Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Kaizen at Nicola Wealth Management

 By: Michael Taylor, CA

IN THIS ISSUE: We have always advocated an investment portfolio that generates substantial cash flow. These turbulent times have confirmed just how important this strategy can be, but is there more that can be done? Can we also improve diversification, liquidity, and flexibility, enhance returns and reduce overall costs? With a desire to continuously improve our business model, we think we can. In this issue, our Finance & Administration Manager, Michael Taylor, will demonstrate just how important “Kaizen” is at NWM by introducing six new Pooled Funds.

These are tumultuous times!
The current global financial situation is without recent precedent and volatility and uncertainty are likely to continue for the foreseeable future. At times like this, sticking with an investment strategy that emphasizes cash flow is more important than ever. Proper diversification and efficient structure will also benefit investors in troubled times.

We all know what it means to be diversified, but what do we mean by “efficient structure”? Can we make improvements to the way investments are made? Can Nicola Wealth Management create a structure that permits us to make investment decisions that immediately impact all investors in a particular asset class? Can we improve liquidity and lower product delivery costs at the same time? Perhaps these objectives sound mutually exclusive at first, but they represent multiple goals in a process designed to continually make things better; to continually improve. At Nicola Wealth Management, we are constantly looking for ways to improve our service levels and product offerings to enable clients to meet their investment objectives.

A recent conversation with my teenage daughter really brought this into focus for me.

Carolyn really enjoys scrapbooking. The other day, she wanted to show me one particular scrapbook that she has been working on for some time. The key thing she wanted me to realize was just how much better the most recent pages were. She is constantly working to improve the layout, colour choices and content of her scrapbooking pages – and it shows. Suddenly, I realized that Carolyn was practicing Kaizen.

Kaizen is a Japanese philosophy that focuses on continuous improvement throughout all aspects of life. When applied to business, Kaizen leads to superior performance and a competitive advantage. Many believe this longstanding “attitude” has singlehandedly propelled Toyota to its place as the leading automobile manufacturer in the world.

 What does Kaizen have to do with Nicola Wealth Management?

About a year ago, I arrived at NWM initially to investigate whether or not there was an opportunity for the firm to create new, proprietary pooled funds. The firm had already successfully launched the Strategic Income Fund in early 2005, but the question remained: “Should this concept be expanded across other investment asset classes?”

In order to help answer that question, I needed an understanding of the firm’s underlying philosophy. As you know, it is very easy to say one thing and do another; we see this all the time. However, when it comes to the wealth management business, a solid, consistent and professional approach to investment strategies and operating philosophy builds a firm’s reputation and the confidence of its clients. This leads to a virtuous circle – client service continually improves, the firm grows and everyone wins. Sounds like Kaizen to me!

So what exactly did I discover?

I concluded that the firm has two core competencies against which all activities are benchmarked. They are:

  1. The development of long-term client relationships through the implementation of comprehensive wealth management plans and the provision of high quality service and attention to its clients, and
  2. A unique focus on cash flow oriented investments and the development of product options to meet that objective.

Both points give rise to a culture of continuous improvement and a willingness to explore what it takes to build the value proposition for clients. We employ an active investment strategy when it comes to managing our clients’ wealth, so it holds that we should also actively find better and more efficient ways to improve our offerings. Only by changing and improving what you, our client, already feel is valuable, can we truly continue to earn your confidence.

Consequently, I concluded that the development of unique and proprietary pooled funds is consistent with our underpinning strategy of continuously adding value for our clients.

Okay, but what value is actually created by these new pooled funds? Why should you be excited about this?

Our plan to create proprietary pooled funds has been developed over many months. The current market conditions are not causing us to rethink our plans, nor are they making us react in a different way. One of the benefits of Nicola Wealth Management’s consistent and stable approach to investing is the similar effect this philosophy has on the management of the firm. The benefits to be gained through the creation of proprietary pooled funds do not diminish because the markets are volatile. In fact, quite the opposite is true. Recent events confirm to us that there is no better time than the present to make these changes!

Cost Effectiveness and Efficiency

By creating these new pooled funds, we can consolidate a wide variety of holdings into a few asset class-specific investment vehicles while making them accessible to a large number of client accounts. What do I mean by this? Perhaps these images will help illustrate the point:

The first picture shows an investor with a variety of holdings in his or her account:

The second picture shows the same investor with fewer investments (namely the NWM funds), which in turn hold a variety of investments within the various asset classes:

The decision to create new pooled funds is timely and will enable us to more efficiently and effectively rebalance accounts, make strategic investments, and access the best fund managers for our clients.

Consolidating our clients’ investments in this fashion gives Chief Investment Officer, Rob Edel, and his team, the ability to work with large pools of money versus smaller amounts across hundreds of individual accounts. Investing large amounts gives them more investment options – including access to managers and funds we cannot access at this time.

As is the case with just about anything, buyers with more money can command a better price, so our ability to negotiate lower fees from third party managers will also result in lower product costs for our clients.

Flexibility to Work with Market Conditions

In general, there is a great deal more flexibility available in a pooled fund structure. Firstly, it will be easy to adjust a client’s exposure to various asset classes. Instead of dealing with many different investments in an account, we can simply trade amongst the pooled funds in order to quickly change a client’s asset mix. Perhaps more importantly, it is easier for us to adjust the investment mix within a fund for the benefit of all investors in that fund. It is very difficult to affect a change in strategy for a particular asset class if it involves trades across hundreds of client accounts.

We will also be able to improve diversification within each asset class for the benefit of all clients. As well, pooled funds will enhance liquidity in a manner that does not exist if the underlying assets are held separately in individual client accounts. This is particularly important for less liquid assets classes such as mortgages and related mortgage investment products.

There will be fewer transactions in each client’s account, thereby reducing trading commissions and simplifying client account reconciliations.

What else?

We are creating a single Declaration of Trust, which is the key document that establishes the rules for the new funds. Similarly, there will be a single Offering Memorandum and Subscription Agreement covering all funds. Consequently, you will not need to receive documentation for each investment the NWM funds will make. These changes will cut back on the paperwork for everyone (eliminating masses of paper is also a wonderful environmental benefit)!

At the same time, we plan to hire a best-in-class custodian, trustee, fund accountant and record keeper to provide the professional services necessary to efficiently operate the funds. A capped administrative fee will keep operating costs low and the funds will not pay Nicola Wealth Management a management fee.

What exactly are the new Funds we plan to create for you?

In addition to the Strategic Income Fund which has been in place since 2005, we will create the following new funds:

  • NWM Global Equity Fund
  • NWM High Yield Bond Fund
  • NWM Primary Mortgage Fund
  • NWM Balanced Mortgage Fund
  • NWM High Yield Mortgage Fund
  • SPIRE Mutual Fund

The fundamental investment objective of the NWM Global Equity Fund is to seek long-term capital growth by investing in a diversified portfolio consisting primarily of Canadian, U.S. and international equity-related securities issued by corporations around the world. The portfolio will focus primarily on long-term capital growth with a secondary focus on income generation.

The NWM High Yield Bond Fund will generate a high level of interest income and some capital appreciation. The Fund will invest in high yield bonds, debentures, and convertible debentures issued by Canadian, U.S. & foreign governments and corporations denominated in Canadian dollars and/or foreign currencies.

The fundamental investment objective of the mortgage funds is to achieve a stable level of current income while also seeking to preserve capital. The NWM Primary Mortgage Fund will invest debt secured by term mortgages on Canadian, income producing, real property. The NWM Balanced Mortgage Fund will invest in Canadian construction loans, interim financing, finished goods inventory financing, and term loans all secured by mortgages on Canadian real property. Finally, the NWM High Yield Mortgage Fund will invest in Canadian-dollar denominated construction loans, interim financing, and land loans secured primarily by second mortgages on Canadian real property.

The fundamental investment objective of the SPIRE Mutual Fund is to invest in the SPIRE Real Estate Limited Partnership. Consequently, it will make SPIRE available to clients previously unable to invest in SPIRE; including registered accounts and those wishing to invest less than the minimum amount required by SPIRE. Being able to invest indirectly in SPIRE will give these clients the benefit of SPIRE’s stable income while providing long-term capital appreciation through investments in real estate, mortgages and related investments that are presently only available to direct investors in SPIRE.

What’s next?

We are nearing completion of the Declaration of Trust, Offering Memorandum and Subscription Agreement. Your Planner will be contacting you soon to discuss how our new funds will impact the management of your investment portfolio and how best to convert your current holdings into units of the new funds where it is appropriate to do so.

Kaizen in action?

Continuous improvement, continuous innovation and a drive to consistently improve the value proposition for our clients are the things that drive Nicola Wealth Management. Toyota and my daughter, Carolyn, aren’t the only ones who can practice Kaizen!