not for public distribution omega funds
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Not for public distribution
OMEGA Funds
Preferred Equity
September 2009
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Need for a stable source of income
A solution that provides steady,tax-efficient income
A strong increase in the number of people at or approaching retirement
combined with
Market uncertainty
results int the need for
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Investing in preferred shares
Preferred shares:
Provide greater security of principal
Ensure a stable income flow
Have priority over common shares for distributions
Provide downside protection to a portfolio
Have lower volatility compared to the S&P/TSX Composite Index*
* Calculation based on historical monthly performance of Intact's Preferred Share Portfolio (institutional mandate) from July 1989 to December 2007 and the Omega Preferred Equity Fund from January 2008 to June 30, 2009. The fund had a monthly annualized volatility of 8.4% compared to 15% for the S&P/TSX Index.
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Preferred shares from a taxationstandpoint
Preferred shares offer better after-tax returns than bonds of a similar quality and level of risk.1
The preferential tax treatment afforded to income trusts will disappear in 2011, enhancing dividend tax efficiency in a portfolio.
1. Because of tax credits afforded to dividends.
2. This return varies based on your marginal tax rate and your province of residence. In this example, we used the most recent income tax rate (2008) for an investor in the highest marginal tax bracket, residing in Ontario.
RBC
5.65%, Series AH
Issuer
Scotiabank
5.60%, Series 17
Great West
4.55%, Series H
Power Financial
5.25%, Series E
Price as at May 29, 2009
$23.18
$18.19
$20.17
$23.00
Dividend
$1.40
$1.21
$1.31
$1.41
Current dividend yield
6.04%
6.65%
6.49%
6.13%
Comparableyield of a bond2
8.57%
9.44%
9.22%
8.70%
Sample Pre-Tax interest equivalent yield
HOW CAN YOU SEIZE THESE OPPORTUNITIES?
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The solution:The Omega Preferred Equity Fund
Investment objective
MER
The Fund
1. Ensure high dividend income 2. Focus on capital protection
Management expense ratio is capped at 1.50%1
• First to offer a fund consisting primarily of preferred shares
• Low volatility
• High returns based on a yield enhancement strategy
• Stable, tax-efficient income
• In-depth analysis of credits
• Major player in the preferred shares market with significant presence
1. Advisor Series.
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The Fund manages the complex universe of preferred shares for you
Split
shares
Callable/convertible
Cumulative dividends
Non-cumulative dividends
Fixed rate/floaters reset
Perpetuals
Credit
risk
RetractablesWide
bid-
ask
spreads
Variable rates
Interest rate risk
Redemption risk
Liquidity risk
More than $6.4 billion in new issues in 2008
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A diversified portfolio strengthened by a yield enhancement strategy
Preferred shares universe
$30 billion, more than 180 issues
Extensive credit analysisAssessment of risk/return profiles
Assessment of current market conditions
Portfolio makeupSecurity selection
Weighting of each of the securities within the fund
Sector diversification Value added created through
security selection
Additional income and yield enhancement
Identify opportunities in structural cycles
+
Proprietary active trading strategy based on
DROP
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What is Intact's Dividend Rollover Plan (DROP)?
Purchase preferred shares shortly before the
ex-dividend date*
Sell the same preferredshares before the market
discounts the value of the dividend
The purchaser is therefore entitled to dividends
* Ex-dividend date = Investors must purchase the share prior to this date to be eligible for dividends.
The purchaser thus reaps the benefit of the dividends while reselling securities at approximately the same price
This trading strategy is proprietary to Intact Investment Management Inc.
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Example of DROP in a portfolio
Quarterly distributions
• Intact holds Royal Bank (RBC) preferred shares in its portfolio from January 1 to December 31, 2008
• Dividend yield = 5% ($0.3125 per share payable quarterly)
DROP strategy:Additional dividend
• Intact purchases and sells Scotiabank preferred shares
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With the DROP strategy, the portfolio accumulates total earnings of $1.59 compared to $1.25 had the investor simply held Royal Bank preferred shares.
$0.3125 (RBC)
$0.3125 (RBC)
$0.3125 (RBC)
$0.3125 (RBC)
$0.34375 (BNS)
Timeline
March July August Sept. Dec.
Example of DROP in a portfolio (cont’d)
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DROP
Why use such a strategy?
Adds an additional dividend to quarterly distributions
Provides immediate returns on investments without increasing the level of risk for the Fund.
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Opportunities in structural and economic cycles according to Intact
Fixed reset rate
The weighting of fixed resets has more than doubled
A powerful tool should inflation ever spike
Fixed rate
The weighting of fixed rate securities was trimmed because of long-term inflation concerns
Fund makeup
Retractables (non-perpetual)
December 2008
26.6%
August 2009
17.4%
Perpetuals 73.4% 82.6%
Variable rate 2.8% 1.9%
Fixed rate - resets 16.6% 36.6%
Floating rate - resets 2.6% 1.4%
Fixed rate 51.4% 42.7%
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Manager's comments (cont’d)August 2009
On the Canadian preferred marketvaluation:
December 2007: Peak of valuation, expensive
(spreads for fixed rates were around 140 bps)
December 2008: Extremely attractive valuation, cheap
(spreads were around 330 bps)
Today : Still attractive compared to peak.
The next tightening to follow will be slower to achieve
It will require continued strength in the economy and in credit markets
David W. TremblayVice-President andPortfolio Manager
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Manager's comments (cont’d) - August 2009
On opportunities
Short-term:
Expect further credit spread contractions over the next 12-18 months
A pullback would result in good buying opportunities
Medium to long-term:
The coupon is what we should make on preferred shares
The focus should be on credit analysis
Avoiding defaults will create value in the portfolio
The quantity of issues may become a negative aspect
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Manager's comments - August 2009
Outlook and comparison to common sharesand bonds:
Compared to bonds, preferred shares have a fiscal advantage
Current climate of low interest rates and overvalued Canadian financial securities offer a relative advantage to preferred shares
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Omega Preferred Equity Fund
Sector allocation as at August 31, 2009
85.7%
6.5%
Financial services
Public services
Telecommunications
Consumer staples
Consumer discretionary
Materials
5.3%
1.4%
1.1%
0.0%
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Omega Preferred Equity Fund
Main Securities as at August 31 2009
Royal Bank of Canada
Great-West - preferred
CIBC - preferred
Royal Bank of Canada - preferred
Royal Bank of Canada – preferred
National Bank of Canada - preferred
TD Bank - preferred
Bank of Montreal - preferred
Sunlife Financial
Credit rating DBRS
2.20%
1.90%
1.80%
1.70%
1.60%
1.60%
1.60%
1.50%
1.50%
P1L
P1L
P1L
P1L
P1L
P1L
P1L
P1L
P1L
Bond creditrating DBRS
AA-
AA-
AA-
AA-
AA-
AA-
AA-
AA-
AA-
Weight
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Omega Preferred Equity Fund
Fund makeup
Retractable (non-perpetual)
August 2009
17.4%
Perpetuals 82.6%
Variable rate 1.9%
Fixed rate - resets 36.6%
Floating rate - resets 1.4%
Fixed rate 42.7%
Current yield by preferred type
Perpetuals – fixed
Perpetuals – floating
Perpetuals – fixed reset
Perpetuals – floating reset
Retractables
5.65%
3.39%
5.51%
3.39%
5.03%
Duration (incl. Options): 6.35 yearsDuration (excl. Options): 9.61 years
Data as at August 31, 2009
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Omega Preferred Equity Fund
Portfolio characteristics
Approx. Number of holdings: 140
Canadian preferred equity allocation:
min. 90%
Cash allocation: max. 10%
Benchmark Index: S&P/TSX Preferred
Share
Management feesAdvisor Series: 1.25%F Series: 0.50%
Fund codes:Advisor series
ISC: NBC480DSC: NBC580
F Series: NBC780
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Omega Preferred Equity Fund
Intact’s Preferred Equity Portfolio was created in January 1987.
Omega Preferred Equity Fund**
Returns as at August 31, 2009
S&P/TSXPreferred Share
3.6% 10.1% 22.4% 6.0% 24.6% 2.8%* 1.25%
3.1% 8.1% 21.3% 6.5% 23.9% N/A
1 M 3 M 6 M 1 Y YTDSince inception Mgmt. fee
N/A
*The Omega Preferred Equity Fund was created in November 2007.
**Advisor Series. For F Series, the management fee is 0.50%. Historical institutional returns - Pre-Tax (June 2009)Intact Preferred
SharesNesbitt Burns
50 Preferred Shares
1 year
3 years
5 years
10 years
-1.1%
-1.8%
0.8%
3.7%
-0.2%
-1.6%
-0.2%
2.8%
S&P/TSX preferred share
0,2 %
-1,8 %
1,6 %
N/A
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About Intact
Wholly-owned subsidiary of Intact Financial Corporation with more than 7,000 employees across over Canada.
Team consisting of 40 professionals working from offices in Montreal and Saint-Hyacinthe.
Specializes in active Fixed Income Securities and Canadian Equity management.
Has nearly $7 billion in assets under management in Canada.
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About Intact
Benjamin JasminCFA, Canadian Equities Analyst
Associate portfolio manager for preferred shares
Equities analyst within Intact investment team
David W. TremblayM. Sc., CFA, Vice-President and Portfolio Manager
Manager of Preferred Equity and High Dividend Equity portfolios.
Currently managing close to $2 billion in assets for
Intact Investment Management Inc.
David W. Tremblay
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Questions?
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Omega Funds™ (the “Funds”) are offered by National Bank Securities Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with Fund investments. Please read the prospectus of the Funds before investing. The Funds securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. “Omega Funds™” and the Omega Funds logo are trademarks of National Bank of Canada.
The information contained herein was obtained from sources which we believe to be reliable but is not guaranteed by us and may be incomplete. This guide is provided for information purposes only and creates no legal or contractual obligations for National Bank of Canada, its subsidiaries or affiliates. For more details on tax treatments for your personal situation, please consult an accountant or tax consultant.
1-877-463-7627 www.nbcadvisor.com
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David W. Tremblay, M.Sc., CFA Portfolio Manager, Preferred Shares and Canadian Equities
Mr. Tremblay has been managing preferred shares, common shares, and income trust portfolios for seven years for Intact Investment Management Inc. He has more than eight years of experience in the investment industry. Mr. Tremblay is also actively involved in asset mix optimization, capital management, and risk management for the Portfolio Manager’s institutional clients. Prior to joining the Portfolio Manager, Mr. Tremblay worked for BMO Nesbitt Burns Inc. as an investment banking analyst. Mr. Tremblay earned his M.Sc. in Finance from the Université de Sherbrooke and is a CFA Charterholder.
Benjamin Jasmin, CFA Investment Analyst – Canadian Equities
Benjamin Jasmin has been with the Portfolio Manager since December 2005. Mr. Jasmin specializes in the analysis of the Preferred Shares. Benjamin also works on developing and analyzing quantitative and risk models. Prior to joining the Portfolio Manager, Mr. Jasmin worked for Landry Morin Inc. as a quantitative analyst and is a CFA Charterholder.