IS 2013 THE YEAR?
Market observers expect that equity-related products in 2013 will benefit from signs of recovery in the U.S. and globally. In Canada, we expect to see a year-over-year increase in structured product offerings in 2013. Overall in 2012, global equity exchange-traded products enjoyed approximately US$167-billion of net inflows, of which US$74-billion went to products providing exposure to North American equities. Reuters reported a net increase of US$3.7-billion into equity funds during the first week of January alone. We expect that issuers will develop closed-end funds that are reflective of the themes that have been successful in gathering assets in the exchange-traded funds (ETF) space or that track the performance of indexes that have delivered robust performance in these markets, such as products that focus on large-cap and emerging market equities.
GETTING PAID WHILE YOU WAIT ... TO SEE WHAT HAPPENS NEXT
With many expecting the Bank of Canada to maintain low interest rates well into the new year, a by-product of continuing market uncertainty, we expect that investor appetite for higher yielding retail structured products in asset classes that offer lower positive correlation to the market generally, such as infrastructure, real estate and commodities, will remain strong in 2013. We expect that investors will seek investment products that provide cash flow and a modicum of protection as they watch macroeconomic events unfold. As the impact that continuing debt ceiling limits and tax reform will have on employment and housing prices in the U.S. and the impact of austerity on growth in certain EU states becomes known, the industry will respond by offering investors thematic yield products that are responsive to continuing market challenges. We also anticipate that many of these products will employ inexpensive leverage to amplify returns.
In the closed-end fund market, we expect leading asset managers will continue to grow their most popular fund offerings. With several funds trading at a premium to net asset value, indications are that after-market trading levels for well-performing closed-end funds remain strong. Reopenings in 2012 raised a total of C$873-million and represented nearly 43% of the total number of public offerings in the industry, almost 10% higher than the number of reopenings in 2011. Issuers will continue to grow funds through non-dilutive follow-on offerings as these types of transactions benefit from lower cost and certainty of execution.
THE NEED TO OWN REAL ESTATE
In 2012, Canadian commercial real estate volume returned to pre-recession levels. This was in stark contrast to the U.S., where deal volumes remained at approximately 50% of the market's peak. Despite a softening in the residential sector in 2012, Canadian commercial real estate prices exceeded pre-recession levels in a number of core markets. Published reports have indicated that real estate investment volume increased by 18% over 2011 volumes. REITs accounted for approximately 40% of the aggregate value of this volume and REITs are expected to acquire more than half of the commercial properties to be sold in 2013.
Last year, publicly listed REITs produced an average cash yield of approximately 5% and the S&P/TSX Capped REIT Index generated a total return of approximately 16.5%. We anticipate that the activity in the REIT industry space will remain strong in 2013. With REIT valuations approaching all-time highs, Canadian grocer Loblaws recently announced that it was preparing to launch one of Canada's largest REITs with an expected real estate portfolio worth in excess of C$7-billion. Other representative transactions in the Space include the C$4.4-billion hostile bid for Primaris REIT by a group led by KingSett Capital (which was followed in January 2013 by the announcement of H&R REIT's friendly agreement with Primaris REIT), the C$1.3-billion acquisition of Scotia Plaza by H&R and Dundee REITs, and the C$318-million acquisition of Georgian Mall by RioCan REIT from Cadillac Fairview. We expect that entities providing exposure to publicly listed REITs or other revenue-producing real estate assets will see continued success.
A SECOND MORTGAGE, AND A THIRD ...
Mortgage investment entities also enjoyed a rise in popularity, raising over C$700-million in the closed-end fund market alone in 2012. Last year, both Timbercreek Asset Management and Trez Capital successfully completed several mortgage investment financings and in December 2012, First National Asset Management Inc., an affiliate of First National Financial Corporation, entered this market. With stated yields ranging from 5% to 8%, we expect to see strong market interest in this type of vehicle in 2013.
ALL THAT GLITTERS IS GOLD, SILVER AND PALLADIUM
Commodities have been particularly popular since 2008. For the 12-month period ended November 2012, funds providing exposure to physical commodities represented over 30% of the gross proceeds raised in the retail structured product space. Sprott Asset Management continued to dominate this segment of the market raising approximately C$1.9-billion in new assets, primarily through silver and gold offerings and a C$280-million offering of platinum and palladium that closed in late 2012. In the ETF industry, iShares Silver Bullion ETF was the largest new ETF entrant in 2012, carrying C$128-million in assets under management. We expect commodity-based products to remain popular in 2013 as investors seek to capitalize on the correlation between commodity prices and uncertainty in the capital markets. In particular, we expect gold to maintain its lustre given current inflationary policies. Globally, BlackRock reports that gold exchange-traded products now hold 2,607 tons of gold, which collectively would represent the fourth-largest gold holding in the world, behind only the U.S., Germany and the IMF.
THE ETF SUCCESS STORY: CHANGING THE GAME
The ETF landscape saw both expansion and some modest rationalization in 2012, which we believe is a sign of the continuing maturity of the Canadian ETF sector. In Canada, the birthplace of the ETF, ETF assets grew by approximately 25% in 2012 despite the fact that only 45 new ETFs were launched in the year, down from 2011. The Canadian ETF Association reported a record year for Canadian-listed ETFs, with C$11.7-billion in net creations (outpacing the record set in 2011 of C$6.9-billion) and C$56.4-billion in total assets. To put this in perspective, as at the end of 2012, for every dollar invested in ETFs in Canada there was C$15 invested in mutual funds, down from C$18 in 2011. Capitalizing on this opportunity, First Asset Investment Management entered the ETF market in 2011 and in 2012 solidified its position as one of the very few leading market players to be involved in all three fund sectors: closed-end funds, mutual funds and ETFs.
ACTIVELY MANAGED ETFs SHOULD EXPECT MORE ACTIVITY
Given the huge success of the first actively managed fixed income ETF in the U.S. – the PIMCO Total Return ETF – we expect that a trend of actively managed ETFs will increase in popularity in Canada. Launched in March 2012, the fund was the second-largest global exchange-traded product entrant in 2012, with assets under management of US$3.9-billion, enjoying the 10th-greatest inflow of all U.S. exchange-traded products for the year. We expect investors will continue to warm up to actively managed ETFs, and also active management of passive investment vehicles more broadly, in 2013.
THE ETF FEE WAR: WHAT IS IT GOOD FOR?
In Canada, as in the rest of the world, significant participants in the ETF industry have been competing for market share in part, by reducing their fees. BMO Asset Management, BlackRock Canada and Horizons ETFs Management all announced fee reductions for funds in 2012. South of the border, Vanguard announced in December that it had cut fees on several of its index funds and moved to change index providers in order to reduce expense ratios for investors. Fee reductions will be a significant aspect of the ETF story and we expect that it will cause traditional fund managers to continue to focus on ways to reduce management expense ratios across their fund platforms, particularly in light of the regulatory review of mutual fund fees released in December.
GLOBAL OUTLOOK: CHALLENGES GOING FORWARD
The dominant challenges of 2013 will remain the uncertainty surrounding the U.S. economy's recovery and European sovereign debt concerns. In December 2012, the equity markets reacted cautiously to the apparent gulf between the Republicans and Democrats on scheduled spending cuts and tax increases. As the U.S. recovery remains uncertain, the Bank of Canada has warned of the challenges associated with continued low interest rates, including that they may increase investors' appetite for risk as they pursue further yield.
Globally, assets of exchange-traded investment products reached a record of more than US$1.9-trillion by the end of December 2012, 27% more than at the end of the prior year. Industry reports note that the number of exchange-traded products that have surpassed US$500-million in assets now total 480, a benchmark of success and stability. Expect this trend to continue in 2013 through the offerings of yield-driven products in several of the alternative asset classes that found popularity over the past year.
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