Making the right choices in a time of transition

The Sharing of Knowledge Learning Series offers current and prospective clients of TD Asset Management an opportunity to meet with our leading thinkers and discuss some of the most important topics of the day. This year, the conversation was about making the right choices in a time of transition, with a focus on intelligent risk and equity strategies for a slow growth environment.

Saskatoon | Regina | Winnipeg | Ottawa | Halifax | MontrealToronto | Québec | Vancouver | Calgary | Edmonton

Sharing of KnowledgeLearning Series 2014

Volatility is the norm and will always persist. That means we need to fi nd the best possible ways of dealing with it. And it is at market extremes—the periods of highest volatility—that investors are most likely to change their attitudes and behaviours.

After a period of U.S. Federal Reserve-induced calm, we believe that we are entering a new period of rising volatility. We also believe that this is when action can and should be taken—ideally in the form of intelligent risk strategies that can pay off in the form of better risk-adjusted returns.

Institutional investors are changing

Intelligent risk is about managing risk effectively in the context of your specifi c objectives and obligations. This means going beyond traditional asset allocation and traditional ways to select managers in order to be appropriately compensated for the risks taken. We’ve just lived through a strong bull market in equities and, with rising long interest rates we believe this is the optimal time for many institutional investors to implement intelligent risk solutions.

Sure enough, Greenwich Associates’ 2013 survey of 247 Canadian institutional investors shows that these investors are now more open than before to changing their asset mix and using new investment vehicles to help improve risk-adjusted returns. In the past decade, they’ve dropped their exposure to domestic equities from 27% to 14% of total assets, while looking increasingly at alternative assets such as infrastructure and real estate.

Here are some more ways we’re seeing investors tackle risk today:

• More focus on meeting individual liabilities and less focus on benchmark or peer comparisons• Leveraging plan design to manage risk, such as rethinking automatic infl ation protection • Converting from DB to DC plans or shared risk arrangements, such as target benefi t plans• Moving to shared risk arrangements, where employees take on more of the investment risk

One could use the analogy of a traffi c roundabout. In a sense, we all have the same destination—better risk-adjusted returns. But we may need to take different roads to get there.

Your path doesn’t need to be dramatic or revolutionary. It might simply mean embracing new types of investment solutions, tactical asset allocation, different rules-based or actively managed solutions, or expanding more globally. Whichever road you take, choose strategies that you understand clearly, and remember that education, transparency and governance are essential to your intelligent risk journey.

We believe it’s time to exit the roundabout and choose a path. Don’t let current market euphoria lull you into inaction. Remember the missed opportunities of the past decade and get on the road to intelligent risk.

Part I: Trending towards intelligent risk

“We all have the same destination—better risk-adjusted returns. But we may take different roads to get there.”

Mark Cestnik

Mark Cestnik, CFAManaging Director, TD Asset Management Inc.

Rachna de Koning, FCIA, FSAVice President & Director, TD Asset Management Inc.

Normand Vachon, FCIA, FSA, CFAManaging Director, TD Asset Management Inc.

Speakers:

Part II: Focus on fundamentals: Equities in a slow growth environment

The last fi ve or six years has been a tale of two economies. Those of us who associate with the fi nancial economy have had a rewarding time. Central bankers’ actions back in 2008 had a terrifi c effect on the valuation of fi nancial assets. Unfortunately, the real economy has responded much more slowly than they and others would have liked.

Over the last couple of years, the IMF has revised its global GDP growth numbers lower and lower. We simply live in a world where growth is slowing. And a lot of it has to do with the effects of defl ation, which is still a potential threat to a number of areas of the world.

It’s all about allocating free cash fl ow

There are two important insights into how we invest in equities in this environment. The fi rst insight

is that businesses are run on cash. If investors can follow the cash coming in and deduct the cost of generating it, they’ll wind up with what we call free cash fl ow. This is the cash available for distribution to shareholders after all planned capital expenditures and taxes.

The second insight is that there are only fi ve things company management can do with that free cash fl ow: pay cash dividends, buy back stock, pay down debt, make an acquisition, or reinvest in the business. That’s it. Every company has the same options. The question is, is management good at allocating their free cash fl ow?

The stock market is often focused on earnings, but we’re focused on companies that use free cash fl ow to benefi t shareholders—what we call shareholder yield. We’re actually indifferent to indexes for the most part, and we have a very low correlation to the index.

We live in a slow-growth world. But companies have huge cash positions on their balance sheets, and many will give that money back to shareholders through share buy-backs, and not just dividends, but growing dividends. These are the companies we like to own for our clients.

“The stock market is often focused on earnings, but we’re focused on companies that use free cash fl ow to benefi t shareholders.”

William W. Priest

William W. Priest, CFACEO, Co-CIO & Portfolio Manager, Epoch Investment Partners, Inc.

David N. PearlExecutive Vice President, Co-CIO & Portfolio Manager, Epoch Investment Partners, Inc.

Kenneth N. Hightower, PhD, CFADirector, Quantitative Research & Risk Management, Epoch Investment Partners, Inc.

Speakers:

If you are interested in hearing this presentation that addresses many of the issues and concerns prominent in the marketplace but were unable to attend this year, we would be happy to arrange a presentation for you.

If you would like to hear from us, please contact your Relationship Manager or Timothy Thompson, COO.

T: 416-982-6346 | timothym.thompson@tdam.com

Mark Cestnik, CFAManaging Director, TD Asset Management Inc.21 years experience

Rachna de Koning, FCIA, FSAVice President & Director, TD Asset Management Inc.22 years experience

William W. Priest, CFACEO, Co-CIO & Portfolio Manager, Epoch Investment Partners, Inc.48 years experience

Normand Vachon, FCIA, FSA, CFAManaging Director,TD Asset Management Inc.31 years experience

Kenneth N. Hightower, PhD, CFADirector, Quantitative Research & Risk Management, Epoch Investment Partners, Inc.16 years experience

David N. PearlExecutive Vice President, Co-CIO & Portfolio Manager, Epoch Investment Partners, Inc.29 years experience

Media coverageNational Post

“How does an investor get a 9% return, which is the long annualized

gain for U.S. stocks over the period 1927-2013? According to Bill Priest,

chief executive and co-chief investment officer at New York-based Epoch

Investment Partners… the answer lies in focusing on companies focused

on so-called shareholder yield.”

Benefits Canada“Investors need to be intelligent about risk taking in volatile times, but the

path they take won’t be identical. No matter which progressive approach

investors take, the important point is that they make a move.”

Benefits and Pensions Monitor“Mark Cestnik, [TD Asset Management] managing director, said while

institutional investors stayed the course after recent market disruptions,

he expects they will take action this time around. However, while

a dominant theme is a willingness to try new things, the road taken

depends on the destination.”

Client feedbackHalifax

“[I] thoroughly enjoyed the format. Both presenters were

extremely good speakers.”

Toronto“ Best presentation of the past 11 years. Always enjoy

attending this event.”

Winnipeg“Very topical and relevant.”

Regina“Love the real world examples. [It] helps when you use actual

companies in explaining topics.”

Saskatoon“I enjoy the SOKLS series as one way of gauging the consistency

of message from the investment industry.”

TD Asset Management Inc. (“TDAM”), The Toronto-Dominion Bank and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. The statements contained herein are based on material believed to be reliable. Where such statements are based in whole or in part on information provided by third parties, they are not guaranteed to be accurate or complete. The synopsis does not provide individual financial, legal, tax or investment advice and is for information purposes only. Particular investment or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. TDAM, TD and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. TDAM is a wholly-owned subsidiary of The Toronto-Dominion Bank. Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable and may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS. TDAM may not update any FLS. Epoch Investment Partners, Inc. (“Epoch”) is a wholly-owned subsidiary of The Toronto-Dominion Bank and an affiliate of TD Asset Management. TD Asset Management operates in Canada as TD Asset Management Inc. and in the U.S. as TDAM USA Inc. All trademarks are the property of their respective owners. ®The TD logo and other trademarks are the property of TD Bank.