investment review · strong return profile, conservatively financed, attractive valuation (1) •...

Portfolio Management & Financial Counsel

Investment Review

June, 2018


1

OUTLINE

1. Inside Nexus

2. Current Environment

3. Portfolio Overview

4. Investment Performance


2

We continue to build our capability to support our clients and our vision

INSIDE NEXUS

Our Vision Our Clients

Our PeopleOur Firm

◆ To be one of Canada’s most respected

investment counselling firms focused on private clients and foundations

◆ Nexus has surpassed $1.8 billion in assets under management

◆ We have approximately 550 clients with a range of portfolios up to $100 million in size

◆ 98% client retention rate (1)

◆ Improved custody fee schedule with RBC IS for clients who hold a

“segregated” portfolio

◆ Our team is growing!

• Alana Awad, Vice President, Investment Analyst

(1) Calculated as the average annual retention rate from December 31, 2007 to December 31, 2017.


5

15

25

35

45

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

VIX

20-year Average

3

CURRENT ENVIRONMENT

◆ Geopolitics • North Korea, Middle East, Europe

◆ Trade disruption • NAFTA, China

◆ Rising interest rates

◆ High debt levels• Consumers

• Government

Investors remain preoccupied with a long list of concerns… …and market volatility has recently increased

VIX (The Fear Index) (1)

Source: Bloomberg. (1) The Chicago Board Options Exchange Volatility Index is often used as a market estimate of future volatility of the S&P 500, and is commonly referred to as the fear index.(2) The twenty year average is 20.32.

• A higher VIX does not necessarily imply the end of the bull market

(2)


4

CURRENT ENVIRONMENT

Despite many “Made in Canada” specific worries…

Canada

◆ Household indebtedness

◆ Relative competitiveness • Tax rates

• Wages and energy costs

◆ Dysfunctional politics

◆ Slowdown in job growth• 41,000 jobs lost in 2018 (YTD)

◆ NAFTA


-4

-3

-2

-1

0

1

2

3

4

74%

76%

78%

80%

82%

84%

86%

88%

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Canadian Capacity Utilization (LHS)

Business Outlook Survey (RHS)

5

CURRENT ENVIRONMENT

…the economy is proving resilient

Source: Bloomberg. (1) YOY growth of average hourly earnings of permanent workers for April was 3.3%. (2) The Business Outlook Survey is a diffusion index calculated quarterly from consultations between Bank of Canada staff and businesses across Canada. Employment, pricing, revenue growth and

competitive conditions are some of the factors considered.(3) In May, the CFIB Business Barometer Index rose to 62.5 from 56.6 in April.

Canada

Business Outlook Survey (2) and Capacity Utilization

4%

6%

8%

10%

12%

14%

Feb-88 Feb-93 Feb-98 Feb-03 Feb-08 Feb-13 Feb-18

Canadian Unemployment Rate

5.8%

• Wage growth is increasing (1) • CFIB business barometer has rebounded (3)


96

98

100

102

104

106

108

110

Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-181500

2500

3500

4500

5500

6500

7500

2.5%

3.0%

3.5%

4.0%

Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

Job Openings (RHS)Job Hires (LHS)Job Separations (LHS)

6

CURRENT ENVIRONMENT

The U.S. economy continues to power ahead

Index of Leading Economic Indicators (LEI) (1)Job Opening and Labour Turnover Survey (JOLTS)

Source: Bloomberg.(1) The LEI Index is comprised of ten components, such as the length of the work week, consumer expectations, new orders for capital goods, and the S&P 500 Index.

United States

• Near record number of unfilled jobs

• Hirings and voluntary separations accelerating


46

50

54

58

62

May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

Markit Eurozone Manufacturing PMI

Nikkei Japan Manufacturing PMI

7

CURRENT ENVIRONMENT

There are signs that growth outside North America is slowing

Source: Bloomberg.

Japan and Euro Area Purchasing Managers’ Index

Rest of World

◆ Japanese growth has stagnated in 2018

◆ EM economies have specific problems

◆ Political risk (Italy) brings risk of financial contagion in Europe


8

CURRENT ENVIRONMENT

Inflation remains under control, but it’s heating up

Source: JPMorgan Asset Management.

Year-Over-Year Headline Inflation

Global


-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

U.S. FederalReserve

Bank ofCanada

Bank ofEngland

ECB Bank ofJapan

January 1, 2017 June 1, 2018

9

CURRENT ENVIRONMENT

Central bank policies are in “flux”

Central Bank Policy Rates

◆ Globally, monetary conditions remain easy• Emergency conditions no longer warranted

◆ Fed, ECB and BoJ Quantitative Easing policies have kept longer yields low

• Yield curve does not anticipate pick-up in inflation

◆ Interest rate sensitivity of economy unknown • Small rate increase may generate large effects

Source: Bloomberg.

Global


10

CURRENT ENVIRONMENT

◆ Despite a long economic expansion, the economic fundamentals remain healthy• U.S. tax cuts and fiscal stimulus should fuel more growth

◆ Valuations have returned to more normal levels• Strong growth in corporate earnings

◆ Easy money + strong economic growth + low inflation not sustainable

Continued volatility and modest investment returns most likely


11

PORTFOLIO OVERVIEW

◆ Allocation to equities and fixed income close to guidelines

◆ Fixed income portfolios are focussed on shorter maturities and higher quality

◆ Equity portfolios have been adjusted to take advantage of new opportunities

We remain focussed on the long term despite current uncertainty


12

PORTFOLIO OVERVIEW

Overall equity allocations are close to long-term guidelines

As at May 31, 2018

Nexus Equity Fund Nexus Income FundNexus Balanced Fund

Portfolio Positioning

9% 5% 9% 5% 5%

26% 30%

75%80%

41% 50%

28%

40%

20% 20%

39%

45% 29%

25%

11% 8%

Actual Guideline Actual Guideline Actual Guideline

Cash

InternationalEquities

U.S.Equities

CanadianEquities

Bonds

InternationalEquities

U.S.Equities

CanadianEquities

CashCash

Bonds

Income-Oriented Equities


3% 12%

20%

16%

25%

32%

52%

39%

Nexus Universe

Cash

AAA

AA

A

BBB$0m

$20m

$40m

$60m

$80m

2Year

5Year

10Year

20Year

30Year

Fixed Income Holdings

1.0%

1.5%

2.0%

2.5% GOC Yield Curve

13

PORTFOLIO OVERVIEW

Short duration and high quality remain our focus

Fixed Income

Source: Bloomberg.

Nexus Income Fund Credit Exposure vs. the Universe

• We have a high-quality portfolio

Yield Curve and Income Fund Positions

• Our duration is 4.2 years vs. Universe at 7.3 years

As at May 31, 2018


Non-Dividend-

Paying Companies

Dividend-Paying

Companies

REITs

100%

14

PORTFOLIO OVERVIEW

Our North American equities combine defensiveness and growth

Nexus North American Equity Portfolio

Source: Bloomberg.(1) The “forward” year is the current fiscal year estimate for each company; excludes data points that are not meaningful.

As at May 31, 2018

• 3 stocks

• Average EPS growth of 10.6% per year over 5 years

• 18.7x average forward P/E multiple (1)

• 31 stocks

• 2.8% average dividend yield

• Average dividend growth of 8.1% per year over 5 years

• 14.3x average forward P/E multiple (1)

• 2 Real Estate Investment Trusts

• Average distribution yield of 5.2%

• Average Price/NAV of 93%

Equities


15

PORTFOLIO OVERVIEW

Equity Portfolio Changes

Six Months to May 31, 2018

Foreign EquitiesCanadian Equities

Buy Sell Buy Sell

Magna International — General Motors —

Add Trim Add Trim

Cenovus Energy — — U.S. tech stock trims (1)

Equity portfolios have been adjusted to take advantage of new opportunities

(1) Trims of selected “overweight” stocks.


Body & Chassis25%

Powertrain17%

Exterior14%

Seating13%

Tooling & Other9%

Vehicle Assembly8%

Vision & Elec.7%

Closure7%

16

PORTFOLIO OVERVIEW

Magna is a leading auto parts supplier with a global footprint and strong customer relationships

Magna International

Magna Business Mix – 2017 Revenue

◆ #3 supplier of auto parts in the world• Total sales of US$39 billion in 2017

• 168,000 employees

◆ Diversified geographic footprint• 335 manufacturing operations in 28 countries

• 47% of revenue generated outside North America

◆ Supplies almost every auto manufacturer

◆ Strong return profile, conservatively financed, attractive valuation (1)

• 20% return on equity

• 2.2% dividend yield (20% payout ratio)

• 23% total debt/capital

• P/E multiple of 8.2x (on estimated 2019 earnings)

Source: Magna International company documents.(1) Metrics calculated at time of acquisition.


17

PORTFOLIO OVERVIEW

Magna is well-positioned for “Auto 2.0”

Magna International

◆ Possible transition to autonomous, ride-sharing and electric cars

◆ Transition will be slow• Barriers to change exist

• In the interim, Magna will continue to earn strong returns

◆ Magna has the opportunity to transition• Innovate alongside key customers

• Strategic partnerships (BMW/Intel/Mobileye, Lyft)• Shared

• Autonomous

• Electric/Hybrid


MSCI EAFE (1) MSCI EM (2) S&P 500

Forward

Price / Earnings14.0x 11.8x 16.3x

Price / Book 1.7x 1.7x 3.2x

Dividend Yield 3.1% 2.3% 1.9%

18

PORTFOLIO OVERVIEW

The case for international equities remains

International Equities

◆ Attractive valuations

◆ Portfolio diversification benefit

◆ Solid prospects for long-term earnings growth

As at May 25, 2018

(1) MSCI EAFE is the principal equity index for Europe, Austrailasia and the Far East region.(2) MSCI EM is the principal equity index for emerging markets.


-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1985 1990 1995 2000 2005 2010 2015

Calendar Year Returns

Intra-Year Declines

19

PORTFOLIO OVERVIEW

Equity market volatility is the norm

Source: JPMorgan Asset Management; Year-to-date is up to May 31, 2018.

◆ Despite average intra-year declines of 15%, annual returns were positive in 24 of 33 years

Importance of a Long-Term Focus

S&P/TSX Composite Intra-Year Declines vs. Calendar Year Returns

YTD


-39%

-3%-1%

7%

47%

28%

19% 17%

-8% -2%1% 1%

43%

23%

16%12%

-15%

1% 2%

5%

33%

21%

16%14%

1 Year 5 YearRolling

20 YearRolling

10 YearRolling

20

PORTFOLIO OVERVIEW

Time and diversification reduce the volatility of returns

Source: JPMorgan Asset Management.(1) Returns shown are U.S. market returns in US$ and are based on calendar year returns from 1950 to 2017.

Importance of a Long-Term Focus

Range of Stock, Bond and Blended Total Returns (1)

Annual avg. 20-yr growth

total re turn of $100,000

Stocks 11.2% $840,219

Bonds 5.9% $316,600

9.0% $556,84850/50

Portfol io


21

INVESTMENT PERFORMANCE

Portfolio returns have moderated in 2018

◆ 1-Year equity returns decent, but slightly behind benchmark• Canadian, U.S. and International stocks all made similar contributions

• Canadian dollar strength reduced U.S. equity returns by 4.7 percentage points

◆ Fixed income returns were negative in the last 12 months• Paradoxically, our conservative portfolio underperformed

• Nexus bonds -1.8% vs. -1.0% for the Universe Bond Index

◆ Over the long term, Nexus portfolios have performed well• Up- and down-market capture ratios even better after Q1


7.3%8.4%

4.1%5.3%

-1.0% -1.0%

NexusBalanced

Fund (1)

NexusEquityFund (1)

NexusIncomeFund (1)

MarketBenchmark (2)

MarketBenchmark (3)

MarketBenchmark (4)

22


(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results.(2) Equity Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 50% TSX, and 45% S&P 500 (in C$); rebalanced monthly.(3) Balanced Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 30% FTSE TMX Canada Universe Bond Index, 40% TSX, and 25% S&P 500 (in C$); rebalanced monthly.(4) Income Fund market benchmark is the FTSE TMX Canada Universe Bond Index. Note that in addition to bonds, up to 20% of the Income Fund portfolio may be invested in equity securities.

12 Months ended May 31, 2018

One-year returns faced a number of headwinds

1-Year Returns on Nexus Funds


12.7% 12.3%

9.8%8.7%

4.3%

2.9%

NexusBalanced

Fund (1)

NexusEquityFund (1)

NexusIncomeFund (1)

MarketBenchmark (2)

MarketBenchmark (3)

MarketBenchmark (4)

23



Five Years ended May 31, 2018

5-Year Annualized Returns on Nexus Funds

Fund and benchmark returns are above long-term averages


9.0%

7.6% 7.8%

6.2%5.7%

4.4%

NexusBalanced

Fund (1)

NexusEquityFund (1)

NexusIncomeFund (1)

MarketBenchmark (2)

MarketBenchmark (3)

MarketBenchmark (4)

24



Ten Years ended May 31, 2018

10-Year Annualized Returns on Nexus Funds

Ten-year returns attractive on an absolute and relative basis


7.4%

5.0%

16.8%

13.6%

Fund1-Year (1)

MarketBenchmark (2)

MarketBenchmark (2)

Fund2-Year (1)

25


(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results.(2) International Equity Fund market benchmark is 75% MSCI EAFE and 25% MSCI Emerging Markets indices (both in C$); rebalanced monthly.

Periods ended May 31, 2018

The International Equity Fund return exceeded its benchmark

Returns on Nexus International Equity Fund

◆ Benefitted from a recovery in Emerging Markets and JPMorgan outperformance

◆ We still like International


Appendices


4%

5%

6%

7%

8%

9%

3% 5% 7% 9% 11% 13%

Re

turn

Risk

North American Equity Fund

North American Equity Fund Benchmark

S&P/TSX Composite Index

S&P 500 Index (C$)

102%(50 quarters)

69%(23 quarters)

UpQuarters

DownQuarters

Benchmark

Benchmark

27

RISK MANAGEMENT

Equity Fund

Equity Fund Up- & Down-Market Capture Ratios (1,2,3) Risk / Return Profile Since January 1, 2000 (2,3,4)

(1) Each quarter since January 1, 2000 is defined as an “up” or “down” quarter based on whether the benchmark return for the quarter was positive or negative. For up (down) quarters, the capture ratio is the ratio of compound average rates of return for the Fund and its benchmark for such quarters.

(2) Nexus returns are presented prior to the deduction of investment management fees. Past performance is not indicative of future results.(3) Equity Fund benchmark is 5% FTSE TMX 91 Day TBill Index, 50% TSX, and 45% S&P 500 (in C$); rebalanced monthly.(4) Risk is calculated as the annualized standard deviation of monthly returns since January 1, 2000.

Period Ending March 31, 2018

Our approach has worked over the long term, with good downside protection


4%

5%

6%

7%

8%

9%

3% 5% 7% 9% 11% 13%

Re

turn

Risk

North American Balanced Fund

North American Balanced Fund Benchmark

S&P/TSX Composite Index

S&P 500 Index (C$)

FTSE TMX Universe Bond Index

56%(22 quarters)

UpQuarters

DownQuarters

Benchmark

Benchmark

101%(51 quarters)

28

RISK MANAGEMENT

Balanced Fund

Balanced Fund Up- & Down-Market Capture Ratios (1,2,3) Risk / Return Profile Since January 1, 2000 (2,3,4)

(1) Each quarter since January 1, 2000 is defined as an “up” or “down” quarter based on whether the benchmark return for the quarter was positive or negative. For up (down) quarters, the capture ratio is the ratio of compound average rates of return for the Fund and its benchmark for such quarters.

(2) Nexus returns are presented prior to the deduction of investment management fees. Past performance is not indicative of future results.(3) Balanced Fund benchmark is 5% FTSE TMX 91 Day TBill Index, 30% FTSE TMX Universe Bond Index, 40% TSX, and 25% S&P 500 (in C$); rebalanced monthly.(4) Risk is calculated as the annualized standard deviation of monthly returns since January 1, 2000.




4%

5%

6%

7%

8%

9%

3% 5% 7% 9% 11% 13%

Re

turn

Risk

North American Income Fund

North American Income Fund Benchmark

103%(47 quarters)

27%(15 quarters)

UpQuarters

DownQuarters

Benchmark

Benchmark

29

RISK MANAGEMENT

Income Fund


Risk / Return Profile Since October 1, 2002 (2,3,4)Income Fund Up- & Down-Market Capture Ratios (1,2,3)

(1) Each quarter since October 1, 2002 is defined as an “up” or “down” quarter based on whether the benchmark return for the quarter was positive or negative. For up (down) quarters, the capture ratio is the ratio of compound average rates of return for the Fund and its benchmark for such quarters.

(2) Nexus returns are presented prior to the deduction of investment management fees. Past performance is not indicative of future results.(3) Income Fund benchmark is the FTSE TMX Universe Bond Index. Note that in addition to bonds, up to 20% of the Income Fund portfolio may be invested in equity securities.(4) Risk is calculated as the annualized standard deviation of monthly returns since October 1, 2002.


investment review · strong return profile, conservatively financed, attractive valuation (1) •...

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