Managing Banking Relations in a Transparent World RBC Capital Markets – Global Investment Solutions Strictly Private and Confidential October 28, 2013 Scott McBurney & Cindy Hansen - RBC Capital Market Patrick J. Hickey & Joseph Sardo - RBC Dominion Securities [email protected]Phone 905 546 5677 www.joe.sardo.com
Strictly Private and Confidential. Managing Banking Relations in a Transparent World RBC Capital Markets – Global Investment Solutions. October 28, 2013 Scott McBurney & Cindy Hansen - RBC Capital Market Patrick J. Hickey & Joseph Sardo - RBC Dominion Securities - PowerPoint PPT Presentation
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Managing Banking Relations in a Transparent World
RBC Capital Markets – Global Investment Solutions
Strictly Private and Confidential
October 28, 2013
Scott McBurney & Cindy Hansen - RBC Capital Market
Patrick J. Hickey & Joseph Sardo - RBC Dominion [email protected] Phone 905 546 5677 www.joe.sardo.com
● SNs are senior unsecured debt obligations of RBC
Rank equally with RBC deposit obligations
No CDIC insurance
● Pay-off at maturity linked to the change in the price of a market asset
● Market assets can include
Equities, commodities, currencies, interest rates
● SNs may or may not pay coupons
● Two main types
Principal protected notes (PPNs)
Principal guaranteed to be repaid at maturity
Non principal protected notes (NPPNs)
Principal not guaranteed to be repaid at maturity
Designed to be attractive alternatives to traditional equity investments
Structured Notes – A Primer
55
What are structured notes?
● SNs are very flexible investment vehicles
Represent a powerful “tool kit” for investors
Can be created to reflect a specific investment view of a client
Virtually all aspects of a SN can be customized
Term
Level of principal protection
Underlying market asset and currency
Upside participation
IA compensation
Structured Notes – A Primer
66
Structured Notes – A Primer
What makes a “good” structured note?
● Purpose
Should have an investment premise or purpose
Should represent a strategy that the client cannot replicate cost effectively on his / her own
● Simple and transparent
Should be easy for the client to understand
It should be easy to calculate, for various outcomes
What the coupon payments (if any) will be
What the payment at maturity will be
The simplest notes are generally “passive” strategies linked to public market assets
● Low cost
The total cost of a SN (selling commissions, issue costs and hedging costs) should be reasonable
Control over these costs is critical to ensure that a SN represents an attractive investment
RBC will be transparent about its profit and will control the total cost embedded in its SNs
77
Principal Protected Notes (PPNs)
● Economically, PPNs consist of
A “zero-coupon” bond
One or more financial “options” (equity, commodity, FX etc.)
● Current low interest rate levels make the embedded zero-coupon bond expensive
PPNs have become more complex to
Cheapen the embedded options
Improve deal pricing and terms
Investors must examine PPN structures carefully to make sure they fully understand them
It is easy to be misled about how a PPN will perform
Structured Notes – A Primer
8
Non Principal Protected Notes (NPPNs)
● The general features of NPPNs
Intentionally, not principal protected
Designed to be attractive alternatives to traditional equity investments such as
Stocks, ETFs, mutual funds, closed-end funds and hedge funds
Have the same downside risk as a traditional equities
Sometimes less risk (“buffered” principal protection)
● There two main types of NPPNs
“Option-based” NPPNs
Allow you to customize the payoff profile of an equity investment
Have some option-like characteristics
Dividends invested in structure – not paid out
“Long Equity” NPPNs
Enable very efficient access to compelling high turnover “long” equity strategies
Have no “optionality”
Structured Notes – A Primer
9
Principal Protected Notes (PPNs)
10
Principal Protected Notes (PPNs)
Investment objective: Clients are conservative, seeking the potential for annual income in excess of GIC's or government bond yields. Principal protection is paramount.
Product Pay-Off on Sample Terms:
Annual coupon of 0.00% - 7.25% based on the performance of a portfolio measured annually from inception where each asset with positive performance is counted as 7.25% and each asset with a flat or negative return is recorded as its actual return.
There is a floor on negative returns per asset of -25%.
Full principal return at maturity.
Can also offer fixed coupons in year 1 or minimum coupons per annum
Risk: Opportunity cost, typically the yield on government bonds over the investment term.
Daily liquidity provided by RBC
This pay-off profile is possible on the following assets: ETF's, shares, and commodities
Commentary: This product is constructed using options. The pricing, or the terms we can provide to investors improves with increasing interest rates. This strategy should appeal to investors who are seeking market participation without risk to principal.
Sample Terms:
5 year term
Linked to portfolio of Canadian equities
CAD / currency hedge possible on foreign denominated assets
Annual coupon of 0.00% - 7.25% based on portfolio performance
Sample Calculation of an Annual Coupon
Enhanced Yield PPNs
11
Investment objective: Clients are conservative and seek diversification through returns linked to commodity markets. Principal protection is paramount.
Product Pay-Off on Sample Terms:
100% of the return in a portfolio of assets, subject to a maximum return for each asset of 50% and therefore a maximum return for the portfolio of 50%.
Return cannot be negative
Full principal return at maturity.
Risk: Opportunity cost, typically the yield on government bonds over the investment term.
Daily liquidity provided by RBC
This pay-off profile is possible on the following assets: equity indices, equity sub-indices, shares, ETF's and commodities
Commentary: This product is constructed using options. The pricing, or the terms we can provide to investors improves with increasing interest rates. This strategy should appeal to investors who are seeking market participation without risk to principal.
Sample Terms:
5 year term
Linked to silver, nickel, corn, sugar, natural gas, crude
USD / currency hedge possible on foreign denominated assets
Return capped at 50% per commodity for a maximum return of 50%
Principal Protected Notes (PPNs)
Individually Capped PPNs
12
Option-based NPPNs
13
Introduction
● The value proposition
Allows you to customize the payoff profile of an equity investment
Not possible with any other investment vehicle
● The payoff profile of traditional equities is very limiting
Most clients understand that they need core equity exposure
However, the payoff profile of traditional equities is represented by a 45 degree line
1:1 participation in positive market performance
1:1 participation in negative market performance
The problem is that the 45 degree line
Is the only payoff profile available for traditional equities
Does not necessarily reflect your investment view
Option-based NPPNs
14
0%
30%
-30%
50%
Market Value of Underlying
Inve
stm
ent
Ret
urn
Initial Price
-50% -40% -30% -20% -10% 10% 20% 30% 40% 50%
Payoff profile of a traditional equity investment
Option-based NPPNs
15
Advantages
● You can modify the 45 degree line
At very low cost
In small amounts ($2 to 3 MM depending on term)
● No other investment vehicle offers this flexibility
● Currently, most payoffs are designed to provide attractive returns in flat markets
The “Booster” structure
The “Double Up” and “Triple-Up” structures
● Can be structured with varying levels of principal protection (“Buffer” structure )
Important not to pay for more principal protection than you need
Option-based NPPNs
16
0%
18%
-18%
Not
e V
alue
at
Mat
urity
Strike
Price -25% -20% -15% -10% -5% 5% 10% 15% 20% 25%
Maturity payoff profile of Triple-Up structure
Market Value of Underlying 1 year term, 18% cap
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Concerned about mediocre returns
- Willing to cap market upside
- Does not want principal protection
Index Return
Note Return
17
0%
30%
-30%
50%
Not
e V
alue
at
Mat
urity
Strike
Price-50% -40% -30% -20% -10% 10% 20% 30% 40% 50%
Maturity payoff profile of Booster structure
Market Value of Underlying
-50%
3 year, 30% booster
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Concerned about mediocre returns
- Not willing to cap market upside
- Does not want principal protection
Index Return
Note Return
18
Maturity payoff of Buffered Triple Up structure
-32% -24% -16% -8%
32%
24%
16%
8%
0%
Market Value of Underlying
Not
e V
alue
at
Mat
urity
-8%
-16%
-24%
-32% Strike Price
8% 16% 24% 32%
3 year, 24.3% cap, 20% buffer
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Concerned about mediocre returns
- Willing to cap market upside
- Wants some principal protection
Index Return
Note Return
19
-80% -60% -40% -20%
80%
58%
40%
0%
Market Value of Underlying
Not
e V
alue
at
Mat
urity
-40%
-80%Strike
Price 20% 40% 60% 80%
5 year, 58% cap, 40% buffer
Maturity payoff of Buffered Protection structure
Option-based NPPNs
Client Rationale
- Has core equity exposure
- Wants significant principal protection
- Wants market upside potential
- Willing to accept cap on upside
Index Return
Note Return
20
Long Equity NPPNs
21
Introduction
● The value proposition
Enables very efficient access to compelling high turnover “long” equity strategies
20 year back-tested performance (FI Investment: 5 year swaps)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
20 year back-tested performance (FI Investment: 3 month BAs)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
U.S. Tactical Equity Allocation Model (5-Year Swap)
U.S. Equity Strategy
S&P 500 Total Return Index
3-5 Year U.S. Government Bond Index
20 year back-tested performance (FI Investment: 5 year swaps)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
S&P/ TSX Composite Tactical Equity Allocation Model
Over the past 20 years, this investment approach has only lost money in one year. In addition, in all but two years it has generated an annual return of more than 5%.
20 year back-tested annual returns (FI Investment: 5 year swaps)
U.S. Tactical Equity Allocation Model (5-Year Swap)
U.S. Tactical Equity Allocation Model (90-Day T-Bills)
S&P 500 Total Return Index
3-5 Year U.S. Government Bond Index
20 year back-tested performance (FI Investment: 3 month T-Bills)
The Tactical Equity Allocation Model sacrifices some of the upside performance during bull markets to achieve a high degree of downside protection during corrections.
Since 1992, this strategy has never suffered a loss greater than 15%.
S&P 500 Total Return Index U.S. Tactical Equity Allocation Model (90-Day T-Bills)
Over the past 20 years, this investment approach has only lost money in one year. In addition, in all but two years it has generated an annual return of more than 5%.
20 year back-tested annual return (FI Investment: 3 month T-Bills)
Long Equity NPPNs
TEAM Security – U.S. Market
49
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
99 00 01 02 03 04 05 06 07 08 09 10 11 12
5-Year Trailing Total Return (Annualized)
RBC U.S. Tactical Equity Allocation Model (5-Year Swap)RBC U.S. Tactical Equity Allocation Model (with 3-Month T-Bills)S&P 500
5-Year Trailing Total Return (Annualized)
Long Equity NPPNs
TEAM Security – U.S. Market
50
U.S. Tactical Equity Allocation Model
U.S. Equity StrategyS&P 500 Total Return
Index3 - 5 Year U.S. Gov
Bond Index3-Month U.S.
T-Bills
Annualized Return 14.3% 15.0% 8.1% 3.1% 3.1%
Beta 0.50 1.05 1.00 0.00 0.00
Annualized Alpha 9.7% 6.7% 0.0% 3.1% 3.1%
Sharpe Ratio 0.87 0.64 0.39 0.00 0.00
R-Squared 0.37 0.63 1.00 0.00 0.00
Best 12 Months 70.0% 70.0% 53.6% 6.3% 6.3%
Worst 12 Months -6.0% -48.5% -43.3% 0.0% 0.0%
Max Drawdown -19.6% -55.6% -50.9% 0.0% 0.0%
Duration Under Water 26 Mths 62 Mths 73 Mths 3 Mths 3 Mths
20 year performance statistics (FI Investment: 3 month T-Bills)
Long Equity NPPNs
TEAM Security – U.S. Market
51
● U.S. TEAM product status
We have a retail registered account version currently available
We are working on a version for tax exempt accounts
We have created a note structure that addresses the U.S. withholding tax issues
Results in no U.S. withholding tax on distributions
The U.S. TEAM product is not be subject to U.S. estate tax
Long Equity NPPNs
TEAM Security – U.S Market
52
Disclaimer
This presentation was prepared exclusively for the benefit of and internal use by the recipient for the purpose of considering the transaction or transactions contemplated herein. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent.
By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy.
The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change.
To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it.
IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.
The level of the S&P/TSX Composite relative to its 200-Day Moving Average is one of the most widely utilized technical metrics in gauging the near-term prospects for equity market returns in Canada.
Investing in the index only when it’s above its 200 DMA over the past 26 years would have yielded an annualized return of 6.6%.
Conversely, investing in the index only when it’s below its 200 DMA would have resulted in a -7.7% compound annual return.
Long Equity NPPNs
TEAM Security
55
Case Study #1: 2008 / 2009
Throughout the 2008 crash, this strategy did a reasonably good job of timing the market.
Long Equity NPPNs
TEAM Security
56
From June 2008 to December 2009, the RBC TEAM Model returned 16.3%.
Case Study #1: 2008 / 2009
Long Equity NPPNs
TEAM Security
57
During the bond market collapse of 1994, the strategy was 100% invested in equity during the most severe part of the decline.
At the end of the first quarter of ‘94, the allocation switched to 50% / 50%.