Fall 2021

Global Trends Affecting Investment Counselling & Multi-Family Offices

One of the most respected truisms is that people and their organizations must adapt, or they will fall behind.

Mark Webster
Director, Institutional & Advisory, Western Canada
Oct. 5, 2021

Identifying the Gaps

One of the most respected truisms is that people and their organizations must adapt, or they will fall behind. 

A recent Credit Suisse report1 remarked that the number of Ultra High Net Worth (UHNW) investors increased by 24% in 2020, the largest rate of increase since 2003. For the first time, wealthy individuals, defined as adults with over US$1 million in assets, comprise over 1% of the global population. The Canadian proportion of global wealthy is 3%, similar to Canada’s share of global gross domestic product.

Not surprisingly, as the market for UHNW business expands, there are more reports on global trends in the competitive industry, illuminating the investment, will & estate, financial and tax planning multi-family and investment counselling firms provide to wealthy individuals.

PWC, the global consulting firm, identified major areas2where UHNW have expressed concerns:

  • Succession issues – how money will be bequeathed and the consequences which may ensue. Lawyers with a Will & Estate practice have reported rising proportion of errors & omissions claims in recent years3;
  • Tax regulations – the spectre that they will change, posing unknown risks to investable assets and requiring investment planning to adapt accordingly; 
  • Alternatives – ranging from Private Debt & Private Equity to Real Estate to Special Purpose Acquisition Companies (SPACs);
  • Impact investing – UHNW families have a long history in philanthropic endeavours but now there is an expressed desire to align their wealth with qualitative objectives, deepening their impact; 
  • Governance – particularly, the decision on where wealth is domiciled and the tax implications. UHNW families often have their assets broadly diversified, increasing the question about how some assets should be managed and where.

From a Canadian context, the themes outlined pose special significance. Canadian investors are renowned for their home country bias, but this has been declining for many years, with much of the money flowing to U.S. equities, in particular, but also internationally. 

Traditional portfolio construction has also changed significantly in this era of low interest rates. It is pointless to refer to yet another article warning that the 60/40 portfolio has expired, but it is common to see equity-heavy portfolios, even when valuations are high. Fixed Income is not dead; it may be less important as a portfolio diversifier, but longer government bonds remain a valuable portfolio hedge, to make a fine distinction. Do multi-family offices have the sophistication and the capacity or scale to manage more specialized exposures for their clients?

A recent UBS Global Family Office4 report discussed how UHNW investors have expressed an interest in new, technologically driven, service platforms. This trend will be particularly strong among UHNW investors who generated their wealth as young, tech-savvy entrepreneurs. According to Forbes5, these investors have a natural inclination to seek out technology mega trends specifically, while generally looking to increase their allocation to both developed market public equities and private equity. Both pose unique challenges for investment counsellors and multi-family offices.

Most Canadian investment counsel firms and multi-family offices have strong Canadian and U.S. equity expertise, but lack the resources to provide the same expertise when it comes to international or private equity, the latter demanding a very different skillset. How does an investment counsellor or multi-family office provide consistent expertise among all asset classes? Hiring specialists is an option, but attracting the kind of experience needed to compete and maintain the breadth of opportunities required in today’s portfolio can be difficult and expensive.


Adapting to Challenges

Firms may not have the resources or the scale to adapt to evolving needs in this competitive landscape, but they should take deliberate steps to respond to their clients’ desires for different solutions. From this perspective, exchange traded funds provide low-cost, scalable exposures that can address many of these investor concerns:

Succession, changing tax regulations & Governance issues can be addressed simply by using Canadian-listed ETFs for U.S. and International exposure. U.S. Estate tax liabilities, in particular, are a significant concern for UHNW investors. To determine if an estate faces U.S. estate tax liabilities, calculate your client’s gross assets, including property, investments, jewelry, equity memberships in golf, tennis or yacht clubs and the death benefit on life insurance policies. Remember that U.S. estate tax is payable on the size of the US asset, not on its gain. 

BMO Exchange Traded Funds provides the largest US-dollar-traded suite in Canada, covering several asset classes. Being Canadian-domiciled, these listings provide access to U.S. assets in US dollars, yet their domicile means they are exempt from U.S. Estate tax liability. These listings cleanse the exposure, adding an important degree of control, which would otherwise not be possible if holding U.S. stocks or bonds directly.


Solutions for U.S Dollar Accounts

  • No U.S. Estate Tax Exposure
  • No T-1135 Foreign Income Verification form required

Equity

BMO S&P 500 Index ETF
ZSP.U
BMO Nasdaq 100 Equity Index ETF
ZNQ.U
BMO MSCI USA High Quality Index ETF
ZUQ.U
BMO Low Volatility US Equity ETF
ZLU.U
BMO US Dividend ETF
ZDY.U
BMO US High Dividend Covered Call ETF
ZWH.U
BMO S&P US Mid Cap Index ETF
ZMID.U
BMO S&P US Small Cap Index ETF
ZSML.U


Fixed Income

BMO Ultra Short-Term US Bond ETF
ZUS.U, ZUS.V
BMO Mid-Term US IG Corporate Bond Index ETF
ZIC.U
BMO Short-Term US Treasury Bond Index ETF
ZTS.U
BMO Short-Term US TIPS Index ETF
ZTIP.U
BMO Mid-Term US Treasury Bond Index ETF
ZTM.U
BMO Long-Term US Treasury Bond Index ETF
ZTL.U
BMO High Yield US Corporate Bond Index ETF
ZJK.U


Alternatives

BMO US Preferred Share Index ETF
ZUP.U
BMO US Put Write ETF
ZPW.U
BMO Premium Yield ETF
ZPAY.U


Diversification in low interest rate environment means multi-family offices and investment counsellors must evaluate how they will incorporate asset classes in their models, often in areas demanding specialized knowledge. Increasing staff and providing them with the research to do their work is one option, as would merging with a complementary firm, but both are costly solutions. ETFs offer immediate solutions to the conundrum:

1. Long government bonds to hedge equity risk – these are macro-driven trades which must be executed quickly and efficiently (spreads can be wide). BMO provides exposures to Long Federal (ZFL), Long Provincial (ZPL), and Long US Treasuries (ZTL.F – Hedged / ZTL – Unhedged) / ZTL.U – US$), making it easy to manage portfolio hedges as conditions change.

BMO Long Corporate Bond Index ETF
ZLC
Duration: 13.3
Distribution Yield: 4.3% | M
Yield to Maturity 3.7%
Mgmt. Fee: 0.30%
Risk Rating: Low to Medium
BMO Long Provincial Bond Index ETF
ZPL
Duration: 16.1
Distribution Yield: 3.4% | M
Yield to Maturity 2.8%
Mgmt. Fee: 0.25%
Risk Rating: Low to Medium
BMO Long-Term US Treasury Bond Index ETF (hedged to CAD)
ZTL.F
Duration: 19.0
Distribution Yield: 2.4% | Q
Yield to Maturity 2.2%
Mgmt. Fee: 0.20%
Risk Rating: Medium
BMO Long-Term US Treasury Bond Index ETF (unhedged)
ZTL
Duration: 19.0
Distribution Yield: 2.6% | Q
Yield to Maturity 2.2%
Mgmt. Fee: 0.20%
Risk Rating: Medium
BMO Long-Term US Treasury Bond Index ETF (USD Units)
ZTL.U
Duration: 19.0
Distribution Yield: 2.5% | Q
Yield to Maturity 2.2%
Mgmt. Fee: 0.20%
Risk Rating: Medium

2. Technology and other mega trends – keeping pace with sophisticated technological developments is exceedingly difficult, requiring highly detailed knowledge. BMO provides ARK-defined, MSCI-designed Innovation ETFs to capture the major mega-trends in the changing economy: Genomics (ZGEN), Tech & Industrial Innovation (ZAUT), Fintech (ZFIN) and Next-Generation Internet (ZINT).
For simplicity, there is also ZINN, which provides exposure to all four themes in a single listing:

Megatrends & Thematic ETFs

BMO MSCI Innovation Index ETF
ZINN
Distribution Yield: N/A | A
Mgmt. Fee: 0.40%
Risk Rating: Medium
BMO MSCI Genomic Innovation Index ETF
ZGEN
Distribution Yield: N/A | A
Mgmt. Fee: 0.40%
Risk Rating: Medium
BMO MSCI Fintech Innovation Index ETF
ZFIN
Distribution Yield: N/A | A
Mgmt. Fee: 0.40%
Risk Rating: Medium
BMO MSCI Tech & Industrial Innovation Index ETF
ZAUT
Distribution Yield: N/A | A
Mgmt. Fee: 0.40%
Risk Rating: Medium
BMO MSCI Next Gen Internet Innovation Index ETF
ZINT
Distribution Yield: N/A | A
Mgmt. Fee: 0.40%
Risk Rating: Medium

3. Alternative investments – private debt, private equity, real estate are used by Canada’s largest and most sophisticated pension plans, but they hold these assets directly, having both the capacity and the knowledge required to complete the required due diligence. In a low interest rate era, alternatives provide several benefits:

  • Low correlation to fixed income
  • Attractive yield
  • They do not mark-to-market, so they provide smoother valuations when reporting.

Asset owners have very long investment horizons, so they reap the liquidity premium associated with these assets. Multi-family offices and investment counsellor investors may not be as patient or understanding as asset owners.

In a previous article, we discussed how ETFs can be used to capture the intended diversification benefits and the liquidity premia associated with several Alternative asset classes (What is the Alternative: Using ETFs to Diversify Portfolios). This may provide some insights on how to integrate alternative themes on a scalable basis, without capacity or liquidity hinderances.

4. Responsible investing – this is important to all investors, crossing generations. Although studies have shown Millennials have the highest conviction in this realm, most Baby Boomers also prefer to be responsible investors. Accessing dependable data required to integrate responsible investing disciplines into a firm’s security selection criteria is expensive, time consuming and fraught with many issues. Even if an investment counsellor or family office can build internal capabilities, it is highly unlikely they will have the resources to steward the capital properly by engaging with management for positive change or voting in proxy events.

Grappling with the responsible investing (RI) spectrum, and establishing a coherent position which can be applied across a clientele, yet still achieve required rates of return, can be exceedingly difficult. There is a simple rule of thumb which lays the foundation for discussing this highly divisive subject. Portfolio Managers are Fiduciaries, and their primary responsibility is to account for all risks to protect capital. ESG is defined as a risk management screen, so it is incumbent on Fiduciaries to take ESG into account when allocating capital6.

In contrast, exclusionary RI approaches inhibit a Fiduciary’s ability to meet required rates of return. If a portfolio manager (PM) is asked to exclude sectors or industries, the PM must amend the Investment Policy Statement to state explicitly that it is acceptable to have Tracking Error, which may compromise future returns. This poses significant administrative and portfolio management burdens on a firm and is not scalable.

It is easy to integrate sound Environmental, Social and Governance (ESG) exposure within a portfolio using rules-based ETFs. BMO has a comprehensive ESG suite, which uses the MSCI ESG Leaders methodology. This is a best-in-class approach, which maximizes the ESG score in the portfolio but does not exclude sectors or industries. It will exclude companies within sectors if they have controversial business practices (risk management), but Tracking Error is minimized because the ESG methodology has the same sector exposure as the parent Index from which it is constructed.

The ESG Leaders methodology has been used by several large pensions and sovereign wealth funds, a testament to its Fiduciary benefits, and has also been used as a policy benchmark. Its transparency, reduction in carbon footprint, and higher Social and Governance scores create a solid foundation to build consensus across stakeholders or, in this case, generations.

Responsible Investing ETFs

Equity

BMO MSCI Canada ESG Leaders Index ETF
ESGA
BMO MSCI USA ESG Leaders Index ETF
ESGY
BMO MSCI EAFE ESG Leaders Index ETF
ESGE
BMO MSCI Global ESG Leaders Index ETF
ESGG


Specialty Income

BMO Global High Dividend Covered Call ETF
ZWG

ESG Themes

BMO Clean Energy Index ETF
ZCLN
BMO Women In Leadership Fund
WOMN


Asset Allocation

BMO Balanced ESG ETF
ZESG
BMO ESG Corporate Bond Index ETF
ESGB


Fixed Income

BMO ESG US Corporate Bond Hedged to CAD Index ETF
ESGF
BMO ESG High Yield US Corporate Bond Index ETF
ESGH

Breadth, Scale & Efficiencies through ETFs

ETFs provide multi-family offices and investment counsellors with the ability to expand their expertise into new areas, incorporating complementary strategies, asset classes, or new technologically-driven investment platforms. Their core businesses can be maintained without disruption, using ETFs to provide scalable exposures to construct more robust portfolios in a low interest rate environment.

Incorporating ETFs to address tax issues would enhance will & estate or tax planning, deepening the level of service provided to clients, without sacrificing investment objectives.

ETFs are low cost, transparent, asset access tools, which can be valuable additions to family offices and investment counsellors, enabling them to remain competitive as investors demand broader exposures or solutions.

1 Credit Suisse Research Institute June 2021 Global Wealth Report.

2 https://www.pwc.ch/en/insights/family-office-global-trends.html.

3 https://www.practicepro.ca/2018/05/2017-claims-report/.

4 UBS: Global Family Office Report 2021.

5 Ten trends that will impact private wealth and family offices in 2021 – Forbes, Francois Botha, Jan 212021.

6 https://www.mccarthy.ca/en/insights/articles/pension-fund-investment-managing-environmental-social-and-governance-esg-factor-integration.


Disclosure:

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

The viewpoints expressed by the authors represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. The statistics in this update are based on information believed to be reliable but not guaranteed.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

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