SIGMA MANAGEMENT

Index based solutions

WHY THE MOVE TO FEE-BASED ?A strategic perspective

Standard & Poor’s MasterclassSeptember 28th 2017

Sigma ManagementIndex based solutions

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▪ Guy Lalonde: CIM, CAIA, discretionary portfolio manager.

▪ Christian Lamarre: CIM, discretionary portfolio manager.

▪ François Beaucage: CIM, IQPF, discretionary PM, Fincl Pln.

▪ Marie-Ève De L’étoile: :Licensed investment assistant.

▪ Marie- Claude Décary: Licensed investment assistant.

Sigma Management

Index based solutions

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Because we had to?• Regulatory pressures such as CRM1-CRM2-CRM..n?• Because our firm wanted us to?

To seize a great opportunity• More competitive.• Greater control over our pricing.• Made sense with an ETF-based model.• Greater differenciation.• Give ourselves a unique identity.• Powerful branding

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• Strategy• Focus• Structure and processes.• Awareness of and adjusts to its competitive environment.

A business has

• Strengths• Weaknesses• Opportunities.• Threats.

SWOT

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Clients were ready for a more balanced approach.Clients were ready to talk about risk management vs hitting homeruns. Investors’ confidence in individual stocks is shaken.

• (Nortel, Enron and Worldcom)

Tech bubble Hangover + Accounting scandals

• Offer a « managed solution ».• Huge inflow from deposits to mutual funds• Funds are still new to Canadian investors.• Funds promise superior management in exchange for their MERs.

Massive inflows into mutual funds

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Source: Vanguard, IFIC,Investor Economics

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Source: nvestor Economics

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1 year 5 years

Canadian equities (2004)(Index S&P/TSX RT)

US equities (S&P 500) (2004)

International stocks (S&P EPAC) (2007)

Canadian dividend equities(Index S&P/TSX Aristocrats div) (2007)

Source: SPIVA December 2016 (average over 8 years)

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Source: SPIVA December 2016 (USA)

1 yr 3 yr 5 yr 10 yr 15 yr

All large cap

funds

S&P 500 Index 66.00% 93.39% 88.30% 84.60% 92.15%

All Mid Cap funds S&P Mid-Cap

400 Index89.37% 94.21% 89.95% 96.03% 95.40%

All Small Cap

funds

S&P Small-Cap

600 Index85.54% 95.69% 96.57% 95.64% 93.21%

International

funds

S&P Int’l 700

Index84.94% 71.09% 66.95% 83.89% 89.36%

Long investment

grade

Barcley’s LT

Gov Index75.00% 98.04% 74.80% 96.30% 97.44%

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5 years

Canadian equities(Index S&P/TSX RT)

US equities (S&P 500)

International stocks (S&P EPAC)

Canadian dividend equities (Index S&P/TSX Aristocrats div)

Source: SPIVA Canada scoreboard December 2016

40/60 mutual fund portfolio

underperforms by 2,16%

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Institutional managers: Canadian equities

1st quartile

median

3rd quartile

4th quartile

19 4

4

5

4

4 years ending December 2012 4 years ending December 2016

Source: Mercer pooled fund survey, déc 2016

1717

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Institutional managers: Canadian equities

1st quartile

médiane

3rd quartile

4rd quartile

19 5

1

2

7

4 years ending December 2011 4 years ending December 2015

Source: Mercer pooled fund survey, dec 2015

1515

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Canadian equities three year average

1st quartile

mediane

3rd quartile

4th quartile

100% 19%

17%

21%

26%

Source: Mercer pooled fund survey

83%83%

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US equities three year average

1st quartile

mediane

3rd quartile

4th quartile

100% 26%

22%

13%

18%

Source: Mercer pooled fund survey

79%79%

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EAFE equities three year average

1st quartile

médiane

3rd quartile

4th quartile

100% 32%

7%

16%

24%

Source: Mercer pooled fund survey

79%79%

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Canadian bonds three year average

1st quartile

mediane

3rd quartile

4th quartile

100% 29%

25%

13%

13%

Source: Mercer pooled fund survey

80%80%

17 Source: SPIVA Canada scoreboard December 2016

CATEGORY 1st 3rd DIFFERENCE

Large Cap funds 13.36% 4.80% 8.56%

Small Cap funds 22.45% 17.27% 5.18%

International stocks 2.37% -1.77% 4.14%

Emerging market stocks 12.74% 4.54% 8.20%

18 Source: SPIVA Canada scoreboard December 2016

CATEGORY 1st 3rd DIFFERENCE

Large Cap funds 14.34% 11.83 2.51%

Small Cap funds 16.17% 12.82% 3.35%

International stocks 7.77% 5.72% 2.05%

Emerging market stocks 3.60% 1.00% 2.60%

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Source: Investor Economics

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Source: Vanguard

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O N L Y F E E F E E

MF MF E T F S

2.25%

0.98%

0.15%

0.00%

1.00%

1.00%

COMPARATIVE COST TO CLIENT FOR 1% REVENUE

Source: Vanguard, Investor Economics

22 Source: SPIVA USA scoreboard December 2016

CATEGORY 1st 3rd DIFFERENCE

Large Cap funds 14.34% 11.83 2.51%

Small Cap funds 16.17% 12.82% 3.35%

International stocks 7.77% 5.72% 2.05%

Emerging market stocks 3.60% 1.00% 2.60%

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2000 - 2015 – Annual return by asset class

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

29.23% 29.92% 24.80% 46.74% 18.15% 35.81% 28.88% 33.55% 6.41% 62.76% 22.61% 21.67% 16.97% 41.53% 24,43% 20,68

24.86% 13.67% 15.28% 30.86% 17.53% 29.54% 24.73% 31.35% 5.53% 55.25% 21.94% 16.75% 16.05% 35.97% 22,76% 18,49%

21.40% 12.44% 8.73% 28.68% 16.99% 25.25% 22.95% 9.83% 0.42% 44.46% 17.61% 11.46% 14.77% 31.26% 13.18% 17,66%

16.99% 9.27% 8.58% 27.46% 16.45% 24.84% 19.56% 5.49% 0.23% 37.83% 13.32% 9.75% 14.14% 20.14% 10.55% 7,69%

16.61% 8.08% 7.37% 26.72% 14.48% 24.13% 17.26% 3.97% -16.85% 35.05% 12.22% 9.02% 13.48% 12.99% 10.36% 5,44%

10.24% 7.91% 2.25% 25.90% 13.99% 18.36% 16.94% 3.68% -23.87% 26.97% 10.75% 8.60% 9.37% 6.87% 10.01% 3,52%

9.08% 3.60% -2.29% 20.78% 13.09% 15.20% 16.06% 1.79% -30.80% 26.46% 10.19% 5.24% 8.67% 4.71% 8.79% 2,79%

7.41% 1.97% -4.73% 19.58% 10.88% 6.46% 15.80% 1.60% -32.61% 25.36% 8.33% 4.82% 7.19% 0.39% 8.66% 2,71%

4.95% 0.52% -7.12% 19.50% 10.14% 6.01% 9.66% 0.71% -33.00% 23.96% 7.73% 4.08% 6.22% -1.19% 7.24% -4.65%

-6.14% 0.17% -8.84% 13.31% 7.29% 4.91% 4.56% -0.41% -37.00% 16.26% 6.74% 3.04% 4.87% -2.64% 7.14% 5,03%

-7.11% -11.89% -12.44% 10.49% 7.15% 3.53% 4.39% -4.85% -38.28% 14.50% 6.00% -7.57% 3.60% -5.52% 4.17% -8.32%

-9.10% -12.57% -22.10% 8.50% 5.74% 3.30% 4.06% -5.65% -39.93% 13.46% 5.43% -8.83% 2.85% -13.08% 3.22% -12.53%

-25.30% -16.04% -25.82% 6.69% 5.36% 2.05% -2.89% -6.56% -45.75% 5.41% 2.15% -20.65% -16.86% -23.07% 0% -14.95%

Canadian bonds Canadian dividend shares Emerging market

Real return bonds S&P/TSX large cap MSCI EAFE C$

Corporate bonds US dividend shares Real etstate investment trusts

High yield bonds S&P500 C$ Gold

Preferred shares

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ASSET CLASS 1980 1984 1988 1995 1999 2002 2010

Domestic Equity 66% 47% 46% 38% 24% 15% 11%

Foreign Equity 0% 0% 0% 20% 24% 15% 22%

Private Equity 0% 7% 12% 12% 12% 13% 11%

Real Assets 0% 3% 5% 15% 17% 29% 23%

Fixed Income 34% 43% 37% 17% 17% 16% 15%

Alternatives 0% 0% 0% 0% 6% 12% 16%

1980 1988 1999 2010

Source: Arrowfunds, National Association of College and University Business Office

25Source: Arrow funds 2010

Endowments have evolved

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Source: Dalbar Dec 2014

S&P500

Investors

11,06%

3,79%

Barclay’s

Aggregate

Bonds

7,38%

Investors

1,76%

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Benchmark portfolio: 40% DEX, 30%TSX, 15% S&P500, 15% EAFE

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Reliability

• No manager selection risk

• Greater diversification.

• No performance chasing.

• Better behavior.

Low-cost

• Take out the expensive middle man.

• Don’t pay for what you don’t get.

Institutional inspired

management

• Portfolio structure akin to largest pension funds.

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The need to create a whole new language

• Reliability vs performance chasing.• Portrfolio structure vs manager selection.• Resist emotions.

The transition process

• Converted the book within one year• Met each client individually.• 90 minute meeting per client.• Explain the reasons behind the changes.• Why didn’t we do this before?

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The conversation changes

• YOU are the one charging the fees, not some third party.• The client SEES the fees that are charged• Client more prone to challenge the level of fees:

• Can’t you lower your fees?• What have you done for me lately?

What have you done for me lately?: Your value proposition

• Lower cost.• Greater reliability of future returns.• Lower volatility• Better reflexes during turbulent times.• Better reflexes during good times too!

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Alternatives

Extenalmanagers,

Corporate funds, Hedge funds

Fixed income

Structures products

Stock picking

(discount brokerage)

Core: Mutilple asset class index investingCore: Mutilple asset class index investing

CoreSigma balanced, Sigma income

- Superior risk control

- Superior reliability of resutls

Tactical complementSigma Asset class rotation

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DISCLAIMER

o The contents of this document are intellectual property of Christian Lamarre and Guy Lalonde.

o The information contained herein was prepared by Guy Lalonde and Christian Lamarre, Investment Advisor of National

Bank Financial. The particulars contained herein come from sources believed to be reliable but are not guaranteed by us and

may be incomplete.

o NBF is an indirect wholly-owned subsidiary of National Bank of Canada.

o The National Bank of Canada is a public company listed on Canadian stock exchanges.

o NBFI may act as financial advisor, fiscal agent or underwriter for certain of the companies mentioned herein and may receive

remuneration for its services.

o NBF and/or its officers, directors, representatives or associates may have a position in the securities mentioned herein and

may make purchases and/or sales of these securities from time to time in the open market or otherwise.

o National Bank Financial is a member of the Canadian Investor Protection Fund.

o Neither returns nor capital are guaranteed.

o Not all securities listed above are suitable for all investors. .

o You should consult your investment advisor regarding investments suitable to your unique circumstances.

o This is not an offer to buy or sell securities.

o National Bank Financial is not a tax advisor and we recommend that clients seek independent advice on tax-related matters.