bill hill - going global – how much is enough
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Going Global – How Much is Enough?
William (Bill) H. Hill, RBC Asset Management
CIFP June 2007 2
What we talked about last year
The importance of investor behaviourUnderstanding it so you can help manage it
The Case for America
International Investing
Our 2006 Outlook
How to keep clients on track
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What’s changed since last year?
What products are selling today vs. last year
Global Flows$11 Billion to Foreign Equity (International & Global)
$533 million to US Equity
$22 Billion to Balanced Funds
$11 billion in Cdn Equity Fund Redemptions
Product launchesMore than 60 global mandates launched since June 2006
Almost $4 billion in assets in those new funds
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We are not alone
What are institutional money managers doing?
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What hasn’t changed
Client behaviour
Diversification is still key
Global investing should be the focus
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Going Global
So how much is enough?
35%
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Global investing challenges
Knowledge / exposure
Currency
Behavioural
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Global investing challenges – knowledge/exposure
Where’s Waldo?
Royal Bank of Canada
CIBC
Bank of MontrealCanadian Natural Resources
Suncor Energy
EnCana Corp.
TD Bank
Bank of Nova Scotia
Manulife
Sun Life Financial
Total S.A.
Procter & Gamble
UnitedHealth Group
Groupe Danone
Cemex
CVS Caremark Corp.
BBVA
Continental AG
Atlas Copco
Royal Bank of Scotland Group
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Global investing challenges – knowledge/exposure
Easier to be more familiar with Cdn / NA companies
Canada
Royal Bank of Canada
Manulife
Bank of Nova Scotia
TD Bank
EnCana Corp.
Suncor Energy
Canadian Natural Resources
Bank of Montreal
CIBC
Sun Life Financial
Which list do your clients know?
RBC Global Titans Fund
CVS Caremark Corp. (US)
Total S.A (France)
Groupe Danone (France)
Procter & Gamble (US)
Cemex (Mexico)
BBVA (Spain)
UnitedHealth Group (US)
Royal Bank of Scotland Group
Continental AG (Germany)
Atlas Copco (Sweden)
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$161
$357
$168
$319
$98
$465
$131
$416
$-
$100
$200
$300
$400
$500
1990 1995 2000 2005
Canadian Investment Abroad Foreign Investment in Canada
As countries become more economically integrated, global economies are looking beyond their borders for opportunities
Global Investing – The Realities
It’s not only Canadians who are investing more globally. Foreign investors are investing more here too.
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Global Investing – The RealitiesDanger of not going global
Canadian companies represent only a very small portion of the world’s stock market value. As a result, investors without exposure to other countries limit their range of available investment opportunities.
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Global Investing – The RealitiesCanada only offers exposure to a couple of sectors
Compared to the global economy, Canada’s economy is dominated by Financials and Resources companies.
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Global investing challenges – Knowledge/exposure
17.3%14.1%
9.7% 9.1%7.3%
4.6%1.3%
Emerging Mkts Canada Germany France U.K. Japan U.S.
Remember, you w ant to position your portfolio for the future - don't get caught looking in the rear view mirror.
Outperfomance of Canadian marketI don’t need to invest anywhere else – look at my amazing returns over the past 5 yrs!
Source: TSX, S&P, MSCI at April 30, 2007
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Global Investing – Geographical Outlook
S&P/TSX Composite EquilibriumNormalized Earnings & Valuations
398
600
903
1359
2047
3082
4642
6989
10524
15849
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Bloomberg, RBC AM
May '07 Range: 7696 - 11435 (Mid: 9566)May '08 Range: 8090 - 12022 (Mid: 10056)Current (22-May-07): 14112
Canadian equities remain expensive
After strong gains since 2003, Canadian equities are trading above fair value.Source: Bloomberg, RBC Asset Management
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Strong upside in Natural Resources for a
prolonged period!
•China driving demand, & just getting started
•India, Russia & Brazil add to pressure
DEMAND
Pressure Increasing
•Underinvestment in exploration &
development for past two decades
•Restrained capital spending due to high costs
relative to commodity prices
SUPPLY
Lagging for awhile
Global Investing – The Realities
The Canada story
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Across the Huangpu River to Pudong, Shanghai, 1984
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Across the River Now…
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Source: TSX Group, as of December 31, 2006
Mining:Canada has 58% of the world’s listed mining companies 1293 financings in 2006- US$10.1 billion raised- 84% of world total by number- 38% of world total by valueAggregate market capitalization of US$280 billion listed in Canada45 TSX mining companies have >$1 billion market capitalization
EnergyCanada has the highest number of listed oil & gas companies in the world431 listed companies with a total market capitalization of C$532 billionC$10.5 billion in financings in 200631 new listings in 2006
Global Investing – The Realities
Canada is a leader in global resources
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Global Investing – Geographical Outlook
S&P/TSX Composite EquilibriumNormalized Earnings & Valuations
398
600
903
1359
2047
3082
4642
6989
10524
15849
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Bloomberg, RBC AM
May '07 Range: 7696 - 11435 (Mid: 9566)May '08 Range: 8090 - 12022 (Mid: 10056)Current (22-May-07): 14112
Canadian equities remain expensive
After strong gains since 2003, Canadian equities are trading above fair value.Source: Bloomberg, RBC Asset Management
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Global Investing – Geographical Outlook
U.S. equities trading at attractive pricesS&P 500 Equilibrium
Normalized Earnings & Valuations
40
63
100
158
251
398
631
1000
1585
2512
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Bloomberg, RBC AM
May '07 Range: 1134 - 1822 (Mid: 1478)May '08 Range: 1245 - 2002 (Mid: 1624)Current (22-May-07): 1524
Current valuations suggest good potential for U.S. equitiesSource: Bloomberg, RBC Asset Management
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Global Investing – Geographical Outlook
Japanese stocks are particularly attractive
Improving growth and attractive valuations continue to support a positive outlook for JapanSource: Datastream, Consensus Economics, RBC Asset Management
Japan Datastream IndexNormalized Earnings & Valuations
50
70
97
136
189
264
368
514
717
1000
1980 1985 1990 1995 2000 2005 2010
Source: Datastream, Consensus Economics, RBC AM
May '07 Range: 312 - 798 (Mid: 555) May '08 Range: 337 - 861 (Mid: 599)Current (22-May-07): 518
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Global investing challenges - Currency
0.7%
5.8%9.1%
-6.9%
3.6% 5.4%
-0.6%
-23.4%
-7.6%-3.3%
-0.1%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
In 2003 and 2004, the decline in the U.S. dollar (and rise in the Canadian dollar) had a significant impact on returns for Canadian investors holding U.S dollar securities
Difference in Canadian investor returns and U.S. investor returnsS&P 500 Index
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Global investing challenges - Behavioural
People see what they want to see.
It’s just the way we’re built…and conditioned.
The size of the bowl or plate biases how much a person eats by an average of 20-30%.
You'll eat 35% more dining with a friend than when eating alone and double the amount of food ingested when dining with 7 or more people.
About 1 in 5 employees have more than 50% of their work-related investment plans in company stock
One third of Canadians have no foreign content in their RRSPs
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Canadian government bond market is shrinking
-
50
100
150
200
250
300
350
De
c-8
4
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5
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6
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Go
ve
rnm
en
t B
on
d O
uts
tan
din
g (
CA
D$
bill
ion
)
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
% o
f W
orl
d G
ov
ern
me
nt
Bo
nd
Canadian Govt Bond (CAD$ bil)
Canadian Govt Bond % Global GovtBond (rhs)
Source: Citigroup WGBI
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The Case For Hedging Global Bonds
Risk (STD)
Return (GM)January 1987 - December 2006
Risk vs. Return
3.0% 10.0%4.0% 5.0% 6.0% 7.0% 8.0% 9.0%5.0%
9.0%
5.2%5.4%5.6%5.8%6.0%6.2%6.4%6.6%6.8%7.0%7.2%7.4%7.6%7.8%8.0%8.2%8.4%8.6%8.8%
Citigroup Canada 1+ Yr Gvt TR
Citigroup Canadian $ Hedged Wld Gvt TR
Citigroup World 1+ Yr Gvt TR CADHedged global bonds have provided better returns at much lower risk levels
Source: RBC Asset Management with data provided by Ibbotson EnCorr
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The Case For Hedging Global Bonds
Source: RBC Asset Management with data provided by Ibbotson EnCorr
ReturnJanuary 1987 - December 2006
Range of One Year Returns
-20.0%
40.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
23.2%
-6.3%
19.3%
-3.0%
30.4%
-14.7%
Citigroup Canada 1+ Yr Gvt TRCitigroup Canadian $ Hedged Wld Gvt TR
Citigroup World 1+ Yr Gvt TR CAD
Highest:
Average:
Lowest:
Legend
Hedged global bonds have tightest range of returns compared to Canadian bonds
and unhedged global bonds
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Getting there – Riding the Efficient Frontier
Diversification can both increase potential for returns, but more importantly, provides consistency of returns
7%
8%
9%
10%
11%
12%
13%
13% 14% 15% 16% 17% 18%Risk
(measured by standard deviation)
An
nu
al R
etu
rn
Canadian EquitiesS&P / TSX Composite Index
International Equities MSCI EAFE Index
U.S. EquitiesS&P 500 Index
A combination of Canadian, U.S. and International equities has historically provided investors with higher returns and less risk than a portfolio invested solely in Canada.
Diversified Portfolio40% Canada40% U.S.20% International
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How much is enough?
Criteria to considerInvestor characteristics – risk and return
Currency needs – income, expenses, retirement
Risk management – diversification benefits
Your own asset mix approachFamiliarity with client situation and needs
Your style – prefer standalone funds or managed solutions?
Level of ongoing involvement – rebalancing requirements
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How much is enough?
What is the RBC Asset Management approach?
RBC Investment Strategy CommitteeFirm wide asset allocation recommendations
Investor profile recommendationsBased on strategy committee recommendations
Implementation in investor portfoliosModel portfolios, fund-of-funds
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Finding the Right Mix
RBC AM Current Recommendations
Asset Class Benchmark Current Benchmark Current Benchmark Current Benchmark Current Benchmark CurrentCash 5 2.8 5 2.6 5 2.5 5 1.5 5 1.5Fixed Income 75 72.2 60 55.4 40 35.0 25 19.5 0 0.0Total Cash &Fixed IncomeCanadianEquitiesU.S. Equities 5 9.1 10 15.5 20 26.4 25 32.5 30 34.6InternationalEquitiesTotal Equities 20 25.0 35 42.0 55 62.5 70 79.0 95 98.5Current Recommendation as at February 28, 2007
Aggressive Growth %
21.0
25.0
Income % Conservative % Balanced % Growth %
5
35
30
1.5
35.0
28.9
30
25
20 21.5
45
20
15
37.5
20.0
16.1
80
10
5
75.0
10.0
5.9
65
15
10
58.0
15.0
11.5
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And now for the HOW…
Individual securities
ETFs
Individual funds
Fund of Funds
Combination of all of the above
32CIFP June 2007 32
Trade Execution
Diversification
Managing Currency
Access to research
Reporting
Challenges involved with investing in global segregated securities
Global Investing – Additional Challenges
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Global Investing – The Realities
Challenges identified: currency, execution, fixed income, are all difficult to take on as an individual investor…
But can be efficiently and effectively managed through mutual funds
Funds even help manage behavioural challengesStaying investedNot chasing performanceRebalancingdiversification
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One way or another
Different solutions can mean very different results
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Clients Succeed with Packaged Solutions
15.714.7
11.69.6
-3.8 -5.1
200220042003
Self-directed Investors in 401 k Investor in "Premixed Funds" in 401k
“Premixed Funds” target date and target risk funds/ portfolios
Source: Hewitt Associates, January 2006
Money Magazine, October 2006
Good for you…and good for them.
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If you’re looking at mutual funds, here are some things to consider when hiring an asset management company
… always important investment considerations but especially critical for a global strategy
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Value
Experienced managers
Consistent discipline
Track record of performance
Value for moneyA shop that can deliver:
Global opportunities through global footprint
Currency experience and expertise– Size and scale enables us to have dedicated team
Trading execution excellence
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Choice
Broad spectrum of fundsGlobalInternationalRegionalSectorStyleCurrency hedged or un-hedged options
Single fund or portfolio solution
Purchase options to suit client needs and advisor style
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Transparency
Know what you’re getting
The importance of clear investment mandates in portfolio construction
Confidence that a fund will do what it says it’s going to do
Are Canadian equity funds truly Canadian?
Apples to apples comparisons becoming difficult
The importance of clear, predictable fees
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Success
Serious about ours
Committed to yours
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Disclosure
The information contained in this report has been compiled by RBC Asset Management Inc. (“RBC AM”) from sources believed to be reliable, but no representations or warranty, express or implied, are made by RBC AM, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC AM’s judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report may not be reproduced, distributed or published without the written consent of RBC Asset Management.To the full extent permitted by law neither RBC AM nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. Past performance does not indicate future performance.RBC Asset Management Inc. provides global wealth management services. RBC Asset Management Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. ® Registered trademark of Royal Bank of Canada. Used under license. © Copyright 2007. All rights reserved.