Post on 10-Oct-2020
Welcome | 2018 Strategic Outlook Introduction by Mark Therriault, Financial Advisor/Partner
WHAT
IS
WEALTH
MANAGEMENT?
NWM
Planning Process
circa 1994
2018 Strategic Outlook Rob Edel, Chief Investment Officer
Our Agenda
Investment Roadmap 2017 in Review
Good Neighborhood Turning Bad Points of Interest
Oct 19, 1987 Oct 18, 2017
2017 in Review S&P 500
2017 S&P 500 +21.8%
+1% Declines
Last
+5% Decline
June 24-27 2016
Feb 2, 2018
404 Days
Average since 1929
92 Days
Feb 8, 2018
-10.1% 2017 S&P 500 +21.8%
1%+ Declines
2017 in Review S&P/TSX
Sept 8, 2017
+9.2%
2017
S&P/TSX
+9.1%
2017 in Review Canadian and U.S. Yield Curves
Yield Curve
Yield Curve
Dec 31, 2017
Dec 30, 2016
Dec 31, 2017
Dec 30, 2016
0.74%
1.69%
2.04%
1.72%
+95 bps
+32 bps
1.19%
1.88% 2.44%
2.41%
+69 bps
Mar 20, 2018
Investment Road Map The Art of Forecasting – Tricks of the Trade
Business Insider Jan 4, 2016
Investment Road Map
Investment Road Map
Maximum sustainable output
Recession
rate cuts
Early recovery,
low inflation,
low policy
rates
Late
recovery,
rate hikes,
rising inflation
Stagflation,
High Inflation
Slowing Growth
Rate
Cuts
Rate
Hikes
Time Federal reserve: +1.8%
Investment Road Map
The Daily Shot – Jan 9, 2018
Investment Road Map
Maximum sustainable output
Federal reserve: +1.8%
Rate
Hikes
INFLATION
Investment Road Map
Barron’s – Dec 30, 2017 The Daily Shot – Jan 30, 2017
5% 10 Year 3.5% 10 Year
Investment Road Map
Investment Road Map
Investment Road Map
Morgan Stanley Research – Sunday Start – What’s Next in Global Macro Dec 10, 2017
Investment Road Map
U.S. Tax Reform: • Corp rate 35% to 21%
• U.S. Corporations hold estimated $2.6 trillion overseas
• Full expensing of business investment for five years
http://download.tomtom.com/open/manuals/LIVE/TomTom-EU-LIVE-RG-en-gb.pdf
Maximum Sustainable GDP
Time
Investment Road Map
McKinsey & Co.
Productivity +2.0% vs. +0.5%
+1.8%
Bad Neighborhood Trump
Source: Financial Times, February 2018
Trade War – China
North Korea
Syria/Middle East
Mueller Investigation
Stormy Daniels
Tomorrows Headlines Hedgeye – Cartoon of the Day – Mar 5, 2018
Investment Road Map
Bad Neighborhood Monetary Policy
Past 7 recessions
Fed cuts rates +500 bps
Fed Funds - 1.50%
Expected Peak – 3.0%
Can’t cut 500 bps
Bad Neighborhood Fiscal Policy
JP Morgan Michael Cembalest “Eye on the Market – Feb 21, 2018
Bad Neighborhood Debt: Canadian Consumer
WSJ – Feb 19, 2018 https://www.bankofcanada.ca/wp-content/uploads/2017/12/san2017-24.pdf
Bad Neighborhood
DEFLATION INFLATION
Secular Stagnation
Low Productivity
High Debt Levels
Stagflation
Inflationary
Expectations
Bloomberg – Feb 3, 2018
Points of Interest Bitcoin: Blockchain
MIT Study: $270 - $317 million raised by ICO’s are
frauds or scams
Charles Kindleberger: “There is nothing so disturbing to
one’s wellbeing and judgement as to see a friend get rich.”
Blockchain
• A secure database, or ledger, spread across multiple computers
Bitcoin • Digital Global Currency – used for everyday transactions?
• Store of value?
• Bitcoin Energy Consumption Index = Algeria
Points of Interest Bitcoin: Useless Etherium Token
Contributions in US$’s - $276,342
Enough to buy 230 televisions!
Points of Interest Marijuana
1 Year Cannabis Stock Performance
Barron’s – Mar 30, 2018
Canopy CEO Bruce Linton ROB Magazine – Nov 12, 2017
Barely existed 3 years ago
Now dozens of companies
~$30 billion market cap
Points of Interest Marijuana
Globe & Mail – Feb 8, 2018 Globe & Mail – Feb 8, 2018
Barron’s Mar 30, 2018
60 Private and public companies
Health Canada granted 89 licenses
Feb 1 – 244 more in review stage
Oregon/Colorado – wholesale $0.50 - $2.00
Commodity business
Low barriers to entry
No sustainable advantage
Canada • Deloitte: After legalization
• $4.9-$8.7 billion market
• Low=rum, High=wine
• Price: $10/gram initially
Constellation Brands • U.S. $50 billion Market
• Global: $200 billion in 15 years
• Wine: $60 billion
• Tobacco: $75 billion
Points of Interest Active vs. Passive Investing
Strategas – Technical Strategy & Analysis October, 2017
Active equity mutual funds
• 2009-2017 $1.0 trillion in
outflows
ETFs - Passive
• 2009-2017 $1.7 trillion in
inflows
• 44% of equity AUM ETFs or
passive mutual funds
Strategas Technical Analysis Research – May 16, 2017
Points of Interest Active vs. Passive Investing
Strategas Technical Analysis Research – May 16, 2017
Low interest rates mean more bad companies are able to survive
WSJ – Feb 13, 2018
Long time horizon
$1.7 Trillion in Dry Powder
Manager Selection
Points of Interest Active vs. Passive Investing: Private Equity
Summary
• Next recession at least 12 months away
• Conditions more challenging during next recession
• Risk asset still attractive in this environment
• Watch for sign of end of the cycle – lower risk exposure
• Avoid investment fads
• Active management to outperform
• We have reached our destination Business Insider – Feb 7, 2018
2018 Strategic Outlook Mark Therriault, Financial Advisor/Partner
Many Happy Returns (1870-2015)
Asset Class Returns 1870-2015 (NBER)
4.6% 6.1%
11.1% 10.8%
3.3%
8.9% 10.7%
22.8%
T-Bills Bonds Real Estate Equities
Nominal Return Volatility
Same Return
Liquidity and
behaviour
Great Expectations
Cape Shiller 10-Year PE (peaks)
1929
1936 1966
2000
2008
2018
Higher than 1929
0.2%
-0.8%
-2.2%
-0.9%
2.3%
-0.3%
4.0%
1929 1937 1966 2000 2008 Average GoalNo real return
for five years
5 Year 60/40 Balanced After Inflation and Fees After CAPE Peak
Our Asset Allocation
CDN/US
CDN /
Foreign
(Private &
Public) Bonds
Mortgages
Private Debt
Hedge Funds
Precious Metals
Real Estate
20%
Equity
38% Fixed
Income
36%
Alternative
6%
-2.1%
-0.1%
-1.1%
4.0%
5.1%
3.1%
4.1% 4.0%
2000 2008 Average Goal
60/40 vs. Core Net of Inflation and Fees 5 Years After CAPE Peak
Less Risk and More Return
13% more
over 20 years
and 30% less risk
7.2%/year
6.7%/year
Much bigger difference in bear markets
3.17% +74% 14% Less
Harbour Towers Hotel & Suites
Acquired: October 2015
Purchase Price: $23.0 M
Hotel Rooms: 196
Pre-Acquisition
• NOI – $1.5M
• NOI Yield – 6.5%
• Occupancy – 62%
• ADR* – $130
Post-Acquisition (2016)
• NOI – $2.0M
• NOI Yield – 8.7%
• Occupancy – 70%
• ADR* – $148
*Average Daily Rate
Acquisition, Victoria
Harbour Towers – Value Creation Multi-Family Rental Conversion
219 New Rental Units
Projected Cost: ~$56.4 M
Projected Value: ~$67 M
Return on Cost: ~19%
Projected IRR: ~17%
BEFORE
AFTER
Portfolio acquired in January 2007 for $31.2 Million
Partnership with Venterra Realty
Three (3) multi-family properties built in mid 1980’s,
totaling 738 units
Value-Add Strategy with capital program to increase
rents
Strong operational and customer-focused
management platform.
Sold in 2016 for $57.75 Million
Leveraged IRR of approximately 18% from
acquisition in 2007
SPIRE US LP The Huntcliff Portfolio, Houston, Texas
Acquired in May 2017 in partnership with
Hopewell
76,709 sf industrial warehouse facility on a 4.55
acre site in Foothills Industrial District
47% leased at acquisition
Repositioning of existing building
Physical upgrades include “white-boxing”
vacant warehouse space
Vacant unit leased within six (6) months of
acquisition
7703 30th Street
Work in Progress
7703 30th Street
Original at Acquisition
SPIRE Value Add LP 7703 30th Street SE, Calgary, AB
NWM Private Debt Fund
Why private debt investing?
Higher Yields – less competition
Better Risk Control – stronger collateral, covenants and info
Equity Participation – shares, warrants or bonus payments for some equity upside
Why NWM Private Debt Fund?
1. Diversification – across niche markets and deals
2. Full Investment – IRR is on full investment; NWM manages liquidity and commitments with the Fund
3. Cost Efficiency – NWM negotiates lower manager fees and no-fee co-investments access due to pooled fund size
Launch Date: October 2017
Current Size: $125 million invested ($63 million on waitlist)
Estimated Yield: 8.2% Gross, 7.3% Net
Target IRR: 9.8% Gross, 8.5% Net
Baylin Technologies 1st Lien Loan - $1.5 million
As one Crown Capital Fund IV’s largest
investors, NWM Private Debt Fund was
provided with this Co-Investment opportunity
on a no-fee basis.
Interest Income: 9% per year
Fees Earned: 1%
Equity Participation: 30,000 Warrants
Leverage: 2.1x Debt/EBITDA;
25% Loan-to-Value
Target Gross Return: 9.7% to 13.7% IRR (before Warrants)
Drill down
Documents
Newsletters
Net Worth Retirement and
Estate projections
Trust Fund Buddies
Tax Reform 2017
What’s Being Plucked?
• Income splitting of dividends from private corporations
• Increase tax on passive corporate income that could reach 71% when paid
out as dividends
• Pipeline planning that converts dividends to capital gains is prevented
How is the Goose Doing Now?
• Income splitting allowed over age 65 with a spouse
• Otherwise no, unless labour or financial contribution
• Passive rules stay the same except reduction in SBD if passive income over
$50,000/year; more expensive to recover RDTOH in some cases
• Integrated tax on passive income can be as high as 56% in Ontario
Tax Reform 2018
Before Tax Reform
• Dividend compensation if SBD
• Income split using dividends and trust
• Accumulate passive assets in CCPC and recover RDTOH when dividends paid
• SBD not impacted by passive assets
After Tax Reform
• Salary RRSP/IPP better
• Over 65 on with spouse otherwise labour or capital
• CCPC still better but try and minimize taxable passive income
• Start losing SBD at $50,000 of passive income. 100% gone at $150,000. Does it make much difference?
Bonds
15%
Mortgages
30%
High Yield
Bonds
15%
Global
Bonds
15%
Private Debt
25%
Asset Allocation for Registered Plans and Foundations
Interest Bearing Tax deferred in
registered accts.
Cdn Equities
25%
Foreign
Equities
15%
Real Estate
35%
Life Insurance
10%
Pref. Shares
5%
Private Equity
5% Alternatives
5%
Asset Allocation for Taxable Private Corporation
Historical Tax Analysis 11.5%
9.7% 10.1%
5.0% 4.6% 5.4% 5.9%
9.3%
Annual Returns
53.0% 41.0%
17.0% 0.0%
75.0%
20.0% 5.0%
30.0%
% Taxable
15.2%
Expected Return 6% Expected Return 7.5%
• $2.2M portfolio in
private company
• Qualifies for SBD
What is overall tax and tax rate going forward?
A Tale of Two Taxpayers
$170,000
$50,000 $23,500
$0 $0 $23,500
Total return Taxable return Corporate tax Impact on
SBD
Additional tax Total tax
$140,000
$72,000
$34,200
$110,000
$16,500
$50,700
Total return Taxable returnCorporate tax Impact on
SBD
Additional tax Total tax
21% more return, 54% less tax
13.8%
36.2%
Tax Efficient Portfolio Analysis
Saving Corporately $100,000 pre-tax income
$88,000 $73,000
$12,000 $27,000
12% Business Tax 27% Business Tax
Tax
Saving
20% more to save
Assumptions
• Save for 30 years
• 6% after tax return
• Take out income at
retirement as dividends
$7,300,000
$6,100,000
Assets in 30 years
SBD General Rate
20% more saved
$227,000 $213,000
Spendable Income
Wealth Accumulation Corporately
$7,300,000
$6,100,000
Assets in 30 years
SBD
General Rate
6.5% less
$290,000/yr.
$250,000/yr.
20% more
saved
Planning Factors
• Corporate assets
• Age
• Business Income
• Spending needs
Planning needs to be customized and will change over time.
Planning Options
Tax Efficient Asset Allocation
IPP vs. RRSP
Over Age 50
Prescribed Rate
Loans
Insurance With or
Without Leverage
THANK YOU
QUESTION AND ANSWER