In our annual Toronto event, held at the Four Seasons Toronto, we presented Strategic Decisions for an Uncertain Future: John Nicola, Chairman & CEO addresses several issues facing high net worth families: • How will the Liberals’ tax changes affect financial planning for Canadians? • How will inflated prices impact future returns? • Are there best practices for navigating the current environment? Rob Edel, Chief Investment Officer provides an investment roadmap for 2018: • After a record-breaking period for the S&P 500, what signs might indicate an economic downturn? • What current events could most affect the economy and investment strategy? • What should one make of bitcoin, marijuana stocks, electric vehicles, and other hot topics for the upcoming year?

1. Welcome | 2018 Strategic Outlook
Introduction by David Sung, President

2. WHAT
IS
WEALTH
MANAGEMENT?

6. NWM
Planning Process
circa 1999

10. 2018 Strategic Outlook
Rob Edel, Chief Investment Officer

11. Our
Agenda
Investment Roadmap2017 in Review
Good Neighborhood Turning Bad Points of Interest
Oct 19, 1987 Oct 18, 2017

12. 2017 in Review S&P 500
2017 S&P 500 +21.8%
+1% Declines
Last
+5% Decline
June 24-27 2016
Feb 2, 2018
404 Days
Average since 1929
92 Days
Feb 8, 2018
-10.1%
Feb 2, 2018
404 Days
(Avg since 1929
92 Days)
Feb 8, 2018
-10.1%
2017 S&P 500 +21.8%
1%+ Declines
Last
+5% Drawdown
June 24-27 2016

13. 2017 in Review S&P/TSX
Sept 8, 2017
-0.1%
Sept 8, 2017
Dec 29, 2017
+9.2%
2017
S&P/TSX
+9.1%
• Financials: Concern over housing and consumer debt
• Energy: Western Canadian Select Crude differentials
• Small Technology weight
• NAFTA
• No tax reform

14. 2017 in Review Canadian and U.S. Yield Curves
Yield Curve
Yield Curve
Dec 31, 2017
Dec 30, 2016
Dec 31, 2017
Dec 30, 2016
0.74%
1.69%
2.04%
1.72%
+95 bps
+32 bps
1.19%
1.88%
2.44%
2.41%
+69 bps
Mar 20, 2018

15. Investment Road Map The Art of Forecasting – Tricks of the Trade
Business Insider Jan 4, 2016

16. Investment Road Map

17. Investment Road Map
Maximum sustainable output
Recession
rate cuts
Early recovery,
low inflation,
low policy
rates
Late
recovery,
rate hikes,
rising inflation
Stagflation,
High Inflation
Slowing Growth
Rate
Cuts
Rate
Hikes
TimeFederal reserve: +1.8%

18. Investment Road Map
The Daily Shot – Jan 9, 2018

19. Investment Road Map
Maximum sustainable output
Federal reserve: +1.8%
Rate
Hikes
INFLATION

20. Investment Road Map
Barron’s – Dec 30, 2017 The Daily Shot – Jan 30, 2017
5% 10 Year3.5% 10 Year

21. Investment Road Map

22. Investment Road Map

23. Investment Road Map

24. Morgan Stanley Research – Sunday Start – What’s Next in Global Macro Dec 10, 2017
Investment Road Map
U.S. Tax Reform:
• Corp rate 35% to 21%
• U.S. Corporations hold estimated $2.6 trillion overseas
• Full expensing of business investment for five years

25. http://download.tomtom.com/open/manuals/LIVE/TomTom-EU-LIVE-RG-en-gb.pdf
Maximum Sustainable GDP
Time
Investment Road Map
McKinsey & Co.
Productivity +2.0% vs. +0.5%
+1.8%

26. Bad Neighborhood Trade Wars
Source: Financial Times, February 2018
Trump strategy:
• Use the threat of tariffs as a negotiating tool
• Real target - China
• Reduce trade deficit by $100 billion, but intellectual property is key
• Made in China 2025 program
• 10 priority sectors - Advanced IT (5G), EV, AI, Robotics, Aviation…..
• China requires U.S. companies to form joint ventures & transfer IP
• US believes WTO have been too soft
• Designed before rise of Chinese state-backed capitalism
• Other countries in the same position

27. Investment Road Map

28. Bad Neighborhood Monetary Policy
Past 7 recessions
Fed cuts rates +500 bps
Fed Funds - 1.50%
Expected Peak – 3.0%
Can’t cut 500 bps

29. Bad Neighborhood Fiscal Policy
JP Morgan Michael Cembalest “Eye on the Market – Feb 21, 2018

30. Bad Neighborhood Debt: Canadian Consumer
WSJ – Feb 19, 2018
https://www.bankofcanada.ca/wp-content/uploads/2017/12/san2017-24.pdf

31. Bad Neighborhood
DEFLATION INFLATION
Secular Stagnation
Low Productivity
High Debt Levels
Stagflation
Inflationary
Expectations
40%X

32. Points of Interest

33. Bloomberg – Feb 3, 2018
Points of Interest Bitcoin: Blockchain
MIT Study: $270 - $317 million raised by ICO’s are
frauds or scams
Charles Kindleberger: “There is nothing so disturbing to
one’s wellbeing and judgement as to see a friend get rich.”
Blockchain
• A secure database, or ledger, spread across multiple computers
• Eliminate paperwork & speed up transactions
• Used to store and transfer ownership of goods & track them
through a supply chain
Bitcoin
• Digital Global Currency – used for everyday transactions?
• Store of value?
• Bitcoin Energy Consumption Index = Algeria

34. Points of Interest Bitcoin: Useless Etherium Token
Contributions in US$’s - $276,342
Enough to buy 230 televisions!

35. Points of Interest Marijuana
1 Year Cannabis Stock Performance
Barron’s – Mar 30, 2018
Canopy CEO Bruce LintonROB Magazine – Nov 12, 2017
Barely existed 3 years ago
Now dozens of companies
~$30 billion market cap

36. Points of Interest Marijuana
Globe & Mail – Feb 8, 2018Globe & Mail – Feb 8, 2018
Barron’s Mar 30, 2018
60 Private and public companies
Health Canada granted 89 licenses
Feb 1 – 244 more in review stage
Oregon/Colorado – wholesale $0.50 - $2.00
Commodity business
Low barriers to entry
No sustainable advantage
Canada
• Deloitte: After legalization
• $4.9-$8.7 billion market
• Low=rum, High=wine
• Price: $10/gram initially
Constellation Brands
• U.S. $50 billion Market
• Global: $200 billion in 15 years
• Wine: $60 billion
• Tobacco: $75 billion

37. Points of Interest Active vs. Passive Investing
Strategas – Technical Strategy & Analysis October, 2017
Strategas
 3,202 active equity mutual funds
• Flat since 2002
• 2009-2017 $1.09 trillion in
outflows
 ETFs
• 2003: 100
• 2009-2017 $1.7 trillion in
inflows
• 44% of equity AUM ETFs or
passive mutual funds
Strategas Technical Analysis Research – May 16, 2017

38. Points of Interest Active vs. Passive Investing
Strategas Technical Analysis Research – May 16, 2017
Low interest rates mean more bad companies are able to survive

39. WSJ – Feb 13, 2018
Long time horizon
$1 Billion in Dry Powder
Manager Selection
Points of Interest Active vs. Passive Investing: Private Equity

40. Summary
• Next recession at least 12 months away
• Conditions more challenging during next recession
• Risk asset still attractive in this environment
• Watch for sign of end of the cycle – lower risk exposure
• Avoid investment fads
• Active management to outperform
• We have reached our destinationBusiness Insider – Feb 7, 2018

41. 2018 Strategic Outlook
John Nicola, Chairman & CEO

42. Where are markets going?

43. Many Happy Returns (1870-2015)

44. Housing
19.4% Bills
0.9%
Bonds
7.7%
Equities
25.7%
Non-Financial
20.7%
Other
Financial
13.2%
Deposits
12.3%
Investable Assets

45. What is the Rest?
Life insurance,
corporate bonds,
mortgages, private
debt
Private equity,
commercial real
estate, farmland

46. Asset Class Returns 1870-2015 (NBER)
1.3%
2.5%
6.7% 7.0%
T-Bills Bonds Real estate Equities
Real Returns

47. What asset allocation would achieve a real
return of 4% after fees over 30 years ?
1.3%
2.5%
6.7% 7.0%
T-Bills Bonds Real
Estate
Equities
Real Returns
T-Bills
15%
Bonds
25%
Equities
30%
Real
Estate
30%
Asset Allocation
Different kind
of 60/40

48. Asset Class Returns 1870-2015 (NBER)
4.6%
6.1%
11.1% 10.8%
3.3%
8.9%
10.7%
22.8%
T-Bills Bonds Real Estate Equities
Nominal Return Volatility
Same Return
Liquidity and
behaviour

49. Great Expectations

50. Expected Results for Bonds After Fees
Expected
Return
4.9%
10 yr. Govt.
2.8%
A+ Corporate
3.8%
Bonds
Before Fees

51. Ain’t No Mountain High Enough

52. Cape Shiller 10-Year PE (peaks)
1929
1936
1966
2000
2008
2018
Higher than 1929

53. -6.7%
-0.5%
-2.0%
-5.0%
-3.5%
-3.7%
1929 1937 1966 2000 2008 Average
5-Year annual return S&P500 After CAPE Peak & Inflation

54. 0.2%
-0.8%
-2.2%
-0.9%
2.3%
-0.3%
4.0%
1929 1937 1966 2000 2008 Average Goal
No real return
for five years
5 Year 60/40 Balanced
After Inflation and Fees After CAPE Peak

55. Our Asset Allocation
CDN/US
CDN
/Foreign(
Private and
Public)
Bonds
Mortgages
Private Debt
Hedge Funds
Precious Metals
Real Estate
20%
Equity
38%Fixed
Income
36%
Alternative
6%

56. -2.1%
-0.1%
-1.1%
4.0%
5.1%
3.1%
4.1% 4.0%
2000 2008 Average Goal
60/40 vs. Core Net of Inflation and Fees
5 Years After CAPE Peak

57. Less Risk and More Return
13% more
over 20 years
and 30% less risk
7.2%/year
6.7%/year

58. -2.1%
2.1%
7.7%
13.3%
Jan 2000 - Jan 2005 Jan 2008 - Jan 2013
S&P 500 Total return Put Write Index plus Interest
10.4%/yr more
Annualized Return

59. 3.17% +74%
14%
Less

60. Harbour Towers Hotel & Suites
Acquired: October 2015
Purchase Price: $23.0 M
Hotel Rooms: 196
Pre-Acquisition
• NOI – $1.5M
• NOI Yield – 6.5%
• Occupancy – 62%
• ADR* – $130
Post-Acquisition (2016)
• NOI – $2.0M
• NOI Yield – 8.7%
• Occupancy – 70%
• ADR* – $148
*Average Daily Rate
Acquisition, Victoria

61. Harbour Towers – Value Creation
Multi-Family Rental Conversion
219 New Rental Units
Projected Cost: ~$56.4 M
Projected Value: ~$67 M
Return on Cost: ~19%
Projected IRR: ~17% BEFORE
AFTER

63. Transportation as a Service (TaaS)
• By 2030, 95% of all Passenger Miles will be
by Automated Electric Vehicles (AEVs)
• This will add about $5600 per family in
discretionary spending (10% of income or
$1 trillion)
• There will be minimal production of
Internal Combustion Engines (ICEs) or
individual ownership of cars.
• IO cars will be 40% of the fleet, but 5% of
passenger miles
• AEVs will have a lifetime mileage capacity
between 500,000 and 1 million miles

64. Transportation as a Service (TaaS)
• TaaS will be 4 to 10 times cheaper than
traditional owner driving
• Pre-TaaS companies (Uber and Lyft) drove
500,000 passengers per day in NYC in 2016
• By 2030 passenger cars in the US will drop
from 237 million to 44 million
• 70% fewer cars manufactured annually
• 50% more passenger miles in total at a cost
of $400 billion vs. $1.5 trillion today

65. Transportation as a Service (TaaS)
• Oil demand would drop to 70 million BPD
from what is predicted by the IEA at 110 million
BPD
• Price of oil could drop to $25 and make 50% or
more of North American Oil uncommercial but
still leave us energy independent
• Keystone and Dakota Access Pipeline would be
stranded
• Energy requirements would drop by 80% and
emissions by 90%
• Huge impact on oil industry, autos/trucks, auto
insurance
• Big geopolitical outcomes (impact on Canada?)

66. 39% Mid East
15% Russia
1% US
5% Canada
Oil Dependency
Cheaper oil
Who needs oil?

67. • When will this occur?
• Winners/Losers?
• Impact on related
products and
services?
• Impact on portfolio
mix?

69. 60% drop in 4 years (average = $35/barrel)
It is now about
technology

70. Renewable Energy

71. 6x

72. 72
Solar Power
More potential close to people

73. This needs this
What will get in the way?

74. If they build them will
they work ?

75. Trust Fund Buddies

76. Tax Reform 2017
What’s Being Plucked?
• Income splitting of dividends from private corporations
• Increase tax on passive corporate income that could reach 71% when paid
out as dividends
• Pipeline planning that converts dividends to capital gains is prevented
How is the Goose Doing Now?
• Income splitting allowed over age 65 with a spouse
• Otherwise no, unless labour or financial contribution
• Passive rules stay the same except reduction in SBD if passive income over
$50,000/year; more expensive to recover RDTOH in some cases
• Integrated tax on passive income can be as high as 56% in Ontario

77. Tax Reform 2018
Before Tax Reform
• Dividend compensation if SBD
• Income split using dividends and trust
• Accumulate passive assets in CCPC
and recover RDTOH when dividends
paid
• SBD not impacted by passive assets
After Tax Reform
• Salary RRSP/IPP better
• Over 65 on with spouse otherwise
labour or capital
• CCPC still better but try and minimize
taxable passive income
• Start losing SBD at $50,000 of passive
income. 100% gone at $150,000. Does
it make much difference?

78. Cdn Equities
25%
Foreign
Equities
15%
Real Estate
35%
Life Insurance
10%
Pref. Shares
5%
Private Equity
5%
Alternatives
5%
Asset Allocation for Taxable Private Corporation

79. Historical Tax Analysis
11.5%
9.7%10.1%
5.0% 4.6% 5.4% 5.9%
9.3%
Annual Returns
53.0%
41.0%
17.0%
0.0%
75.0%
20.0%
5.0%
30.0%
% Taxable
15.2%

80. Bonds
15%
Mortgages
30%
High Yield
Bonds
15%
Global
Bonds
15%
Private Debt
25%
Asset Allocation for Registered Plans and Foundations
Interest Bearing
Tax deferred in
registered accts.

82. Future Tax Analysis 7.0% 7.0% 7.0%
5.0% 4.0%
8.0% 7.0% 7.0%
Annual Returns
53.0%
41.0%
17.0%
0.0%
75.0%
20.0%
5.0%
30.0%
% Taxable
15%

83. 24% less Tax
16% higher
return

84. Saving Corporately $100,000 pre-tax income
$88,000
$73,000
$12,000
$27,000
12% Business Tax 27% Business Tax
Tax
Saving
20% more to
save

85. Assumptions
• Save for 30 years
• 6% after tax return
• Take out income at
retirement as dividends
$7,300,000
$6,100,000
Assets in 30 years
SBD General Rate
20% more
saved

86. $227,000
$213,000
Spendable Income
Wealth Accumulation Corporately
$7,300,000
$6,100,000
Assets in 30 years
SBD
General Rate
6.5%
less
$290,000/yr.
$250,000/yr.
20% more
saved

87. Planning Factors
• Corporate assets
• Age
• Business Income
• Spending needs
Planning needs to be customized and will change over time.

88. Planning Options
Tax Efficient Asset Allocation
IPP vs. RRSP
Over Age 50
Prescribed Rate
Loans
Insurance With or
Without Leverage

89. To Sum it Up
Good Neighborhood Turning Bad Treading Water ?????
Managing Tax ReformDisruptive Technologies

90. THANK YOU

91. QUESTION AND ANSWER