RBC Dominion Securities Inc.

There’s Wealth in Our Approach.™

SPRING 2016

Wealth ManageMent SolutionS Private inveStMent ManageMent retireMent Planning eState & inSurance Planning

greg thoMPSon, ciM Vice-President & Portfolio Manager greg.thompson@rbc.com 204-982-3459

lori hazell Associate lori.hazell@rbc.com 204-982-3932

RBC Dominion Securities 3100 - 201 Portage Avenue Winnipeg, MB R3B 3K6 Toll-free: 1-800-463-9775 Fax: 204-982-2649 www.thompsonwealthmgmt.ca

Thompson LetterTHE

Spring is on its way across the country, although it seems to be detouring around Manitoba for now, and the season always symbolizes change as we move from cold nights to long, hot summer days.

In Canada, we have seen a lot of change over the past year, including a new government, which will affect all Canadians. In this quarter’s newsletter, we will look at what the new Liberal government proposed to do (and not do) with their first budget. Our industry is evolving as well and with that a new set of guidelines are being instituted that I covered off last year but thought I should review once more. Given the market volatility that started the year, I’ll also add some perspective on the events that have shaped our economy and guided our portfolios.

Budget Changes, u.s. gains & Common sense Prevails

2016 Federal Budget summary

Finance Minister Bill Morneau brought down his first budget this year, and much of the changes were aimed at tightening perceived loopholes or inequalities in various aspects of the tax system. Several changes have been proposed to prevent tax evasion and improve tax compliance. The budget also proposes to provide the Canada Revenue Agency (CRA) with significant financial support to improve its ability to collect outstanding tax debts. This does not look like much of a change to us but more of the same carried on from previous administrations.

2 RBC DOMINION SECURITIES | THE THOMPSON LETTER

Providing greater Clarity on Client relationshiP model ii (Crm2) and What it means to you

Last spring I wrote about the upcoming reporting changes to our industry and with the change now fast approaching, a reminder seems appropriate. CRM2 is a new set of industry regulations meant to provide investors with more details on their investment costs and performance. It was developed by the Canadian Securities Administratowrs, an organization representing Canada’s investment industry regulators. All investment firms, including RBC Dominion Securities, will be providing these additional details on your existing statements and in two new reports that will be delivered to you.

For our clients, the additional details required on existing statements should be business as usual as RBC Dominion Securities has already been delivering most of this information on our statements. But for some investors in Canada, the new details on statements will provide more information than they are used to receiving.

The more significant changes will occur in early 2017, when two new reports will be delivered to clients:

1. One report will disclose the costs paid by the client to the firm and other compensation received by the firm in relation to services provided to the client from each account annually.

2. A second report – an annual performance report – will show an account’s returns over certain time periods. Notably, this report will show “money-weighted” rates of return. This is a different way of calculating investment performance than the “time-weighted” method that is currently used by RBC Dominion Securities and across the industry. Some think of money-weighted as a “personal” rate of return because it factors in the impact of the amount and timing of money you deposit into or take out of your account, whereas time-weighted does not.

The effect of these two new reports will be to provide investors with a better understanding of what they are receiving for the money they are paying their advisor’s firm for the products and services they receive. Our clients are used to knowing that their fees cover their investment services but also give them access to specialists to help them with financial plan modelling, Will, estate and insurance planning at no additional cost. Many firms charge the same or more for the investment services but without access to the other important services to prepare a proper family wealth plan.

If you have questions about the new reports or CRM2 in general, please do not hesitate to call us at any time.

A change of note that clients may find of interest was the move to restore the age of eligibility for Old Age Security back to 65. The previous government had not planned on making this move to 2023 so it is a little moot for people at present, but it is important to note when we are modelling a client’s long-term financial plan.

In the investment world, two interesting changes were the elimination of “mutual fund corporations,” which allowed investors to move from one fund to another fund in the same family without realizing any disposition for tax purposes (no deemed capital gain or loss) as of September, 2016. This will ensure that investors pay tax on any capital gains earned while holding the fund. The previous arrangement allowed capital gains to be deferred until the funds were sold out of the “corporate family.” The other notable change is that gains on

linked notes sold prior to maturity will now be taxed as interest income as opposed to present treatment as a capital gain.

What may be more newsworthy is what the budget did not do. The government left the taxation of capital gains and dividend as is and also did not touch professional corporations. There was widespread concern that the latter may be eliminated and taxation of capital gains and dividends was set to rise in this budget. Thankfully that was not the case.

As always, each person’s tax situation is unique so please be sure to consult your accounting professionals to see how this year’s budget may have affected you. If you would like to read more about the 2016 Federal Budget, please email myself or Lori and we can provide you with RBC Wealth Management Services’ overview.

2016 Federal Budget summary continued from page 1

THE THOMPSON LETTER | RBC DOMINION SECURITIES 3

Markets can test the emotions when viewed through a short-term lens. Starting last August, markets took a rather ugly down turn. The market bottomed quickly in early fall and then retested those lows in January.

The volatility shook investor confidence, and while there are many reasons to be concerned about the global economy,

myself and our strategist team believe that we are still in the early to middle innings of a longer-term secular bull market. The chart on the left is the last two years of the Dow Industrials and the big moves seen since August only appear as a small blip when you look at the longer dated chart below.

niCe (and needed) turn around Above are Bob Dickey’s comments and latest S&P 500 Long Term Market Cycles 1925-2016 chart. I have used versions of this chart in previous newsletters and most client meetings to give perspective to the nature of equity market movements and returns over a lifetime of investing. The S&P 500 is a great representation of global markets as the companies inside the index provide goods and services around the world.

The present pull back appears to be no different than what was experienced coming out of the previous secular bear markets of the 30’s and the 70’s. When markets turned up and the new bull markets began, global economies were still facing many challenges and investor sentiment was very low. After the initial rebound in markets, the economy also began to rebound but pullbacks in both are inevitable. The economy and markets do not rebound in a straight line and investors, unfortunately, have to deal with this.

Investors hit the sell button last fall based on some very real concerns that still need to be monitored. China continues to be an issue as they struggle to convert from an export-oriented economy to one that can be self-sustained by internal

demand. Trusting the data emanating from China is another issue. Europe is still limping along as they deal with high deficits, an entitled culture and anemic economic growth.

Jobs are being added at a feverish pace in the U.S. but consumers continue to build up their savings as opposed to spending in the economy. This leaves the U.S. economy with positive economic growth but only at 2%-3% and so the Federal Reserve continues to provide support via their monetary policy (low rates). I will make no comment on the present presidential election campaign except to say that no one expected the present Republican front runner to be the presumptive nominee (and really what are they thinking). So yes, the stock market and the economy are facing issues.

As stated earlier, history has shown that it is from the rubble of the economic meltdowns that new cycles are born. Well-managed businesses are able to expand and take market share from poorly run competitors. New companies are created that may evolve into brand new industries that create new jobs for a new work force and make everyone more efficient. At the peak of the last market

cycle in 2001 there wasn’t a Facebook or Google but now they are everywhere and business uses their services to become more efficient. It is an evolution that started with the wheel. Now that wheel has TV sets built into the front seats and Wi-Fi everywhere.

Investors may remain cautiously bullish when it comes to the markets – confident that over time solid businesses will pay their dividends and grow their profits. The equity markets, at some point, will reward investors for their patience and discipline.

Today, stock market valuations are elevated but not dangerously so and interest rates should remain accommodative in the near term. This is not the time to take a great leap into aggressive, high risk assets (is it ever?) but a prudent, diversified portfolio should continue to provide investors with adequate return over the investment cycle for the risk and volatility they will experience along the way.

For a more detailed discussion on how we are positioning the portfolio and why, please refer to the attached Client Direction Letter.

rBC teChniCal analyst BoB diCkey on the markets

Professional Wealth Management Since 1901.

This publication is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc. and its affiliates may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC Dominion Securities Inc. and its affiliates also may issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC Dominion Securities Inc. or its affiliates may at any time have a long or short position in any such security or option thereon. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member–Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. Insurance products are offered through RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products, Investment Advisors are acting as Insurance Representatives of RBC Wealth Management Financial Services Inc. ®Registered trademarks of Royal Bank of Canada. Used under licence. © RBC Dominion Securities Inc. 2016. All rights reserved. 16_90783_NVB_004

Professional Wealth Management Since 1901.

Final notes and Quotes

Hedge funds: be careful what you pay for. Hedge funds were supposed to be the great diversifier, trading market risk for some other kind of risk exposure to help overall portfolio performance/risk metrics. While it is certainly a big basket of strategies rolled into one index, it may surprise some that the correlation of the Credit Suisse hedge fund performance to the MSCI World equity index has averaged 0.82 (or almost perfectly in line with the global markets) over the past decade. That is not much diversification. Historically, back in the late 1990s and early 2000s, this correlation was much lower… South Korea is planning on being a cashless society by 2020? Bold moves. We will be watching keenly…Company stock repurchases have been a key source of demand for U.S. equities. S&P 500 companies are set to buy back as much as $165 billion worth of shares this quarter, “approaching a record reached in 2007.” In contrast, mutual

fund and Exchange Traded Funds have seen big outflows. Clients pulled out $40 billion in January alone. Volatility has been rampant in 2016. According to Bloomberg, “the S&P 500 has posted daily swings of 1% or more in 26 of 48 trading sessions since December.” The fact that companies continue to repurchase shares amid the volatility could be interpreted as a sign of confidence… and further on hedge funds, The Financial Times reported that 2015 was the worst year for liquidations in hedge funds since 2009, with 979 funds shutting down, up from 864 in 2014. Assets in hedge funds fell by ~$65bn in the first month of 2016, bringing total assets under management below $3 trillion for the first time since mid-2014. I have said for years, fancy does not work. Stick to the basics and use common sense...

Greg Thompson