managing banking relations in a transparent world rbc capital markets – global investment...
TRANSCRIPT
Managing Banking Relations in a Transparent World
RBC Capital Markets – Global Investment Solutions
Strictly Private and Confidential
October 28, 2013
Scott McBurney & Cindy Hansen - RBC Capital Market
Patrick J. Hickey & Joseph Sardo - RBC Dominion [email protected] Phone 905 546 5677 www.joe.sardo.com
2
● Structured Notes – A Primer
● PPNs
● Option-based NPPNs
● Long Equity NPPNs
● Ground-breaking New Product
“Tactical Equity Allocation Model” Security
Outline
RBC Structured Notes
3
Structured Notes – A Primer
44
What are structured notes?
● SNs are senior unsecured debt obligations of RBC
Rank equally with RBC deposit obligations
No CDIC insurance
● Pay-off at maturity linked to the change in the price of a market asset
● Market assets can include
Equities, commodities, currencies, interest rates
● SNs may or may not pay coupons
● Two main types
Principal protected notes (PPNs)
Principal guaranteed to be repaid at maturity
Non principal protected notes (NPPNs)
Principal not guaranteed to be repaid at maturity
Designed to be attractive alternatives to traditional equity investments
Structured Notes – A Primer
55
What are structured notes?
● SNs are very flexible investment vehicles
Represent a powerful “tool kit” for investors
Can be created to reflect a specific investment view of a client
Virtually all aspects of a SN can be customized
Term
Level of principal protection
Underlying market asset and currency
Upside participation
IA compensation
Structured Notes – A Primer
66
Structured Notes – A Primer
What makes a “good” structured note?
● Purpose
Should have an investment premise or purpose
Should represent a strategy that the client cannot replicate cost effectively on his / her own
● Simple and transparent
Should be easy for the client to understand
It should be easy to calculate, for various outcomes
What the coupon payments (if any) will be
What the payment at maturity will be
The simplest notes are generally “passive” strategies linked to public market assets
● Low cost
The total cost of a SN (selling commissions, issue costs and hedging costs) should be reasonable
Control over these costs is critical to ensure that a SN represents an attractive investment
RBC will be transparent about its profit and will control the total cost embedded in its SNs
77
Principal Protected Notes (PPNs)
● Economically, PPNs consist of
A “zero-coupon” bond
One or more financial “options” (equity, commodity, FX etc.)
● Current low interest rate levels make the embedded zero-coupon bond expensive
PPNs have become more complex to
Cheapen the embedded options
Improve deal pricing and terms
Investors must examine PPN structures carefully to make sure they fully understand them
It is easy to be misled about how a PPN will perform
Structured Notes – A Primer
8
Non Principal Protected Notes (NPPNs)
● The general features of NPPNs
Intentionally, not principal protected
Designed to be attractive alternatives to traditional equity investments such as
Stocks, ETFs, mutual funds, closed-end funds and hedge funds
Have the same downside risk as a traditional equities
Sometimes less risk (“buffered” principal protection)
● There two main types of NPPNs
“Option-based” NPPNs
Allow you to customize the payoff profile of an equity investment
Have some option-like characteristics
Dividends invested in structure – not paid out
“Long Equity” NPPNs
Enable very efficient access to compelling high turnover “long” equity strategies
Have no “optionality”
Structured Notes – A Primer
9
Principal Protected Notes (PPNs)
10
Principal Protected Notes (PPNs)
Investment objective: Clients are conservative, seeking the potential for annual income in excess of GIC's or government bond yields. Principal protection is paramount.
Product Pay-Off on Sample Terms:
Annual coupon of 0.00% - 7.25% based on the performance of a portfolio measured annually from inception where each asset with positive performance is counted as 7.25% and each asset with a flat or negative return is recorded as its actual return.
There is a floor on negative returns per asset of -25%.
Full principal return at maturity.
Can also offer fixed coupons in year 1 or minimum coupons per annum
Risk: Opportunity cost, typically the yield on government bonds over the investment term.
Daily liquidity provided by RBC
This pay-off profile is possible on the following assets: ETF's, shares, and commodities
Commentary: This product is constructed using options. The pricing, or the terms we can provide to investors improves with increasing interest rates. This strategy should appeal to investors who are seeking market participation without risk to principal.
Sample Terms:
5 year term
Linked to portfolio of Canadian equities
CAD / currency hedge possible on foreign denominated assets
Annual coupon of 0.00% - 7.25% based on portfolio performance
Sample Calculation of an Annual Coupon
Enhanced Yield PPNs
11
Investment objective: Clients are conservative and seek diversification through returns linked to commodity markets. Principal protection is paramount.
Product Pay-Off on Sample Terms:
100% of the return in a portfolio of assets, subject to a maximum return for each asset of 50% and therefore a maximum return for the portfolio of 50%.
Return cannot be negative
Full principal return at maturity.
Risk: Opportunity cost, typically the yield on government bonds over the investment term.
Daily liquidity provided by RBC
This pay-off profile is possible on the following assets: equity indices, equity sub-indices, shares, ETF's and commodities
Commentary: This product is constructed using options. The pricing, or the terms we can provide to investors improves with increasing interest rates. This strategy should appeal to investors who are seeking market participation without risk to principal.
Sample Terms:
5 year term
Linked to silver, nickel, corn, sugar, natural gas, crude
USD / currency hedge possible on foreign denominated assets
Return capped at 50% per commodity for a maximum return of 50%
Principal Protected Notes (PPNs)
Individually Capped PPNs
12
Option-based NPPNs
13
Introduction
● The value proposition
Allows you to customize the payoff profile of an equity investment
Not possible with any other investment vehicle
● The payoff profile of traditional equities is very limiting
Most clients understand that they need core equity exposure
However, the payoff profile of traditional equities is represented by a 45 degree line
1:1 participation in positive market performance
1:1 participation in negative market performance
The problem is that the 45 degree line
Is the only payoff profile available for traditional equities
Does not necessarily reflect your investment view
Option-based NPPNs
14
0%
30%
-30%
50%
Market Value of Underlying
Inve
stm
ent
Ret
urn
Initial Price
-50% -40% -30% -20% -10% 10% 20% 30% 40% 50%
Payoff profile of a traditional equity investment
Option-based NPPNs
15
Advantages
● You can modify the 45 degree line
At very low cost
In small amounts ($2 to 3 MM depending on term)
● No other investment vehicle offers this flexibility
● Currently, most payoffs are designed to provide attractive returns in flat markets
The “Booster” structure
The “Double Up” and “Triple-Up” structures
● Can be structured with varying levels of principal protection (“Buffer” structure )
Important not to pay for more principal protection than you need
Option-based NPPNs
16
0%
18%
-18%
Not
e V
alue
at
Mat
urity
Strike
Price -25% -20% -15% -10% -5% 5% 10% 15% 20% 25%
Maturity payoff profile of Triple-Up structure
Market Value of Underlying 1 year term, 18% cap
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Concerned about mediocre returns
- Willing to cap market upside
- Does not want principal protection
Index Return
Note Return
17
0%
30%
-30%
50%
Not
e V
alue
at
Mat
urity
Strike
Price-50% -40% -30% -20% -10% 10% 20% 30% 40% 50%
Maturity payoff profile of Booster structure
Market Value of Underlying
-50%
3 year, 30% booster
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Concerned about mediocre returns
- Not willing to cap market upside
- Does not want principal protection
Index Return
Note Return
18
Maturity payoff of Buffered Triple Up structure
-32% -24% -16% -8%
32%
24%
16%
8%
0%
Market Value of Underlying
Not
e V
alue
at
Mat
urity
-8%
-16%
-24%
-32% Strike Price
8% 16% 24% 32%
3 year, 24.3% cap, 20% buffer
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Concerned about mediocre returns
- Willing to cap market upside
- Wants some principal protection
Index Return
Note Return
19
-80% -60% -40% -20%
80%
58%
40%
0%
Market Value of Underlying
Not
e V
alue
at
Mat
urity
-40%
-80%Strike
Price 20% 40% 60% 80%
5 year, 58% cap, 40% buffer
Maturity payoff of Buffered Protection structure
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Wants significant principal protection
- Wants market upside potential
- Willing to accept cap on upside
Index Return
Note Return
20
Long Equity NPPNs
21
Introduction
● The value proposition
Enables very efficient access to compelling high turnover “long” equity strategies
The embedded equity strategies may be created by
The client or advisor
RBC Research
Zyblock: Strategic / tactical (“Conservative Dividend RoC Security”)
McAlpine: Quant (“SPARQS” and “Canadian Bank Yield RoC Security”)
Typically provides one or more of the following benefits
Tax efficiency
No CG tax triggered on rebalancing of the underlying portfolio
ROC treatment on income distributions
Operational efficiency
“One ticket solution” (no trading required by client/advisor)
No transaction costs (all costs to client reflected in annual fee)
Long Equity NPPNs
22
Assumptions:
15% Annualized
Return
5-Year Holding Period
34% Tax Rate
Source: Bourbonniere Paul, Polson Bourbonniere Financial Planners, Five Keys to successful investing, Money Digest Oct. 2000.
The structure of the note defers any tax consequences until maturity or disposition.
Advantages of NPPN tax efficiency
Long Equity NPPNs
23
● Description
Simplified investable version of McAlpine’s Quads Score Top 40 model
1:1 “up and down” participation in the total return of an RBC 8 factor quant model
Strategy developed by Chad McAlpine, RBC Quantitative Research
Universe is 100 largest dividend paying TSX Composite stocks (ex. RY and trusts)
100 stock universe ranked monthly based on equal weighting of 8 quantitative factors
25 stocks with highest score chosen from 100 stock universe
25 stock portfolio rebalances quarterly back to equal weights
Dividends reinvested quarterly (indicated yield 2.65%)
Very strong back testing vs. TSX composite over 20 years
● Advantages
Tax efficiency (no tax triggered on portfolio rebalancing)
Operational efficiency (“one ticket solution” with no transaction costs)
Daily secondary market
Can be customized (maturity, selling commission, etc.)
RBC “SPARQS” Security
Long Equity NPPNs
24
ATTRACTIVE VALUATIONS
Low Price to Earnings
Low Price to Book Value
High Quarterly Earnings Growth
High Return On Equity
High Earnings Surprise
High Estimate Revisions
High 3-Month Price Change
High 6-Month Price Change
Dividend yielding large-cap Canadian equities
Rank stocks based on an equally weighted combination of 8 factor models that fall into 4 distinct investment themes
SUSTAINABLE GROWTH
POSITIVE SENTIMENT
MARKET RECOGNITION
The Universe
The Model
S&P/TSX Composite Member
Must Pay a Dividend
Excluding Trusts
Excluding RY
x 1/8
x 1/8
x 1/8
x 1/8
x 1/8
x 1/8
x 1/8
x 1/8
= Total Score
The SPARQS Portfolio
• 25 stocks
• The portfolio is traded monthly – annual turn over is 120%
• Replacement buys are the best-ranked stocks not already held by the portfolio
• Only the largest 100 qualifiers by market cap are eligible to be bought
• Stocks are sold if they drop below the 50th position in terms of their rank
• At the end of each quarter the portfolio is rebalanced to equal weights
RBC “SPARQS” Security
Long Equity NPPNs
25
$0
$1
$2
$3
$4
01 02 03 04 05 06 07 08 09 10
S&P/TSX Equity Index (Excluding Royal Bank) Hypothetical 25 Stock Portfolio
QuaDS Canada Large Cap Top 40
Hypothetical 25 stock portfolio – unitized total return vs. QuaDS Canada Large Cap Top 40
Over the past 10 years, the portfolio has performed in line with our Canada Large Cap Top 40.
RBC “SPARQS” Security
Long Equity NPPNs
26
● Description
1:1 “up and down” participation in “Dogs of Canadian Banks” strategy
Strategy developed by Chad McAlpine, RBC Quantitative Research
Portfolio consists of the “Big 6” Canadian bank stocks
Portfolio rebalanced quarterly
2 “highest yielders” weighted 50.0% (25% each)
2 next highest yielders weighted 33.3% (16.7% each)
2 lowest yielders weighted 16.7% (8.35% each)
Dividends paid quarterly as ROC (indicated yield 4.38%)
Very strong back testing vs. S&P / TSX Banks Index and TSX Composite
● Advantages
Tax efficiency (no tax on triggered rebalancing and ROC treatment on distributions)
Operational efficiency (“one ticket solution” with no transaction costs)
Daily secondary market
Can be customized (maturity, selling commissions, etc.)
RBC Canadian Bank Yield RoC Security
Long Equity NPPNs
27
RBC Canadian Bank Yield RoC Security
16.4%
12.0%
8.1%
Long Equity NPPNs
Back-tested performance
28
● Description
1:1 “up and down” participation in a large cap, conservative, dividend strategy
Strategy developed by Myles Zyblock, RBC-CM Chief Strategist
Portfolio is top yielding 20 large cap Canadian dividend paying stocks on the TSX60
Pay-out ratios cannot exceed 90%.
20 stock portfolio broken into 5 groups of 4 stocks, weighted according to div yield:
Top yielders @ 36%, 2nd highest yielders 28%, 3rd highest yielders at 20%, 4th highest yielders at 12% and the lowest yielders at 4%
Portfolio is rebalanced quarterly – dividends paid quarterly as ROC
Very low correlation to the TSX Composite and the S&P TSX60
● Advantages
Tax efficiency (no tax on triggered on rebalancing and ROC treatment on distributions)
Operational efficiency (“one ticket solution” with no transaction costs)
Daily secondary market
Can be customized (maturity, distribution type and frequency, etc.)
RBC Conservative Dividend RoC Security
Long Equity NPPNs
29
5.0%
14.9%
0
100
200
300
400
500
600
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
S&P/TSX 60 Note Strategy
Source: RBC Capital Markets Quantitative Research
RBC Conservative Dividend Yield RoC Security
Long Equity NPPNs
Back-tested performance
30
2.8%
4.9%
0%
2%
4%
6%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Div
iden
d Yi
eld
S&P/TSX 60 Note Strategy
Source: RBC Capital Markets Quantitative Research
RBC Conservative Dividend Yield RoC Security
Long Equity NPPNs
Back-tested yields
31
● Description
1:1 participation in a defensive high turnover “long equity” strategy
Compelling alternative to traditional equity investments and hedge funds
Simple rules-based strategy developed with Chad McAlpine, RBC Quantitative Research
Incorporates defined sell-discipline based on 200 DMA of TSX Comp
Note investment allocated on a monthly basis between
Equities (i.e. RBC 8 factor quant model); and
Fixed income (govt. bonds, rate swaps, T-Bills, BAs etc.)
If TSX Comp > 105% of the 200 DMA
100% in equities
If TSX Comp > 95% and < 100% of the 200 DMA
50% in equities and 50% in fixed income
If TSX Comp < 95% of the 200 DMA
100% in fixed income
Tactical Equity Allocation Model (TEAM) Security
Long Equity NPPNs
32
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
200 DMA 200 DMA +5% 200 DMA -5%
100% Equity 100% Fixed Income 50% Equity & 50% Fixed
At the end of each month, an asset allocation decision can be made based on the level of the S&P/TSX relative to its 200 DMA.
To lower turnover, we’ve introduced a +/- 5% band around the moving average of the index.
100% Fixed Income
Switch to 50% Equity 50% Fixed Income
Switch to 100% Equity
+ 5%
- 5%200 DMA
Long Equity NPPNs
TEAM Security
TSX Composite performance (colour-coded for TEAM asset allocation)
33
16.0%
13.9%
8.6%
6.7%
3.6%
$0
$5
$10
$15
$20
$25
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Tactical Equity Allocation Model
Equity Strategy
S&P/ TSX Composite
3 - 5 Year Government of Canada Bond Index
3-Month T-Bills
20 year back-tested performance (FI Investment: 5 year swaps)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
Long Equity NPPNs
TEAM Security
34
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
S&P/ TSX Composite Tactical Equity Allocation Model
Over the past 20 years, this investment approach has only lost money in one year.
20 year back-tested annual total returns (FI investment: 5 year swaps)
Long Equity NPPNs
TEAM Security
35
Tactical Equity Allocation Model
RBC SPARQS Strategy
S&P/TSX Composite
3 to 5 Year Gov of Canada Bonds
3-Month T-Bills
Annualized Return 16.0% 13.9% 8.6% 6.7% 3.6%
Beta 0.38 0.73 1.00 0.01 0.00
Annualized Alpha 11.8% 7.2% 0.0% 6.4% 3.5%
Sharpe Ratio 1.12 0.73 0.39 0.75 0.00
Standard Deviation 10.6% 14.6% 15.2% 4.0% 0.6%
R-Squared 0.30 0.58 1.00 0.00 0.00
Best 12 Months 68.6% 77.0% 63.4% 19.3% 7.5%
Worst 12 Months -10.7% -43.7% -38.2% -4.3% 0.2%
Max Drawdown -12.1% -49.2% -43.3% -8.6% 0.0%
Duration Under Water 21 mths 38 mths 59 mths
Turnover >200% 120.0% 16.2%
Long Equity NPPNs
TEAM Security
20 year comparative performance metrics (FI Investment: 5 year swaps)
36
● Advantages (investment strategy)
TEAM is not “the market”
Beta = 0.38 vs. TSX Comp
Concentrated investment portfolio of 25 Canadian stocks
Rebalanced every month based on an RBC 8 factor quant model (SPARQS)
Very attractive performance and risk-return metrics (20 year back-testing)
Annualized total return = 16.00% (vs. 8.60% for TSX)
Sharpe ratio = 1.12 (vs. TSX = 0.39)
Worst 12 months = -10.70% (vs. -38.20% for TSX)
Maximum drawdown = -12.10% (vs. -43.30% for TSX
Duration underwater = 21 months (vs. 59 months for TSX)
Completely transparent
Simple rules-based asset allocation strategy
TEAM Security
Long Equity NPPNs
37
● Advantages (NPPN structure)
Tax efficiency
Taxation does not affect investment decisions / asset allocation
No tax on triggered rebalancing of equity portfolio (115% turnover)
No tax on triggered on allocation from equities to fixed income
If dividends / interest retained, tax is deferred until sale and is paid at CG tax rate
Distributions can also be paid-out as ROC
Operational efficiency
“One ticket solution” for IAs
RBC-CM executes all trades (no additional transaction costs to investor)
Daily secondary market
Low upfront management fee to RBC-CM (no “2 and 20”)
5 year = 1.82% (36.4 bps per annum)
10 year = 3.00% (30.0 bps per annum)
Can be customized (maturity, selling commission, currency, etc.)
TEAM Security
Long Equity NPPNs
38
● The Fixed Income Investment
The preceding slides assumed FI investment was a 5 year “interest rate swap”
Very similar to 5 year Govt. of Canada bonds
5 year duration
No credit risk for investor
The bond “bull market” did help returns of the TEAM strategy
However, TEAM significantly outperformed the TSX if FI Investment was BAs ...
Long Equity NPPNs
TEAM Security
39
16.0%
13.3%
8.6%
6.7%
3.6%
$0
$5
$10
$15
$20
$25
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Tactical Equity Allocation Model (5 Year Swap)
Tactical Equity Allocation Model (3 Mth BA's)
S&P/ TSX Composite
3 - 5 Year Government of Canada Bond Index
3-Month T-Bills
20 year back-tested performance (FI Investment: 3 month BAs)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
Long Equity NPPNs
TEAM Security – 3 Month BAs
40
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
S&P/ TSX Composite Tactical Equity Allocation Model (using 3 Mth BA's)
Over the past 20 years, this investment approach has only lost money in 3 years.
20 year back-tested annual returns (FI Investment: 3 month BAs)
Long Equity NPPNs
TEAM Security – 3 Month BAs
41
-5%
0%
5%
10%
15%
20%
25%
30%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
5-Year Trailing Total Return (Annualized)
RBC Tactical Equity Allocation Model (5-Year Swap)RBC Tactical Equity Allocation Model (with BAs)S&P/TSX Composite
5-Year Trailing Total Return (Annualized)
Long Equity NPPNs
TEAM Security – 3 Month BAs
42
Tactical Equity Allocation Model
Equity StrategyS&P/TSX
Composite3 to 5 Year Gov of
Canada Bonds3-Month T-Bills
Annualized Return 13.3% 13.9% 8.6% 6.7% 3.6%
Beta 0.41 0.73 1.00 0.01 0.00
Annualized Alpha 9.2% 7.2% 0.0% 6.4% 3.5%
Sharpe Ratio 0.92 0.73 0.39 0.75 0.00
Standard Deviation 10.3% 14.6% 15.2% 4.0% 0.6%
R-Squared 0.36 0.58 1.00 0.00 0.00
Best 12 Months 66.3% 77.0% 63.4% 19.3% 7.5%
Worst 12 Months -13.8% -43.7% -38.2% -4.3% 0.2%
Max Drawdown -14.3% -49.2% -43.3% -8.6% 0.0%
Duration Under Water 21 mths 38 mths 59 mths
Turnover >200% 120.0% 16.2%
20 year performance statistics (FI Investment: 3 month BAs)
Long Equity NPPNs
TEAM Security – 3 Month BAs
43
● TEAM Strategy looks compelling for U.S. market too
Over past 20 years, TEAM has significantly outperformed S&P 500
It does not matter whether FI Investment was 5 year swaps or 3 month T-Bills
Long Equity NPPNs
TEAM Security – U.S. Market
44
16.1%
14.3%
8.1%
5.6%
$0
$5
$10
$15
$20
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
U.S. Tactical Equity Allocation Model (5-Year Swap)
U.S. Equity Strategy
S&P 500 Total Return Index
3-5 Year U.S. Government Bond Index
20 year back-tested performance (FI Investment: 5 year swaps)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
Long Equity NPPNs
TEAM Security – U.S. Market
45
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
S&P/ TSX Composite Tactical Equity Allocation Model
Over the past 20 years, this investment approach has only lost money in one year. In addition, in all but two years it has generated an annual return of more than 5%.
20 year back-tested annual returns (FI Investment: 5 year swaps)
Long Equity NPPNs
TEAM Security – U.S. Market
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
S&P 500 Total Return Index U.S. Tactical Equity Allocation Model (5-Year Swap)
46
U.S. Tactical Equity Allocation Model
U.S. Equity StrategyS&P 500 Total Return
Index3 - 5 Year U.S. Gov
Bond Index3-Month U.S.
T-Bills
Annualized Return 16.1% 15.0% 8.1% 5.6% 3.1%
Beta 0.46 1.05 1.00 -0.05 0.00
Annualized Alpha 11.6% 6.7% 0.0% 5.9% 3.1%
Sharpe Ratio 0.99 0.64 0.39 0.66 0.00
R-Squared 0.31 0.63 1.00 0.04 0.00
Best 12 Months 70.0% 70.0% 53.6% 16.4% 6.3%
Worst 12 Months -4.1% -48.5% -43.3% -2.1% 0.0%
Max Drawdown -19.6% -55.6% -50.9% -4.3% 0.0%
Duration Under Water 16 Mths 62 Mths 73 Mths 13 Mths 3 Mths
20 year performance statistics (FI Investment: 5 year swaps)
Long Equity NPPNs
TEAM Security – U.S. Market
47
16.1%
14.3%
8.1%
5.6%
$0
$5
$10
$15
$20
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
U.S. Tactical Equity Allocation Model (5-Year Swap)
U.S. Tactical Equity Allocation Model (90-Day T-Bills)
S&P 500 Total Return Index
3-5 Year U.S. Government Bond Index
20 year back-tested performance (FI Investment: 3 month T-Bills)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
Long Equity NPPNs
TEAM Security – U.S. Market
48
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
S&P 500 Total Return Index U.S. Tactical Equity Allocation Model (90-Day T-Bills)
Over the past 20 years, this investment approach has only lost money in one year. In addition, in all but two years it has generated an annual return of more than 5%.
20 year back-tested annual return (FI Investment: 3 month T-Bills)
Long Equity NPPNs
TEAM Security – U.S. Market
49
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
99 00 01 02 03 04 05 06 07 08 09 10 11 12
5-Year Trailing Total Return (Annualized)
RBC U.S. Tactical Equity Allocation Model (5-Year Swap)RBC U.S. Tactical Equity Allocation Model (with 3-Month T-Bills)S&P 500
5-Year Trailing Total Return (Annualized)
Long Equity NPPNs
TEAM Security – U.S. Market
50
U.S. Tactical Equity Allocation Model
U.S. Equity StrategyS&P 500 Total Return
Index3 - 5 Year U.S. Gov
Bond Index3-Month U.S.
T-Bills
Annualized Return 14.3% 15.0% 8.1% 3.1% 3.1%
Beta 0.50 1.05 1.00 0.00 0.00
Annualized Alpha 9.7% 6.7% 0.0% 3.1% 3.1%
Sharpe Ratio 0.87 0.64 0.39 0.00 0.00
R-Squared 0.37 0.63 1.00 0.00 0.00
Best 12 Months 70.0% 70.0% 53.6% 6.3% 6.3%
Worst 12 Months -6.0% -48.5% -43.3% 0.0% 0.0%
Max Drawdown -19.6% -55.6% -50.9% 0.0% 0.0%
Duration Under Water 26 Mths 62 Mths 73 Mths 3 Mths 3 Mths
20 year performance statistics (FI Investment: 3 month T-Bills)
Long Equity NPPNs
TEAM Security – U.S. Market
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● U.S. TEAM product status
We have a retail registered account version currently available
We are working on a version for tax exempt accounts
We have created a note structure that addresses the U.S. withholding tax issues
Results in no U.S. withholding tax on distributions
The U.S. TEAM product is not be subject to U.S. estate tax
Long Equity NPPNs
TEAM Security – U.S Market
52
Disclaimer
This presentation was prepared exclusively for the benefit of and internal use by the recipient for the purpose of considering the transaction or transactions contemplated herein. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent.
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The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change.
To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it.
IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.
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Appendix
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86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
S&P/TSX Composite 200 DMA
S&P/TSX Composite vs. 200 day moving average
The level of the S&P/TSX Composite relative to its 200-Day Moving Average is one of the most widely utilized technical metrics in gauging the near-term prospects for equity market returns in Canada.
Investing in the index only when it’s above its 200 DMA over the past 26 years would have yielded an annualized return of 6.6%.
Conversely, investing in the index only when it’s below its 200 DMA would have resulted in a -7.7% compound annual return.
Long Equity NPPNs
TEAM Security
55
Case Study #1: 2008 / 2009
Throughout the 2008 crash, this strategy did a reasonably good job of timing the market.
Long Equity NPPNs
TEAM Security
56
From June 2008 to December 2009, the RBC TEAM Model returned 16.3%.
Case Study #1: 2008 / 2009
Long Equity NPPNs
TEAM Security
57
During the bond market collapse of 1994, the strategy was 100% invested in equity during the most severe part of the decline.
At the end of the first quarter of ‘94, the allocation switched to 50% / 50%.
Case Study #2: 1994
Long Equity NPPNs
TEAM Security