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   Ottawa invents shock absorbers for banks
Limited recourse capital notes, launched in July, have a 60-year term — and could be held in a bond fund near you
PRODUCT WATCH TD introduces three portfolio ETFs
Toronto-based TD Asset Management Inc. has launched a suite of three funds under its TD One-Click ETF Portfolios banner. These ETFs invest in a mix of broad market index TD ETFs and actively managed TD ETFs.
TD One-Click Conservative ETF Portfolio has a target asset mix
of 70% fixed-income and 30% equities. The ETF offers investors a moderate level of income as well as capital preservation with the potential for growth. TD One-Click Moderate ETF Portfolio has a target asset mix of 60% equities and 40% fixed-income. The ETF aims to generate long-term capital growth while providing the opportunity to earn income. TD One-Click Aggressive ETF Portfolio has a target asset mix of 90% equities and 10% fixed- income. The ETF is meant to generate long-term capital growth with the potential for earning a modest level of income.
All three ETFs have a management fee of 0.25%. The ETFs are listed on the Toronto Stock Exchange.
BMO boosts its fund lineup
Toronto-based BMO Investments Inc. has added three funds to its product shelf.
BMO Sustainable Opportunities Canadian Equity Fund invests in an all-cap portfolio of high-growth Canadian companies that have demonstrated a clear commitment to sustainability.
BMO Low Volatility U.S. Equity ETF Fund focuses on defensive sectors and Canadian equities with a lower sensitivity to market movements, thereby offering investors the potential for long-term capital appreciation.
BMO Target Education 2040 Portfolio is the latest addition to BMO’s suite of education funds. As a target-date fund, it provides investors with an opportunity for capital appreciation by investing primarily in a diversified mix of mutual funds and ETFs until the target date of June 30, 2040. As the target date approaches, the fund will gradually shift its asset mix from an exposure balanced among Canadian and global equities and fixed-income securities to an exposure that is primarily Canadian and global fixed-income securities and cash equivalents.
BMO also released the following U.S.-dollar versions of three
ETF portfolios: BMO USD Income ETF Portfolio, BMO USD Conservative ETF Portfolio and BMO USD Balanced ETF Portfolio.
For full fund details, including fees, visit
New emerging-markets fund from Horizons
A new ETF from Toronto-based Horizons ETFs Management (Canada) Inc. offers investors exposure to emerging markets. Horizons Emerging Markets Equity Index ETF replicates the Horizons emerging markets futures roll index, net of expenses.
The index measures the performance of large- and mid-cap securities across 26 emerging markets. The index also reflects the investment returns generated over time through long notional investments in a series of MSCI emerging markets index futures that are based on the performance of the MSCI emerging markets index. The ETF is part of Horizons’ suite of total-return index ETFs. The management fee for the new ETF is 0.25%. The ETF trades on the Toronto Stock Exchange.
Active ETFs from CIBC
Toronto-based CIBC Asset Management Inc. has added two funds to its ETF lineup.
CIBC Global Growth ETF aims to generate long-term capital growth. The fund invests primarily in equities issued by companies from around the world with high valuations and growth prospects. The ETF gains exposure to these securities through investments in Renaissance Global Growth Fund, which is subadvised by London-based Walter Scott & Partners Ltd.
CIBC International Equity ETF invests in equities issued by companies in Europe, Asia and the Pacific Rim with the aim
of generating long-term growth through capital appreciation. The ETF offers investors access to international investment opportunities not readily available in Canada or the U.S. To achieve this goal, the ETF will invest in Renaissance International Equity Fund, also subadvised by Walter Scott & Partners.
Both ETFs have a management fee of 0.85%. The ETFs trade on the Toronto Stock Exchange.
institutional investors
have a brand new security in which to invest: limited recourse capital notes (LRCNs). The notes are secured with preferred shares that convert to common equity only if the issuing entity becomes non-viable.
In July, the Office of the Super- intendent of Financial Insti- tutions (OSFI) approved the new structure and provided issue terms for chartered banks. (OSFI is developing rules for insurers.)
The notes have 60-year terms backed by perpetual preferred shares; those underlying pre- ferreds are non-cumulative and non-redeemable. Issuers, in other words, don’t have to give the money back or make up for missed dividends.
The structure means the issuer can deduct interest pay- ments, consistent with Canada Revenue Agency rules for bonds
with terms of less than 100 years. Furthermore, OSFI recognizes LRCNs as additional Tier 1 regu- latory capital. This recognition means banks have a cheaper instrument with which to raise Tier 1 capital than common or preferred shares.
John Shaw, head of investment- grade credit and preferred shares with Signature Global Asset Management in Toronto, says engineering the new notes
creates a high-yield device in a tightly regulated sector.
On July 21, Royal Bank of Canada became the first insti- tution to issue LRCNs, raising $1.75 billion. (The Globe and Mail reported demand for the issue was more than double supply.) Each note has a face value of $1,000 and matures in November 2080.
Non-accredited investors need not apply — in fact, OSFI told issu- ers not to solicit retail accounts. Furthermore, the LRCNs will not be board-priced or tracked in major bond indexes because the notes do not include a solid promise to return capital. Access to pricing information will be via traders’ bond desks only. Some bond funds may have difficulty buying these notes because they lack the promise of redemption intrinsic in bonds.
James Hymas, president of
Hymas Investment Management
Inc. in Toronto, says that since the issuing banks are not required to redeem LRCNs at maturity, “they are not really bonds.”
LRCNs come with an attract- ive return: 4.5% for five years, reset every five years at the Government of Canada five- year bond rate plus 4.137%. The return far exceeds the return on bank-issued senior bonds of sim- ilar term, consistent with LRCNs’ higher risk. The notes’ premium
over other bank-subordinated debt makes LRCNs attractive on their own merits, says Hymas.
LRCNs rank in priority of payment below former non- viability-contingent capital but ahead of ordinary preferreds, explains Chris Kresic, head of allocation and fixed-income with Jarislowsky Fraser Ltd. in Toronto: “The attraction for issu- ers is that the money they pay is not preferred income, but tax- deductible interest.” Banks also can distribute the underlying preferreds in lieu of cash.
Geof Marshall, head of fixed-income at CI Investments in Toronto, says the bonds fit the times: “Interest rates are not going to rise for a long time. The underlying asset, the perpetual preferreds, have a 10-year call and five-year interest resets. So the real term is five years, but the credit spread over conven- tional corporate bonds is much larger if the issuers do not call. In good times, LRCNs will behave like bonds; but if issuers are in financial difficulty, they will be orphans in search of a home.”
Given the complexity of LRCNs, who will buy them? Bond funds with broad mandates will, suggests Hymas. (Indeed, Marshall says he has bought them for several CI portfolios.)
LRCNs also get Canadian tax- payers off the hook in the event that a chartered bank needs more capital. “There is no reli- ance on taxpayer money,” Shaw says, because LRCNs convert to equity in a crisis at unfavourable terms for holders.
For both issuers and OSFI, the new hybrids are win-win investments. IE
    LRCNs come with an attractive return: 4.5% for five years, which exceeds the return on similar bank-issued senior bonds
                Compiled by Fiona Collie

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