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Grow Together - June 2021

As the summer season approaches, so does a sense of optimism — life is gradually returning to normal. We’re excited about entering the early stages of our economic reopening, however we’re also careful to retain the lessons learned from the pandemic – the reminder that nothing in life is guaranteed. Thoughtfully accounting for uncertainty is a value we seek to provide our client families every day and is the primary theme for our latest Grow Together.

In this issue: President's message | What to do about inflation | Market mindfulness: Why diversification is what real winners do | The art of assumptions: What financial planning guidelines in Canada mean for you


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President's message

Matt Evans, CFA
President & CEO


Summer is finally in the air. The longer days and warmer nights seem to bring a sense of optimism unique to the season. This year, we’re especially optimistic as we anticipate putting the long winter of COVID-19 behind us. While further progress is needed before we sound the “all clear” signal, public health trends in Canada are improving and we look forward to the gradual re-opening and reconnection that’s yet to come.


It’s hard to believe we are fully fifteen months on from the first stage of pandemic-related lockdowns. In last year’s June edition of Grow Together, we shared that our priority through the first three months of working at a distance from our clients, and from each other, was to contribute to peace of mind for our client families. The team effort was extraordinary as we found creative ways to be effective without the conveniences afforded by the office. I was proud of what we accomplished together in those early months, and inspired by how our people found new ways to live our values.


The fact that we also substantially transformed our business as the pandemic took hold certainly added to the high-velocity feeling during that time. In early March 2020, we announced that CWB Wealth Management and CWB McLean & Partners would combine forces with T.E. Wealth and Leon Frazer & Associates. June 1st of this year marked the one-year anniversary of CWB closing the acquisition. At the time, we called it a bold step forward to scale up our presence in key markets across the country, with the goal of strengthening our position as a leading private wealth boutique in Canada. One year on, we could not be happier with the results.


While business combinations of this kind can be disruptive, we made an explicit choice to prioritize stability and continuity for both our clients and our people. We committed to maintain business-as-usual conditions for our client teams, with no immediate changes to the client or advisor experience. This approach gave us (virtual) space and time to get to know our new colleagues, to form relationships and build trust. 

It’s been a tremendous learning experience for all of us, and I’ve personally come away from it supremely impressed with the skill and integrity of our teams.

The trust that our clients place in them is well-earned, and well-deserved.


Pandemic life has been an exercise for all of us in resilience and living with uncertainty. It’s been a useful reminder that nothing in life is guaranteed. Thoughtfully accounting for uncertainty is a value we seek to provide our client families every day, and our primary theme for this issue of Grow Together. To kick us off, Scott Blair and Aliyah Khatri explore the heated inflation debate currently making headlines. Whether price increases will prove to be persistent or transitory is a key source of uncertainty for portfolio managers, and they deftly cover how we’re navigating this issue for our clients. Linnea McKercher revisits the virtue of portfolio diversification as a tool to manage investment risks related to various sources of uncertainty, and to profit from them. Jim Grant rounds out the discussion with an exploration of how we account for uncertainty and thoroughly plan for a range of potential outcomes through a professional financial planning process.


The experiences of the past year have reminded us to take nothing for granted especially our health and the health of our loved ones. Over the past fifteen months, the focus of our newly expanded team has been to take care of our clients, and each other. We’re optimistic as we look ahead to further recovery in overall public health, and in the economy. Through it all, we’ll continue to grow together.


What to do about inflation

Scott Blair, CFA
Chief Investment Officer

Aliyah Khatri, CFA, FRM
Associate Portfolio Manager, Credit, Fixed Income


If you’re old enough, the word inflation likely conjures images of long lines at the gas pumps, recessions and cripplingly high interest rates like the ones we saw in the ‘70s and early ‘80s. If you came of age in the last twenty years or so, the concept of inflation might be more abstract. It’s a threat that pops up from time to time, but never quite materializes. Kind of like a Canadian team winning the Stanley Cup.


Today, we’re seeing inflationary pressures build at a red-hot pace. This is not unusual coming out of an economic downturn, and central banks (like the Bank of Canada) have been predicting higher inflation for months with the caveat that it should be temporary and not require an increase in interest rates anytime soon.


However, the April inflation numbers in Canada and the U.S. have surpassed all expectations and added fuel to concerns that the situation is, not temporary and that the central banks are behind the curve. Before we look at what the truth is, let’s dig deeper into what’s driving inflation at this point in time. 


The two main factors are:

1. Base effects: Comparisons to last year’s pandemic-shocked economy make inflation appear potentially hotter than it really is. For instance, a year ago energy prices cratered (the price of oil briefly went negative). We’re now lapping those base numbers, making year-over-year comparisons look tough. While it’s true that month-over-month numbers are also turning out higher than expected, they are being driven by a re-opening economy. For instance, April’s price increased in part due to higher airfares and hotel rates (particularly in the U.S.) as the world started to get back to normality. Over the coming months, we could see more of this activity as massive discounts continue to come off. It will likely take time for pricing to recover from pandemic lows and normalize.


2. Supply demand imbalance: Demand for goods is strong and inventories are at record lows. We’ve gone on a buying binge in lockdown while factories have had to run at less capacity than usual due to public health measures. Once economies re-open completely, COVID-hit sectors are expected to see high demand as people start doing things again (travelling, eating out, etc.) rather than buying things. And if service sector picks up before the goods sector has a chance to normalize, we could possibly see a continued surge in prices.


What can central banks do?

Higher interest rates are the main tool to control inflation. Both the Federal Reserve (Fed) in the U.S. and the Bank of Canada (BoC) have indicated that they will tolerate inflation to run hot for longer than usual in order to see employment recover before they start to hike interest rates. Even after the April inflation report, Fed Vice Chairman, Richard Clarida, reiterated that they view this inflation jump to be transitory. 


Figure 1: Inflation in the U.S. and in Canada

chart showing inflation in the U.S.



chart showing inflation in Canada


The Fed adopted a formal inflation target of a 2% annual rate of change in the Personal Consumption Expenditure (PCE) index in 2012, while BoC adopted three different measures of Core Inflation in 2017 and have a target range of 1-3% inflation. In all, the measures preferred by the Fed and BoC will generally look through volatile factors like energy and instead focus on sustainable inflation. As we see in Figure 1, since these measures were adopted we have rarely seen them reach the respective central bank’s target, which is another reason why central bankers feel they can let inflation run. 


Should we be worried?

Inflation has derailed the economy and markets in the past, but these are truly unusual times. There is no precedent for the events of the past fourteen months: a pandemic caused the global economy to shut down, war-time fiscal and monetary measures were immediately deployed, and the recovery has been faster-and-stronger-than almost anyone expected. And we’re not done yet. Federal governments continue to run stimulative programs and are discussing infrastructure investments. The average person has more income in their pocket and there’s still massive demand that’s been bottled up for over a year in many sectors.


In short, inflation worries will ebb and flow through the rest of this year. 

Just like we’ve never locked down an economy like we did in 2020, we’ll have never fully reopened one like we’ll do this year.

It’s an uncertain and noisy process that’s hard to predict on a month-to-month basis.


As such, we aren’t worried about inflation getting out of hand yet. We believe it will run hot for a while, but it’s simply not clear whether it will become a serious issue or whether it’s transitory. We’re focussed more on the big picture, which is strong economic growth this year and next supported by generous fiscal support and ultra-low interest rates. This, along with positive earnings expectations, provides a good backdrop for stock markets.


While we’re preparing for higher-than-usual inflation this year, we’re not altering our investment process or philosophy. Instead, we’re using the tools at our disposal to take advantage of higher inflation. For many of our client portfolios this includes overweighting equities, tilting portfolios toward more cyclical sectors that benefit from inflation, and shifting our bond portfolios toward shorter-term maturities. The inflation threat is a real one and, as such, it needs to be monitored. The best defense continues to be diversification and sticking to your long-term plan.


Market mindfulness: Why diversification is what real winners do

Linnea McKercher, CFA
VP, Portfolio Manager


Diversification is one of the most basic principles to reduce risk in investing, and pretty much the first thing we learn in finance. Despite knowing this, people commonly question its wisdom. While the past year alone has shown us examples of spectacular gains in individual securities or assets, a deeper dive on this subject reveals that the majority of success achieved through the markets can be traced back to the time tested approach of diversification.


Bitcoin is one of the most popular examples of quick market wins in the past year. Had an individual been solely invested in bitcoin over the past year, their return would have been fantastic despite the recent sharp sell-off in crypto currencies.


We’re naturally drawn to dramatic stories of people striking it rich by making concentrated bets that deliver huge returns in a short period of time, but in reality, there are far more people who gain substantial wealth through their hard-earned success as business owners, than those who placed risky bets in the stock market.


At CWB Wealth Management, we seek to achieve the best return possible for the personalized risk profile of each client. Total portfolio risk is made up of two types: systematic risk and unsystematic/idiosyncratic risk. 


Systematic risk

Systematic risk is the risk underlying the entire market and reflects the impact of economic or geopolitical factors, or even inflation. It’s unpredictable and difficult for investors to avoid completely, but can be reduced with proper allocation to different asset classes like bonds, cash, and real estate. We help protect client portfolios by using their personalized portfolio guidelines to tilt more towards fixed income or equities as we see market conditions shift.


Systematic risks often require government intervention to restore confidence and spur the economy, as we saw during the Global Financial Crisis in 2008 when central banks lowered rates and purchased massive amounts of government bonds.


Unsystematic / idiosyncratic risk

While we can’t control systematic risks, we can control unsystematic or idiosyncratic risk. This type of risk is unique to an individual company or a specific group of companies which are all in the same industry.


Common idiosyncratic risks include poor innovation, new entrants, and regulatory changes. This type of risk can be virtually eliminated by diversification across many different industries, and is therefore also known as diversifiable risk. Numerous studies have been done over the years to try to quantify the exact number of securities needed to diversify away idiosyncratic risk. While there are outlying extremes ranging from only eight securities up to 100, many studies have shown that between 20 and 50 securities are needed for sufficient diversification, depending on the equity market.


As professional investment managers, we’re not aiming to shoot the lights out by owning just one stock or by investing in just one industry. We consider that gambling. Many clients have achieved their wealth by being successful business owners, or an expert in their profession, and are looking to protect and grow that wealth above and beyond inflation. The best way to do so is by diversifying.


Many of our clients who transition from owning active businesses into retirement struggle to adjust that their years of earning impressive returns on business investments are done, and that they’re now going to need to live on the fruits of their past successes. They may wonder why we don’t go ‘all in’ on what we think is a sure thing – after all, they created their wealth by going all in on their businesses. Of course, you can never know someone else’s business as well as you know your own, and that is the difference between investing in the market and investing in your own venture. 


Our objective is to take educated bets and tilt the portfolio accordingly – but not bet the farm!

 While it’s been relatively easy to make a good return in the past year (housing, equity markets, commodities have all risen), we know this bull market will not last forever. 


Tilting with intention

Today’s news headlines are telling us that inflation is all around us right now, and while we’re taking cautious measures to protect against it, we’re not building a portfolio of 100% copper stocks either.


In response, we’re tilting many of our portfolios from more defensive sectors towards ones that are more cyclical and sensitive to inflation. We’re also tilting away from bonds as much as our client guidelines will allow. However, we’re retaining some defensive and staples stocks in the portfolio in case inflation proves to be transitory or the market corrects for some other reason.


The difficult part about investing in times like this is that there are no ‘all clear’ signals. No one will tell us when inflation is truly a problem, or when it’s no longer one. Again, that’s why we diversify.


Our vast access to research and information helps us make what we feel are the best investments, but we never know what surprises the future will bring. Diversification ensures that we’re prepared for numerous scenarios because markets can change overnight. Often, something unseen knocks the market off course, even if it’s only temporarily.


Looking at the past 90 years of U.S. market history, we can see that the markets show: 

History of the market in the U.S.

Source: Bloomberg


While it’s difficult to prepare for this, history has shown us that the best way for us to protect your assets is through well diversified portfolios, with an awareness of – and game plan for – minimizing both systematic and unsystematic risks. We’re not looking to win the stock market jackpot. Instead, we believe that partnering with our clients to try to produce a predictable return and minimize extremes over the long term is the real winner’s way to go.


The art of assumptions: What financial planning guidelines in Canada mean for you

Jim Grant, CFP®, CIM®, FCSI®
Senior Planner


Have you ever wondered where the numbers that financial planners use to create your long-term financial plan come from? Since we make projections that need to consider future inflation, borrowing rates, investment returns and how long the money needs to last, there are certain assumptions we need to make. These come not from a crystal ball, but rigorous guidelines set out by FP Canada and the Insitiut Quebecois de planification financiere (IQPF). Both have just announced their 2021 projection assumption updates. What does that mean for you? Let’s find out.


The goods on guidelines

The FP Canada Standards Council and IQPF have established guidelines using a variety of reliable and publicly available resources. Each use numerous data sources which helps eliminate potential biases that may arise from using only a single source. Both institutions update their actuarial reports every three years which ensures their guidelines remain relevant.


These guidelines have been established by using the main asset classes, namely, short-term assets (cash & equivalents), Canadian fixed income, Canadian equities, foreign developed market equities (U.S., Europe, Australia and Far East) and emerging markets. They consider both expected future economic behaviour based on assumptions provided in the CPP/QPP actuarial analysis, and the 2020 FP Canada/IQPF survey, as well as historical market performance. 


Figure 1: Projection assumption guidelines for 2021 

a) Inflation rate  2.0%
b) Return rates  



Fixed income:


Canadian equities:


Foreign developed market equities:


Emerging market equities:

c) Borrowing rate 4.3%
d) YMPE, MPE growth rate or salary

3.0% (inflation +1%)

e) Probability of survival 2014 Canadian Pensioners' Mortality Table

Source: FP Canada


So, what does all this mean for you when we create your financial plan?


When making projections for your retirement needs, retirement income, insurance needs, education planning, etc., our planners can show you whether your plan can realistically achieve your goals in your desired time frame, or whether you’ll need to work longer, spend less in retirement, save more or invest in a more aggressive manner. We do this largely by referring to the guidelines. When new guidelines come out, it’s a good reminder to review your financial plan. Usually, one year doesn’t require an update of the plan but if unemployment or exceptional changes occur (maybe even a pandemic) then we would like to review. When looking longer term, many things could change like taxes, new products, new planning strategies or family or retirement goals. These would trigger the need to update the plan and reproject what your options or situation may look like.


While there are many articles and tools available to those who want to create their own plan, these are generally geared towards simpler financial situations. A Certified Financial Planner (CFP) with the requisite education and experience can help you with planning opportunities where a business is involved, where there might be needs arising from previous relationships, or where estate planning/succession planning requires more complex planning and tax strategies.


Case study

To illustrate how referencing the guidelines can reliably show the effectiveness of your plan, let’s look at a case study. A client, whom we’ll call Mia, determines with her portfolio manager that a portfolio consisting of 60% stocks and 40% bonds would be appropriate for her conservative risk tolerance. CWB Wealth Management’s current positioning for the equity position is 40% in Canada, 30% in the U.S., 30% in international markets and 100% Canadian bonds.


chart showing breakdown of equities versus bonds


So, 40% of 60% means 24% will be in Canadian equities, 30% of 60% or 18% will be in both U.S. and international stocks (24 + 18 + 18 = 60%) and 40% in Canadian bonds. This combination would result in a combined gross return of 4.9% for Mia. For her net rate of return, we would deduct the fee for managing her accounts. If her fee were 1.25%, then her net rate of return would be 3.65%. 


To illustrate her cash flows over time, we would use a 2% inflation rate, and typically use a planning period to age 95-100. The inflation assumption is central to the preparation of medium and long-term projections. For our purposes, we consider in equal proportion the average of the last 30 years of assumptions, both for the CPP and QPP, in addition to the results of the 2020 FP Canada/IQPF survey and the current Bank of Canada target inflation rate.


To put this into perspective, income needed in 2021 of $75,000 would become income needed of $135,852 in the year 2050 (29 years of 2% inflation).

Forecasting a longer projection period accounts for the greatest financial risk to an individual – longevity.


Putting it all together

So, how do you best ensure that your financial plan is sound? An FP Canada survey mentions that only 43% of Canadians currently have a financial plan. This suggests to me that these Canadians could benefit from having a qualified financial planner work with them to ensure their plan’s assumptions hold up against the FP Canada/IQPF guidelines.


Additionally, a planner can ensure that your plan is reviewed and updated every couple of years, or as material changes occur in your life (such as selling your business or buying property). These reviews are critical to maintaining the integrity of your plan and availing yourself of current planning and tax strategies.


Creating assumptions or scenarios based on taxes, inflation, rates of returns and cash flow needs (income) is only part of the equation. All of which are likely to vary from what occurs and each having a significant impact on the sustainability of the plan.


If you have a financial plan, when was the last time it was reviewed? If you don’t have one (over half of all Canadians don’t), you could benefit from the financial peace of mind that comes from creating one while guided by a financial expert. The more complex your scenario, the more you’ll stand to gain through a strategic approach. Our Certified Financial Planners can work with you to ensure that your retirement plan is based on sound assumptions, to meet your goals and dreams.


Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of CWB Wealth Management (CWB WM) or its affiliates. CWB WM does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant or other advisor before making any financial decision. Quoted yields should not be construed as an amount an investor would receive from the Fund and are subject to change. Investors should consult their financial advisor before making a decision as to whether mutual funds are a suitable investment for them. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. CWB WM uses third parties to provide certain data used to produce this report. We believe the data to be accurate, however, cannot guarantee its accuracy. Visit cwbwealth.com/disclosures for our full disclaimer.