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  12 | INVESTMENT EXECUTIVE NEWS April 2020 Beginning the year on a solid footing
   Big banks are in the best shape to endure the coronavirus crisis
many canadian financial
services companies were in good shape as 2020 began, which will help them survive the effects of the Covid-19 pandemic. The Big Six banks are in the best shape, given their large amounts of cap- ital and diverse businesses. Large life insurers are more vulnerable because of their exposure to financial markets.
Investment Executive’s finan- cial services profit survey covers the quarters ended between Nov. 30, 2019 and Jan. 31, 2020. Of the 40 companies surveyed, 22 reported higher net income than in the corresponding period a year ear- lier, five reported positive earn- ings vs a loss a year earlier and HSBC Bank Canada’s profit was unchanged. That left eight with
lower net income and four in a loss position. The average gain was 13.7%. (These figures exclude Great-West Lifeco Inc. [GWL] and IGM Financial Inc., the results for which are consolidated with those of Power Financial Corp.)
The majority of the gains were among the banks and life insurers. There were nine banks and three lifecos that reported higher earn- ings, and E-L Financial Corp. Ltd. reported positive net income vs a loss in the corresponding quar- ter the previous year. It was the lifecos that had the biggest dol- lar increases in net income. If that sector is excluded, net income for the remaining 38 companies was up an average 6.3%.
Of the other nine firms report- ing increases in net income, three were finance companies and three were mutual fund and investment companies. The others were mort- gage insurer Genworth MI Canada Inc., Intact Financial Corp. (a property and casualty [P&C] insurer) and U.S.-based brokerage Oppenheimer Holdings Inc.
The four firms reporting posi- tive net income vs a loss in the
corresponding quarter in the year before were Co-operators General Insurance Co., Fairfax Financial Holdings Ltd., Guardian Capital Group Ltd. and Stone Investment Group Ltd.
In the quarter, 12 firms raised their dividends: Canadian Imperial Bank of Commerce (CIBC), to $1.46 from $1.44; Equitable Group Inc., to 37¢ from 35¢; Royal Bank of Canada, to $1.08 from $1.05; Toronto- Dominion Bank (TD), to 79¢ from 74¢; GWL, to 43.8¢ from 41.3¢; iA Financial Corp. Inc., to 48.5¢ from 45¢; Manulife Financial Corp., to 28¢ from 25¢; ECN Capital Corp., to 2.5¢ from 2¢; MCAN Mortgage Corp., to 34¢ from 32¢; Intact, to 83¢ from 76¢; Guardian Capital, to 16¢ from 15¢; and Brookfield Asset Management Inc. (BAM), to 18¢ from 16¢.
In addition, BAM is splitting its common shares as of April 1: shareholders will receive one share for every two already held. This effectively increases the dividend payout for previously held shares to 27¢.
E-L Financial and Genworth
declared special dividends. E-L will pay a special dividend of $25 on top of its regular quarterly dividend of $1.25 on April 17. On Dec. 12, 2019, Genworth MI sold a majority interest in subsidiary Genworth Financial Inc. to BAM subsidiary Brookfield Business Partners LP. In anticipation of this transaction, Genworth MI paid special dividends of $1.45 on Oct. 11 and $2.32 on Dec. 30. A final special dividend of $2.32 was paid on Feb. 11. These dividends were in addition to the firm’s regular 54¢ quarterly dividend.
Here’s a look at the sectors: ■■ banks. Only Bank of Nova Scotia and Laurentian Bank of Canada reported lower earnings year-over-year.
Scotiabank reported a 3.6% increase in net income, but this included a $316-million gain on the sale of operations in Puerto Rico, the U.S. Virgin Islands and El Salvador, plus reduction in the bank’s investment in Thailand. These are one-time, non-recur- ring items that are excluded in this survey. Without this gain and some integration costs, net
income dropped by 9.4% as prof- its slipped in both Canadian and international banking.
François Desjardins, Laur- entian’s president and CEO, stated in his firm’s financial report: “We are disappointed with this quar- ter’s financial results [a drop in net income of 18.1%] and are address- ing both the revenue and expense sides of this equation.”
Loan-loss provisions for the 12 deposit-taking institutions were a combined $3 billion vs $2.9 bil- lion in the previous quarter and $2.7 billion a year earlier. Credit- rating agency DBRS Morningstar Inc. stated in a recent report on the large Canadian banks that credit quality “remains sound.”
After the quarter ended, Can- adian Western Bank announced on March 2 that it will acquire T.E. Wealth and Leon Frazer & Associates from iA Financial. On March 16, DBRS raised the credit rating of Home Capital Group Inc. to BB (high) from BBB (low). ■■ finance companies. Element Fleet Management Corp.,
— especially death benefits.”
The fund family doesn’t favour any investment style, but offers quality funds at low prices. Says Nardi: “We are one of the few places where some- one with $5,000 can get a fund managed by Mawer or by NEI Investments [i.e., Northwest & Ethical Investments Ltd.].”
Co-operators also offers Aviator-branded funds, asset-al- location funds that “mimic insti- tutional investment strategies” featuring global exposure and are aimed at minimizing down- side risk. These funds have been fine-tuned in the past year.
■■ empire life. The portfolio managers use a value invest- ment approach. Chief investment officer Ian Hardacre was “very happy” with 2019’s performance in a “momentum” year.
He notes some large
underlying mutual funds were close to achieving above-aver- age status. For example, Empire Life Elite Equity fund had four versions in second quartile and seven versions in third quartile.
Returns for 2019 were helped by stock picks that included BAM and Cineplex Inc. BAM’s stock price dropped owing to the virus, mirroring stocks generally, but Cineplex’s has plunged as movie theaters are closed in an effort to contain the virus. (Cineplex is in the midst of a takeover by U.K.- based Cineworld Group PLC.)
Hardacre says Empire Life’s portfolio managers are now pick- ing up quality stocks that they like, but considered too expen- sive before.
■■ ia. This fund family is diversi- fied in the same way as the Canada Life, GWL and London Life funds. “It’s important to have both growth and value because usually one or the other style
outperforms,” says Pierre Payeur, director of fund management.
But the IA family has a value tilt and last year, growth outper- formed. IA’s portfolio managers also were defensive on U.S. equi- ties in general because valua- tions were relatively high, Payeur says. He notes this defensiveness is paying off now.
Payeur adds that it was diffi- cult to beat stock indexes last year, but 2020 will be a year for active investment management. In the midst of dropping stock markets, he notes, “[portfolio] managers are becoming more defensive. Cash is increasing and some man- agers are using derivatives to pro- tect against downside risk.”
■■ canada life/gwl/lon- don life. Portfolio man- agers focus on quality, but don’t rely on stock-picking as much as Manulife’s. Holdings tend to be more diversified than those of straight stock-pickers and
portfolios show a conservative bias.
There are differences among the three families. GWL, which did the best among the three, has the most diversified range of strat- egies. London Life focuses more on asset-allocation positioning. Canada Life’s funds reflect a heav- ier focus on Canadian funds, and the S&P/TSX composite index’s return in 2019 was 20.5% vs the S&P 500’s 30.4%.
These differences will no longer be evident with the amal- gamation of the fund families. Brent MacLellan, vice presi- dent, portfolio construction and analysis for the merged com- pany’s fund family, says the new shelf consists of 75 funds: 36 are amalgamations of pre-existing funds; 16 were offered by GWL and London Life; 12 were avail- able through Canada Life; and 11 are Pathways-branded funds launched in November 2019.
MacLellan adds that existing funds in the three families not being amalgamated will con- tinue to function. However, they will be closed to new investors, although existing unitholders can still make contributions.
The strategy behind the amal- gamation is to create a diverse product offering that will be competitive through full market cycles, says MacLellan.
Like Wilson, MacLellan is confident that the emphasis on quality investments means the new Canada Life family is pos- itioned to survive the current market turmoil.
■■ primerica life. This com- pany uses strip bonds to meet guarantees, so returns vary. In 2018, 96.6% of AUM were in above-average performing funds. Generally, Primerica’s seg fund returns are better when fixed-income has outperformed equities. IE
Quality and defensiveness should pay off in 2020

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