Worth Allaye-Chan

Investment Counsel2100 – 925 West Georgia Street

Vancouver, BC V6C 3L2

Brian.Worth@raymondjames.ca

www.worthallayechan.com

Office: 604.659.8066 Toll Free: 1.855.659.8066

DISCLAIMER

The opinions expressed at the seminar will be those of Dr. Brian Worth, and not necessarily those of Raymond James Ltd.

Statistics and factual data and other information presented at the seminar are from sources RJL believes to be reliable but

their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under

no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or

solicitation for the sale or purchase of securities.

Securities are offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Insurance products

and services are offered through Raymond James Financial Planning Ltd., which is not a member-Canadian Investor

Protection Fund.

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RELATIONSHIPS

CLIENT

WORTH ALLAYE-CHAN

INVESTMENT COUNSEL

A registered investment dealer

Registered Portfolio Managers

Financial Plan

Investment Advice

Asset Allocation

Portfolio Management

Client Service

Macro-economic analysis

Quantitative stock analysis

Buy side (independent) research

SRI screening (when requested)

Investment Plan/Portfolio Reviews

Regulatory membership - IIROC

Membership - Canadian Investor

Protection Fund

CDS participant

Capital Management

Portfolio Manager Support

Trading platform and systems

Sell side and buy side research

Oversight, compliance &

reporting

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GOVERNANCE AND POLICIES

For Foundations, it is said that the five key components of good financial governance are:

• Budget

• Financial Reporting

• Audit

• Investment Policy

• Spending Policy

Similar for most investing institutions.

Investment Policy is an essential part of good governance.

First Nations communities have unique challenges in building an

investment policy.

Here we will broadly describe parameters that you will need to address.

This is not an all-encompassing list and may be more detailed for a higher net worth

investor.

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FUNCTIONS OF A FULL INVESTMENT POLICY

Once completed, reviewed and updated a full policy will:

• Define the community as a financial investor

• Define the structure: key responsibilities and personnel; organizational

structure;

• Define investment risk management structure;

• Assign responsibilities for reporting, monitoring.

• Document acceptance of the policy and updates.

• Specify responsibilities;

• Describe the process for review and update;

• Describe the process for engaging and discharging PMs

• Define roles & responsibilities of committees and officers / staff

• Assign responsibility for asset allocation and rebalancing.

• Define a process for rebalancing.

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FUNCTIONS OF A FULL INVESTMENT POLICY.

• Assign responsibility for risk management, monitoring and reporting.

• Describe the overall investment objective(s)

• Describe risk and return objectives

• Define the investors’ risk tolerance.

• Itemize constraints and boundaries

• Identify tax considerations that may affect investment decisions

• Identify policy requirements for: liquidity; concentration; base currency; foreign

content; use of leverage.

• State the investment philosophy,

• Indicate a proxy voting policy.

• Define metrics for risk measurement

• Define a time frame and process for rebalancing to target asset allocations.

• Define a time frame and a process for updating the policy.

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CONTENT

• What is an Investment Policy? Why do you need one?

• What is an Investment Policy Statement?

• Who should be responsible for creating, updating and monitoring?

• Separating out “funds” designated for different purposes.

• Determination of time horizon, risk tolerance and asset allocation for each

separate “fund”

• Are the return expectations and risk assumptions realistic?

• Define withdrawal, liquidity, diversification, foreign content, base currency and

other constraints or requirements,

• What about SRI / ESG? Hard policy or overlay?

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CONTENT

• What metrics are to be used in evaluating performance and risk? Using an

appropriate benchmark(s).

• Choosing a manager(s). Knowledge, trust and communication.

• Frequency of reporting

• Documenting acceptance, review and compliance?

• Engaging and discharging managers

• SAMPLE; risk & objectives assessment process

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WHAT IS AN INVESTMENT POLICY?

• A documented roadmap and guidelines of the who, how, where and what for.

• An IP may be a requirement, but in any event it is a necessity.

• A set of guidelines to be adopted & reviewed by a new council and / or a new

CFO or CIO

• A central document that contractual relationships with 3rd party managers

must satisfy.

• A separate policy (IP) might be put in place for distinctly different pools of

funds, but cumbersome.

• In any event, a distinct time horizon, objective and acceptable risk

assessment must be done for each “pool”.

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WHAT IS AN INVESTMENT POLICY?

• Most themes are very long term

– Included in main body of the IP

• Those likely to change, use an Appendix:

– Short term cash management parameters

– Project funding parameters

– People officers committees responsible

– Return expectations

– Withdrawal requirements & timing

– Asset allocation for each “pool”

– Foreign content policy. This gives us an opportunity to move off topic momentarily.

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FOREIGN CONTENT

Many old IP are very Canada centric, need updating for both:

– Fixed income duration. After 32 years of declining interest rates, the cycle will change and

dramatically affect the reward from fixed income component, and in turn may affect asset

allocation decisions and risk.

– Foreign content allowances.

• Canadians (and other commodity exporting economies) have enjoyed nearly 20 years of

the commodity super-cycle; boosted economy; currency, and markets

• This super-cycle peaked in 2011 and broke down in 2014

• Those days are gone, perhaps for quite some time

• Is Canada the best place to invest?

• Is a 5 – 20% foreign content allowance appropriate in today’s world?

• We can no longer afford to be Canada centric investors

• Commodity prices are not just In a downturn. Outside of an “event” commodity prices are

returning to the “norm”

• Main drivers of the super-cycle

– Afghan & Gulf Wars

– China growth

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200 YEARS OF COMMODITY PRICES

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Through the agency of innovation, technology and improving productivity, commodity prices have been in

decline for over 200 years. Aberrations have led to commodity bull markets over the period, the most recent

caused by rapid China manufacturing and infrastructure growth. The current period of cheaper commodities

is not unusual, in fact it is the norm.

COMMODITY SUPER-CYCLE

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End of the commodity super-cycle

100

200

400

800

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Source: Bloomberg

AN EVOLVING CHINESE ECONOMY

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China’s manufacturing & construction sectors are now less important to their economy. Their GDP growth is not

just slowing as it matures, but is changing as service sectors serving the growing middle class represent a much

larger portion of their GDP. This is not a smooth rebalancing and overall GDP growth has been volatile; they

need less stockpiles of commodities.

INVESTMENT POLICY - WHO ARE THE KEY PEOPLE?

Council will likely hold final authority

Investment Committee; Executive Committee; CIO, or CFO responsible

for:

– IPS & IP updates

– Re-allocating / rebalancing funds between managers or mandates

– Maintaining records

– Meeting with investment manager(s)

– Monitoring investment performance and compliance

– Engaging / discharging manager(s)

– Reviewing custody status

– Instruct manager(s) regarding additions and withdrawals of funds.

– Continuous reporting to Council

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THE KEY PEOPLE

Investment Consultant (if applicable) responsible for:

– Assist in generating IP & IPS

– Investment manager search, short listing

– Monitoring performance and adherence to IPS

– Assist in assessing relevance of economic and market outlook

from managers

– Advise on update recommendations

– Advise on rebalancing & asset allocation decisions

– Advise on fees and custody

Accounting & legal

– Representation as required.

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THE KEY PEOPLE

• Investment / Portfolio Manager(s) PM

– One or more PM contracted to invest funds

– Relationship(s) governed by an IPS which (in sum) reflect the IP

– One IPS for each manager

– May assist in the generation of IP, if qualified, but ideally any potential for

conflict of interest to be avoided

– Provide monthly statements of position and transactions

– Provide data required for maintenance of records (cost base, book value

etc.)

– Provide custody services or use the community’s chosen custodian (to

CDS or DTCC)

– Performance reporting (quarterly)

– Market and economic outlook (quarterly)

– Provide data to facilitate tax reporting (annual)

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IMPORTANT COMPONENTS OF AN INVESTMENT

POLICY & QUESTIONS TO BE ANSWERED

• a) Time Horizon

– For a pool of funds, how long can the money be invested? When is it

needed? What level of volatility is tolerable?

– Examples:

• Operating cash / surplus 6 – 18 months?

– Cash management, guaranteed, low volatility, liquidity

– Schedule of withdrawals

• Project funding 2 – 4 years?

– Still low volatility, highly liquid securities

– Income biased profile may be appropriate

– Schedule of withdrawals

• Minors’ incentive funds: decades, but with scheduled withdrawals

– Schedule of payouts

– Longer horizon

– Balanced, but equity biased may be appropriate

• Future generations & trusts

– Very long term; growth profile?

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GETTING THE RIGHT TIME HORIZON

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THE RIGHT TIME HORIZON

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THE RIGHT TIME HORIZON IS CRITICAL

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TIME HORIZON & RISK

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Time Horizon, Risk and Mandates

AGGRESSIVE

GROWTH GROWTH

MANDATE

EQUITY

BALANCED

INCOME

BALANCED

LOW RISK

CASH MANAGEMENT

1 2 3 4 6 7 8 9 10 11 12 13 14 15

TIME HORIZON (YEARS)

(Time Frame for Withdrawal(s))

Low Risk Moderate Medium Elevated High

Source: Worth Allaye-Chan Investment Counsel

RISK & REWARD

• b) Risk & Reward

– What return is needed for each pool of funds?

– What risk (volatility) is acceptable for each?

– Is the assessed risk tolerance correct?

– What is your ABILITY to take risk?

– What is your WILLINGNESS to take risk? … the sleep at night

• Example (from a CFA Institute article):

You have money but you have already lost $1,000!

How much more would you be willing to risk in order to win back your

$1,000?

• Nothing.

• $200

• $500

• Another $1,000?

This is classic risk tolerance assessment!

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REAL RISK

Maximum drawdown in 2008

-5% -15% -25% -50% -50% -50%

Retu

rn

Income balanced

Bonds

Canadian mid/small cap

Global equity

US mid/small cap

Equity balanced

Canadian equity

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Risk (volatility)

RETURN EXPECTATIONS

• c) Return Expectations

– The CFO, CIO or perhaps Investment Consultant or even the PM will

need to manage expectations of return for a given level of risk.

– For the time horizon involved and the risk tolerance assessed, are the

return expectations realistic?

– It is important to look at the actual returns of different levels of asset

allocation over the last 10 years to see if expectations are even somewhat

realistic. Note that we believe that the next 5+ years will offer even more

modest opportunities than in the past.

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ACTUAL HISTORICAL RETURNS

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10/31/2015 Annualized Returns

Asset Mix 1 Year 3 Year 5 Year 10 Year

100% XBB 4.05% 3.03% 4.01% 4.73%

90% Bonds 5% TSX 5% SP500 4.51% 4.37% 4.82% 4.98%

80% Bonds 10% TSX 10% SP500 4.97% 5.71% 5.62% 5.22%

70% Bonds 15% TSX 15% SP500 5.43% 7.04% 6.43% 5.47%

60% Bonds 20% TSX 20% SP500 5.89% 8.38% 7.24% 5.72%

50% Bonds 25% TSX 25% SP500 6.36% 9.72% 8.05% 5.97%

40% Bonds 30% TSX 30% SP500 6.82% 11.06% 8.85% 6.21%

30% Bonds 35% TSX 35% SP500 7.28% 12.40% 9.66% 6.46%

20% Bonds 40% TSX 40% SP500 7.74% 13.73% 10.47% 6.71%

10% Bonds 45% TSX 45% SP500 8.20% 15.07% 11.27% 6.95%

50% TSX 50% SP500 8.66% 16.41% 12.08% 7.20%

Source: Bloomberg

CALENDAR YEAR RETURNS

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Calendar Year returns 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

60% Bonds 20% TSX 20% SP500 8.90% 1.78% -7.39% 11.80% 8.92% 4.68% 6.03% 9.91% 11.96% 3.23%

40% Bonds 30% TSX 30% SP500 11.46% 1.02% -14.15% 15.21% 10.21% 2.33% 7.43% 15.62% 13.71% 3.88%

* 10/31/2015

Source: Bloomberg

SOCIALLY RESPONSIBLE INVESTING,

ENVIRONMENT SOCIAL GOVERNANCE,

& IMPACT INVESTING

• SRI, ESG and Impact investing is an option for inclusion in an

Investment Policy

– Can be quite subjective. Consensus sometimes difficult

– May need updating and perhaps best as an Appendix

– Performance relative to benchmark?

– Some use a simple exclusion policy

– Can also hold a small amount of a security to enable a voice at the AGM

– Shareholder activism services

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ELIGIBLE SECURITIES

• It is common to list types of securities allowed for investment and also

some exclusions:

Examples (only)

• Allowed:

– Common shares

– Preferred shares

– Common share warrants

– Market capitalisation limitations

– Government bonds

– Corporate bonds rated A- or higher

– GICs from CDIC or CUDIC member issuers

– Many others

• Not Permitted

– Private company shares and other securities

– Futures contracts

– Naked option positions

– Other29

DIVERSIFICATION, CONCENTRATION AND LIQUIDITY

• Examples (only)

– No more than 7% of funds to be invested in securities of any one

company

– No more than 40% to be invested in any one sector of the Canadian

market

– No more than 25% to be invested in any one sector of the U.S. market

– Funds must be invested in liquid securities such that all of any one

position can be liquidated in an orderly manner in one day

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REPORTING

• Reporting:

– Manager(s) shall provide monthly statements of position and transactions

– Currency of reporting

– Data to update cost base / book value, monthly

– Quarterly performance reporting in agreed upon format

– Adherence to parameters of the IPS

– Manager “self check” reporting

– Quarterly market and economic outlook

– Outlook for any material impact on the mandate at least quarterly

– Committee (CIO or CFO) meet with manager(s) at least semi-annually or

annually

– Annual manager performance review

– Committee (CIO or CFO) reports to council quarterly

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PERFORMANCE BENCHMARK(S)

• Benchmark(s)

– An independent reference point for evaluating manager(s)

performance

– Often an index or blend of indices

– Risk statistics for comparison

– Performance relative to plan / expectations

– Quartile performance measurement

– Position relative to target allocation (tilt)

– Outlook to rebalance to target?

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EXECUTIVE SUMMARY

• Investor ABC First Nation

• Investible Assets $10,000,000

• Time Horizon Approximately 10 years

• Investment Objective Long-term capital appreciation

• Expected return Higher of 6% p.a. or 2% over inflation

• Risk tolerance Moderate

• Approximate fee rate 0.7% of portfolio market value p.a.

• Benchmark 40% Canada bond universe; 30% S&P/TSX;

30%S&P500 (CAD)

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THANK YOU

Worth Allaye-Chan Investment Counsel

Raymond James Ltd.

2100 – 925 West Georgia Street

Vancouver, BC V6C 3L2

Brian.Worth@raymondjames.ca

www.worthallayechan.com

Office: 604.659.8066

Toll Free: 1.855.659.8066

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