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Canadian ETFs: February’s launches

In this research report created this week for The Globe And Mail, we look at Canadian ETF’s: February’s launches

Middlefield Group is the latest asset manager to join the ETF industry.

Middlefield Group is a specialty investment manager that creates and manages specialized investment products for individual and institutional investors. The new ETF issuer converted two closed-end funds, together representing more than $150-million in assets, into ETFs. The Middlefield Healthcare & Life Sciences ETF (LS) focuses on securities of issuers operating in the health care, life sciences and related industries, while the Middlefield REIT INDEXPLUS ETF (IDR) provides low-cost exposure to the global real estate sector through a combination of indexing and active portfolio management.

Desjardins expanded its suite of responsible investment ETFs with the launch of the Desjardins RI Emerging Markets Multifactor Low CO2 ETF (DRFE) and the Desjardins RI Global Multifactor – Fossil Fuel Reserves Free ETF (DRFG).

DRFE seeks to replicate the performance of the Scientific Beta Desjardins Emerging RI Low Carbon Multifactor Index. The index is composed of securities selected based on a multifactor approach: size, valuation, volatility, momentum, profitability and investment. These securities are also selected to significantly reduce the weighted average carbon intensity and ensure that all constituent issuers meet predetermined environmental, social and governance (ESG) standards. It charges a management fee of 0.65 per cent.

DRFG tracks the Scientific Beta Desjardins Global RI Fossil Fuel Reserves Free Multifactor Index. The index is composed of securities selected based on a multifactor approach. These securities are also selected to significantly reduce the carbon asset stranding-risk exposure and ensure that all constituent issuers meet predetermined ESG standards. The management fee on DRFG is 0.6 per cent of net asset value.

Following the steps of other major ETF providers, Bank of Montreal launched a suite of risk-based asset allocation ETFs. Each ETF charges a management fee of 0.18 per cent and invests in global equity and fixed income ETFs, according to their risk specifications. The BMO Conservative ETF (ZCON) targets a 60-per-cent fixed income and 40-per-cent equity exposure, the BMO Balanced ETF (ZBAL) targets a 40-per-cent fixed income and 60-per-cent equity exposure, and the BMO Growth ETF (ZGRO) targets a 20-per-cent fixed income and 80-per-cent equity exposure.

In addition to the one-ticket solution ETFs, BMO also introduced three U.S. equity ETFs: the BMO Covered Call US Banks ETF (ZWK), the BMO Equal Weight US Health Care Index ETF (ZHU) and the BMO Nasdaq 100 Equity Index ETF (ZNQ). The BMO Ultra Short-Term US Bond ETF (ZUS.U) was also added to BMO’s product lineup. It provides exposure to short-term U.S. fixed income asset classes, with a term to maturity of less than one year or reset dates within one year. The ETF is also offered in accumulating units under the ticker ZUS.V.

Read more in this article written by Kimberly Yip Woon Sun, ETF Analyst at Inovestor Inc.

Portfolio Manager Commentary – February 2019

The S&P/TSX Total Return Index increased by 3.1% in February, adding to the strong January returns (8.1%) and leading to a YTD return of 12.2%. This gives the Canadian market a very strong start so far in 2019 which has actually slightly outperformed the MSCI Global (11.2%) and the S&P 500 (11.8%). Most sectors of the Canadian market were positive contributors in February, with Information Technology being the strongest one at an 8.4% increase.

The Canadian central bank & the FED comments have remained highly constructive for the equity markets. Although some analysts were expecting a more hawkish tone for the future, central banks have not indicated such act. Furthermore, the overall earnings and guided earnings have been positive over this period.

In addition, commodity prices, including energy and metals, have been stable which is crucial for the Canadian market. Finally, Canadian banks’ results were in-line to slightly below expectations, except for BMO, that came higher than expected.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 2.1% in February, leading to a YTD positive return of 10.7%, slightly underperforming the market.  Looking at contribution factors to the NQICA returns, the best performing stock up 14.6%, was Constellation Software (CSU), that outperformed earnings expectations. On the contrary, the worst performer was CCL industries (CCL.B) which was down 3% in February as a result of weaker than expected results.

Portfolio Manager Commentary – February 2019

Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of January up 8.1% offsetting in one month most of last year decline of 8.9%, making it one of the best month in the last 20 years. This upturn has been driven by several catalysts including a softening in the tone of last minutes of the FED, relatively strong results from earnings releases of large North American corporations, and the end of the US government shutdown. Meanwhile, prices of most key commodities including crude oil and gold were stronger in the month. Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose 8.1% for the same period, 60bps below the benchmark. Our sector allocation removed 110bps as our decision to underweight Energy and underweight Healthcare proved to be unfruitful in January. However, our stock selection contributed a positive 50bps as a several of our stocks outperformed.

INOC’s constituents were changed on January 18th

Ins:

  1. THE NORTH WEST COMPANY INC (NWC)
  2. PAREX RESOURCES INC (PXT)

 

Outs:

  1. NFI GROUP Inc. (NFI)
  2. WEST FRASER TIMBER CO. Ltd. (WFT)

Best,

The Inovestor Asset Management Team

Canadian ETFs: January’s launches and terminations

 In this research report created this week for The Globe And Mail, we look at Canadian ETF’s: January’s launches and terminations

Three new ETF providers entered the industry in January. CIBC Asset Management introduced a suite of two actively-managed fixed income ETFs and two multifactor equity ETFs, which seek to replicate CIBC’s in-house indices. The indices consider the following factors in selecting equity securities: low volatility (low sensitivity to market fluctuations), quality (high profitability and low financial leverage), value (low price to earnings and price to book), and high price momentum characteristics.

SmartBe Wealth Inc. launched the SmartBe Global Value Momentum Trend Index ETF (SBEA) listed on NEO exchange. The ETF tracks the Alpha Architect Value Momentum Trend for Canada Index, which is based on three factors: value, momentum and trend-following. The index is designed by Alpha Architect LLC, a research-intensive asset management firm that delivers concentrated factor exposure.

National Bank Investments Inc. joined the herd of ETF sponsors with the launch of four ETFs. Its initial suite includes the NBI Active Canadian Preferred Shares ETF (NPRF), the NBI Canadian Family Business ETF (NFAM), the NBI Global Real Assets Income ETF (NREA) and the NBI Liquid Alternatives ETF (NALT). NALT’s investment objective is to provide a positive return while maintaining low correlation to, and lower volatility than, the return of the global equity markets. The ETF will seek to achieve this objective by investing primarily in long and short positions on financial derivatives that provide exposure to different major asset classes, such as government bonds, currencies, equities or commodities.

Another ETF Issuer has filed a preliminary prospectus to issue liquid alternatives ETFs. Accelerate Financial Technologies Inc., established by a team with a track record of successfully managing award-winning hedge funds, intends to launch a suite of exchange traded alternative funds.

Accelerate’s initial suite consists of the Accelerate Absolute Return Hedge Fund (HDGE), the Accelerate Enhanced Canadian Benchmark Alternative Fund (ATSX) and the Accelerate Private Equity Alpha Fund (ALFA). The ETFs’ fee structure will be similar to that of hedge funds. They have a 0% management fee and will only earn a performance fee if they outperform their high-water mark. For instance, HDGE will charge a performance incentive fee of 20% of the excess NAV in between quarters, ATSX’s performance incentive fee is 50% of the positive amount by which ATSX’s performance exceeds the performance of the S&P/TSX 60 TR Index for the quarter and ALFA will charge a performance incentive fee of 15% of the excess NAV in between quarters.

Read the full report here.

This article is written by Kimberly Yip Woon Sun, ETF Analyst for Inovestor Inc.

Portfolio Manager Commentary – December 2018 – Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of December down 5.4% and the year of 2018 down 8.9%, making it the worst year for stocks since 2015. This downturn has been driven by signs of a global economic slowdown, concerns about the direction of the US monetary policy, inflation fears from a strong job market, ongoing trade tensions between the US and China and the political dysfunction causing a US government shutdown. Meanwhile, the price of crude oil plunged 9.6% to $45.81, its lowest settle since August 2017, on fears of a weak oil demand from lower global growth. Our Nasdaq Inovestor Canadian Equity Index (NQICA) fell 6.8% for the same period, 143bps below the benchmark. Our sector allocation contributed 50bps as our decision to overweight staples and underweight energy proved to be fruitful. However, our stock selection contributed a negative 193bps as a couple of stocks underperformed. You will find below the top three and bottom three contributors to performance. (Download)

The top three contributors to performance were:

1.       Metro (MRU:CN), a food & staples retailer, rose 3.4% following the approval of the TSX for its Normal Course Issuer Bid (NCIB) program to repurchase 2.7% of its outstanding shares.

2.       Stella Jones (SJ:CN), a paper & forest producer, declined -1.3% after the company announced it would pursue its own NCIB program to repurchase 4.3% of its outstanding shares.

3.       West Fraser Timber (WFT:CN), a paper & forest producer, fell -2.5% after implementing a temporary production curtailment in BC over the holiday period at four of its BC sawmills.

The bottom three contributors to performance were:

1.       Canadian National Railway (CNR:CN), a railway operator, declined -11.1% as investors fear a global growth slowdown might impact the firm’s crude-by-rail and commodities shipments.

2.       Equitable Group (EQB:CN), mortgage and thrift company, fell -14.7% as Canada’s mortgage credit growth continued to decelerate in Q3 2018, on pace to weakest growth in 22 years.

3.       TFI International (TFII:CN), a transportation company, dropped -19.5% as price increases in the trucking market are leveling off. This could prove difficult for operating margins in 2019.

Best,

The Inovestor Asset Management Team

Socially Responsible Investing

Today, we are exploring socially responsible investing (SRI) whose nature is attracting an increasing number of investors everyday. Infact, assets under management in this type of investment fund grew by 146% between 2011 ($ 4.45B) and 2017 ($ 10.9B) while net cash inflows increased from $ 655M in 2016 to $ 1.22 billion in 2017*. This trend is based on the growing influence of millennials on the investment community. This generation is much more attentive to ESG factors (Environmental, Social, Governance) and, hence, more and more fund managers are integrating those factors into their business risk analysis.

The choice of participants in the funds is no longer only done using negative filters, such as, “excluding companies in the arms industry”. The use of positive filters such as “low carbon footprint” or “women’s representativeness” is becoming more common. According to the article published in the “Finance et Investissement” newspaper in November 2018, we can expect that SRI will focus on tackling the 17 objectives set by the UN in 2015, where education, gender equality, and the elimination of poverty and hunger are the main goals.

NEI Investments is the leader in the field of responsible investing in Canada. The 30-year-old company bases its strategy on issues such as the global energy transformation, sustainable food production, and board diversity. As of October 31, 2018, the performance of the Canadian Small Cap Equity Fund- ER NEI Series A- over 3 years is 6.84%, 5.37% over 5 years, and 10.22% since inception. These results indicate that responsible investment funds can be just as successful as other types of ETFs.

On our platform, we can find the iShares Jantzi Social Index (“XEN”) Exchange Traded Fund (ETF), which has been running for more than ten years. It aims for long-term capital growth by replicating the return of the Jantzi Social Index, net of expenses. The Jantzi Social Index is a weighted market capitalization index consisting of 50 Canadian companies that have responded to ESG criteria. XEN’s SP Score, calculated as a weighted average of the SP Scores of the securities held, is 59.74. As of October 31, 2018, the 10-year compounded annual return is 8.37% compared to 7.36% for the S&P/TSX 60, according to data from Sustainalytics. After fees, the ETF’s return is 7.77%.

During this year, eight SRI ETFs were launched, including a range of climate change ETFs recently launched by Desjardins Global Asset Management. These new ETFs aim to significantly reduce the carbon intensity of the portfolio or avoid investing in the fossil fuel sector all together.

In conclusion, we can emphasize that Responsible Investment is becoming an increasingly common approach. These investment funds, intended for a clientele with more diversified objectives than usual, provide a new range of products.

* Source: Finance and Investments November 2018

Blog post written by Loic Chatelanat (intern), under supervision of Kimberly Yip Woon Sun (ETF Analyst).

Magna International Inc. (MG)

In today’s content analysis (Download), we will discuss Magna International Inc which has been in our Canadian model portfolio since December 31, 2012. There has been a lot in the news lately concerning the family dispute which has brought a lot of negative attention to this company, however, the auto parts giant Magna’s operations prove strength and continuity. Magna is the largest automotive parts manufacturer in North America by sales of original equipment parts and one of Canada’s largest companies, having garnered a spot in the S&P/TSX 60. Magna operates under Magna Steyr, Magna Powertrain, Magna Exteriors, Magna Seating, Magna Closures. Magna Mirrors, Magna Electronics and Cosma International. 

Q3 2018 Earnings Release

On November 9th, Magna delivered third quarter earnings per share of $1.56, versus $1.39 during the same period a year ago. Analysts had forecasted $1.49. Revenues for the company totaled $9.6 billion higher again then last years revenues of $8.9 billion but lower then analyst’s expectations of $9.8 billion.  EBIT declined from 705 million to 699 million. Magna reduced their forward guidance expecting total sales of $40.3B – 41.4B and profits of $2.3B – 2.4B. Down from their earlier estimates of sales of $40.3B – 42.5B and profits of $2.3B – 2.5B. All business segments of Magna experienced growth in sales

EVA Analysis

As of November 16th2018, Magna, had one of our highest EVA scores of 72 indicating that it is currently a quality company at a great value. MG is trading well below the Intrinsic Value. Trading at approximately half of its intrinsic value. The Future growth value (FGV) is another representation of whether the stock is trading at a discount of premium by comparing the market value to the current operating value. In the case of Magna, it is currently trading at a 29% discount.

Magna has constantly increased their year over year net operating profits after tax (NOPAT) by an average of 10%. We can also see that the return on capital has been increasing steadily since 2016 and so has the cost of capital. This resulted in a slight decrease in the performance spread from 1.64 to 1.60.

The EVA (TTM) graph is an important indicator of future performance and sustainability of the company. We can see that the EVA has been almost flat because even thought the profits increased, so did the capital charge, hence, flattening out the overall EVA trend.

Magna has had quite an aggressive share buyback decreasing the outstanding shares on average of 5.2% per year which is helping increase the intrinsic value per share.

Portfolio Manager Commentary – October 2018

Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of October down 6.27% as investors are selling off risky assets on slower global growth, mounting inflation, peaking corporate earnings and rising bond yields, which coincides with a late-stage of the economic cycle. The Bank of Canada hiked its interest rate to 1.75% citing the economic output is operating close to its potential and trade risks are subdued with NAFTA 2.0. Meanwhile, the Canadian dollar fell 1.91% as commodities retreated. Our Nasdaq Inovestor Canadian Equity Index (NQICA) fell 6.35% for the same period, 8bps below the benchmark. Our sector allocation contributed 82bps as our decision to overweight staples and underweight energy proved to be fruitful. However, our stock selection contributed -90bps as a couple of our stocks clearly under performed. You will find below the top three and bottom three contributors to performance.

The top three contributors to performance were:

1. Metro (MRU), a food retailer, rose 3.3% as investors chose to invest in defensive sectors such as staples, which only declined 0.7% this month as stocks retreated from their highs.

2. Parkland Fuel (PKI), a consumable fuel producer, gained 2.1% after saying it would buy a 75% stake in SOL Investments, the largest independent fuel marketer in the Caribbean.

3. Gildan Activewear (GIL), an apparel manufacturer, increased 0.1% as Moody’s shifted the apparel industry to a positive outlook from stable after watching faster than anticipated growth.

The bottom three contributors to performance were:

1. CAE (CAE), a simulation equipment maker, declined -11.4% as industrial stocks faced a route with several bellwethers like Caterpillar (CAT) and 3M (MMM) warning of higher costs ahead.

2. NFI Group (NFI), a bus manufacturer, dropped -11.7% as industrial stocks faced a route with several bellwethers like Caterpillar (CAT) and 3M (MMM) warning of higher costs ahead.

3. Equitable Group (EQB), a mortgage and thrift company, fell -12.2% as the Bank of Canada raised its interest rates, another sign the Canadian real estate market could cool even more.

Best,

The Inovestor Asset Management Team

Canadian ETFs October’s Launches And Terminations

In this research report created this week for The Globe And Mail, we look at Canadian ETFs: October’s launches and terminations

The Canadian ETF space is getting crowded with more than 650 ETFs offered by 33 ETF issuers. This month, iA Clarington Investments joined the industry with the active ETF series of IA Clarington Core Plus Bond Fund, iA Clarington Global Bond Fund and iA Clarington Emerging Markets Bond Fund. Two new providers are set to join the ETF industry in 2019.

National Bank Investments filed a preliminary prospectus to launch its first suite of ETFs. It consists of four ETFs: an active Canadian preferred shares ETF, an ETF that invests in equity securities of family-owned Canadian companies, a global real estate and infrastructure sectors ETF and a liquid alternatives ETF. Management fees for this suite range from 35 to 90 basis points.

Middlefield Group, a Specialty Investment Manager which creates and manages specialized investment products for individual and institutional investors, will convert two closed-end funds into exchange-traded funds. Middlefield Healthcare & Life Sciences Dividend Fund and REIT INDEXPLUS Income Fund, which together represent approximately $150-million in assets, are expected to be converted into ETFs in early 2019.

Find the full report click here 

This article is written by Kimberly Yip Woon Sun, ETF Analyst for Inovestor Inc. 

Canadian ETFs – September’s Launches and Terminations

In this research report created this week for The Globe And Mail, we look at Canadian ETFs: September’s launches and terminations

Four asset managers entered the Canadian ETF Industry this month: Fidelity Investment, Coin Capital Investment Management, Starlight Capital and First Block Capital.

Fidelity’s first suite of ETFs consists of six divided-factor ETFs covering the Canadian, U.S. and international markets. The funds seek to replicate Fidelity’s in-house indices that are based on three dividend factors: dividend yield, payout ratio and dividend growth for FCCD, FCUD, FCUH and FCID. A fourth factor, correlation to 10-year U.S. Treasury yields, is considered for FCRR and FCRH.

Find the full report click here  

This article is written by Kimberly Yip Woon Sun,  ETF Analyst for Inovestor Inc.