Economic Substance Regime

By | News | No Comments



If you use a BVI (or comparable) company to hold an investment account then you may have recently received a, possibly confusing, letter from your corporate services provider. The letter likely described a new set of rules that cover a specific set of activities, referred to required levels of employees, premises and activity in the offshore jurisdiction along with a compliance warning and perhaps provided a recommendation.

This new “Economic Substance” regime will create some compliance and tax issues for those with complicated structures, but they need not create as much difficulty as you may initially have feared.


In the late 1990’s, the OECD began initiatives addressing many practices of multi-national companies and wealthy families that were identified as being used to avoid taxes. Many of these practices are legal tax avoidance schemes that take advantage of gaps created because the domestic tax systems of different countries treat certain types of income or transactions inconsistently.

The OECD’s objectives include greater transparency and better alignment of domestic tax regimes, especially with respect to income-producing activity that is geographically mobile (e.g., royalty and licensing payments, inter-affiliate loans, trading units). In 2013, the OECD and G20 countries adopted a 15-point Action Plan.

Action 5, describing the proposed economic substance rules, primarily addresses entities within corporate groups that facilitate the shifting of profits to low-tax jurisdictions, potentially eroding the tax base where the key income generating activities actually occur.

The OECD was not focused on personal holding companies (“PICs”) when devising this new regime.  Most of their initial work for Action 5 was actually focused on intellectual property rights and associated transfer pricing / income shifting.  And while PICs are often associated with tax evasion, the Common Reporting Standard and other AML regulations are seen as adequate to deal with transparency issues for this type of vehicle.

However, your PIC may not look much different, superficially, from the shell companies actually targeted by these rules and as a result may be drawn into these rules.


Broadly, the EU supports the principle that companies pay taxes in the jurisdictions in which their commercial activities generate income; and when taxpayers claim that income is actually generated in low-tax jurisdictions, that they demonstrate that real income generating activities actually occurred to those jurisdictions – thus the “economic substance” moniker.

The EU / OECD has issued guidelines as to the type of activities covered and rules that would be helpful to demonstrate substantial economic activity. At the same time, they threatened to black-list those countries that did not commit to introducing such helpful domestic regulations.

The so-called “offshore jurisdictions” have been surprisingly compliant and all of the well-known places (e.g., BVI, Cayman, the Crown Dependencies) have responded with proposed changes to their domestic rules.

For example, the BVI enacted an economic substance reporting regime effective January 1, 2019, although the draft code was only introduced in April and the final Rules in October, 2019.

Impact on a Typical PIC

There are nine categories of “relevant activities” covered by the rules. If your PIC is caught in these rules, then it would likely be as a holding company – described more specifically as a “pure equity holding entity”.  Assuming your PIC holds equity investments in a passive nature, then there are three general considerations:

First, the new rules might not even apply to your PIC. This relevant activity is defined as holding only equity investments.

Some corporate service providers are suggesting that the least disruptive non-equity asset classes to add to an otherwise all-equity portfolio include bonds or bank accounts. (There is the issue of proportionality – i.e., what size is required to establish a true “investment” in the context of the total portfolio).  The purpose of adding other sources of income is to remove the PIC from the scope of the regime itself.

Second, even if your entity is a pure equity holding entity, then the entity may be tax-resident somewhere else.  This doesn’t remove your PIC from the reporting regime, but you will not be required to demonstrate economic substance.

It would greatly assist if you had actually filed a tax return in that other jurisdiction. If not, your corporate services firm will likely ask you to get a tax certificate. Those might be difficult to obtain without a real economic connection to that jurisdictions.

Finally, your entity, even if caught within the new rules, likely meets a reduced threshold show the economic substance designed for passive pure equity holding entities.

For example, unlike the other eight categories of relevant activities, there is no requirement that your entity be directed or managed from within the BVI.

Many commentators believe (and the final BVI Rules strongly suggest) that passive PICs that

  1. have a local registered agent with suitable local premises and staffing (and that ensures mandatory filings are completed), and
  2. comply with the general statutory requirements for BVI companies,

should meet that threshold.

The primary practical impact for you may be a modestly higher annual corporate services fee.

If you have a PIC incorporated in any of the jurisdictions imposing economic substance reporting requirements, then you probably need to seek specific professional advice, at least for the first reporting cycle.

This note is not intended to be advice in any form (except that you should seek advice).  There are complicating aspects of the new economic substance rules and the rules and definitions are not uniform from one jurisdiction to another.

Click here to download a PDF version of this article.



Vintage Wine Market Update Oct, 2019

By | News | No Comments


Vintage wine auctions in 2019 so far are turning out well for the major auction houses. The first half saw strong results and it was not rare to see 100 percent of lots sold.

US-based Acker Merrall and Condit reported a superlative first half when top Burgundy producers like DRC and Leroy continued to lead. Interestingly, a lesser known producer, Domaine Comte Liger-Belair, made a strong impact and has been slowly building a leading position among the top 10 sellers in auctions.  Liger-Belair’s wines include world-renown grand cru such as La Romanée, Clos de Vougeot and Echezeaux.

For the first half of the year, Sotheby’s fine wine sales increased 23 percent year- on-year to USD 65 million. It was their highest spring total since they began auctioning wine in 1970.   Notably, the three-day auction held in Hong Kong in March established a new record, selling 2,700 lots for USD 34.5 million against an estimate of USD 20-30 million.

Although Christie’s May auction in Hong Kong saw most wines sold below their high estimates, the exceptions were Domaine Leroy, Roumier and DRC in top vintages and appellations. A two-bottle lot of Domaine Leroy Musigny 2000 sold for HKD 375,000, which was 97 percent above the high estimate.

October marks the beginning of the Fall auction season in the major markets of Hong Kong, London and New York. Despite the unsettling situation here in Hong Kong, both Sotheby’s and Acker reported strong results. Online bidding allowed buyers to purchase their favorite wines and Sotheby’s reported a 44 percent increase in phone bidding for their early October auctions.

It is noteworthy that there appears to be different preferences in different geographies. The US and UK auction markets remain very keen on top Bordeaux, whereas in Hong Kong the focus seems to be more on Burgundy and less on Bordeaux. Nevertheless, not every wine performs well in auction. As mentioned earlier, only a select few among the Burgundy and Bordeaux estates will sell at levels exceeding their high estimates. For Bordeaux, Chateaux Lafite Rothschild and Petrus in the best vintages usually do very well.  For Burgundy, Leroy, Roumier, DRC and Rousseau are the leaders, but not in every appellation.  Roumier’s Bonnes-Mares, Leroy’s Musigny and Rousseau’s Chambertin Clos de Beze are the most desired, whereas Romanée Conti and La Tache are top sellers for DRC.

It is important for potential sellers to understand that the auction market is uneven and a majority will sell below or just within market price. As is often the case, larger formats seem to attract more attention and enjoy a premium.

While sales in the auction market appear to be doing well in these turbulent times, the broader vintage wine market is feeling the effects of global trade tensions, confusion around Brexit and recent social discontent in Hong Kong. The Liv-Ex indices listed below clearly illustrate this slowdown.

Returns of various vintage wine indices for the latest 12 months to the end of September 2019:

Liv-ex 100 1                       -1.55%

Liv-ex 50 2                          -3.01%

Liv-ex Burgundy 150 3    +6.31%

It is increasingly apparent that Bordeaux first growths are no longer the major driving force in the fine wine world that they once were.  Lesser classified Bordeaux, as well as the second wines from the 1st growth are becoming more attractive to wine merchants and ultimately to wine drinkers.

Top Burgundy remains the focus of both wine buyers and collectors, but given the strong upward trend in prices one must wonder if the region has reached its peak and if there is a speculative bubble. However, what makes Burgundy different from other leading wine producing regions is the sheer scarcity of the product.  There are 33 Grands Crus in Burgundy (the equivalent of Bordeaux 1st growths) and they represent only 1.5 percent of total Burgundy production. There are only 5,000 bottles of Romanée Conti produced annually. The coveted Musigny from Domaine Leroy comes from a vineyard of 0.27 hectares and in 2009 only 600 bottles were produced.

How was the 2019 vintage?

We have heard reports of lesser quantities across the board due to the extreme hot weather during June/July across Europe which caused uneven flowering during the beginning of the growing season. Burgundy could see its production down by 30-40 percent. In Bordeaux, 2019 will be a smaller vintage compared to 2018.  So far, Italian producers are expecting a drop of at least 15%.

In terms of quality, 2019 looks like a very good year for most European wine regions with the exception of Spain which saw the potential of a great vintage dashed by the diluvial rains of last month.


  1. Industry benchmark comprised of the 100 most sought-after wines from the secondary market
  2. The latest 10 vintages of the 5 Bordeaux First Growths
  3. Latest 10 vintages of 15 Burgundy wines including 6 DRC


Click here for download version


Canadian Real Estate Market Update 2019 Q2

By | News | No Comments


Vancouver’s housing prices have started to level off after 6 to 9 months of decline. Prices declined between 1.9% and 2.5% in Q2 compared to Q1; however, this is lower than the 3% to 4% experienced in Q1 2019 compared to Q4 2019.

As price declines began to slow, it is not surprising to see sales increase across all three markets (single detached, condos, townhomes). Compared to Q1, sales increased by 70% for single detached homes, 47% for condos, and 84% for townhomes. Furthermore, with price declines slowing and sales increasing, the number of listings on the market has risen.  Currently, the Vancouver market appears to be a buyer’s market, as we expect prices will start to rise as buyer interest surges.  Vancouver’s current market provides investors the opportunity to enter the market at a price point which hasn’t been available since beginning 2017.

In Q2 2019, Toronto’s residential market continued its upward trend as prices, sales and listings all increased. Compared to Q1, prices have increased by roughly 5% for both single detached and condos, and 2.4% for townhomes.  Compared to prices from a year ago, single detached home prices have decreased by 8%, condominiums have returned to the same price, and townhomes have decreased by 1%. Despite the increase in prices, sales have drastically increased, especially for single detached and townhomes which increased by 113% and condos by 50%.   As is the normal trend when sales increase, the number of listings increased as well.   Single detached listings increased by 54%, condos by 31% and townhomes by 89%.

Montreal’s hot market continues in Q2 2019 with sales and prices increasing while listings decline, creating a tighter market. Prices increased by roughly 3% across the single detached, condo, and the plex markets and single detached and condominiums YoY prices grew, by 1% and 2% respectively, whilst plex YoY prices decreased by 1%. Sales picked up during Q2 compared to Q1, rising by 28% for single detached, 22% for condos, and 50% for plexes. Unlike Vancouver and Toronto, the uptick in sales and prices in the Montreal market hasn’t led to a drastic increase in listings.  Listings increased by only 7% for single detached, and decreased by 6% for condos and plexes. As a result, Montreal’s residential property high demand – low supply environment has continued to fuel international property investors interest in Montreal’s property market.

Victoria’s residential market is experiencing an increase in price, sales, and listings for the first time since Q3 2018.  Compared to Q1 2019, prices increased by 1.6% for single detached, 2.5% for condos, and 1.1% for townhomes. There has also been positive YoY price growth across the three markets as single detached homes increased by 2%, condominiums by 4%, and townhomes by 2%.  Sales have increased drastically in Q2, increasing by 74% for single detached, 52% for condo, and 57% for townhomes. Following its neighbor Vancouver, Victoria’s increase in prices and sales have led to a drastic uptick in listings, increasing 31% for townhomes and 41% for single detached homes and condos.   Overall, the Victoria market is a balanced market leaning slightly more towards a seller’s market as a result of the minor increase in prices as well as the strong increase in sales.

After a long stretch of strong price growth, the Whistler market has experienced a slowdown since the end of Q3 2018 and this slowdown continues in Q2 2019. Prices decreased 5.5% for single detached homes, while increasing by 1.6% and 1% for condos and townhomes. However, the YoY prices have all decreased; single detached by 4%, condominiums by 12%, and townhomes by 19%.  Sales also decreased with single detached homes dropping by 29%, condos declining by 6%. However, Townhome sales increased by 29%.   Despite the relatively quiet sales activity, apart from townhomes, listings increased by 4% for single detached, 8% for condos, and 2% for townhomes.


Please click here for PDF report


ESG Factors should be applied to the Emerging Markets

By | News | No Comments



We recently posted notes reflecting on the tremendous increase in interest in sustainable or responsible investing.

Many clients would like responsible investing to play a fundamental role in the decisions shaping their investment portfolios. The goal is to feel that you are doing good while seeking financial returns, by supporting positive social and environmental changes.

Investment managers increasingly understand the need to accommodate sustainable investing. This is, in part, because surveys suggest that millennials and women are particularly focused on responsible investing, two demographics that will become increasingly active in selecting investment managers.


Applying ESG factors to investment decisions likely leads to a more complete analysis because it involves analysis that might have been overlooked by traditional approaches.

While there are significant definitional and measurement issues to applying or measuring sustainable or ESG investing, investors appreciate that certain key sustainability issues will certainly impact a company’s ability to generate long-term financial returns.   These include a failure to anticipate changes in environmental standards, poor governance and financial transparency and labour practice that impede retention or promotion of qualified employees.

Not all ESG risks are company-specific. Investment surveys have also identified countries with poor ESG performance that contribute to poor financial outcomes for investors and domestic companies.  This could be the result of inequitable regulatory regimes, political interference or corruption, inadequate preparation for extreme weather or poor-quality financial infrastructures.

For these and other reasons, many commentators suggest that emerging economies may be more vulnerable to ESG-related issues than are developed economies. In addition, emerging market companies themselves often rate poorly on ESG measures.  This may be, in part, a measurement issue resulting from managements often failing to appreciate the importance of providing useful information.

As a result, proper implementation of ESG factors into the investing process may well enhance performance or reduce volatility to a greater extent than would be the case with respect to developed markets.  For instance, Blackrock has found that application of ESG factors in EM resulted in a more significant improvement than they found in DM.

And yet, ESG issues appears to be less embraced by Asia-based investors than has been the case in Europe. A UBS survey suggests that the majority of HNW investors in China are concerned that “sustainable investing” will result in lower investment returns.

Letko, Brosseau & Associates, a Montreal-based investment manager that manages our client portfolios, takes the same bottom-up approach to stock selection to its emerging markets strategies. LBA takes a long-term investment approach and believes that integrating ESG considerations into its investment decision-making as part of their mandate to deliver long-term returns. Oversight of ESG integration resides within their management committee.  Its investment committee is responsible for ensuring that all material ESG considerations are incorporated into the analysis and selection of each emerging market investment.

Those fund managers applying ESG factors to EM, including LBA, have identified a number of useful signals:

  • strong (or lack of), independent board oversight,
  • the competence, experience and diversity of senior management,
  • exposure to inappropriate political interference or involvement,
  • transparency in financial reporting and with respect to related party transactions and interests,
  • a commitment to global environmental and labour standards (or at least local standards), and
  • preparedness for environmental disasters, damages to important infrastructure or social unrest.


Click here to download PDF version of this article

Canadian Real Estate Market Update 2019 Q1

By | News | No Comments

In Q1 2019, we have experienced Vancouver’s continued property price decline, Toronto’s significant sales drop, Montreal and Victoria’s large YoY price increases, and Whistler’s cooling period after an extended period of strong price growth.

In Vancouver, YoY prices have fallen for condominiums (-7%), townhomes (-4%), but most notably single detached homes (-13%).  This is not surprising considering it has been three consecutive quarters where Vancouver’s property prices have decreased.   The drop in Q1 2019 prices coincided with a drop in sales as condominiums and single detached sales declined 11% and townhome sales declined 22%.   West Vancouver was the area which saw the largest decrease in prices this quarter, whilst East Vancouver has experienced the least.

Toronto’s YoY prices saw no change in the condominium market, a slight increase in townhomes, and a significant 12% decrease for single detached homes.  However, all three markets increased since last quarter, with single detached homes increased minutely by 0.4%, while condos and townhomes increased by roughly 1%.   Though prices have increased since Q4 2018, sales activity declined significantly for all markets.   Sales declined 23% for single detached homes, 13% for condos, and 27% for townhomes.  Amidst this downturn, the markets that experienced some growth were Toronto East’s single detached market and Toronto West’s condo market, both increasing by 3.6% since last quarter.

Although there was slight slowdown in price in Montreal from last quarter, YoY prices have increased along with sales.   YoY prices have increased in all markets, 5% in for single detached homes, 10% for condominiums, and 4% for plexes.   QoQ Montreal prices decreased 5.6% for single detached homes while condo prices only increased by 1%.   Nevertheless, the number of buyers in Montreal continues to grow as sales increased 8% for single detached homes and 15% for condos but decreased 14% for plexes since last quarter.

Victoria’s Q1 market statistics are very similar to Montreal’s with YoY increases in all markets while experiencing a slow down compared to last quarter.   YoY prices increased 4% for single detached homes, 7% for condos, and 5% for townhomes.  Compared to Q4 2018, single detached prices decreased 2% and condo and townhouse prices remained the same.

Whistler’s Q1 2019 property market is a tale of two stories; continued price growth in the single detached market and slumping prices for condos and townhomes.   Prices increased for single detached homes QoQ and YoY by 2% and 1%, respectively.   The reverse occurred for condos and townhomes, with both decreasing since last quarter by 1% and 4%, respectively, and YoY by 6% and 10%, respectively.   Whistler’s market has been very active over the past few quarters and as a result it isn’t surprising to see listings for single detached homes, condos, and townhouses increased more than 25% since last quarter, with townhouse listings experiencing a 46% increase.



Implementation Issues re ESG Factors

By | News | No Comments



Many families want responsible investing to play an increased role in the design of their investment portfolios. The goal is a greater alignment between their investments and their personal values, promoting outcomes that are financially rewarding while supporting positive social and environmental change.

Investment managers increasingly understand the need to accommodate sustainable investing, once considered a fetish.

However, obstacles to adoption include confusion around terminology, rationale and implementation.

Investors in the U.S. and Asia have been generally slower to embrace ESG factors or other approaches to responsible investing than have Europeans, because they appear less convinced that it will be impactful and would like clearer evidence of a positive impact on financial performance. But evidence suggests that when a client does decide that ESG investing is important, they do not just nibble, they seek significant ESG allocations.

While not all managers expressly state that they apply ESG factors, good investment analysis necessarily identifies sound corporate behavior and objectives that serve to protect the company and its stakeholders. It would seem unwise to ignore key sustainability issues when assessing a company’s ability to generate long-term financial returns.

 Implementing Within the Investment Processes

JPMorgan estimates $23 trillion of assets are now managed applying ESG factors as a part of the investment criteria, with over $100 billion invested in ESG Funds. According to Barrons, US assets managed under ESG mandates grew 23% (CAGR) between 2014 and 2016 (compared to an average of 5% for the industry as a whole). Approximately half of US financial advisors now have portfolios dedicated to ESG investing.

Applying ESG factors to portfolios, funds and sector indices take a range of approaches including: (i) exclusionary approaches, applying broad principles, or screens or sector bans; (ii) “positive” approaches that include companies with certain performance or improvement scores; and (iii) thematic, or impact, investment approaches.

Measurement Issues

However, ESG classifications can be problematic. It is difficult to manage and report on that which is hard to measure.

ESG data are a means to assist an investor to evaluate a company’s strategy, institutional purpose and management execution and understanding how the company is adapting to transformational change (e.g., changing consumer preferences, evolving policies addressing climate change).

Morningstar (via Sustainalytics) and MSCI have created sustainability ratings to assist in evaluating or scoring mutual funds. Moody’s and S&P now incorporate ESG data into their credit ratings.  But some managers, such as GMO warn against a broad application of third-party scoring systems.  It is also important to identify those factors that are truly material for any particular industry and company.

Implementation Issues

 A consensus is lacking as to what ESG or sustainable investing involves, whether the integration of such in the investment decision is based on seeking improved financial performance or reduced risks (or both), or is simply an attempt to align portfolio construction with personal values.

Like any new trend, responsible investing has its critics.  Some question whether it even is appropriate.  However, more often critics point to difficult implementation and measurement issues.

1.  Definitional Issues

Even though integrating ESG factors within investment decisions has clearly accelerated since 2012, definitional issues appear to be holding back adoption.

The UN’s Sustainable Development Goals created a framework in 2015, but the 17 goals are rather general and difficult to translate into portfolio design.

It is hard to monitor compliance with the Principles of Responsible Investing, even ignoring that many signatories have done little to implement the spirit of the goals.

2.   Not effective in changing corporate behavior

Many critics argue that it would be more effective to engage with managements on broad issues such as climate change, diversity or governance, rather than simply divest.

Some have argued that if too many fund managers exclude certain sectors, then the cost of capital will increase for those sectors and while there might be supply constraints later, it could positively impact the sector’s future returns, perversely.

3.  Limiting choice necessarily results in worst outcomes

The argument is, the larger the asset class you want to exclude, the greater potential underperformance (vis-à-vis a benchmark).

There remains debate on whether ESG has demonstrated itself as a useful style factor.

4,   Is a fad – asset managers owe a duty to focus on the traditional, widely-accepted analytical approaches

Some have questioned whether asset managers owe a fiduciary duty to their clients to take ESG issues into account. In the US, there has been arguments that the manager’s fiduciary duty is focused on financial performance, and that applying ESG factors constitutes activism which may not be part of the manager’s mandate.

For example, when aligning “core” values, are those the values of the manager or of the clients or as prescribed by activist or independent groups. Clients necessarily have a broad range of values.  Communities sensitive to “political correctness” may see this as a liberal intrusion into an otherwise allegedly scientific process.

5.  Primarily a marketing ploy, since quality investment manager s already apply these principles

Others argue that applying ESG factors is redundant because the best companies and best asset managers are already incorporating these factors within strategic and investment decisions. The sustainability of their business model has always been relevant. It is suggested that developing these new frameworks and reporting systems is more likely to confuse and increase costs without a commensurate benefit.

In addition, commentators point out that fund managers often trumpet ESG credentials and commitments and yet have changed their investment approach very little. Companies lay claim to integrate ESG factors into their strategic planning, but it is very resource intensive and time consuming to collect, catalogue and present performance or compliance confirmation.


We think it unlikely that there will ever be a consensus on specific frameworks for responsible investing, its role in asset manager deliberations and how best to implement, but so long as research continues to support a connection between sustainable business models and financial performance, and certain guy demographics increasingly champion the goals, asset managers will be offering a range of approaches to integrate ESG factors and responsible investing. Borrowing from Voltaire – waiting for the perfect approach should not prevent asset managers from improving on current approaches.

Click here to download PDF version of this article

Applying ESG Factors to investment decisions

By | News | No Comments




Many families want responsible investing to play an increased role in the design of their investment portfolios. The goal is a greater alignment between their investments and their personal values, promoting outcomes that are financially rewarding while supporting positive social and environmental change.

Investment managers increasingly appreciate the need to accommodate sustainable investing.  Trends supporting interest in ESG include increasing awareness amongst asset managers that (i) sustainability issues do impact financial performance, and (ii) millennials and women, two demographics that will be managing an increased share of AUM going forward, have demonstrated an affinity to responsible investing (potentially impacting manager selection).

However, obstacles to adoption include confusion around terminology, rationale and implementation.

For example, are ESG (environmental, social and corporate governance), sustainable, socially responsible and impact investing different names for essentially similar evaluation frameworks, or would they require substantially different implementations in the eyes of the cognoscenti? 

 We believe that at a broad level, each of these concepts encourage the integration of the clients’ personal values or society’s perceived concerns or an entity’s mission into consideration, alongside traditional criteria, when making investment decisions.


Applying ESG factors to investment decisions likely leads to a more complete analysis of the investment opportunity because it involves analysis that might have been overlooked by traditional approaches.

DWS and the Univ of Hamburg reviewed (in 2015) the conclusions of over 2000 studies and found that the majority of such studies found a positive relationship between ESG factors and corporate financial performance; while relatively few found a negative relationship.

A long-term study by JP Morgan found that stocks with the poorest ESG scores exhibited greater volatility during choppy markets … supporting the view that sustainable investing may help make investment portfolios more durable.  A recent Bank of America study found companies with better ESG performance exhibited lower earnings volatility and higher ROE over the period reviewed.

While not all managers expressly state that they apply ESG factors, good investment analysis necessarily identifies sound corporate behavior and business strategies that serve to protect the company and its stakeholders. It would seem unwise to ignore key sustainability issues when assessing a company’s ability to generate long-term financial returns.


Developing a Framework

There are over 2,000 signatories to the U.N.’s responsible investments initiative, established in 2006 and called the Principles of Responsible Investment (PRI).  Signatories commit to six principles designed to embed ESG considerations into investment decision-making processes and to hold the companies in which they invest to account for ESG failures.

In 2015, the U.N. set out 17 Sustainable Development Goals (SDG) relating to societal challenges including poverty, inequality, climate change, the environment and justice.  Its intention was to redirect investments to address specific problems that may not attract capital purely on expected financial performance metrics, with the goal to achieve a cleaner, healthier and more equitable world.

However, given the broad nature of the goals as well as the implementation language having been prepared for governments rather than investors, it has not been easy for investors to translate these goals to specific practices.

Implementing Within the Investment Processes

JPMorgan estimates $23 trillion of assets are now managed with at least an indication that ESG factors play a part as investment criteria, with over $100 billion invested in ESG Funds.

Managers applying ESG factors to portfolios, funds and sector indices apply a range of approaches including: (i) an exclusionary approach using screens or sector bans; (ii) a “positive” bias designed to include companies with certain performance or improvement scores; and (iii) thematic, or impact, investing.

 1.  Exclusions based on broad failure.

As a first step, responsible investing will look to avoid companies that fail to meet the most basic standards on issues such as corruption, environmental degradation and human rights.

2.   Systematic exclusions.

The early and still a predominate ESG approach is to exclude sectors seen as not meeting society’s priorities. Initially, these tended to be the so-called “sin” stocks (gambling, alcohol and tobacco).

An exclusionary approach has to deal with how broadly a net is thrown. Do you exclude companies that sell alcohol or tobacco (food retailers, pharmacy chains) or just manufacturers?  Do you exclude weapons manufacturers or also those providing components or that have much larger businesses in other sectors (e.g., Boeing or Airbus)? Do you exclude all fossil fuel producers, or only the products with the highest carbon intensity?

This exclusionary approach is sometimes criticized as: being too limiting, potentially hurting returns, (ii) not doing enough to encourage behavioural changes, (iii) not having a strong economic rationale, and (iv) presents a risk of capture by social activist movements.

3.  Screening-based inclusions.

Arguably, a more effective ESG approach goes beyond exclusions as managers become more focused on what to include, as much as what to exclude. Under a best-in-class or positive approach, companies are included or emphasized that have the strongest ESG credentials.

This approach is useful for managers that want to label a fund as ESG based on quantifiable measures (although there are questions about the effectiveness of third-party scoring models).

4,   Integrating ESG factors.

The recent trend is a more comprehensive approach whereby ESG factors are integrated with traditional analysis to improve the investment decision-making process and highlights risk.

For example, a manager with whom we work closely, states that:

“… our approach to investing responsibly and integrating ESG considerations is guided by our mandate to deliver returns that will enable our clients to achieve their long-term investment objectives and our core values.   We believe that companies with sound business practices, including strong corporate governance and responsible management of material environmental and social issues, have better success and deliver stronger financial performance over time.  Conversely, companies that have poor environmental, social or corporate governance practices present risks and controversies that may hinder their financial performance.” 

Under this approach, industry analysts investigate ESG risks as part of their in-house research process and may compliment that work with third-party research. Conclusions are integrated into investment decisions.

This approach can also run alongside an exclusionary framework. For example, the manager cited above excludes tobacco, gaming and thermal coal miners from all portfolios, while its ESG Fund adheres to a much more restrictive investment policy which precludes investments in companies for which ESG information is insufficient or which do not pass certain ESG filters.

5.  Thematic Investing.

Thematic or impact investing generally funds strategies addressing specific environmental or social challenges.  This is often done through investment vehicles that are private and project oriented.

Click here to download PDF version of this article

Emerging Markets Allocations

By | News | No Comments



The vibrancy and high growth rates of emerging market economies are often alluring for investors looking to add incremental growth and exotica to their portfolios. The high under-lying growth rates, huge population base and a perception that less transparency and analyst attention suggest that these markets are less efficient was the start-point for many fund pitches.

There have been two broad approaches for adding emerging market exposure to segregated portfolios:

  1. indirect exposure, by investing in well-run western companies with significant emerging market businesses; or
  2. direct exposure, through ownership of companies based and operating within one or more emerging economies.

Our portfolios have historically had a mix of the two, with the bias being toward the first approach. Our portfolio manager is dedicated to a detailed, bottom-up analysis of each company that it evaluates.  This approach is often more challenging when it comes to emerging market issuers, in part because of less access to management, frequently the lower quality of financial information, the reticence of EM management teams (that were not used to that sort of due diligence process), and frankly, less confidence in the quality of corporate governance.

However, the balance has been shifting towards direct exposure over the past decade, as these issues are addressed by more and more management teams in the emerging markets. Client portfolios now have direct exposure to emerging markets at, or slightly above, the MSCI ACWI allocation.

However, and as you are no doubt aware, these elevated growth rates enjoyed by emerging economies have not always translated into elevated total returns for minority investors in emerging markets companies. EMs have had periods of exceptional performance and then periods of under-performance, such as we witnessed in 2018.  In addition, volatility has historically been considerably higher than in developed markets, producing unenviable Sharpe ratios (although Bloomberg Markets pointed out last week that short-term volatility in developed markets was currently above that in emerging markets, a very rare event.)

So what changes, other than greater comfort with due diligence processes, give us more comfort with direct EM exposure than was the case historically?

Emerging economies now represent almost two-thirds of total global GDP, while their stock markets represent approximately one-third of global market capitalisation.   Key global indices have an even lower allocation to EM, at around 10%.  As more China-listed companies are included in indices over the next few years, that figure will rise, but it will still remarkably understate the importance of those economies to global growth.

While emerging economies typically exhibited higher growth rates, their economies were not as large and influential to total global growth as were the developed economies. However, whether it’s China, India, southeast Asia or EM as a whole, their absolute scale has become very important, not just their relative growth.

A recent paper from the Brookings Institute estimated that over 90% of the increased spending power of the global middle class will come from China, India and other Asian emerging countries by 2022.  In other words, the impact that these economies have on global growth is now impossible to ignore.

Second, the composition of what drives emerging economies is evolving. In boom periods of the past, growth was led by low-cost, export-driven manufacturing, domestic property development typically fueled by cross-border capital flows and resource extraction industries.  This led to considerable volatility in EM returns during a business cycle.

However, the less volatile and often domestically-oriented sectors such as healthcare, consumer staples and consumer discretionary sectors are becoming more relevant. In most Asian EMs, the technology sector, albeit still export-oriented, is now much more important – although whether the chip makers and components suppliers have managed to reduce cyclicality is currently on trial. The MSCI EM index now comprises over 40% of technology and consumer sectors.

Third, research focused on the increasing integration of ESG issues (environmental, social and corporate governance) into company analysis and investment decisions has highlighted that this approach is particularly helpful in evaluating risks in the emerging markets. Assuming this is true, and we believe that it is, then the detailed, bottom-up style of investment research (as opposed to the use of passive products) should enhance returns over time, relative to the same impact with respect to developed markets.

Finally, from a relative value perspective, EM currently looks very attractive. While the relative value between EM and DM is somewhat cyclical, the end-of-2018 MSCI EM relative to the MSCI World (normalized to early 2008) is extreme, historically.

As 2019 market outlooks were distributed in the first two weeks of January, it is clear that emerging markets are again very much in the conversation. The large sell-side houses seem about equally divided on the attractiveness of the asset class, informed in large part by their outlook for global growth, the likely strength / weakness of the USD and the likelihood of two or more Fed rate increases during the year.

We do not market or promote any fund products, but if you are interested in more information on how our client exposure to emerging markets is expressed within their segregated accounts, please contact us.


Click here to download PDF version of this article

Keelan Chapman spoke to The Globe and Mail

By | News | No Comments

Since 2016, Keelan Chapman has been actively supporting our clients in his role as Real Estate Consultant at ChapmanCraig Ltd.   Concurrently, Keelan manages the Canadian Real Estate Investment Center (H.K.)  which assists Asia-based investors in making property acquisitions in Canada.  He was recently highlighted in an article penned by Nathan Vanderklippe in the Globe and Mail, one of Canada’s leading business newspaper.  The article, titled “The Re-returnees”, was published on January 13, 2019, and below in italic is an excerpt.

       When Keelan Chapman moved back to Hong Kong three years ago, he didn’t expect to find himself with a front-row seat to a Canadian exodus.

       Mr. Chapman runs the Canadian Real Estate Investment Centre (Hong Kong), a company he created three years ago to help people in Asian buy property in Canada. He figured his clients, who meet him in Hong Kong’s skyscraper forests of buzzy coffee shops and swish boardrooms, would be investors moving cash into Vancouver’s exuberant housing market. 

       What he has found instead is people looking to buy homes for themselves.

      “My main clients in Hong Kong tend to be Canadians looking to return to Canada,” he says.

An active member of the Canadian Chamber of Commerce in Hong Kong, a founding member of the Pearl River Delta Canada Chamber and an engaged member of the Alumni Association of McGill University, Keelan often speaks at conferences on the Canadian Real Estate market, giving specific updates on the Vancouver, Toronto and Montreal real estate markets as well as on recent implementation of various taxes affecting real estate investors.

From his experience, buyers are interested in Canadian properties for three reasons: investment, for a retirement home or for young families returning so their children receive education within the Canadian education system, whether it be secondary, post-secondary or university.

Vancouver and Toronto continue to attract most interest due to strong family ties developed over the years.   However, since the steep price increases and various policies aimed at foreign buyers in these cities,  Keelan has noticed that he is getting more inquires for cities like Montreal (Canada’s second largest city) where prices are affordable, yields are strong and there is a growing dynamic wave coming from high-tech companies that are looking to take advantage of the city’s collection of world class universities.

Keelan is a licensed real estate broker in the province of British Columbia and regularly travels back to Canada to assist his clients in real-estate matters.



Developments in the Vintage Wine Market Oct, 2018

By | News | No Comments

2018 is turning out to be a very positive year for the vintage wine market with the combination of a broad strengthening of prices, a couple of stunning surprises from recent auctions and a good yielding but high quality harvest.

In France, the 2018 vintage will be a great one in many regions, with the exception of areas which were devastated by hail storms in late May.   Some Bordeaux winemakers are already talking about 2018 being the vintage of a lifetime.  Italy, Spain and Portugal overall had mixed results – an excessively wet spring and very high temperatures during the growing season.

There has been much excitement in the auction market and Burgundy wines have been the undisputed stars.  Two headline auctions took place: Henri Jayer’s sale of his personal cellar in Switzerland in June and the Drouhin family cellars of Domaine de la Romanée-Conti (DRC) in October.   The Jayer collection was comprised of 855 bottles and 209 magnums and sold for US$ 35 million, or an average price of US$ 33,000 per bottle.   Not to be outdone, two bottles of 1945 DRC were  sold in NYC last month for a combined amount of more than US$ 1 million.

The star status of Burgundy wines continues to spill into the general vintage wine market.   However, it should be clearly noted that while the broad vintage wine market is enjoying strengthening pricing, Bordeaux looks to be a laggard after having had a preeminence status for many years.

Below are the returns of various vintage wine indices for the 12 months to end of Oct 2018:

  • Liv-ex 1000   (comprised of 1000 wines from around the world)       +10.4%
  • Liv-ex 50    (comprises the latest 10 vintages of the 5 Bordeaux First Growths)       +1.4%
  • Liv-ex Burgundy 150  (comprises the latest 10 vintages of 15 Burgundy wines incl. 6 Domaine de la Romanée Conti)   + 31.5%

Strong interest in Italian Barolo wine and broad based Burgundies has been a strong support for better pricing in the wider vintage market.

Looking ahead, there are reasons to expect continued stronger prices for leading Burgundy producers other than DRC and Jayer.   Scarcity of Burgundy is a simple fact that we will address in further details in our next update.