Q: What industry trends are impacting advisors and their practices?

Heidi MacDonald: Volatile markets are impacting client investment strategies, which impacts Assets Under Management (AUM) and subsequent trailer fees for advisors. High interest rates mean clients are diverting available cash to debt servicing/reduction strategies and placing available funds in alternate or low commission savings vehicles or solutions like high interest savings accounts and GICs. In the wealth space, specifically segregated funds, advisors can experience significant strain on revenue resulting from the DSC ban and shift to no-load funds, including uptake of advisor chargeback funds. This is in addition to the impact of additional deposit options (ADO) on first-year commission (FYC), and recurring revenue from insurance sales.

“We help advisors accelerate their growth, no matter where they’re at in their business, by providing the right tools, technology, resources and expertise when they need them.”

Meanwhile, advisors are feeling the pressure to digitize their practices. COVID helped move the industry forward with updated technologies. Now an advisor’s business must be easily accessible from anywhere—at any time. And the client expectation is a one-stop shop.

That’s why the value of advice goes far beyond knowing your product and sales today. It’s about understanding the industry and being prepared for where things are going. This is where we partner with our advisors, so they can support their clients through that journey.

Q: How does working with the right MGA partner help advisors sustain their practice and success?

HM: Success looks different for everyone. At Financial Horizons, our commitment is to help advisors accelerate their vision of success. We distinguish ourselves as industry leaders in this space through distinct programs, access to industry-leading experts, best-in-class education, and proven approaches that work.

We can say that confidently because we listen to our advisors’ feedback, and continuously search out new solutions so that we can enhance the tools and services that drive their success.

We also have local teams across Canada. So, whether an advisor needs support in leadership, sales, operations, compliance, or back office, our experts are available to understand the local perspective, unique needs and, most importantly, the advisor’s definition of success with a path to get them there.

Q: How are you advocating with regulators on behalf of advisors?

HM: We have a proactive team of compliance experts that work side-by-side with advisors to help them safeguard their practice and provide best practices to navigate through the various challenges they’re having within a compliance or regulatory space.

Not only that, but we’re on various industry committees also ensuring we are at the table when regulators are shaping policy. We advocate for advisors, we are on industry boards that represent MGAs and independent advisors, and we partner with the Canadian Life and Health Insurance Association (CLHIA). Through that, we represent all of our advisors – their needs and the needs of their clients – and the industry.

Regulators may not understand a day in the life of an advisor and what their clients expect. We provide education and information to regulators on the impact of some of the policy decisions they’re looking to implement.

Q: What other support do you provide advisors?

HM: We help advisors accelerate their growth, no matter where they’re at in their business, by providing the right tools, technology, resources and expertise when they need them. We listen to our advisors, follow industry trends, and then act by creating new programs and solutions that keep their businesses ahead of the curve.

For advisors working in advanced markets, our complex case support includes a proactive operations team, and the expert advice of insurance and investment strategists who can act as an extension of the advisor’s team to help identify new opportunities and deliver better solutions to their clients. We’re also constantly modernizing the advisor experience. Our innovative Accelerator programs are a fully immersive experience designed to help advisors gain clarity on what success means to them, setting them on a path to get the business, clients and life they want.

Those are just some of the ways Financial Horizons helps advisors accelerate their success today and amplify it tomorrow.

Here’s why you should integrate ESG criteria into your investment selection process — and how to do it.

Today, ESG is mainstream among institutional investors. In fact, To points out that almost every Canadian is already an ESG investor because the Canada Pension Plan applies ESG analysis to all of its investments. It’s also so core to the operations of large businesses that about three in four S&P 500 companies tie executive compensation to ESG performance.

Furthermore, it’s increasingly recognized that demand for renewable energy is being driven by the private sector — for example, by technology companies that want to move away from fossil fuels —rather than government incentives. To says this “sustainable appetite” stands to benefit ESG investors and the advisors who guide them toward appropriate investments.

ESG screening helps to mitigate risk

While attracting clients and uncovering investments with attractive long-term growth potential may be the flashy side of ESG integration, risk mitigation through ESG investing is probably even more important to build a practice that is successful over the long term. 

As a case in point, in 2022, one of the largest U.S. natural gas and electric utilities agreed to pay more than US$55 million to escape criminal prosecution for two disastrous California wildfires because its power lines were implicated in the blazes. 

“If you had ESG baked into your approach, then this is a company that may have been screened out because of these unsafe power lines,” To suggests, emphasizing that the US$55 million was a drag on the company’s performance and therefore investors’ returns. 

In general, companies that take ESG seriously tend to be more transparent with their investors, he adds, often disclosing more details about their operations than what’s strictly required from public companies. More information helps investors mitigate risk and gives them greater confidence in investment decisions.

Of course, not everyone is equally transparent. Greenwashing — when a company or fund manager pretends to be greener than it is — still happens. For example, a German asset management company recently paid US$25 million to settle U.S. Securities and Exchange Commission charges stemming, in large part, from misstatements concerning the firm’s ESG investment process. Again, a significant cost to the company diminishes investors’ returns.

“It’s important to address greenwashing [and] to ensure there are standards and disclosure requirements for fund managers,” says To.

Design investment policies around client priorities

Integrating ESG into your practice starts with client conversations. 

As part of the discovery process, To says advisors can probe to find out if investing in environmentally friendly companies or companies that have fair labour practices connects with a client’s values. Then, in ongoing client meetings and through financial literacy workshops, they can introduce ESG concepts, aided by illustrations like the ones available through Visual Capitalist.

“Having an earnest conversation with clients is the first step. If ESG values are important, then you can move to the next step and start screening managers for their ESG adherence,” he says.

ESG investors generally expect two things from ESG investments: a social impact and a financial impact.  

To measure the social impact, advisors can check a fund’s holdings against ESG ratings set by MSCI, S&P, and Sustainalytics, which scour the web for corporate data and other information — such as news articles — about a company. It’s a good signal when the vast majority of the fund’s holdings rate highly. 

To measure the financial impact — in other words, the effect on returns — advisors can measure a fund against a benchmark. ESG screening of a fund’s holdings should have a material impact on financial performance against a peer group. Ideally, it will also help to diversify a client’s portfolio. 

Now you’re ready to match specific funds to a client’s investment policy statement, and then clearly communicate social and financial results through customized ESG reports. 

“A best-in-class SRI policy [which considers financial returns and ESG benefits] goes beyond the surface-level aspects of ESG and strives to create a meaningful and measurable impact on society,” says To. “It’s important for advisors to really go into the weeds with clients. Being specific on what they want to accomplish is key.”

As countries move to a net-zero climate goal, investors can capitalize by aligning their portfolios in a way that supports the transition. But with so many investment options, it can be difficult to understand the nuances of each strategy.

Christian Felx, Manager and Head of Responsible Investment at Desjardins Global Asset Management (DGAM), and Pierre-Luc Vachon, Head of Products, Investment Strategies, at DGAM explain the various approaches to responsible investment (RI), and how net-zero ETFs are part of the solution.

Q: How have RI approaches evolved in recent years?

Christian Felx: A growing number of investors are opting for investment solutions that promote sustainable prosperity, with RI assets under management (AUM) growing to more than $3 billion in recent years, according to the Responsible Investment Association. The main reason behind this growth is that we were able to bridge the gap between sustainability and financial performance. We have moved from exclusionary strategies to more sophisticated strategies based on analytical frameworks. We now know that using environmental, social, and governance (ESG) criteria in the investment process helps identify risks and opportunities that are sometimes overlooked by traditional financial analysis.

Q: Can you detail the approaches used in RI ETFs?

CF: First, we need to establish the investment universe. Often, most RI strategies  will exclude sectors or companies associated with undesirable activities, such as controversial weapons or tobacco producers.

Second, we assess the ESG performance of issuers with a proprietary scoring methodology. This allows for efficient identification of opportunities and mitigation of risks. For example, an approach that integrates ESG momentum will allow for issuers that have lower or average ESG practices but are set to improve on them in the coming years.

Third, there’s portfolio construction, where investment mandates may include an ESG dimension. For example, net-zero trajectory objectives can be added to the investment objective of some strategies without sacrificing the portfolio’s expected financial return.

Last, there’s shareholder engagement, which is a lever for positive change. The portfolio manager engages in a constructive dialogue with the company, further improving on their understanding of the business, and giving them the opportunity to influence the ESG issuer to adopt sustainable development practices.

“Desjardins’ net-zero pathway ETFs target their climate objective while providing broad and diversified equity market exposure.”

Q: What are the advantages of ETFs with net-zero trajectories?

Pierre-Luc Vachon: A net-zero trajectory aligns with the objective to limit global warming to 1.5 °C, and targets improvement in the portfolio’s carbon emissions over time. Previous approaches to decarbonization would simply offer a reduction compared to a benchmark, which wouldn’t necessarily improve over time.

Q: How do net-zero ETFs differ from other RI ETFs?

PLV: On the Canadian ETF market, there aren’t a lot of strategies targeting carbon emissions, let alone strategies aligning with net-zero objectives. Desjardins’ net-zero pathway ETFs target their climate objective while providing broad and diversified equity market exposure.

Q: How is Desjardins’ Net-Zero Emissions Pathway ETF focused on RI?

PLV: Our approach is light on exclusions, excluding only companies involved in controversial weapons, tobacco production, thermal coal, or severe controversies. We also use ESG scores derived from our own internal analysis or from third parties.

We’re aiming for a portfolio that’s well diversified and provides exposure to most sectors while meeting net-zero objectives. For instance, the portfolio construction process enforces geographical and sectorial diversification, and avoids excessive concentration in any single security.

We’re offering the strategy in a traditional version and a multifactor version, which adds another step to the process where we allocate the portfolio securities’ weights to maximize exposure to factors that have been shown to add value in the long run.

Q: How can advisors and their clients be part of the RI solution?

PLV: Demystify RI and its misconceptions. It’s sometimes believed that RI ETFs exclude all companies from the energy sector, while in fact, some strategies will invest in energy companies if they have robust ESG practices or a strategy to improve the ESG integration in their business model, and low carbon emissions relative to their peers.

Another misconception relates to the belief that integrating an RI dimension to the strategy’s objective will inevitably impact performance negatively. This topic has been subject to meta-studies^* where researchers didn’t find support to these claims.

Understanding that there are diverse approaches to RI is crucial. Each product and strategy may vary, even if they come from the same issuer. Therefore, it’s essential to thoroughly examine the product and gain a clear understanding of what’s being offered.

*Sources: G. Friede, T. Busch, and A. Bassen, “ESG and financial performance: aggregated evidence from more than 2000 empirical studies,” in The Journal of Sustainable Finance & Investment (2015); DWS Group; Hamburg University; and SSRN.

Why are active ETFs gaining popularity in your view?

Andrei Bruno: You can broadly put ETFs into three categories: passive, smart beta/factor, and active. Historically, active strategies have been in the realm of the mutual fund space. But now we’re seeing a lot of active strategies come to ETFs, including equities and fixed income. And that’s partly because advisors are now adopting the ETF vehicle. You’re starting to see certain advisors who buy only ETFs now. Twenty years ago, that would’ve been unheard of.

How do active ETFs differ, and what are the potential benefits of active ETFs?

AB: As we know, passive strategies track an index. So you’re getting beta exposure. For example, with an S&P 500 index strategy, you’re simply getting market exposure. But the primary goal of active strategies is to seek to drive alpha. So, in other words, active strategies seek to outperform the market.

Active strategies are more tactical. If there’s changing investor sentiment, certain styles are more in favour. It might be a growth market. Tactical active strategies can shift around their positioning. They can go more overweight growth or underweight value, for example.

“ Analyze the investment objectives, what the strategy is, what the style of the portfolio manager is, and what areas they’re investing in — whether that’s asset classes, geographies, or cap sizes. ”

And there’s typically a lot more research that goes into active strategies. For example, in a broad-based market active equity

ETF, the portfolio manager would look at each and every sector. Since the main goal is to seek to drive alpha, security selection is extremely important.

Are there any emerging trends in active ETFs?

AB: Over the last two or three years, we’ve seen options strategies become more popular. So, whether it’s protective put strategies, equity buffers, or covered call strategies, those have been tremendously popular as of late, and we continue to see assets flow into these areas of the ETF market.

What factors should investors consider when evaluating active ETFs?

AB: When you’re taking a look at an active strategy, analyze the investment objectives, what the strategy is, what the style of the portfolio manager is, and what areas they’re investing in — whether that’s asset classes, geographies, or cap sizes. Take a look under the hood to see what you’re getting, and overlay that with the rest of your portfolio. You may see a portfolio manager who has tremendous returns and say, “Hey, I want to add that manager’s fund to my portfolio.” But it’s also important to ask, “What are my current risks? What are my current exposures in my portfolio right now? Am I adding to those risks? Am I diversifying those risks? Am I ending up too concentrated in a certain geography, a certain asset class, or a certain style tilt?”

How do Fidelity’s equity active ETFs provide potential for outperformance?

AB: At Fidelity Investments Canada, we draw on a vast network of research and investment professionals across the globe. We have investment analysts who cover every aspect of the market, whether that’s specific sectors, asset classes, or geographies. This helps us make in-depth and well-thought-out investment decisions with the goal of seeking to outperform the markets.

Why is it important to have both fixed income and equity active ETFs?

AB: You generally want to be diversified. And your investment horizon will affect the allocation of fixed income versus equity. If you’re getting close to retirement, capital preservation is a lot more important, so, generally, you want to be overweight to shorter duration, high-quality fixed income relative to equities from a risk perspective. Conversely, younger investors have a longer investment horizon, so they may be able to absorb a little more risk and be more tilted toward equity relative to fixed income.

How can advisors discuss active ETFs with clients?

AB: Advisors can consider talking to their clients about the potential for alpha generation relative to index strategies. Whether you’re talking about fixed income or equities, there’s an opportunity for security selection with active ETFs. With index strategies, there’s less wiggle room around what particular securities you can put in that basket. So, the investible space in active ETF management can be a little larger.

For instance, with fixed income active ETFs, portfolio managers can participate in new issues. Index strategies typically can’t. They have to wait until the rebalance period before they can add those new issues into the index, which then gets added into the fund.

Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the mutual fund’s or ETF’s prospectus, which contains detailed investment information, before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently, and investors may experience a gain or a loss. Past performance may not be repeated.

The statements contained herein are based on information believed to be reliable and are provided for information purposes only. Where such information is based in whole or in part on information provided by third parties, we cannot guarantee that it is accurate, complete or current at all times. It does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Graphs and charts are used for illustrative purposes only and do not reflect future values or returns on investment of any fund or portfolio. Particular investment strategies should be evaluated according to an investor’s investment objectives and tolerance for risk. Fidelity Investments Canada ULC and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.

From time to time a manager, analyst or other Fidelity employee may express views regarding a particular company, security, and industry or market sector. The views expressed by any such person are the views of only that individual as of the time expressed and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are subject to change at any time, based upon markets and other conditions, and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity Fund.

© 2023 Fidelity Investments Canada ULC. All rights reserved. Fidelity is a registered trademark of Fidelity Investments Canada. The presenter is not registered with any securities commission and therefore cannot provide advice regarding securities.

With longer, healthier lives on the horizon for Canadians, retirement can now last 20 to 30 years instead of what it used to be 10-15 years ago. Add in an uncertain economy, and creating future financial security becomes a complex challenge. This infographic explores how today’s 40-somethings can find opportunity and confidence in today’s volatile market through long-term, income-generating investment funds.

Learn more

As the federal government pushes to boost clean electricity capacity by two to three times to achieve a 100% clean electricity grid by 2035 and meet net-zero targets by 2050, it continues to provide incentives to clean energy developers and producers. At the same time, renewables are now the cheapest source of power, allowing the industry’s success to become self-sustaining, according to Rob Stein, President of Skyline Clean Energy Fund, a Canadian private investment trust specializing in clean energy assets such as solar and biogas.

“The renewable industry has already seen tremendous growth and we expect this to continue — not because they are clean, or the right thing to do, although both are true — but because they’re the cheapest [source from which] we can generate power right now,” Stein says. “So, if you’re going to put a dollar in — whether it’s federally, provincially, or privately — it might as well go toward the cheapest form of power; the clean energy and carbon incentive aspects are icing on the cake.”

Stein oversees the Skyline Clean Energy Fund portfolio, which comprises rooftop and ground-mounted solar, as well as biogas facilities, across Canada. “The industry is driving positive social and environmental change, while also fostering emerging clean energy markets across Canada and the world; that’s what makes the space very exciting,” he says.

Positive momentum within the clean energy industry has paid off for Skyline Clean Energy Fund’s investors. To July 1, 2023, the fund’s one-year annualized return was 9.84%, and its three-year annualized return was 9.45%.^[1] As at June 30, 2023, the fund had over $293 million in total assets under management.

A focus on solar and biogas

When Skyline Clean Energy Fund launched in May 2018, generating strong, predictable cash flow was priority. Ontario’s solar market was one of the best-positioned to deliver that cash flow, as many solar assets in the province are backed by 20-year Feed-in Tariff (FIT) contracts with the provincial government, and as a result, those assets have become a foundational investment for the fund. By the end of 2020, Stein and his team had acquired 65 solar assets, all with long-term contracts, when an investor approached them with an offer to tour his biogas facility in Elmira, Ontario. The team purchased a majority stake in the facility in 2021 and retained the previous owner (and developer) as partner.

“Prior to our offer to purchase the Elmira biogas facility, the operational-heavy nature of biogas had made us reluctant to invest in that class of renewables. We were able to get comfortable through partnering with a strong operating team that had many years of experience, along with keeping the original owner and developer in the business as a minority stakeholder,” Stein says.

The closed-loop nature of biogas’ renewable cycle was an attractive feature for the Skyline Clean Energy Fund team. The loop starts with farmers who grow food and send it to cities, where it’s consumed. Since there is a large government push to divert organic waste from landfills, many municipalities pay biogas owners to take it. At the Elmira biogas facility, the organic waste is broken down, creating a gas through a process called anaerobic digestion. This gas is used to power a combined heat and power system that generates electricity, which is then sold back to the grid under a long-term contract.

“The renewable industry has already seen tremendous growth and we expect this to continue — not because they are clean, or the right thing to do, although both are true — but because they’re the cheapest [source from which] we can generate power right now.”

“We’re paid to take the waste. We’re paid to generate and deliver the electricity. And we’re left with this rich organic fertilizer called digestate, which we sell back to the farmers. They replant and fertilize their fields and grow the food, and the cycle starts all over again,” Stein explains.

Additionally, in 2023, Skyline Clean Energy Fund acquired a majority stake in a large biogas facility in Alberta that combines cattle manure from farmers, as well as organic waste from grocery store chains and other sources, to refine into renewable natural gas (RNG), rather than electricity. The renewable natural gas is then sold through a 20-year offtake contact and delivered onto the natural gas grid.

“The federal government is putting a lot of emphasis on biogas because it looks to solve both a waste problem and an energy problem,” says Stein.

Optimizing performance

The fund typically favours stabilized medium to large-scale operating assets that have historically produced reliable cash flows and have a reasonable maintenance history. However, it may also acquire underperforming assets at a discount. The fund’s asset manager, Skyline Energy (also led by Stein), has expertise in improving system operating plans and dispatching technicians for corrective maintenance, so that these assets can be upgraded and optimized for maximum energy generation. Skyline Energy works with technicians to facilitate 24/7 asset monitoring and performance tracking, so the team can take corrective action quickly whenever equipment fails, and power generation slows.

With Canada now being a global leader in clean energy infrastructure — and the federal government signalling through programs such as the clean energy investment tax credit that it intends to further incentivize the deployment of renewable energy capacity across the country — Stein believes the clean energy sector will continue to thrive.

“We have a strong understanding of the Canadian clean energy market, and believe Skyline Clean Energy Fund is well positioned to navigate new opportunities and federal incentives that can help our unitholders benefit from Canada’s shift toward electrification and net-zero targets,” he says.

¹ Skyline Clean Energy Fund’s annualized returns including other periods are: 9.84% 1-year, 9.45% 3-year, 9.17% 5-year, and 9.01% since inception on May 3, 2018. All of Skyline Clean Energy Fund’s numbers are as at July 1, 2023.

Investment professionals are increasingly interested in companies adopting practices that reduce risk and ensure their long-term viability. More and more of them are integrating ESG criteria into their investment decisions.[1] However, due to the lack of standardization or, in some cases, the absence of data, it is difficult to get an accurate and complete picture of the true value of a company’s ESG risk management.

The lack of reliable data is one of the main obstacles to the growth of responsible investment according to industry players.[2]

This is where artificial intelligence (AI) comes to the rescue: AI includes a variety of emerging technologies that have made it possible to automate complex tasks at speeds and volumes never seen before. For businesses, this new reality is changing the way they can use and process data. For portfolio managers investing in those businesses, it is a valuable decision-making tool. Here’s how some of National Bank Investments’ (NBI) open architecture partners are using AI in responsible investment (RI).

AI to identify intangible risks

Much of artificial intelligence’s potential comes from natural language processing (NLP) algorithms. These algorithms can identify perceptions, track emerging trends, and detect controversies around companies.

For example, some of our portfolio managers use the services of firms that analyze communications from hundreds of thousands of public sources on stakeholders’ discourse around companies in a multitude of languages. They are therefore able to detect whether companies are consistent in their disclosure on human rights, labour standards, and their environmental commitments among other issues.

AI and the rise of spatial finance

AI models can also analyze the risks associated with ESG factors from a spatial perspective. That is, using a large set of geospatial data, they contribute to identifying climate risks and opportunities related to a specific location. For example, sea-level rise, extreme weather events and temperature patterns can be projected.

By linking this information to the geographic location of their assets, investment professionals can decide to reallocate capital to more resilient areas or to protect existing assets by investing in adaptation measures.

AI to measure positive impacts

The use of AI goes far beyond risk management. It can be useful in identifying and choosing to invest in companies whose products or services have a positive impact on the world. For example, portfolio managers could use AI to align their investments with the United Nations Sustainable Development Goals.

These technologies, which are still emerging, should provide greater clarity on how issuers’ operations fit into solutions to global challenges.

AI as a competitive advantage and its limits

By building AI capabilities, professional investment firms ensure a more accurate collection and analysis of the massive amount of information available, giving them a head start on their investment decisions.

While AI can make essential data accessible to the search for sustainable investments, it does have its limitations. The capacity to distinguish reliable information from the amount of data available remains a very human ability that technology will not replicate anytime soon.

The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee, explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data. The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations.

© 2023 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under licence by National Bank Investments Inc.

National Bank Investments is a signatory of the United Nations-supported Principles for Responsible Investment, a member of Canada’s Responsible Investment Association, and a founding participant in the Climate Engagement Canada initiative.

[1] Canadian RI Trends Report, 2022

[2] Canadian RI Trends Report, 2022

Canada set new records for immigration in 2021 and 2022, with a goal to add 465,000 permanent residents in 2023; 485,000 in 2024; and 500,000 in 2025. While the government says this is meeting nearly all of Canada’s growing labour needs, housing capacity isn’t keeping up — and high demand for housing is boosting investor interest in multi-residential investment opportunities.

“We’re about 500,000 homes short in Ontario alone,” says Matthew Organ, President of Skyline Apartment REIT, a Canadian private investment trust specializing in multi-residential real estate. “A report from a research company based at the University of Ottawa projects we will need 1.5 million homes constructed by 2031 to meet Ontario’s housing demand. So, the reality is that over the next decade, we’re going to remain in a housing shortage in this country, and that is fuelling the demand for any form of housing — but especially multi-residential, because it’s generally the most affordable.”

The 244 properties owned by Skyline Apartment REIT have a fair market value of $4.83 billion as at June 30, 2023. In total, they comprise 22,436 units diversified across 60 communities in seven provinces with an average monthly rent of $1,330. The REIT, which boasts a 14.51% three-year annualized return as at June 30, 2023,¹ focuses on secondary and tertiary markets and holds a mix of established properties and new developments. Its historical performance record shows stability, with consistent monthly revenue and increasing rents leading to a steady flow of distributions to investors.

On the construction front, Organ favours partnerships with development-friendly municipal governments. “The longer you have a piece of land tied up to get through zoning requirements, you’re sitting on something that isn’t producing any income, and, at the end of the day, the cost of the whole project increases,” he says “We’re generally looking for municipalities that are willing to work with us to get that development across the line faster.”

For Organ, successfully maintaining a positive relationship with a municipality means Skyline Apartment REIT has a higher likelihood of engaging in additional new development opportunities there. While it evaluates opportunities to enhance its presence in markets where it is established, the REIT also looks to enter new markets.

“Our shopping centres are full of tenants that are relevant and vibrant and successful.”

Buy what you know

For Organ, it makes sense to buy and build in secondary and tertiary markets, in part because there’s less competition from public REITs in those communities.

In addition, as experienced specialists in these markets, the Skyline Apartment REIT team draws from a deep knowledge base that enables them to identify the best opportunities. For example, they’re attuned to the trend of retired farmers planning to move to small towns but seeking an alternative to decades-old apartments. In larger secondary cities such as Windsor, Ontario, Organ says it’s equally critical to understand each particular market and know what’s fuelling demand in order to add what’s needed to the supply.

When considering a property acquisition, the typical “sweet spot” for the REIT is around four storeys, with anywhere between 50 and 500 units.

“We have a fairly extensive CapEx program,” says Organ. “When we purchase a property, we go through a comprehensive evaluation. For an older property, in addition to hallway or common-area renovations, it may need other aspects like the balconies, the roof, or the elevator.”

The REIT continues ongoing investment in its existing real estate holdings — for example, by adding EV chargers to many of its buildings.

“We’re looking five to 10 years down the road, thinking, if we can’t offer electric charging for vehicles, our tenants will move on to the next place that will,” Organ explains.

The goal is to get everything up to a modern-day standard to attract the next tenant, generating income and value growth for unitholders.

Prepared for further rate hikes

According to Organ, the multi-residential housing market’s predictability, consistency, and stability—due to its strong demand projected well into the future—are likely its primary attractors for investors. Rising interest rates further support demand for apartments by making it more difficult for homebuyers to purchase property — and variable mortgage rates are up from a low of 1.26% in December 2021 to more than 6% in August 2023.

Of course, rising interest rates affect Skyline Apartment REIT, too. However, Organ notes the portfolio’s mortgages are staggered, positioning the REIT to avoid having a significant portion of the debt mature in any one year.

“From an investment standpoint, the demand for apartments is not going away,” he says. “We see that in our mark-to-market rent gap. Every time we turn over a suite, we’re able to capture more rent and still stay within what would be considered a reasonably affordable living accommodation in Canada.”

¹ The performance quoted represents the 3-year annualized return. Skyline Apartment REIT’s annualized returns including other periods are 10.46% 1-year, 14.51% 3-year, 17.74% 5-year, 14.69% 10-year, and 14.40% since inception on June 1, 2006. All of Skyline Apartment REIT’s numbers are as at June 30, 2023.

Disclaimer:

Skyline Wealth Management Inc. (“Skyline Wealth”) is an Exempt Market Dealer registered in all the provinces of Canada and the territory of Nunavut. The information provided herein is for general information purposes only and does not constitute an offer of securities. Sales of interests in any investments offered by Skyline Wealth are only made to certain eligible investors pursuant to regulatory requirements and available exemptions.

Commissions, trailing commissions, management fees and expenses all may be associated with investments in exempt market products. Please read the confidential offering documents before investing. There is no active market through which the securities may be sold, and redemption requests may be subject to monthly redemption limits. Exempt market products are not guaranteed, their values change frequently, and past performance may not be repeated. Nothing in this email should be construed as investment, legal, tax, regulatory or accounting advice. Prospective investors must make an independent assessment of such matters in consultation with their own professional advisors.

Some of the investment products offered by Skyline Wealth are from related issuers. A full list of issuers related to Skyline Wealth and details of the relationship between them is available upon request.

The information contained within is disseminated by Skyline Wealth Management Inc. (“Skyline Wealth”) on behalf of the Issuer as at the date of publication and Skyline Wealth does not undertake to advise the reader of any changes. The opinions and statements expressed within are of those of the Issuer and do not necessarily reflect those of Skyline Wealth. Skyline Wealth has not taken any steps to verify the accuracy or completeness of the information provided herein.

The U.S. healthcare sector offers what many investors seek: large companies, consistent demand, and innovative growth tailwinds. The sector contains a diverse array of subsets, each with their own growth drivers in both the shorter and longer terms. They include pharmaceutical companies, biotechnology firms, and managed care providers that provide insurance, and run clinics and hospitals. Combined, the US healthcare sector offers a long history of consistent growth, with a market capitalization multiples greater than the entire TSX.

“We see in the U.S. healthcare sector an attractive set of massive companies, with dominant market shares and innovative business practices,” said Harvest ETFs Chief Investment Officer and Portfolio Manager Paul MacDonald. “We’ve identified three permanent, non-cyclical and consistent growth drivers for these companies: aging in the developed world, economic growth in the developing world, and the steady stream of innovations these companies offer.” 

MacDonald manages the Harvest Healthcare Leaders Income ETF (HHL)—the largest US healthcare ETF listed in Canada. He explained that as North American and European populations age, a larger cohort of individuals will require pharmaceutical drugs, medical technologies, surgeries, and managed care. He noted as well that in developing countries like China and India, growth in healthcare spending has outpaced growth in GDP for most of the past 20 years. 

The healthcare sector can offer these growth drivers because healthcare is a superior good. Put simply, healthcare is essential to consumers and countries, and they are far less likely to cut their spending on it when a recessionary period hits. 

That doesn’t mean the healthcare sector doesn’t face its own headwinds. Despite outpacing market growth for the past 15 years, the healthcare sector is often sensitive to two “Ps”: patents and politics. 

When the patent for a particular drug or technology expires after about 20 years, the owner of the patent loses exclusive rights to produce and market that drug or technology. On major drugs and technologies this can have negative short-term impacts. Patents are a somewhat cyclical challenge in the healthcare sector for pharmaceuticals, medtech, and biotech. MacDonald explained that they can be managed relatively well, however, with patent extensions and new innovations. 

“Healthcare companies innovate constantly,” MacDonald said. “Taking large-cap pharma as an example, companies like Merck & Co. Inc.  have huge R&D pipelines and the capital required to capture value from innovations by smaller companies.”

MacDonald is particularly bullish on two innovation themes that continued in 2023. The first is approval of new diabetes and weight loss drugs could fundamentally change the fight against a range of chronic illnesses and open a market potentially worth upwards of $50 billion by 2030. While many have heard of Ozempic, more late-stage trial results from Eli Lilly & Company with their drug Mounjaro, have seen very strong results with many expecting this to be approved by early 2024 for the treatment of obesity. The second is in medical devices, essential tools like dialysis machines, infusion pumps, or hip replacements that are being updated almost constantly. Many of these companies are also innovating robotic-assisted surgeries which can help clear surgical backlogs and deliver far better patient outcomes.  

The other “P” is politics and that’s the factor most likely to impact sentiment around healthcare going into 2024. US politicians on both sides of the political spectrum have used healthcare companies as a political punching bag, making some investors more wary of the sector during election cycles. 

MacDonald explained, however, that throughout its history the US healthcare sector has weathered these political storms. Even when policies are passed that appear to alter the system—such as the Affordable Care Act or the drug price provisions in the Inflation Reduction Act—these businesses find a way to innovate and grow. Moreover, following their key role in resolving the COVID-19 pandemic, these companies are viewed more favorably by the general public and have not been subject to the same levels of rhetoric as in past prior to the pandemic. 

“The things that make regular investors nervous, like politics and patents, make a seasoned healthcare investor look for opportunity,” said MacDonald. 

He explained that the HHL ETF is designed to manage these cyclical changes while capturing the long-term growth drivers in healthcare. It does so by investing in a portfolio of 20 mega-cap healthcare companies, diversified across subsectors and styles. Mega-cap companies typically have the greatest market share and greatest ability to survive and even thrive economic cycles. Diversification offers ballast—when a headwind impacts biotech, pharmaceuticals and managed care might be unaffected. HHL also pays a high annualized income yield generated through dividends and an active covered call strategy. 

“By writing covered calls on our holdings actively, we can pay consistent monthly cashflow to unitholders while ensuring as much of the portfolio as possible is exposed to market upside,” MacDonald said. “That income can contribute to total returns through any short-term downturn, while the portfolio’s mega-cap diversified holdings can capture the long-term upside potential we see in healthcare.” 

National Bank Financial – Wealth Management (NBFWM) continues to gain traction among advisors and clients alike. And there are quite a few reasons for this, including support from all levels of leadership and seamless technology. Both make for a better client and advisor experience.

Senior Wealth Advisors and Portfolio Managers Sean Durkin and Amy Dietz-Graham of The Durkin Dietz Group at NBFWM explain why they made the transition two years ago.

Q: What makes NBFWM different from other brokerages?

Sean Durkin: We try to keep our eyes open in terms of what our competitors are doing. We didn’t have a lot of familiarity with NBFWM, so we went through a due diligence process. As we progressed, we came to appreciate the intersection they had between a special client experience and a special advisor experience. Often, you’re focused on only one, and it comes at the expense of the other. But we found NBFWM actually did both very well.

Amy Dietz-Graham: We also found the culture to be collaborative and supportive from all levels. Leadership is very accessible. That’s why there’s that balance between client and advisor experience. They understand what clients are feeling, how they’re using systems, how they’re interacting, and what services they’re looking for, while also following up with advisors to make sure our lives aren’t more complicated. It’s about making things more simplified so we can spend more time working with clients.

SD: The communication is quite frequent as well. It’s not something that happens once a year. The dialogue is ongoing, and it’s a refreshing approach in how to manage a business.

Q: What was the onboarding process like?

ADG: The onboarding team was alongside us every step of the way as we learned new systems or had any questions. We had a dedicated transfer team making sure things were moving at a good pace. We had another team focused on documentation once we submitted information. And we had another team focused on training our associates on the different systems. We were able to lean on the teams to get us through that busy period. Everything was seamless for both the advisory team and our clients.

SD: Often, a transition like this can take the better part of a year. But we were able to do the bulk of it within the span of a few weeks because the technology is leading edge. Q: Can you further detail the technology?

ADG: It’s easy for the advisor to use, and the output for the client is well put together. The financial planning system was built in-house with the client mindset. Clients can easily view and understand reports.

It’s about how they approach the solutions versus just throwing more spreadsheets at us. For example, when KYP evolved, they had a system in place that was user-friendly so we could get that task done in an organized fashion.

And the technology has been a massive time savings for us. For example, at tax time, it would take me evenings and weekends and months to go through tax and organizing things. But I’m now able to do that within a week during regular business hours. And it was user-friendly for our clients to log in and navigate. It reduced the number of times they had to call us because they couldn’t find something or needed to reset passwords.

Q: How has your business changed since joining NBFWM?

ADG: It has allowed us to reengage with our clients in a more meaningful way. Instead of fussing through administrative tasks, we’re spending more time talking to clients — we’re doing Microsoft Team live events; we’ve put podcasts together — especially high-net-worth individuals, they’re busy in their day-to-day lives, so we want to be available in whatever way it makes sense for them to communicate with us.

SD: Over the years we have been able to expand our practice in a predictable and consistent manner. Working here, leveraging the technology and support we now have available, we feel our ability to grow can be achieved more effectively and efficiently than ever.

Q: What would you say to other advisors looking for a change?

ADG: Do your due diligence and find the right fit for you. Keep an open mind. We were pleasantly surprised to see the client and advisor experience woven through everything we touch day to day.

SD: It’s rare to find an organization that embraces the entrepreneurial spirit of the advisor and supports you with the strength and ability of a large, Big Six bank. But NBFWM has done exactly that.

Looking for a change? Make the move: nbfwm.ca/career