Canadian investors are getting access to a fund from Greenwich, Conn.-based AQR Capital Management LLC as the firm’s Apex strategy becomes available through the iCapital platform.

Co-founder Cliff Asness’s AQR, which manages US$99 billion in assets, is known for its quantitative investment strategies. Apex is a multi-strategy alternative fund that incorporates macro, stock selection and arbitrage strategies.

“Apex represents the culmination of our research process that has been honed over our 25-year history and reflects our foundational belief in generating attractive, diversifying returns,” said AQR co-founder David Kabiller in a release.

The Apex strategy, launched in 2020, posted net returns of 16.2% in 2023 and 17.1% in 2022, according to a person familiar with the fund’s performance who asked not to be identified. Its annualized return since inception is 18.5%.

The fund will be available to accredited investors through investment platform iCapital as the iCapital AQR Apex Canadian Access Fund.

NEI goes alternative

NEI Investments has launched its first alternative fund, a long-short strategy subadvised by Picton Mahoney Asset Management that maintains NEI’s responsible investing focus.

The NEI Long Short Equity Fund adds exclusionary screens, ESG integration and stewardship to Picton Mahoney’s active long-short equity strategy.

John Bai, senior vice-president and chief investment officer with NEI, said investors are looking to alternative strategies for lower correlations, risk and volatility.

“I think the combination of our in-house responsible investing expertise combined with Picton Mahoney’s specialized experience in alternatives addresses an important gap in the market,” he said in a release.

The management fee is 1% for series F and 2% for series A.

CIBC introduces target-maturity bond funds

CIBC Asset Management is the latest firm to offer target-maturity bond funds, with three new products that mature in 2025, 2026 and 2027.

The three CIBC Investment Grade Bond Funds invest primarily in Canadian government and investment-grade corporate bonds, prioritizing bonds trading at a discount to their maturity value. Foreign issuers aren’t expected to make up more than 10% of the funds.

“This is the first time in decades that a considerable amount of bonds within the Canadian bond market are trading at a discount to par,” said David Scandiffio, president and CEO of CIBC Asset Management, in a release.

The funds operate like individual bonds, terminating at a defined maturity date with net assets distributed to investors. Firms including CIBC are pitching target-date funds as a more convenient way to build bond ladders for clients.

The management fee on the three CIBC funds is 0.15% for series F and 0.40% for series A.

CI releases mutual fund versions of dividend ETFs

CI Global Asset Management introduced three dividend mutual funds that invest in existing ETFs.

The funds target quality large-cap, dividend-paying companies that grow their dividends over time, CI said.

The CI WisdomTree Canada Quality Dividend Growth Index Fund (management fees of 0.16% for series F and 1.16% for series A), the CI WisdomTree U.S. Quality Dividend Growth Index Fund (0.30% and 1.30%) and the CI WisdomTree International Quality Dividend Growth Index Hedged Fund (0.43% and 1.43%) each invest in the underlying ETF of the same name.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

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The staff of Advisor.ca have been covering news for financial advisors since 1998.

December was the 10th consecutive month of net redemptions for mutual funds, though the monthly outflow continued to slow.

Data from the Investment Funds Institute of Canada (IFIC) released Thursday showed mutual fund net redemptions were $5.3 billion last month, compared to $8.6 billion in November and $12.5 billion in October.

Redemptions were driven by outflows from balanced and equities funds, IFIC’s report said, while bond funds, money-market funds and specialty funds all had net inflows.

For all of 2023, money-market funds led with $14.8 billion in net sales — more than double the previous year. Bond mutual funds were second, with net sales of $7.0 billion compared to redemptions of $13.8 billion in 2022. And net sales of specialty mutual funds came in third at $3.4 billion — more than two and a half times greater than in 2022.

Overall, mutual fund redemptions totalled $57.1 billion in 2023, compared to $43.7 billion in redemptions in 2022, IFIC said — an increase of 30.5%.

On the ETF side, net sales were $3.8 billion in December, compared to $5.1 billion in November and $2.9 billion in October.

ETF money-market funds had net redemptions of $271 million in December — the first month of negative money-market sales since November 2021, the report said. A National Bank Financial report from earlier this month noted the change in investor appetites toward year-end as rate expectations shifted.

The IFIC report said bond ETFs accounted for 48% of net inflows ($1.82 billion), with most going into Canadian bond funds. Equities ETFs accounted for 47% of net sales ($1.77 billion), with the largest share going to U.S. funds.

Overall, ETF net sales were $37.6 billion in 2023, compared to $36.1 billion in 2022 — an increase of 4.2%.

For the second consecutive month, both mutual fund and ETF assets increased in December, the report noted.

Mutual fund assets totalled $1.94 trillion at the end of December, up by $43.0 billion or 2.3% month over month, and up by $126.5 billion or 7.0% year over year.

ETF assets totalled $382.5 billion at the end of December, up by $13.2 billion or 3.6% since November, and up by $68.8 billion or 21.9% year over year.

Michelle Schriver

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Michelle is Advisor.ca’s continuing education editor. She has worked with the team since 2015 and been recognized by the National Magazine Awards and SABEW for her reporting. Email her at michelle@newcom.ca.

Despite slowing economic momentum, Moody’s Investors Service is projecting that sustainable bond issuance will hold steady in 2024.

In a new report, the rating agency forecasts that issuance of sustainable debt will be flat at US$950 billion in 2024, comprising an estimated US$580 billion of green bonds, US$150 billion of social bonds, US$160 billion of sustainability bonds, and US$60 billion of sustainability-linked bonds.

“Growing policy support for green solutions including green hydrogen, biofuels, battery storage and carbon capture, utilization and storage is fuelling growth in private and public investment,” the firm noted.

This sort of policy support can help emerging technologies become increasingly competitive from a cost perspective, “increasing the likelihood that these projects will become a growing fixture of sustainable bond frameworks,” it said.

Additionally, the shift from voluntary standards to regulatory mandates will gain traction this year, Moody’s said.

“[The] application of the new European green bond standard in 2024 will be the cornerstone of the market’s embrace of regulatory standards,” the report said.

“Disclosure requirements and reporting standardization should also help support sustainable bond activity,” it added.

The sustainable bond market will also continue to diversify in the year ahead, Moody’s said.

“Projects addressing natural capital, gender equity and just transition will continue to blossom this year, which will … bolster its long-term growth prospects,” it said.

Conversely, a declining investor appetite for sustainability-linked bonds amid ongoing concerns about sustainability performance and other issues “has discouraged some would-be issuers from entering the market,” it said.

“With waning appetite for sustainability-linked bonds, we expect volumes to decline both in absolute terms and as a share of total sustainable bond issuance,” Moody’s noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

The troubled U.S. office real estate sector will weigh on Canadian banks’ earnings and credit quality, but the impact should be manageable, says Morningstar DBRS.

In a report, the rating agency examined the ailing U.S. office sector, which is struggling amid weak demand, rising vacancy levels and declining property prices.

That weakness is important for the big Canadian banks with operations in the U.S., as office real estate makes up a greater share of their U.S. commercial real estate loan portfolios compared with their loan books in other markets.

“Headwinds in U.S. commercial real estate, largely driven by the office sector, have become a main driver of credit quality deterioration,” the report said, noting that gross impaired loans have been rising since the second quarter of 2023 — accounting for 22% of impaired loans in the fourth quarter of 2023, up from 7.6% at the end of 2022.

As a result, the banks’ provisions for credit losses have also increased over the past three quarters, DBRS said.

Looking ahead, the prospects for the U.S. commercial real estate sector “remain challenging, despite anticipated interest rate cuts in 2024 and the expectations of a soft landing for the economy,” the report said.

Property prices are likely to remain under pressure in the year ahead, it noted, with growing quantities of debt maturing “at a time when vacancy rates are at decades-high levels and valuations have declined, leaving many borrowers needing to add equity to refinance.”

As a result, the banks’ earnings are expected to face pressure from higher delinquencies, provisions and losses in U.S. commercial real estate.

That said, DBRS expects the effects to prove manageable, given that the banks’ total exposure to the global office sector is “generally well diversified” and only represents approximately 10% of total commercial real estate loans, and about 1% of total loans.

Additionally, the big banks have healthy capital buffers and sufficient internal capital generation capabilities to absorb incremental losses, it said.

If losses prove larger than expected, the Office of the Superintendent of Financial Institutions could also lower the domestic stability buffer, giving the banks the ability to soak up heftier losses.

“With interest rates likely having peaked, banks may explore selling U.S. office debt in an effort to lower commercial real estate exposure. However, any office loan sales may be at a sizeable discount given valuation challenges,” the report noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

Ongoing conflict in the Red Sea region is acting as a support to commodity prices, but prices shouldn’t spike unless the disruptions intensify, according to Fitch Ratings.

Oil shipments through the Red Sea region accounted for about 12% of global oil seaborne trade in 2023, Fitch noted in a report — with shipments coming to Europe mainly from Saudi Arabia and Iraq, and exports of Russian oil to China and India, comprising most of that traffic.

Several major producers, including BP, Shell and QatarEnergy, and many shippers have stopped sending ships through the Suez Canal, Fitch said, and some ships are being re-routed around Africa.

“This may marginally tighten the oil and gas markets, albeit temporarily, as supply chains need to adjust to the alternative route taking about a fortnight longer, but we do not anticipate any material impact on prices,” it said.

The growth of global oil demand is also expected to moderate in 2024 as the global economy slows and China reduces its oil consumption, the report said.

Additionally, the global oil supply is strong, Fitch noted, adding that the OPEC+ countries have more than five million barrels per day of spare capacity.

“This will cushion any impact from potentially protracted or escalated disruptions,” it said. “Without material disruptions to actual oil production, or a wider escalation of attacks to more vital oil transport routes in the region, we do not expect a strong upside to our US$80/barrel price assumption for 2024, as there is material OPEC+ spare capacity.”

However, disruption spreading to the Strait of Hormuz, which accounts for about 27% of global oil shipping, “would create more tangible repercussions for global oil and gas markets, with more sustained price increases,” it noted.

Other commodities are also impacted by the conflict, Fitch said.

About 8% of the global trade in liquefied natural gas is shipped through the Suez Canal, and about 7% of global potash and 5% of the phosphate rock trade also transits through the region, Fitch noted.

While fertilizer ships haven’t been affected by attacks so far, “shipping costs account for about 10% of fertilizer prices, and therefore rising freight rates will add pressure on profitability.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

The outlook for global dividends remains solid, finds S&P Global Market Intelligence in a new report.

Total global dividend payments are projected to rise by 0.7% this year to US$2.2 trillion, with regular dividends maintaining their 4% growth rate and variable dividends expected to drop by 50%.

Powered by the prolonged high interest rate environment, banks will continue to be the primary driver of global dividends, S&P said.

In Canada, regular dividends are forecast to grow by 6% this year, led by the banks and the energy sector, which together account for more than half of Canadian dividends.

The banking sector, which contributes 30% of total dividends, is forecast to grow payouts by 5% year over year, the report said — with energy sector dividends projected to rise by 8% this year.

“Unlike the U.S. market, where numerous energy companies adopted a variable dividend policy, few have done so in Canada,” the report noted. “Accounting for variable dividends growth can drop below 6% compared with 2023.”

Among the remaining Canadian sectors, the retail sector is set to deliver 10% dividend growth in 2024, with basic resources and utilities predicted to grow by 4% and 7%, respectively.

Globally, developed market dividends are expected to be healthier than emerging markets, S&P noted. It predicted that North American dividends will grow by 6% this year, with European payouts rising 4% and developed Asian markets delivering 2% growth.

In developing Asian markets, aggregate dividend payouts are projected to decline by 4%, led by weakness in China and India, following strong growth over the past few years.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

The balanced 60/40 portfolio rebounded last year after a traumatic 2022 for investors. Experts see steady returns continuing, with bonds playing a larger role.

A year ago, obituaries for the 60/40 portfolio were piling up after the negative correlation between stocks and bonds collapsed spectacularly. Balanced portfolios saw double-digit losses in 2022 as central banks hiked interest rates in an attempt to slow the highest inflation in decades. Particularly painful was the fact that a conservative asset allocation provided little to no protection.

But after a “reset” of credit and yields — with the Bank of Canada and Federal Reserve each raising their interest rates from near-zero to 5% and higher between early 2022 and mid-2023 — we’re back to a more “normal environment” where asset allocation matters again, said Craig Basinger, chief market strategist with Purpose Investments.

“When the discount rate moves that aggressively in either direction, it just causes all assets to move in the same direction,” he said.

The largest balanced ETF in Canada, the $2.52-billion Vanguard Balanced ETF Portfolio, posted a return of -11.37% in 2022. It bounced back last year, finishing up 12.49%. Over five years, the fund’s annualized return is 6.16%.

Sal D’Angelo, head of product for Vanguard Americas, said the firm forecasts returns in the 6%–7% range for balanced portfolios over the next decade. But while equity returns have driven gains for 60/40 portfolios in recent years, bonds “will do a lot more of the heavy lifting.”

That’s partly because equities are likely to see more modest returns than in the previous decade of low rates, but also because bonds are offering solid yields again. Vanguard’s market outlook for 2024 recommended a higher tilt toward bonds in asset allocations.

Philip Petursson, chief investment strategist with IG Wealth Management, said 60/40 is usually used as an approximation for a balanced portfolio, with managers adjusting based on the market environment. In the low-interest period since the global financial crisis in 2008, that’s meant overweighting equities.

But with aggregate bond funds yielding around 4%, he said, 60/40 is once again the optimal asset allocation.

“Whether you’re looking at government bonds, corporate bonds, investment-grade or high-yield bonds, they’re much more attractive than they’ve been in a long time,” Petursson said.

With a recession looking less likely and corporate balance sheets remaining healthy, “high yield continues to be one of my favourite asset classes within fixed income,” he said.

Basinger said the good news is investors won’t have to lean so heavily on equities now that return expectations for bonds have improved. However, “the bad news is we probably won’t get back to an environment where correlations are as strongly negative as they were for much of the past 12 years,” he said.

Part of the reason is Basinger doesn’t see the so-called “Fed put” — the U.S. central bank intervening with stimulus to prop up markets — being as decisive a factor going forward.

“Since the financial crisis, any time the economy or the market stumbled, the Fed [and other] central banks were pretty quick to apply stimulus in one form or another,” he said.

That backstop may still exist, but to a lesser degree, Basinger said, and with less urgency.

But while stock-bond correlation may not be negative, it will be lower than it was in 2022, D’Angelo said.

“To have diversification, you don’t have to have negative correlation,” he said. “You just need to have non-perfect correlation, which is less than one.”

A year ago, in response to the balanced portfolio’s terrible 2022, some investors were pointing to private assets to diversify portfolios if bonds were no longer providing the ballast. In the year since, several fund managers have introduced new private market products designed for wealthy retail investors.

Basinger said that while alternatives still have a place in portfolios, “I just don’t think the plain vanilla core should be thrown out and overly reduced in lieu of the alternative space.”

He pointed to real assets as a tool to help insulate portfolios from inflation, for example. But he also noted that with yields in the public market more attractive now, not everyone needs private exposure.

Petursson also said there’s a place for alts in portfolios, but that investors should understand the product and who they’re partnering with.

“I think there is a risk in these private equity or private credit funds because there’s been so much money chasing these asset classes over the last couple of years as investment shops have opened up retail products,” he said.

For D’Angelo, the focus for advisors should be keeping clients invested. Last year saw billions of dollars flow into cash products that suddenly offered 5% yield. While D’Angelo said he expects cash to remain a more prominent part of portfolios as interest rates remain higher over the next decade, “that’s not the foundation of an investment portfolio.”

Many investors missed out on last year’s rebound, he added, and advisors should encourage clients to stick to long-term plans and not be thrown by “bumps in the cycle.”

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

Between performance issues, greenwashing concerns and politicization, U.S. sustainable funds suffered outflows in 2023, according to research from Morningstar Inc.

In a new report, Morningstar reported that investors pulled $5 billion (all figures in U.S. dollars) from U.S.-based sustainable funds in the fourth quarter, pushing annual outflows to $13 billion.

The bulk of the outflows came in a single fund, the iShares ESG Aware MSCI USA ETF, which saw more than $9 billion in withdrawals during the year.

At the same time, investors chilled on sustainable funds generally last year, the report said, as flows lagged the rest of the industry.

For instance, in the fourth quarter, net redemptions from sustainable funds amounted to 1.7% of fund assets at a time when funds overall recorded net inflows reaching 0.2% of assets, Morningstar reported.

“This marked the fifth consecutive quarter where investor appetite for U.S. sustainable funds was weaker than for their conventional counterparts,” it said.

This investor reticence came as sustainable equity fund performance lagged. The median return for a sustainable large-blend equity fund in 2023 came in at 20.8%, compared with 23.9% for the category overall, Morningstar reported.

“Some of the macroeconomic pressures that contributed to their underperformance — such as high interest rates and supply chain disruptions — continue to feature in market outlooks for 2024,” it said.

At the same time, the firm pointed to other factors — including persistent greenwashing concerns and political scrutiny of sustainable and ESG investing — as contributing to “a chilling effect on demand for these funds.”

Nevertheless, market gains boosted sustainable fund assets in 2023, which finished the year at $323 billion, up by 18% from the third quarter of 2022.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

It took longer than many expected, but ETF providers in Canada are catching up on the artificial intelligence (AI) theme, with three new products out this week.

On Thursday, Invesco Canada Ltd. launched the Invesco Morningstar Global Next Gen AI Index ETF (TSX: INAI), offering exposure to companies that are expected to benefit from their role in advancing AI technologies. The index measures the market-cap-weighted performance of AI-focused companies in the Morningstar Global Markets Index.

The fund’s 48 holdings include Taiwan Semiconductor Manufacturing Co Ltd., Broadcom Inc. and Salesforce Inc., and its top holdings are five of the so-called magnificent seven stocks that drove market gains last year, with AI leaders Microsoft Corp. (9.6%) and Nvidia Corp. (7.2%) holding the largest weightings.

Those two companies are also the focus of new single-stock ETFs from Purpose Investments Inc. On Thursday, the firm released two more of its Yield Shares ETFs, which hold a single company and use covered-call writing and relatively modest leverage.

“We’re in the midst of the next technological revolution with AI, and Nvidia and Microsoft are at the forefront of this movement,” said Vlad Tasevski, head of asset management at Purpose, in a release.

The Nvidia (Cboe Canada: YNVD)  and Microsoft (Cboe Canada: MSFY) ETFs use a maximum of 25% leverage and covered calls to provide income as well as potential growth from the underlying stocks.

The new funds, which charge 0.40% in management fees, join five other Yield Shares ETFs that hold Tesla Inc., Amazon.com Inc., Apple Inc., Alphabet Inc. and Berkshire Hathaway Inc., respectively. Those funds, which launched in December 2022, have about $139 million in assets under management, most of that in the Tesla and Amazon ETFs.

Invesco’s AI ETF, which also comes in a Canadian dollar–hedged version, has a 0.35% management fee.

Despite the enthusiasm for AI last year driving stock market returns, the only AI-branded ETF in Canada for most of the year was an Emerge Canada Inc. fund that was liquidated in October and terminated last month.

In November, Horizons ETFs Management (Canada) Inc. changed the name of the Horizons Robotics and Automation Index ETF to the Horizons Robotics & AI Index ETF (TSX: RBOT).

Many other big-tech or innovation-themed products in Canada offer AI exposure even if they aren’t labelled as such, and broad index funds hold leading companies in the space including Nvidia and Microsoft.

Invesco and Horizons introduce new income funds

Invesco also launched a new ETF Thursday that provides income by investing in U.S. Treasury floating-rate notes with time-to-maturity of one month or more. The Invesco US Treasury Floating Rate Note Index ETF (USD) (TSX: IUFR.U) seeks to replicate the performance of the FTSE U.S. Treasury Floating-Rate Note Index.

At launch, about half the holdings were notes with maturities of one year or less, and the other half was invested in notes with maturities of one to five years.

The ETF, which has a management fee of 0.12%, is also offered in a U.S.-dollar version.

Horizons ETFs also released a new income product: the Horizons USD High Interest Savings ETF (TSX: UCSH.U), which invests in high-interest U.S. dollar deposit accounts with Canadian banks.

The ETF, which has a 0.14% management fee, “offers investors a way to earn monthly income on U.S. dollar cash deposits, at a time when the U.S. Federal Reserve’s rate is at a 22-year high,” said Horizons president and CEO Rohit Mehta in a release.

The new fund joins the $4.3-billion Horizons High Interest Savings ETF and the $622.3-million Horizons 0–3 Month T-Bill ETF, which launched last year, in Horizons’ suite of cash products.

Stricter liquidity rules that take effect at the end of this month have led to concerns that ETF issuers will be forced to lower the interest rates offered on high-interest savings account funds.

Correction: An earlier version of this article misstated the yield on the Horizons USD High Interest Savings ETF. The yield on the new fund hasn’t been published.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.