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
patrick.hickey@rbc.com Phone 905 546 5677 www.joe.sardo.com
RBC Structured Notes
Outline
●
Structured Notes – A Primer
●
PPNs
●
Option-based NPPNs
●
Long Equity NPPNs
●
Ground-breaking New Product
 “Tactical Equity Allocation Model” Security
1
Structured Notes – A Primer
2
Structured Notes – A Primer
What are structured notes?
●
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
3
Structured Notes – A Primer
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
4
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
5
Structured Notes – A Primer
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
6
Structured Notes – A Primer
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”
7
Principal Protected Notes (PPNs)
8
Principal Protected Notes (PPNs)
Enhanced Yield 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.
Sample Calculation of an Annual Coupon
 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.
9
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
Principal Protected Notes (PPNs)
Individually Capped PPNs
 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.
10
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%
Option-based NPPNs
11
Option-based NPPNs
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
12
Option-based NPPNs
Payoff profile of a traditional equity investment
Investment Return
50%
30%
0%
-30%
-50% -40% -30% -20% -10%
Initial
Price
10% 20% 30% 40% 50%
Market Value of Underlying
13
Option-based NPPNs
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
14
Option-based NPPNs
Maturity payoff profile of Triple-Up structure
Note Value at Maturity
18%
Client Rationale
- Has core equity exposure
0%
- Concerned about mediocre returns
- Willing to cap market upside
- Does not want principal protection
Index Return
-18%
Note Return
-25% -20% -15% -10% -5%
Strike
Price
5%
10%
Market Value of Underlying
15
15%
20%
25%
1 year term, 18% cap
Option-based NPPNs
Maturity payoff profile of Booster structure
Note Value at Maturity
50%
30%
Client Rationale
- Has core equity exposure
0%
- Concerned about mediocre returns
- Not willing to cap market upside
- Does not want principal protection
-30%
Index Return
Note Return
-50%
-50% -40% -30% -20% -10%
Strike
Price
10% 20% 30% 40% 50%
Market Value of Underlying
16
3 year, 30% booster
Option-based NPPNs
Maturity payoff of Buffered Triple Up structure
32%
24%
Note Value at Maturity
16%
8%
Client Rationale
0%
- Has core equity exposure
- Concerned about mediocre returns
-8%
- Willing to cap market upside
- Wants some principal protection
-16%
Index Return
-24%
Note Return
-32%
-32%
-24%
-16%
-8%
Strike
Price
8%
16%
Market Value of Underlying
17
24%
32%
3 year, 24.3% cap, 20% buffer
Option-based NPPNs
Maturity payoff of Buffered Protection structure
80%
58%
Note Value at Maturity
40%
Client Rationale
0%
- Has core equity exposure
- Wants significant principal protection
- Wants market upside potential
- Willing to accept cap on upside
-40%
Index Return
Note Return
-80%
-80%
-60%
-40%
-20%
Strike
Price
20%
Market Value of Underlying
18
40%
60%
80%
5 year, 58% cap, 40% buffer
Long Equity NPPNs
19
Long Equity NPPNs
Introduction
●
The value proposition
 Enables very efficient access to compelling high turnover “long” equity strategies
 The embedded equity strategies may be created by
 The client or advisor
 RBC Research
 Zyblock: Strategic / tactical (“Conservative Dividend RoC Security”)
 McAlpine: Quant (“SPARQS” and “Canadian Bank Yield RoC Security”)
 Typically provides one or more of the following benefits
 Tax efficiency
 No CG tax triggered on rebalancing of the underlying portfolio
 ROC treatment on income distributions
 Operational efficiency
 “One ticket solution” (no trading required by client/advisor)
 No transaction costs (all costs to client reflected in annual fee)
20
Long Equity NPPNs
Advantages of NPPN tax efficiency
The structure of
the note defers
any tax
consequences
until maturity or
disposition.
Assumptions:
 15% Annualized Return
 5-Year Holding Period
 34% Tax Rate
Source: Bourbonniere Paul, Polson Bourbonniere Financial Planners, Five Keys to successful investing, Money Digest Oct. 2000.
21
Long Equity NPPNs
RBC “SPARQS” Security
●
Description
 Simplified investable version of McAlpine’s Quads Score Top 40 model
 1:1 “up and down” participation in the total return of an RBC 8 factor quant model
 Strategy developed by Chad McAlpine, RBC Quantitative Research
 Universe is 100 largest dividend paying TSX Composite stocks (ex. RY and trusts)
 100 stock universe ranked monthly based on equal weighting of 8 quantitative factors
 25 stocks with highest score chosen from 100 stock universe
 25 stock portfolio rebalances quarterly back to equal weights
 Dividends reinvested quarterly (indicated yield 2.65%)
 Very strong back testing vs. TSX composite over 20 years
●
Advantages
 Tax efficiency (no tax triggered on portfolio rebalancing)
 Operational efficiency (“one ticket solution” with no transaction costs)
 Daily secondary market
 Can be customized (maturity, selling commission, etc.)
22
Long Equity NPPNs
RBC “SPARQS” Security
The Universe
Dividend yielding large-cap
Canadian equities
S&P/TSX Composite Member
Must Pay a Dividend
The SPARQS Portfolio
Excluding Trusts
Excluding RY
• 25 stocks
• The portfolio is traded monthly –
annual turn over is 120%
The Model
Rank stocks based on an equally
weighted combination of 8 factor models
that fall into 4 distinct investment themes
ATTRACTIVE
VALUATIONS
SUSTAINABLE
GROWTH
POSITIVE
SENTIMENT
MARKET
RECOGNITION
Low Price to Earnings
x 1/8
Low Price to Book Value
x 1/8
High Quarterly Earnings Growth
x 1/8
High Return On Equity
x 1/8
High Earnings Surprise
x 1/8
High Estimate Revisions
x 1/8
High 3-Month Price Change
x 1/8
High 6-Month Price Change
x 1/8
= Total Score
23
• Replacement buys are the bestranked stocks not already held by
the portfolio
• Only the largest 100 qualifiers by
market cap are eligible to be bought
• Stocks are sold if they drop below
the 50th position in terms of their
rank
• At the end of each quarter the
portfolio is rebalanced to equal
weights
Long Equity NPPNs
RBC “SPARQS” Security
Hypothetical 25 stock portfolio – unitized total return vs. QuaDS Canada Large Cap Top 40
$4
Over the past 10 years,
the portfolio has
performed in line with our
Canada Large Cap Top 40.
$3
$2
$1
$0
01
02
03
04
05
S&P/TSX Equity Index (Excluding Royal Bank)
QuaDS Canada Large Cap Top 40
24
06
07
08
09
Hypothetical 25 Stock Portfolio
10
Long Equity NPPNs
RBC Canadian Bank Yield RoC Security
●
Description
 1:1 “up and down” participation in “Dogs of Canadian Banks” strategy
 Strategy developed by Chad McAlpine, RBC Quantitative Research
 Portfolio consists of the “Big 6” Canadian bank stocks
 Portfolio rebalanced quarterly
 2 “highest yielders” weighted 50.0% (25% each)
 2 next highest yielders weighted 33.3% (16.7% each)
 2 lowest yielders weighted 16.7% (8.35% each)
 Dividends paid quarterly as ROC (indicated yield 4.38%)
 Very strong back testing vs. S&P / TSX Banks Index and TSX Composite
●
Advantages
 Tax efficiency (no tax on triggered rebalancing and ROC treatment on distributions)
 Operational efficiency (“one ticket solution” with no transaction costs)
 Daily secondary market
 Can be customized (maturity, selling commissions, etc.)
25
Long Equity NPPNs
RBC Canadian Bank Yield RoC Security
Back-tested performance
16.4%
12.0%
8.1%
26
Long Equity NPPNs
RBC Conservative Dividend RoC Security
●
Description
 1:1 “up and down” participation in a large cap, conservative, dividend strategy
 Strategy developed by Myles Zyblock, RBC-CM Chief Strategist
 Portfolio is top yielding 20 large cap Canadian dividend paying stocks on the TSX60
 Pay-out ratios cannot exceed 90%.
 20 stock portfolio broken into 5 groups of 4 stocks, weighted according to div yield:
 Top yielders @ 36%, 2nd highest yielders 28%, 3rd highest yielders at 20%, 4th
highest yielders at 12% and the lowest yielders at 4%
 Portfolio is rebalanced quarterly – dividends paid quarterly as ROC
 Very low correlation to the TSX Composite and the S&P TSX60
●
Advantages
 Tax efficiency (no tax on triggered on rebalancing and ROC treatment on distributions)
 Operational efficiency (“one ticket solution” with no transaction costs)
 Daily secondary market
 Can be customized (maturity, distribution type and frequency, etc.)
27
Long Equity NPPNs
RBC Conservative Dividend Yield RoC Security
Back-tested performance
600
Source: RBC Capital Markets Quantitative Research
14.9%
500
400
300
200
5.0%
100
0
2000
2001
2002
2003
2004
2005
S&P/TSX 60
28
2006
2007
2008
2009
Note Strategy
2010
2011
2012
Long Equity NPPNs
RBC Conservative Dividend Yield RoC Security
Back-tested yields
8%
Source: RBC Capital Markets Quantitative Research
Dividend Yield
6%
4.9%
4%
2.8%
2%
0%
2000
2001
2002
2003
2004
2005
S&P/TSX 60
29
2006
2007
2008
Note Strategy
2009
2010
2011
2012
Long Equity NPPNs
Tactical Equity Allocation Model (TEAM) Security
●
Description
 1:1 participation in a defensive high turnover “long equity” strategy
 Compelling alternative to traditional equity investments and hedge funds
 Simple rules-based strategy developed with Chad McAlpine, RBC Quantitative Research
 Incorporates defined sell-discipline based on 200 DMA of TSX Comp
 Note investment allocated on a monthly basis between
 Equities (i.e. RBC 8 factor quant model); and
 Fixed income (govt. bonds, rate swaps, T-Bills, BAs etc.)
 If TSX Comp > 105% of the 200 DMA
 100% in equities
 If TSX Comp > 95% and < 100% of the 200 DMA
 50% in equities and 50% in fixed income
 If TSX Comp < 95% of the 200 DMA
 100% in fixed income
30
Long Equity NPPNs
TEAM Security
TSX Composite performance (colour-coded for TEAM asset allocation)
At the end of each month,
an asset allocation
decision can be made
based on the level of the
S&P/TSX relative to its
200 DMA.
16,000
14,000
12,000
To lower turnover, we’ve
introduced a +/- 5% band
around the moving
average of the index.
10,000
8,000
Switch to
50% Equity
50% Fixed Income
6,000
+ 5%
4,000
- 5%
2,000
0
200 DMA
200 DMA +5%
200 DMA -5%
100% Equity
100% Fixed Income
50% Equity & 50% Fixed
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
31
Switch to
100% Fixed Income 100% Equity
Long Equity NPPNs
TEAM Security
20 year back-tested performance (FI Investment: 5 year swaps)
$25
Tactical Equity Allocation Model
16.0%
Equity Strategy
$20
S&P/TSX Composite
3 - 5 Year Government of Canada Bond Index
3-Month T-Bills
$15
13.9%
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%.
$10
$5
8.6%
6.7%
3.6%
$0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
32
Long Equity NPPNs
TEAM Security
20 year back-tested annual total returns (FI investment: 5 year swaps)
40%
Over the past 20 years,
this investment approach
has only lost money in one
year.
30%
20%
10%
0%
-10%
-20%
-30%
S&P/TSX Composite
Tactical Equity Allocation Model
-40%
92
33
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Long Equity NPPNs
TEAM Security
20 year comparative performance metrics (FI Investment: 5 year swaps)
Tactical Equity
Allocation Model
Annualized Return
Beta
Annualized Alpha
Sharpe Ratio
Standard Deviation
R-Squared
Best 12 Months
Worst 12 Months
Max Drawdown
Duration Under Water
Turnover
34
RBC SPARQS
Strategy
S&P/TSX
Composite
16.0%
0.38
11.8%
1.12
10.6%
0.30
68.6%
-10.7%
-12.1%
21 mths
13.9%
0.73
7.2%
0.73
14.6%
0.58
77.0%
-43.7%
-49.2%
38 mths
8.6%
1.00
0.0%
0.39
15.2%
1.00
63.4%
-38.2%
-43.3%
59 mths
>200%
120.0%
16.2%
3 to 5 Year Gov of
Canada Bonds
6.7%
0.01
6.4%
0.75
4.0%
0.00
19.3%
-4.3%
-8.6%
3-Month T-Bills
3.6%
0.00
3.5%
0.00
0.6%
0.00
7.5%
0.2%
0.0%
Long Equity NPPNs
TEAM Security
●
Advantages (investment strategy)
 TEAM is not “the market”
 Beta = 0.38 vs. TSX Comp
 Concentrated investment portfolio of 25 Canadian stocks
 Rebalanced every month based on an RBC 8 factor quant model (SPARQS)
 Very attractive performance and risk-return metrics (20 year back-testing)
 Annualized total return
= 16.00% (vs. 8.60% for TSX)
 Sharpe ratio
= 1.12 (vs. TSX = 0.39)
 Worst 12 months
= -10.70% (vs. -38.20% for TSX)
 Maximum drawdown
= -12.10% (vs. -43.30% for TSX
 Duration underwater
= 21 months (vs. 59 months for TSX)
 Completely transparent
 Simple rules-based asset allocation strategy
35
Long Equity NPPNs
TEAM Security
●
Advantages (NPPN structure)
 Tax efficiency
 Taxation does not affect investment decisions / asset allocation
 No tax on triggered rebalancing of equity portfolio (115% turnover)
 No tax on triggered on allocation from equities to fixed income
 If dividends / interest retained, tax is deferred until sale and is paid at CG tax rate
 Distributions can also be paid-out as ROC
 Operational efficiency
 “One ticket solution” for IAs
 RBC-CM executes all trades (no additional transaction costs to investor)
 Daily secondary market
 Low upfront management fee to RBC-CM (no “2 and 20”)
 5 year = 1.82% (36.4 bps per annum)
 10 year = 3.00% (30.0 bps per annum)
 Can be customized (maturity, selling commission, currency, etc.)
36
Long Equity NPPNs
TEAM Security
●
The Fixed Income Investment
 The preceding slides assumed FI investment was a 5 year “interest rate swap”
 Very similar to 5 year Govt. of Canada bonds
 5 year duration
 No credit risk for investor
 The bond “bull market” did help returns of the TEAM strategy
 However, TEAM significantly outperformed the TSX if FI Investment was BAs ...
37
Long Equity NPPNs
TEAM Security – 3 Month BAs
20 year back-tested performance (FI Investment: 3 month BAs)
$25
Tactical Equity Allocation Model (5 Year Swap)
16.0%
Tactical Equity Allocation Model (3 Mth BA's)
$20
S&P/TSX Composite
3 - 5 Year Government of Canada Bond Index
3-Month T-Bills
$15
13.3%
$10
$5
8.6%
6.7%
3.6%
$0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
38
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%.
Long Equity NPPNs
TEAM Security – 3 Month BAs
20 year back-tested annual returns (FI Investment: 3 month BAs)
40%
Over the past 20 years,
this investment approach
has only lost money in 3
years.
30%
20%
10%
0%
-10%
-20%
-30%
S&P/TSX Composite
Tactical Equity Allocation Model (using 3 Mth BA's)
-40%
92
39
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Long Equity NPPNs
TEAM Security – 3 Month BAs
5-Year
Trailing
Total
Return
(Annualized
)
5-Year
Trailing
Total
Return
(Annualized)
30%
25%
20%
15%
10%
5%
0%
-5%
97
98
99
00
01
02
03
04
05
06
RBC Tactical Equity Allocation Model (5-Year Swap)
RBC Tactical Equity Allocation Model (with BAs)
S&P/TSX Composite
40
07
08
09
10
11
12
Long Equity NPPNs
TEAM Security – 3 Month BAs
20 year performance statistics (FI Investment: 3 month BAs)
Tactical Equity
Allocation Model
Annualized Return
Beta
Annualized Alpha
Sharpe Ratio
Standard Deviation
R-Squared
Best 12 Months
Worst 12 Months
Max Drawdown
Duration Under Water
Turnover
41
Equity Strategy
S&P/TSX
Composite
13.3%
0.41
9.2%
0.92
10.3%
0.36
66.3%
-13.8%
-14.3%
21 mths
13.9%
0.73
7.2%
0.73
14.6%
0.58
77.0%
-43.7%
-49.2%
38 mths
8.6%
1.00
0.0%
0.39
15.2%
1.00
63.4%
-38.2%
-43.3%
59 mths
>200%
120.0%
16.2%
3 to 5 Year Gov of
Canada Bonds
6.7%
0.01
6.4%
0.75
4.0%
0.00
19.3%
-4.3%
-8.6%
3-Month T-Bills
3.6%
0.00
3.5%
0.00
0.6%
0.00
7.5%
0.2%
0.0%
Long Equity NPPNs
TEAM Security – U.S. Market
●
TEAM Strategy looks compelling for U.S. market too
 Over past 20 years, TEAM has significantly outperformed S&P 500
 It does not matter whether FI Investment was 5 year swaps or 3 month T-Bills
42
Long Equity NPPNs
TEAM Security – U.S. Market
20 year back-tested performance (FI Investment: 5 year swaps)
$20
U.S. Tactical Equity Allocation Model (5-Year Swap)
U.S. Equity Strategy
$15
16.1%
S&P 500 Total Return Index
3-5 Year U.S. Government Bond Index
14.3%
Since 1992, this strategy
has never suffered a loss
greater than 15%.
$10
$5
8.1%
5.6%
$0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
43
The Tactical Equity
Allocation Model sacrifices
some of the upside
performance during bull
markets to achieve a high
degree of downside
protection during
corrections.
Long Equity NPPNs
TEAM Security – U.S. Market
20 year back-tested annual returns (FI Investment: 5 year swaps)
40%
40%
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%.
30%
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
44
S&P/TSX Composite
Tactical Equity Allocation Model
94 93
95 94
96 9597 9698 9799 98 0099 0100 02
05 05
06 06
07 0708 0809 0910 10 1111 1212
92
01 03
02 04
03 04
S&P 500 Total Return Index
U.S. Tactical Equity Allocation Model (5-Year Swap)
Long Equity NPPNs
TEAM Security – U.S. Market
20 year performance statistics (FI Investment: 5 year swaps)
U.S. Tactical Equity
Allocation Model
Annualized Return
U.S. Equity Strategy
S&P 500 Total Return
Index
3 - 5 Year U.S. Gov
Bond Index
3-Month U.S.
T-Bills
16.1%
15.0%
8.1%
5.6%
3.1%
0.46
1.05
1.00
-0.05
0.00
11.6%
6.7%
0.0%
5.9%
3.1%
Sharpe Ratio
0.99
0.64
0.39
0.66
0.00
R-Squared
0.31
0.63
1.00
0.04
0.00
Best 12 Months
70.0%
70.0%
53.6%
16.4%
6.3%
Worst 12 Months
-4.1%
-48.5%
-43.3%
-2.1%
0.0%
-19.6%
-55.6%
-50.9%
-4.3%
0.0%
16 Mths
62 Mths
73 Mths
13 Mths
3 Mths
Beta
Annualized Alpha
Max Drawdown
Duration Under Water
45
Long Equity NPPNs
TEAM Security – U.S. Market
20 year back-tested performance (FI Investment: 3 month T-Bills)
$20
U.S. Tactical Equity Allocation Model (5-Year Swap)
U.S. Tactical Equity Allocation Model (90-Day T-Bills)
$15
16.1%
S&P 500 Total Return Index
3-5 Year U.S. Government Bond Index
14.3%
Since 1992, this strategy
has never suffered a loss
greater than 15%.
$10
$5
8.1%
5.6%
$0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
46
The Tactical Equity
Allocation Model sacrifices
some of the upside
performance during bull
markets to achieve a high
degree of downside
protection during
corrections.
Long Equity NPPNs
TEAM Security – U.S. Market
20 year back-tested annual return (FI Investment: 3 month T-Bills)
40%
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%.
30%
20%
10%
0%
-10%
-20%
-30%
-40%
94
95
96
97
98
99
00
S&P 500 Total Return Index
47
01
02
03
04
05
06
07
08
09
10
11
U.S. Tactical Equity Allocation Model (90-Day T-Bills)
12
Long Equity NPPNs
TEAM Security – U.S. Market
5-Year
Trailing
Total
Return
(Annualized
)
5-Year
Trailing
Total
Return
(Annualized)
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
99
00
01
02
03
04
05
06
07
08
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
48
09
10
11
12
Long Equity NPPNs
TEAM Security – U.S. Market
20 year performance statistics (FI Investment: 3 month T-Bills)
U.S. Tactical Equity
Allocation Model
Annualized Return
U.S. Equity Strategy
S&P 500 Total Return
Index
3 - 5 Year U.S. Gov
Bond Index
3-Month U.S.
T-Bills
14.3%
15.0%
8.1%
3.1%
3.1%
0.50
1.05
1.00
0.00
0.00
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%
-19.6%
-55.6%
-50.9%
0.0%
0.0%
26 Mths
62 Mths
73 Mths
3 Mths
3 Mths
Beta
Annualized Alpha
Max Drawdown
Duration Under Water
49
Long Equity NPPNs
TEAM Security – U.S Market
●
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
50
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.
51
Appendix
52
Long Equity NPPNs
TEAM Security
S&P/TSX Composite vs. 200 day moving average
16,000
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.
14,000
12,000
10,000
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%.
8,000
6,000
4,000
2,000
S&P/TSX Composite
200 DMA
0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
53
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
Case Study #1: 2008 / 2009
Throughout the 2008
crash, this strategy did a
reasonably good job of
timing the market.
54
Long Equity NPPNs
TEAM Security
Case Study #1: 2008 / 2009
From June 2008 to
December 2009, the
RBC TEAM Model
returned 16.3%.
55
Long Equity NPPNs
TEAM Security
Case Study #2: 1994
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%.
56