Episode 97: Looking to power your income portfolio? —Market Insights Monthly special edition

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Kevin Headland

Commentaries for general information purposes only. Clients should seek professional advice for their particular situation.

 

Macan Nia

PM once told me many, many years ago, it doesn't – it matters how much money you make, of course, but what matters more is how much money you actually keep yourself. So when it comes to tax - a few different things, two very two different things

 

Macan Nia

Good day. Thank you for joining us on our July Market Insights Monthly. My name is Macan Nia. I am co-chief investment strategist at Manulife Investment Management. Now, before I bring Rob, into the discussion, I wanted to welcome everyone for joining us on today's call. But before we get into the details of the solution we're talking about today, I thought it would be important to set the proper macro backdrop that we envision us entering in the second half of this year through our discussions with advisors, we've garnered through a lot of questions that advisors are asking us, and they're the typical ones questions regarding whether we're going to get a soft landing or hard landing,

 

Macan Nia

Questions relating to inflation. Where is the direction, how fast is that going to move? And ultimately, why advisors and investors are curious about the macro backdrop. And the inflationary backdrop is what central banks are going to do moving forward, because that will have implications not only for fixed income but also for equities. And it will have implications for portfolio construction moving forward.

 

Macan Nia

So our team as we navigate through the second half of this year, when we look at this whole narrative of soft landing, hard landing, we are actually in the camp that we believe that our path of least resistance continues to be lower or downwards for the global economy. As you can see, what I'm highlighting here is a gauge of manufacturing across the world, measured through global purchasing manager indices and their following countries. Very quickly, it's a gauge of manufacturing in each one of those countries. On the left hand side, it's a survey based. So they ask these managers questions related to the health of their business. I'm not going to go into the details, but things pick up things. Are you planning on hiring? What are your input costs doing? Are you receiving new orders?

 

 

Macan Nia

When it comes to inflation. We've already seen inflation come off the peaks that we saw two years ago.

 

Macan Nia

They continue to trend lower in some areas. The inflation battle is easier than other parts of the world. But overall, when we look at the entire world, inflation trends are moving, lower. Whether you look at it from a three month moving average perspective. So you smooth the past three months, whether you look at it from a six month moving average perspective, they are trending lower.

 

Macan Nia

Overall. The backdrop for inflation is lower. It's providing opportunities for central banks to begin their easing cycles. And we have already seen that we are in the month of July. We've seen the bank of Canada already start this process. We've seen the ECB already begin this process. We anticipate the UK central bank to begin easing. And obviously the last but not least, they will begin to start easing the US Federal Reserve.

 

Macan Nia

But we believe that it's going to begin in September. But compare this period to what it was last year. Last year at this time, we are waiting for those cuts to happen today. Those cuts have begun again outside of the Bank of England, outside of the Federal Reserve, which we believe will start cutting in the next couple of months.

 

Macan Nia

30, 35% of central banks across the world are already begun their easing cycle. So, as I mentioned, if I can put it in a nutshell, as we move through the second half of this year, global economies continue to weaken, inflationary pressures will continue to remain lower, and central banks, as a result will continue their easing cycle that they've already begun.

 

Macan Nia

Now, what does that mean for investors? It means things are going to be changing. The environment moving forward is going to change. That's going to mean where you get your source of income, where you've traditionally got them over the past couple of years, that is likely to change. Will GIC rates be as attractive as what they've been over the past couple of years?

 

Macan Nia

Likely not. Bond yields are likely to drift lower. What does that mean from an income perspective? We may have to rely and likely rely on alternative sources of income to help meet our clients. Our clients need for income. And then last but not least, we have the income aspect of it, but also diversification. We need to find alternative solutions that diversify from the traditional sources of income, whether it's here at home, here in Canada, where we typically get our income from an equity perspective, and also in the US.

 

Macan Nia

So I think this is a great time to introduce Robert Wernic. He's the director of ETFs and Alternative Solutions for Eastern Canada. Rob. Rob is an immense, immense resource for us here at Manulife and I'm very much looking forward to this discussion with Rob. So as investors with rates coming lower, with still that need for income from our clients, I think Rob has a couple of great solutions that we've launched here.

 

Macan Nia

At Manulife Investment Management that can help solve those issues for investors. Thanks for joining us, Rob.

 

Robert Wernic

Thank you so much for having me on.

 

Macan Nia

So, Rob, what despite all our success in the ETF world, sometimes I come across advisors that are surprised to hear that we offer a full suite of ETF solutions. So I thought, you know, it'd be a good introduction in terms of the whole suite that we offer here at Manulife.

 

Robert Wernic

Absolutely. And I can't help but feel personally attacked just a little bit every time an advisor says that. But we actually launched our first ETFs back in 2017 through a partnership with Dimensional Fund Advisors, or DFA for short. So we launched seven multifactor rules based ETFs. They really aim to give advisors broad market exposure to various number of indices.

 

Robert Wernic

Then in 2020, we launched our first suite of actively managed ETFs, our smart ETF lineup. Right. These are actively managed ETFs that are managed in-house by Manulife Portfolio managers. Then to round off our suite of products, we also have an ETF of ETFs. So our Global dividend ETF that basically combines our Canadian dividend US dividend and international dividend ETFs into one actively managed wrapper.

 

Robert Wernic

Okay. And for those advisors that don't do ETFs who don't have an ETF license are on IROC, we do have one balanced ETF portfolio that's offered through a mutual fund trust.

 

Macan Nia

Okay.

 

Robert Wernic

Okay. So all in all we have 19 ETFs and one mutual fund of ETFs right now.

 

Macan Nia

Great. So we have this family of 19 ETFs one mutual structure of it. But earlier this month we added two new children to the family. Correct. Walk us through the two to the two new children.

 

Robert Wernic

So we actually CYLD which is our main life smart enhanced yield ETF. And UYLD which is our Manulife US Enhanced Yield ETF. Those were launched back in the early of June. And basically their goal is to give advisors and their investors stable, recurring cash flow every single month. So right now for this year, our target is $0.15 a month per unit in monthly income.

 

Robert Wernic

Okay. And the great thing about these two ETFs that the vast majority of advisors are already going to be familiar with the vast majority of the story that we bring to the table with CYLD and UYLD. Why? Because the underlying chassis is our all star and Best-Selling ETF seat of CYLD and UYLD.

 

 

Macan Nia

Okay, so a lot of acronyms being thrown around can be confusing. So I'm going to reference that one more time. So there's the Manulife smart Canadian enhanced Yield ETF. It's a mouthful we will be referring to as C yield which is the ticker. The flip side down south we have the main life smart US Enhanced Yield ETF.

 

Macan Nia

And for the sake of discussion we will be calling that U yield. So C yield and U yield which are the tickers for these enhanced yield ETFs. As you mentioned these aren't new to advisors that are familiar with our ETF lineup because they are built off the chassis of CDIV and UDIV, which have been extremely successful for Manulife.

 

Macan Nia

walk us through why they've been successful and ultimately they are in addressing. I they're providing a solution that advisors are facing concerns with or challenges with us.

 

00;08;46;12 - 00;09;09;04

Robert Wernic

Absolutely correct, Mike, on so both of them see this. And you div, basically what do you do is that they're going to be targeting the highest quality dividend growers and dividend payers in their respective geographies. Okay. So CDIV will be doing that in Canada. And UDIV will be doing that in the US. The reason for our success over the last few years in both CDIV and UDIV, is not because we're necessarily selling just a plain old vanilla dividend solution.

 

Robert Wernic

It's really because we're helping advisors with their portfolio construction and helping them diversify. Diversify away from two main risks in the portfolio okay, which is sector concentration. And stock concentration. So let me explain by talking a little bit more about CDIV. So CDIV even though it's a portfolio of Canadian dividend payers and dividend growers, it's a dividend solution that's underweight financials underweight the banks and underweight energy.

 

Robert Wernic

There's nothing quite like it in Canada. It's a lot of time of saying well you're underweight the banks your financials and underweight energy. What are you invested in? All right. So at the end of the day, we're offering a better diversified portfolio for advisors to invest within the Canadian dividend space. And not only that but it's a solution that trades at two multiples cheaper than the TSX and has significantly outperformed the TSX since our inception by roughly 700 base points or 7%.

 

Macan Nia

Wow.

 

Robert Wernic

Same thing goes for you UDIV. At the end of the day, UDIV is a collection of US dividend payers and dividend growers that's very different from the vast majority of other US dividend solutions out there. So with UDIV, we actually have no mag seven (magnificent seven) exposure in the top ten of the portfolio. So a lot of the times advisors thinking they're very well diversified within the US equity allocation.

 

Robert Wernic

They'll buy this S&P 500, they’ll buy Nasdaq and they'll buy a US equity fund that's actively managed. When we look under the hood, even though advisors thought they were properly diversified, a lot of the times they're buying the same names over and over again, right? The apples, the Microsoft, the Amazons, Nvidia, etc., etc. of this world. So UDIV is a great way to help de-risk and diversify and advise us equity exposure by buying differentiated US dividend payers and dividend growers.

 

Macan Nia

Yeah, it's interesting you say that. So primarily through my discussions and your likely your discussions with advisors. They typically invest and we're going to use the US as an example through three vehicles. Right. They do their own security selection generally like you mentioned a lot of those tech are in there because they're familiar with the names. Now two would be an active equities solution mutual fund solution generally overweight to tech.

 

Macan Nia

And then last but not least is a passive ETF or a passive S&P 500. And then today last time I checked, I think roughly 35% of the S&P 500 is the top ten. It's never been this high. So to your whole point, in terms of security concentration in the US typically concentrated in those mag seven UDIV offers that benefit of getting yield, but outside of that concentration which is typically mag seven you refer to on the Canadian side, we don't have a security concentration here in Canada. We have a sector concentration here in Canada, whether it's financials, it's energy. It's only actually getting worse over the past couple of years. And the fact that CDIV and UDIV have provided an alternative source for income for advisors has led to its success.

 

Macan Nia

Okay. So that's CDIV and UDIV. What is the difference between these two new ETF solutions. In terms of  terms of CYLD and UYLD compared to their chassis or their mains, the main engine right.

 

Robert Wernic

So CDIV and UDIV, those are total return solutions. So these are great core solutions. And an overall advisor's portfolio that will help you get long term capital appreciation. Whereas CYLD and UYLD, their goal is to really generate monthly recurring income. So these are income vehicles. So for those advisor and their clients that need income on a monthly basis, you would rather CYLD and UYLD versus CDIV and UDIV.

 

Macan Nia

So it's very simplistically CDIV, UDIV, total return solutions. Exactly. CYLD, UYLD much more of an income perspective. Exactly. From a portfolio construction. They both can serve a purpose within one's portfolio. But it's ultimately what the goal of that client is, whether they're maybe someone that my age group. That is a total return perspective. That's much more important compared to maybe someone like my parents who are looking for more income in their retirement.

 

Macan Nia

Where CYLD and UYLD are likely a better fit for their portfolio construction.

 

Robert Wernic

Exactly. Okay.

 

Macan Nia

So how are we managing the income on a monthly basis?

 

Robert Wernic

Okay. So basically the way we're going to be generating monthly income is really by selling covered calls. Again, by selling cash covered puts on a portion of the portfolio. So 30% of the portfolio will have covered calls and 20% of the portfolio will have cash covered puts. That's how we're able to generate enough monthly premiums in order to get you that $0.15 per unit per month in recurring income.

 

Macan Nia

Without going too much into the details, because there's going to be a wider range of understanding of covered call. Basically derivatives based on individuals, listening in. So most people are very familiar. Most of us are already very familiar with derivatives. Some are not. If you would like more details about whether about the derivatives or any other features of these two, ETFs, reach out to your Manulife wholesaler.

 

Macan Nia

They have all the details regarding this. More than happy to sit down with you. They'll probably be Rob and the other two ETF specialists in to provide that detail.
But okay, so why would an advisor buy and enhance your products such as CYLD or UYLD.

 

Robert Wernic

So the reason they would want to buy something like seal in yield versus let's say buying a generic fixed income product is because the income we're generating is very tax efficient. Okay. So the premium we're collecting for writing calls or for writing puts, it's treated as capital gains. So the bulk of the income that we're distributing on a monthly basis will be treated as such as capital gains versus let's say for example, you're buying a high yield fixed income product.

 

Robert Wernic

The vast majority of your distribution will be interest income, so taxed at a much higher rate than something like capital gains or dividends would be.

 

Macan Nia

I mentioned before, these solutions are trying to address two challenges for advisors. One is income, one is concentration of that income stream. But the third one would be the tax efficiency.

 

Robert Wernic

That's exactly correct. Yeah.

 

Macan Nia

So in this environment where yeah, the tax efficiency of these products compared to traditional sources of income is another benefit of these. So how would these fit in an overall portfolio.

 

Robert Wernic

So in a number of ways. So one would be advisors. Some things like to have an income sleeve within the overall portfolio that generates monthly recurring income. That they could then point to in front of their clients and saying, let's not worry too much about how the market's doing. Let's not worry too much about the volatility. This is where you're collecting your account on every single monthly basis.

 

Robert Wernic

So that would be one way. The second way would be for those advisors that want to have something that that's a little bit more conservative in nature that will help mitigate some of that downward volatility. So the high income stream provides some sort of downside protection. And finally, it's for those advisors that have income models or model portfolios for clients that need recurring monthly income.

 

Robert Wernic

Think of RRIF accounts for example. So in any one of those three scenarios, something like CYLD, or UYLD would be a perfect complement to their core Canadian equity or core US equity allocations.

 

Macan Nia

So I'm going to go off the track because we had these prepared questions. And now I'm just gonna know that this is this part is going to be interesting. So you've had a lot of success. Rob, in eastern Canada with our ETF lineup. What is one of the more surprising things when you are in advisors office that when you have those discussions, it's like that light bulb, that moment where it makes sense.

 

Robert Wernic

Yes, I would really think it comes down to portfolio construction. Yeah. So when I asked a tough question to an advisor, how do you invest in Canada? How do you invest in US equities? A lot of the times advisors will be buying three or 4 or 5 different solutions, and they'll be buying their own stock picks on top of that to complement them.

 

Robert Wernic

But then when I look under the hood, a lot of the time they're buying the same stocks over and over again, right? It goes back to that sector and that stock concentration risk that we spoke about earlier. All right. So in Canada what is it buying. They're buying the banks. All right. We got some buying the TSX. You're buying stocks are buying keen equity solution.

 

Robert Wernic

You're buying the banks. So a lot of the times I think advisors are surprised to see that even though they're investing in three or 4 or 5 different Canadian equity solutions, they're not properly diversified. And the same thing goes in the US. You have no choice but to buy the mag seven today, if you want to keep up with the S&P 500 or the Nasdaq.

 

Robert Wernic

But a lot of the times you're exposing your clients to unnecessary sector and stock specific risk. And that's where I think we've had a lot of success with CDIV and UDIV  because we can help you build a better portfolio, help you de-risk and diversify, and at the end of the day, help improve the overall client investment experience.

 

Macan Nia

Yeah, I think a lot of that comes to the fact that you've seen the rally of the Mag seven really last year in 2023. So like given times of the year, whether it was in the spring, whether it was in the fall, nearly 100% of the return for the S&P 500 is being driven by seven, eight names. And we were all aware of this.

 

Macan Nia

But I think it's when you look on- and we did this ourselves, Kevin and I, when we were looking at our illustrative portfolio, we were thinking about this at the beginning in March of last year. And we're like, how much US tech weight do we actually own with within our US equity sleeve? And by no means are we sitting here saying that Canadian financials are a bad investment, or US tech, or a bad investment.

 

Macan Nia

No, that's not it. I don't know. They have a lot of positive things behind them. Look at the US those at those tech names strong earnings, strong sales. There's a reason they're being beat up. But too much of a good thing doesn't mean that it's going to be great for our portfolio, especially when it comes to portfolio construction.

 

 

Macan Nia

It makes you much more vulnerable to moves. And I think that's why one of the reasons why you've been successful, Manulife’s  been successful with these ETFs is it provides an alternative. It provides a diversification for income and total return, when it comes to giving CDIV and UDIV. I know I asked this again, but I want to ask it again.

 

Macan Nia

How does it fit in an overall portfolio.

 

Robert Wernic

So at the end of the day, it really comes down to do you need income or not? So a lot of advisors-

 

Macan Nia

Let's say I'm an advisor. Yes. You ask me, do I need income or not? I say, no.

 

Robert Wernic

Perfect. So then let's talk about your portfolio construction. Let's talk about what you're doing in Canada today and in terms of your equity allocation. Let's talk about your US equity allocation. What are you buying in both of those geographies. And if you don't need income, more likely than not you're probably going to be over concentrated in either a sector or a stock that we can help resolve with something like CDIV or UDIV.

 

Macan Nia

And so that's the way to go. So if I don't need income, it's a total return. Mandates of CDIV, UDIV are most likely to fit with your advisors portfolio. But if I have and obviously there's various advisor clients within an advisor's portfolio as well. So but if the client needs income, that's where these enhance the yield ETFs come.

 

Robert Wernic

Exactly.

 

Macan Nia

PM once told me many, many years ago, it doesn't matter how much money you make, of course, but what matters more is how much money you actually keep yourself. So when it comes to a few different things, two very two different things

 

Macan Nia

So not only are we providing that enhanced yield, but also we're doing it in a manner that's more passive fish into your client.

 

Macan Nia

And we all know how important tax questions are.

 

Macan Nia

It's also important to get to know the PM from a more personal perspective, we find. So we always like to do this aspect. We change it around, but this time it's called this or that.
Are you familiar with this or that?

 

Robert Wernic

No I'm not actually.

 

Macan Nia

No okay. So typically we do a lightning round the question is to be scared. Maybe I should be scared. But this one will do this or that in terms of okay, I'm gonna give you two scenarios. Which one would you rather?

 

Robert Wernic

Okay.

 

Macan Nia

So let's go with this. So what's worse, laundry or dishes?

 

Robert Wernic

Dishes. Definitely dishes. Yeah.

 

Macan Nia

I don't know why anyone would say laundry. If you from your home, do you prefer a city skyline or a mountain range?

 

Robert Wernic

Oh. Good question. Same size house and both instances.

 

Macan Nia

I've done literally like ten, 15 of these. And no one has asked for detail like that.

 

Robert Wernic

Same size house, same size house. I'm going to go with, cityscape.

 

Macan Nia

Okay. Vacation has historical tours of nature, like.

 

Robert Wernic

Historical tours.

 

Macan Nia

Toga party or ugly sweater party.

 

Robert Wernic

let's go with toga party.

 

Macan Nia

Why not plan ahead or live in the moment?

 

Robert Wernic

Definitely plan ahead.

 

Macan Nia

Yeah, I think that's a very consistent, answer from all of us, Jack of all trades or specialists?

 

Robert Wernic

Well, that's ironic. Specialist.

 

Macan Nia

Even if you were jack of all trades, I think you do see you as the ETF specialist. You can't say jack of all trades. And then last but not least, frequent small arguments or rare big disagreement.

 

Robert Wernic

how fiery do the disagreements get?

 

Macan Nia

I go with,

 

Robert Wernic

Big, infrequent.

 

 

 

Macan Nia

That's the great answer to who told me what the other PM said. They have many small arguments and also very big disagreements.

 

Robert Wernic

Yeah, like.

 

Macan Nia

They weren't exactly the lucky way. but I think that's a good time to spot or stop. Rob again. you basically flew in from Montreal for this, and I want to thank you for your time. I think we all know how busy you are. Like I mentioned before, if you haven't had the time to discuss Manulife ETFs, line up with any one of our wholesalers.

 

Macan Nia

Please take that opportunity. We have a full suite of ETF offerings. And really, depending on what you're looking for, we're likely to have something that's competitive. and really provides value from a portfolio construction perspective. You can have Rob out on the road or the other ETF specialist, but I really highly recommend that you haven't taken the opportunity to look at us, give us a chance.

 

Macan Nia

We have a full suite. we have category killers. and I think that we are this street best kept secret when it comes to ETFs. So with that Rob, thank you for joining us. And thank you for joining us on this July. Market Insight monthly. We are extremely excited at Manulife for the launch of these two new ETF solutions.

 

Macan Nia

Because we feel that they offer they they answer a problem that advisors are facing today here in Canada. When we look at the challenges we face as investors, one, with yields likely coming down, that means that those income generating solutions that we've relied on over the past couple of years may not be as attractive moving forward. We believe that these ETFs provide the income solution for those challenges.

 

 

 

Macan Nia

But on the flip side, as Rob mentioned, is the challenges of diversification in Canada. We have a sector concentration to a sectors our financials, energy. We believe that we can provide income without that concentration in those two sectors down south. It's not so much a security or excuse me, a sector concentration. It's a security concentration challenge. And we believe that our enhanced your solution in the US provides not only income, but the benefits of diversification outside of traditional technology and obviously very important.

 

Macan Nia

And I hope that came across in the call is solving these two issues, whether it's income and diversification or concentration. But with the backdrop of tax efficiency, it's not how much money you make, it's important, but also how much money you get to keep in your in your pocket. And we believe that these two ETF solutions provide that tax efficiency as well.

 

Macan Nia

So with that, I want to thank everyone for taking the time out of your busy days. We know we're all busy, so we appreciate the half hour that you spent with us.

 

Macan Nia

Thank you.

 

Kevin Headland

This podcast is provided as a general source of information and should not be considered personal legal accounting, tax or investment advice or construed as an endorsement or recommendation of any entity or security discussed. Investors should seek the advice of professionals prior to implementing any changes to their investment. Certain statements in this podcast are forward looking that are predictive in nature depend upon or refer to future events or conditions.

 

Kevin Headland

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