 8.30 5.63 6.25 3.99

EM (Emerging Markets) 2,451 -4.66 2.38 -4.66 4.21 8.28 4.87 4.14 6.75

MSCI Indices ($CA) Total ReturnWorld 13,128 1.29 5.92 1.29 19.20 12.66 10.50 12.91 4.84

EAFE (Europe, Australasia, Far East) 11,202 -0.24 2.84 -0.24 13.44 8.86 6.47 8.58 3.52

EM (Emerging Markets) 3,244 -2.87 2.95 -2.87 4.92 8.84 5.71 6.43 6.25

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Benchmark Bond Yields 3 Months 5 Yrs 10 Yrs 30 Yrs

Government of Canada Yields 1.64 1.28 1.27 1.43

U.S. Treasury Yields 1.53 1.32 1.51 2.00

Canadian Bond Indices ($CA) Total Return Index 1 Mo (%) 3 Mo (%) YTD (%) 1 Yr (%) 3 Yrs (%) 5 Yrs (%) 10 Yrs (%)

FTSE TMX Canada Universe Bond Index 1,156 2.91 2.21 2.91 8.53 4.61 2.84 4.41

FTSE TMX Canadian Short Term Bond Index (1-5 Years) 740 1.04 0.96 1.04 3.48 1.97 1.55 2.36

FTSE TMX Canadian Mid Term Bond Index (5-10) 1,242 2.89 1.90 2.89 7.26 3.77 2.64 4.67

FTSE TMX Long Term Bond Index (10+ Years) 2,028 5.26 3.95 5.26 16.09 8.70 4.60 7.35

CurrencyCanadian Dollar ($US/$CA) 75.57 -1.84 -0.55 -1.84 -0.67 -0.52 -0.79 0.46 0.53

Regional Indices (Native Currency, PR)London FTSE 100 (UK) 7,286 -3.40 0.52 -3.40 4.55 0.87 1.54 3.45 0.75

Hang Seng (Hong Kong) 26,313 -6.66 -2.21 -6.66 -5.83 4.05 1.43 2.72 2.67

Nikkei 225 (Japan) 23,205 -1.91 1.21 -1.91 11.71 6.81 5.60 8.57 0.86

HFRI Indices ($US) Total ReturnHFRI Fund Weighted Composite Index 14,738 -0.36 2.55 -0.36 6.31 3.99 3.49 4.09

HFRI Fund of Funds Composite Index 6,404 0.31 2.92 0.31 6.04 3.66 2.41 2.90

HFRI Event-Driven (Total) Index 16,878 -0.60 1.87 -0.60 3.61 3.50 3.94 4.79

HFRI Equity Hedge Index 22,222 -1.03 3.10 -1.03 7.04 5.14 4.55 4.71

HFRI Equity Market Neutral Index 5,633 0.01 0.57 0.01 0.88 1.94 2.47 2.59

HFRI Macro (Total) Index 15,370 0.56 1.49 0.56 6.61 1.78 0.43 1.51

HFRI Relative Value (Total) Index 12,760 0.62 2.35 0.62 5.59 3.76 3.96 5.10

HFRI Indices ($CA) Total ReturnHFRI Fund Weighted Composite Index 19,504 1.60 3.12 1.60 7.03 4.51 4.31 6.36

HFRI Fund of Funds Composite Index 8,475 2.29 3.48 2.29 6.75 4.17 3.22 5.15

HFRI Event-Driven (Total) Index 22,336 1.36 2.42 1.36 4.30 4.02 4.76 7.08

HFRI Equity Hedge Index 29,409 0.92 3.66 0.92 7.76 5.67 5.38 6.99

HFRI Equity Market Neutral Index 7,454 1.98 1.12 1.98 1.56 2.45 3.28 4.83

HFRI Macro (Total) Index 20,341 2.55 2.04 2.55 7.33 2.29 1.22 3.73

HFRI Relative Value (Total) Index 16,886 2.60 2.91 2.60 6.29 4.28 4.78 7.40

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