BC Pension Leadership Forum 2018

What new investment products are on the horizon?

Philip Falls, Practice Leader and Senior Investment Consultant, PBI Actuarial

Andrew Sweeney, Vice President & Institutional Portfolio Manager, Phillips, Hager & North

Marg Romanow, Benefits Officer, Saskatchewan Union of Nurses, Healthcare Pension Board

Moderator: Stephanie Bertels, Chair, Board of Trustees

Academic Pension Plan, Simon Fraser University

WORKSHOP 3

Marg Romanow, Benefits Officer, Saskatchewan Union of Nurses,

Healthcare Pension Board

WHAT ARE

ALTERNATIVE

INVESTMENTS?

Growing list of non-traditional investments

Hedge Funds

Private Equity

Infrastructure

Real Estate

Commercial Mortgages

Private Debt

Corporate, real estate, infrastructure

Real Assets

commodities, timberland, farmland

Other

insurance linked securities, marine

ARE

ALTERNATIVES

WORTH THE

INCREASED

COMPLEXITY?

Consider

Plan objectives

Current state and market environment

What a new asset class can do for the Plan

Process is key in fulfilling fiduciary duty

WHY ALTERNATIVE INVESTMENTS?

Diversification

Increased Returns

Reduce risk

Long Term Sustainability

CURRENT

STATUS OF

YOUR PLAN

SIPP

Risk Analysis

Sustainability Study – Long Term View

Valuation Timing – Short Term Funding Impact

Industry Status

Strategic Plan Goals and Objectives

Forward Looking Returns

Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525

Understanding New Investment Products

Philip A. Falls, MBA, CFA, ICD.D

Partner, Senior Consultant

PBI Actuarial Consultants Ltd.

Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525

We Select Investment Products After Considering

Investment, Benefit and Funding Policies

8

Policies are interdependent and must be

managed concurrently

This involves making tradeoffs

Focus on the plan’s objectives:

Achieving a fully funded status?

Improving/maintaining benefits?

Building contingency fund?

Lowering investment risk?

Controlling contribution cost?

PBI brings Pension Committee & Managers

together to understand tradeoffs

Benefit

policy

Investment

policy

Funding

policy

Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525

Low Volatility Equities & Private Debt:

Expectations and Experience

Simple thesis - Low Volatility Equities

Expect the same or lower average returns than the regular indices but

with much less volatility (2/3)

Better risk adjusted returns are expected – not a great match but “better”

than regular equities

Simple thesis – Private Debt

Expect higher rate of return – 3-5% more for credit exposure

High skill level required by the investment manager

Credit rating BB-B: “repayment does not represent a problem now …but

could be problematic in the future” and “probability of ..repayment is

weak and may cause a problem in the future”

3

Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525

A “B+” rated company’s risk is high as the “probability of

repayment is weak with cause for concern”.

4

Plain English interpretations of bond credit ratings

Average

Quality

Source: PBI and internet.

Rating Ranks

Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525

What Happens To A/L Volatility If We Add Low Volatility Funds?

Asset Mix

Scenarios

60% Liability

Aware Bonds +

40% Traditional

Equity Funds

60% Liability

Aware Bonds +

40% LV Equity

Funds

100% Liability

Aware Bonds +

0% Equities

92% Liability

Aware Bonds +

8% Traditional

Equity Funds

92% Liability

Aware Bonds + 8%

LV Equity Funds

A/L

Volatility7.4 5.1 1.0 2.3 1.8

5

Andrew Sweeney, Vice President

Investing in New Capabilities

February 2018

13

New Capabilities Improve Risk-Return Profile

Expected Return: 5.5% 5.2%

Standard Deviation 8.4% 6.9%

Sharpe Ratio 0.43 0.50

CVaR 95 -16.3% -12.5%

Expected Return: 5.5% 6.0%

Standard Deviation 8.4% 8.5%

Sharpe Ratio 0.43 0.49

CVaR 95 -16.3% -17.8%

Traditional

Portfolio

■

Traditional

Portfolio

■

New

Portfolio

■

New

Portfolio

■

Low Volatility Equities2 Direct Lending3

1 Refer to appendix for modelling assumptions and disclosures. 2 Equity allocation split 50% traditional equities and 50% low volatility equities along the efficient frontier.3 Fixed income allocation split 75% DEX Universe Bond Index and 25% direct lending along the efficient frontier. * Traditional and low volatility equities split 33% Canadian and 67% global.

Hypothetical performance analyses are for illustrative purposes only and there is no guarantee that hypothetical returns or projections will be realized.

0

2

4

6

8

10

2 4 6 8 10 12 14 16

Retu

rn (

%)

Annualized Standard Deviation (%)

0

2

4

6

8

10

2 4 6 8 10 12 14 16

Retu

rn (

%)

Annualized Standard Deviation (%)

60/40 Portfolio 60/40 Portfolio

DEX Universe

Bond Index

DEX

Universe

Bond Index

Direct LendingTraditional

Equities*Traditional

Equities*30 Traditional Equities*

30 Low Vol Equities*

40 Universe Bonds

Low Volatility

Equities*60 Traditional Equities*

30 Universe Bonds

10 Direct Lending

14

Why Low Volatility Equities?Risk Reduction Frees Up Risk Budget

What They Are

What They Are Not

Superior risk-adjusted returns Market-relative returns

Equity-like returns with lower

overall risk

What they target

Return characteristics

“Bond proxies”

Investing in stable businesses

and thoughtful portfolio

construction

How they do it Short selling, derivatives

Downside riskDefinition of risk Underperforming the market

15

80

100

120

140

160

180

200

220

240

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

Low Vol Global Equity Strategy MSCI World Index (CAD)

Low Volatility Global Equity StrategyOutperforming During Market Volatility

Perf

orm

an

ce I

nd

ex

ed

to 1

00

Low Volatility Global Equity Strategy vs. MSCI World Index (CAD)

(January 1, 2013 – December 31, 2017)

Drawdown 2014

Aug 25–Oct 16

2015

Aug 5 –Sep 28

2016

Dec 29 – Feb 11

2017

Jun 23 – Sept

7

Low Vol Global Strategy C$ -1.5% -6.0% -3.6% -6.2%

MSCI World Index C$ -6.2% -10.0% -12.2% -6.2%

Source: RBC GAM, Bloomberg

Gross of fees

16

Opportunities outside the banking sector

Short-term floating rate loans (4-7 year terms, 2-3yrs average life)

Senior loans: top of the capital structure – get paid first; Subordinate Loans – strong

protection

Targeting event driven situations – growth, restructure or acquisition capital

Attractive for investors

Attractive pricing structure – cash yield, structuring and prepayment fees

Lender-friendly terms – covenant heavy (negotiated directly by us)

Capture illiquidity premium

Attractive for borrowers

Flexibility and customization

Certainty of capital

Long-term partnership

What is Direct Lending?

Alternative Lending Source for Medium Sized Companies

17

Structural Considerations

Capital call and distribution framework

Capital commitment and lock-up period

Investment period

Source: BlueBay internal estimates. For illustrative purposes only.

+200-275bps

Spread

(illiquidity)

Direct LendingCapturing Illiquidity Premium Through Private Loans

Incremental

Spread

+100 –

300bps

Investment Strategy

Target superior returns to equivalent public debt,

through liquidity and credit premiums

Senior secured loans and subordinated debt (short

term, floating rate)

Capital protection, contractual returns, current

income

Gro

ss

An

nu

al

Re

turn

Ob

jec

tive

Credit Risk

Direct

Lending

Appendix

19

Assumptions and DisclosuresCapital Market Assumptions

Assumptions represent the views of PH&N for the purposes of illustrating and understanding the potential risk-reward trade-off of different portfolio decisions. Investors should be aware of the

limitations using forward-looking assumptions in that there is absolutely no guarantee that future performance will occur according to any ex-ante expectation.1 Expected 10-yr annualized return net of fees.

Asset Classes Representative Data Series

Expected

10-yr

Annualized

Return

Expected

Annual

Volatility

Expected

Annual

Downside

Risk

Universe Bonds FTSE TMX Canada Universe Bond Index 2.60% 4.2% -7.4%

Direct Lending1 Credit Suisse Leveraged Loan Index (USD) 8.00% 3.0% -17.8%

Canadian Equities S&P/TSX Composite Index 7.00% 16.5% -29.9%

Canadian Low Volatility Equities RBC QUBE Low Volatility Canadian Equity Fund 6.30% 11.1% -17.6%

Global Equities MSCI World Index (CAD) 6.81% 14.2% -26.2%

Global Low Volatility Equities RBC QUBE Low Volatility Global Equity Fund (CAD) 6.12% 11.3% -16.0%

20

Assumptions and DisclosuresCapital Market Assumptions

Assumptions represent the views of PH&N for the purposes of illustrating and understanding the potential risk-reward trade-off of different portfolio decisions. Investors should be aware of the

limitations using forward-looking assumptions in that there is absolutely no guarantee that future performance will occur according to any ex-ante expectation.

Correlation

Univ

ers

e B

on

ds

Direct

Le

ndin

g

Can

ad

ian E

qu

itie

s

Ca

na

dia

n L

ow

Vo

latilit

y E

qu

itie

s

Glo

ba

l E

qu

itie

s

Glo

ba

l L

ow

Vo

latilit

y E

qu

itie

s

Universe Bonds 1

Direct Lending -0.1 1

Canadian Equities 0.0 0.4 1

Canadian Low Volatility Equities 0.1 0.3 0.7 1

Global Equities 0.0 0.3 0.6 0.5 1

Global Low Volatility Equities 0.4 0.0 0.3 0.4 0.7 1

21

Disclaimer

This presentation is intended for institutional investors only.

This document has been provided by Phillips, Hager & North Investment Management (PH&N IM) for information purposes only and may not be reproduced, distributed or

published without the written consent of PH&N IM. It is not intended to provide professional advice and should not be relied upon in that regard.

PH&N IM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. PH&N IM reserves the right at any

time and without notice to change, amend or cease publication of the information. Information obtained from third parties is believed to be reliable, but no representation or

warranty, express or implied, is made by PH&N IM, its affiliates or any other person as to its accuracy, completeness or correctness. We assume no responsibility for any errors

or omissions.

This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except

pursuant and subject to the respective offering documents and subscription materials, which shall be provided to qualified investors. This document is for general information only

and is not, nor does it purport to be, a complete description of an investment in any RBC, PH&N or BlueBay funds. If there is an inconsistency between this document and the

respective offering documents, the provisions of the respective offering documents shall prevail.

Commissions, trailing commissions, management fees and expenses all may be associated with the funds mentioned in this presentation. Please read the offering materials for a

particular fund before investing. The performance data provided are historical returns, they are not intended to reflect future values of any of the funds or returns on investment in

these funds mentioned in this presentation. Further, the performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption,

distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. The unit values of non-money market funds change frequently. For

money market funds, there can be no assurances that the fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment

in the fund will be returned to you. Mutual fund securities are not guaranteed by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Past

performance may not be repeated. The amount of risk associated with any particular investment depends largely on the investor’s own circumstances. Investors should consult

their professional advisors/consultants regarding the suitability of the investment solutions mentioned in this presentation.

This document may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve

inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place

undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-

looking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.

PH&N IM is a division of RBC Global Asset Management Inc. (RBC GAM Inc.). RBC GAM Inc. is the manager and principal portfolio adviser of the Phillips, Hager & North

(PH&N) investment funds and RBC Funds. RBC Global Asset Management is the asset management division of Royal Bank of Canada (RBC) which includes RBC GAM Inc.,

RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, the asset management division of RBC Investment Management (Asia) Limited, and

BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

®/™ Trademark(s) of Royal Bank of Canada. Used under licence.

© RBC Global Asset Management Inc., 2018.

V A N C O U V E RWaterfront Centre, 20th Floor

200 Burrard Street

Vancouver, British Columbia

V6C 3N5 Canada

T 604-408-6000

T O R O N T O22nd Floor

155 Wellington St. West

Toronto, Ontario

M5V 3K7 Canada

T 416-974-2710

M O N T R É A L6th Floor, North Wing

1 Place Ville Marie

Montréal, Québec

H3B 1Z5 Canada

T 514-876-1256

Marg Romanow, Benefits Officer, Saskatchewan Union of Nurses,

Healthcare Pension Board

ASSESS

ALTERNATIVE

INVESTMENT

OPTIONS

Which Asset Classes meet your needs?

Prioritize those that best meet your needs.

How many new asset classes do you want to introduce?

Consider governance implications.

Determine your ESG priorities.

Consider CAPSA Guidelines

Accessing expertise to ensure knowledgeable decisions

Clearly defined process/criteria

ASK QUESTIONS

ON IDENTIFIED

ASSET CLASS

OPTIONS

Does the Asset Class help meet your long term

obligations?

Ensure you understand the new investment

How are returns generated? What are the risks?

Does the level of risk meet your needs?

Does it fit with your other existing investments?

What is the availability of investment vehicles?

What is the impact on Plan administration?

Access experts/get education as needed to

answer the above

NARROW

DOWN THE

OPTIONS

Once you have decided on an asset class:

How will you implement – multiple managers? Build a program over time? How many will you hire?

Does the asset class require a more nimble approach to manager selection?

Will you interview or delegate the selection process?

Which managers will you interview?

Do you have enough information to make a decision?

ASK QUESTIONS

ON MANAGER

SELECTION

PROCESS

Objectives for fund/manager match our targets?

What is the history of the fund?

What are the risks related to this fund?

Does the team depth/experience and process give it any advantage?

Total Assets Under Management?

Does the manager provide transparency?

Are management fees consistent with the market and structure aligned with our interests?

Political factors? Currency factors?

ADDITIONAL

DUE DILIGENCE

FOR

ALTERNATIVES

Ensure there is an appropriate due diligence

process. Complexity can come from vehicles

used (limited partnerships).

Has the structure been reviewed for regulatory

and tax issues?

Have terms and conditions been reviewed?

Is the reporting process to you acceptable?

What is the expected investment horizon?

Does it meet your needs?

Are they flexible to meet your needs? Ie ESG

considerations?

BE NOT AFRAID

Utilize the typical process of hiring Managers.

Adapt/enhance the hiring process as necessary for the specifics of the new fund.

Do not dismiss the Asset Class without due consideration.

Do not be influenced by generalized fears.

Consider the options carefully.

Ensure that you understand the new Asset Class.

Ensure that you can factually justify your decisions.

Ensure that you are meeting your Fiduciary Responsibility as a Pension Trustee.