Combining safety and performance, principal protected notes (PPNs) offer the best of both worlds for investors, who have good reason to snap up PPNs while interest rates remain relatively high. More on this often-overlooked investment vehicle with Benoît Bélanger, Manager, Structured Product Development and Management at Desjardins.

Why are PPNs particularly attractive in the current environment?

In the wake of the 2022 rate hikes, fixed income investments have seen a resurgence in popularity, offering investors compelling returns while safeguarding their principal. To date, investors have focused primarily on guaranteed investment certificates (GICs). With the rate-cut cycle underway, investors may want to consider principal protected notes to enhance potential returns.

Principal protected notes include both a fixed income component that safeguards invested principal and an option strategy offering exposure to equity markets with varying degrees of participation. Now is an ideal time to embrace this opportunity, with interest rates trending downward and expected to continue. This will adversely affect bond yields, and perhaps in turn, PPN characteristics.

In a few words, how would you explain the advantages of PPNs to a client?

PPNs offer the potential for higher returns linked to equities with the peace of mind of bonds, as you’re guaranteed to receive your principal at maturity even when market returns are negative. Our message to clients is as follows: your investments are exposed to market performance, yet you’re protected, as in the worst-case scenario, if market returns are negative, you get your invested principal back.

What’s the role of PPNs in an investment portfolio?

Diversification is their forte. On the one hand, guaranteed principal protection helps stabilize their portfolio in a downside market scenario. And on the other, a solution that incorporates a range of option strategies generates different results from direct market exposure. In addition, the underlying securities can be chosen specifically to complement other portfolio components.

Can you give a few examples?

Think of an investor approaching retirement who wants to continue growing their portfolio to boost their savings but who cannot afford to lose their principal. For them, principal protected notes are ideal.

Retirees can also come out ahead, earning income to support their lifestyle without jeopardizing their remaining nest egg. This can involve returns through periodic coupon payments or multiple PPNs with staggered maturities.

How do I choose the right principal protected note?

Structured products can quickly become complex, and we strive to avoid this pitfall as manufacturers. At Desjardins, simplicity is what drives our philosophy to avoid unpleasant surprises. Nevertheless, advisors should take the time to thoroughly understand the calculation formula of each note and the market underlying that generates its potential return.

After that, everything depends on the investor’s needs and preferences. Do they want contingent or guaranteed income? Coupon payouts or a growth model? Exposure to a specific market? The beauty of these products is that they’re customizable.

Why choose Desjardins?

We’ve developed a quarter century of expertise in structured product development and management, which has been acknowledged by multiple industry awards. Desjardins was named Best House, Capital Protection in Americas for the second year in a row, and Best House, Canada for the fifth year in a row, at the Structured Retail Products Americas Awards gala organized by the UK-based firm Structured Retail Products (SRP).

This longstanding experience gives us the necessary perspective to design products that are both simple and powerful to meet investors’ goals.

Principal protected notes may not be suitable for all investors. Important information is contained in the information statement and oral disclosure document for each principal protected note. Documents regarding note issues are provided on the summary page for each issue. Before purchasing investments, investors should read these documents carefully and discuss the investment’s suitability with their investment advisor or dealer representative. The notes can only be purchased in the Canadian jurisdictions where they are legally distributed, and only from people who are registered and authorized to sell them. Investments in these notes carry certain risks. Returns on notes are determined by the change in value of the underlying assets over the course of the term. There may be no return payable to the investor. Returns cannot be determined before maturity and past performance is not indicative of future returns. Some notes may be subject to caps, participation rates or other limits affecting returns. For principal protected notes, the full principal amount is only repaid at maturity.

Principal protected notes are not considered insured deposits under Quebec’s Deposit Institutions and Deposit Protection Act, the Canada Deposit Insurance Corporation Act, or any other deposit insurance plan.

Desjardins®, all trademarks containing the word Desjardins, as well as related logos are trademarks of the Fédération des caisses Desjardins du Québec, used under licence.

As countries move to a net-zero climate goal, investors can capitalize by aligning their portfolios in a way that supports the transition. But with so many investment options, it can be difficult to understand the nuances of each strategy.

Christian Felx, Manager and Head of Responsible Investment at Desjardins Global Asset Management (DGAM), and Pierre-Luc Vachon, Head of Products, Investment Strategies, at DGAM explain the various approaches to responsible investment (RI), and how net-zero ETFs are part of the solution.

Q: How have RI approaches evolved in recent years?

Christian Felx: A growing number of investors are opting for investment solutions that promote sustainable prosperity, with RI assets under management (AUM) growing to more than $3 billion in recent years, according to the Responsible Investment Association. The main reason behind this growth is that we were able to bridge the gap between sustainability and financial performance. We have moved from exclusionary strategies to more sophisticated strategies based on analytical frameworks. We now know that using environmental, social, and governance (ESG) criteria in the investment process helps identify risks and opportunities that are sometimes overlooked by traditional financial analysis.

Q: Can you detail the approaches used in RI ETFs?

CF: First, we need to establish the investment universe. Often, most RI strategies  will exclude sectors or companies associated with undesirable activities, such as controversial weapons or tobacco producers.

Second, we assess the ESG performance of issuers with a proprietary scoring methodology. This allows for efficient identification of opportunities and mitigation of risks. For example, an approach that integrates ESG momentum will allow for issuers that have lower or average ESG practices but are set to improve on them in the coming years.

Third, there’s portfolio construction, where investment mandates may include an ESG dimension. For example, net-zero trajectory objectives can be added to the investment objective of some strategies without sacrificing the portfolio’s expected financial return.

Last, there’s shareholder engagement, which is a lever for positive change. The portfolio manager engages in a constructive dialogue with the company, further improving on their understanding of the business, and giving them the opportunity to influence the ESG issuer to adopt sustainable development practices.

“Desjardins’ net-zero pathway ETFs target their climate objective while providing broad and diversified equity market exposure.”

Q: What are the advantages of ETFs with net-zero trajectories?

Pierre-Luc Vachon: A net-zero trajectory aligns with the objective to limit global warming to 1.5 °C, and targets improvement in the portfolio’s carbon emissions over time. Previous approaches to decarbonization would simply offer a reduction compared to a benchmark, which wouldn’t necessarily improve over time.

Q: How do net-zero ETFs differ from other RI ETFs?

PLV: On the Canadian ETF market, there aren’t a lot of strategies targeting carbon emissions, let alone strategies aligning with net-zero objectives. Desjardins’ net-zero pathway ETFs target their climate objective while providing broad and diversified equity market exposure.

Q: How is Desjardins’ Net-Zero Emissions Pathway ETF focused on RI?

PLV: Our approach is light on exclusions, excluding only companies involved in controversial weapons, tobacco production, thermal coal, or severe controversies. We also use ESG scores derived from our own internal analysis or from third parties.

We’re aiming for a portfolio that’s well diversified and provides exposure to most sectors while meeting net-zero objectives. For instance, the portfolio construction process enforces geographical and sectorial diversification, and avoids excessive concentration in any single security.

We’re offering the strategy in a traditional version and a multifactor version, which adds another step to the process where we allocate the portfolio securities’ weights to maximize exposure to factors that have been shown to add value in the long run.

Q: How can advisors and their clients be part of the RI solution?

PLV: Demystify RI and its misconceptions. It’s sometimes believed that RI ETFs exclude all companies from the energy sector, while in fact, some strategies will invest in energy companies if they have robust ESG practices or a strategy to improve the ESG integration in their business model, and low carbon emissions relative to their peers.

Another misconception relates to the belief that integrating an RI dimension to the strategy’s objective will inevitably impact performance negatively. This topic has been subject to meta-studies^* where researchers didn’t find support to these claims.

Understanding that there are diverse approaches to RI is crucial. Each product and strategy may vary, even if they come from the same issuer. Therefore, it’s essential to thoroughly examine the product and gain a clear understanding of what’s being offered.

*Sources: G. Friede, T. Busch, and A. Bassen, “ESG and financial performance: aggregated evidence from more than 2000 empirical studies,” in The Journal of Sustainable Finance & Investment (2015); DWS Group; Hamburg University; and SSRN.

PAID CONTENT

Ongoing market volatility — due to rising interest rates, geopolitical risks, and inflation — has investors on the hunt for more defensive approaches, like dividend strategies. And investors prefer strategies that take responsible investment (RI) into consideration. In fact, 73% of investors want their advisors to discuss RI opportunities, according to the 2022 RIA Investor Opinion Survey.

The search for dividends and RI creates an opportunity for advisors to help clients. In mid-April this year, Desjardins launched the Desjardins SocieTerra Global Dividend Fund for retail investors. It’s one of the first ESG (environmental, social and governance) dividend funds on the retail market. Jean-François Girard — Manager, Mutual Fund and Guaranteed Investment Development, at Desjardins — discusses how a dividend RI fund can meet client needs.

Q. Why is there a need for this fund now?

A. Current market volatility and the recent performance of many dividend stocks have created increased interest in this kind of strategy. In response, with the portfolio manager Sarasin & Partners, we offer a new option for investors seeking to invest in high-quality, cash-generating sustainable businesses that have the capacity to pay rising dividends over time. This can lead to lower earnings volatility and lower share price volatility for the company compared to the market, which is key for investors.

Q. Can you detail how a dividend RI fund can add to a portfolio strategy?

A. The fund is an unconstrained multi-thematic equity strategy. Sarasin & Partners is looking around the world to invest in top-tier companies and provide a premium level of dividend income. The fund is also a high-conviction portfolio of 40 to 60 stocks with a long-term investment horizon, and low anticipated turnover. It’s a strategy with high active share.

The fund considers ESG analysis in every step of the process. We exclude specific sectors or companies based on their activities. We identify climate risks and opportunities and assess how companies are positioning themselves to manage these risks and capture the opportunities inherent to the low-carbontransition. Sarasin & Partners uses a tool called CVaR (Climate Value-at-Risk), which translates the risks and opportunities of climate change to an investment perspective. Basically, this tool shows you how climate change impacts the valuation of a business. It can be positive or negative, depending on the company.

Further, Sarasin & Partners invests based on five key RI megatrends: aging, digitization, evolving consumption, automation, and climate change. These megatrends will play a role in shaping our future for a sustainable society.

The minimum dividend target with this fund is 15% more dividend income than the MSCI World Index.

Q. What competitive advantage does the fund provide advisors?

A. The SocieTerra Global Dividend Fund is an RI fund that meets investor demand. And through a global dividend strategy, it provides a specific dividend target so investors can generate cash flow. The focus on the five key megatrends is really a key distinction, and the defensive and active approach of the strategy helps to manage risk.

Q. How does an RI fund differ from other dividend funds?

A. There are only a few dividend-oriented RI funds in the market. So that’s the key distinction. The minimum dividend target with this fund is 15% more dividend income than the MSCI World Index.

And the megatrends we focus on are also of note. Aging, for example, is really interesting because the world’s population continues to increase. So this means the pattern of consumption will shift, bringing opportunities in financial services and healthcare. Meanwhile, automation will result in increased productivity and be supported by falling technology costs and the way we use AI. It will sweep across all industries. Some sectors are already there, but most are in the early stages of adoption. So it’s a great opportunity for us.

Also, many funds focus on mature companies. But we even look at disruptive-growth companies, which typically aren’t included in dividend portfolios. These companies have the ability to grow through innovation and disruption, and are starting to profit, providing investors with cash flow and dividends. Based on their experience, our portfolio manager saw that these companies provide superior risk-return over time. So it’s interesting because the market usually underestimates their potential and misprices this kind of company.

Q. Whom is this fund designed for?

A. We developed the product to meet the needs of all retail investors looking for an RI approach and cash flow through dividends. It was a good challenge for us to develop this fund while respecting our robust RI policy. The goal was to ensure investors can attain higher dividends and still meet their RI goals.

Jean-François Girard Manager, Mutual Fund and Guaranteed Investment Development, at Desjardins

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The Desjardins Funds are not guaranteed, their value fl uctuates frequently, and their past performance is not indicative of their future returns. The indicated rates of return are the historical annual compounded total returns of the date of the present document including changes in securities value and reinvestment of all distributions, and do not consider sales, redemption, distribution or other optional charges, or income taxes payable by any securityholder that would have reduced returns. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The Desjardins Funds are off ered by registered dealers. Desjardins®, all trademarks containing the word Desjardins, as well as related logos are trademarks of the Fédération des caisses Desjardins du Québec, used under licence.

This interactive infographic outlines the growing demand for responsible investing (ESG) options among Canadians, the unique process Desjardins uses to select companies worth investing in, statistical results on the ESG positive outcomes the Desjardins responsible investment solutions have made, and our approach to partnering with advisors.

Read more here

Canadians will soon have access to a new type of registered plan designed specifically to help them save for a first home. The federal government intends to introduce the Tax-Free First Home Savings Account (FHSA) on April 1, 2023, but this may affect your planning work with clients starting today.

“It’s an additional tool in the toolbox that allows the advisor to offer the best product for their client’s need while planning for their and their family’s financial future,” says Angela Iermieri¹, Financial Planner for Desjardins Group. “It’s an opportunity to showcase [an advisor’s] insight… Some people might not have heard about it, so why not be the first to speak about it?”

An FHSA allows Canadians aged 18 and older to save up to $8,000 a year to a maximum lifetime limit of $40,000, with tax-deductible contributions and tax-free withdrawals to purchase a first home. Contribution room starts accumulating the year the plan is opened, and unused room is carried forward. The plan can remain open for 15 years or until the individual turns 71 years old. It is possible to transfer FHSA funds not used to purchase a first home into an RRSP or RRIF; the transfer won’t be limited by or reduce RRSP contribution room.

Contrary to what was initially announced, clients can use both an FHSA and the Home Buyers’ Plan (HBP) within an RRSP to make a down payment on the same home. Nevertheless, the impending launch of the FHSA may affect advisors’ RRSP contribution recommendations, since some clients will have to choose between an RRSP contribution and an FHSA contribution.

“Look at your client’s home-buying goals. If the project needs to be realized next year, I think it may be best to continue with the Home Buyers’ Plan. If you have the RRSP contribution room, you could even borrow to contribute to your RRSP and obtain your $35,000 maximum HBP withdrawal, and get a tax deduction right now, which you could also use as a down payment,” suggests Iermieri.

There is also an opportunity to open an FHSA before buying a first home, contribute the maximum of $40,000 over the next 15 years, and ultimately transfer to accumulated contributions and growth to an RRSP before the FHSA expires.

With a longer time horizon, the FHSA starts looking more attractive for the down payment. Five years after opening the new plan, clients could have deposited $40,000. Then, at any point in the following 10 years, they can withdraw their contributions plus any growth to make a down payment. Clients can combine the amount from the FHSA with an HBP withdrawal if desired.

In addition, with a longer time horizon, clients who could not contribute the maximum to an FHSA and who would like to free themselves of the need to repay the money to their RRSP, may want to consider moving some RRSP funds into an FHSA. Such transfers will be subject to FHSA annual and lifetime contribution limits. A direct plan-to-plan transfer won’t result in taxation, though it’s important to keep in mind there also won’t be a tax deduction for the deposit into the FHSA, and RRSP contribution room will be lost.

« Being proactive and letting clients know that the FHSA will soon be available will allow clients to put a strategy in place. »

An opportunity for parents to help children save for a home

Since an FHSA can be opened at age 18, advisors have an opportunity to let parents know there’s a way they can continue contributing to their children’s future after they wind down deposits toward post-secondary education through an RESP.

“Parents can give money to their adult children, so the attribution rules would not apply to income earned in an FHSA,” Iermieri points out. “If they have been used to making an annual contribution to a RESP, they could just give the same amount directly to their child and the child could contribute it to an FHSA.”

RESP government grants are not available to people aged 18 and older, so this is an ideal moment to transition parents’ attention from helping with post-secondary education to making a down payment on a first home. Keep in mind that contributions to the FHSA will be tax deductible in the adult child’s hand; however, there’s the option to carry forward the tax deduction and use it in a future tax year.

If parents have saved more than enough in the RESP, they may even want to withdraw some or all their RESP contributions tax-free and give that money to their adult child. Then the child could deposit the amount into an FHSA. Note that it’s critical to wait until the RESP beneficiary is enrolled in a qualifying program before withdrawing money from a RESP to avoid a clawback of government grants.

Overall, Iermieri says, because the FHSA is narrowly focused on the purchase of a first home, it leaves contribution room in a client’s RRSP and TFSA for other goals such as retirement and big-ticket purchases. In addition, an FHSA’s contribution room of $40,000 plus potential growth allows for a bigger down payment than is available through the HBP. That’s critical with housing markets in many cities remaining very strong.

By discussing this new registered plan with clients, an advisor can demonstrate a 360-degree perspective that encompasses the whole family’s needs, Iermieri says. Meanwhile, enabling adult children to save for their first home can help advisors acquire the next generation of clients.

Most importantly, Iermieri adds, “being proactive and letting clients know that the FHSA will soon be available will allow clients to put a strategy in place.”

Angela Iermieri Financial Planner for Desjardins Group

¹ Financial Planner and Mutual Fund Representative for Desjardins Financial Services Firm inc.

Every year, the cost of living increases as a result of inflation. In fact, the Consumer Price Index (CPI) increased 4.1% year over year in August 2021, according to Statistics Canada. This rise in living expenses can significantly reduce the value of your clients’ investments.

“Simply saving isn’t enough,” says Philippe-Olivier Dumas, Head of Product Development, Guaranteed Investment Funds and Annuities at Desjardins Financial Security Life Assurance Company. “Pre-retirees’ savings need to retain value if they want to leave behind as much as possible to their beneficiaries, their kids, and their spouses.”

It’s important to help clients protect their investments from inflation risk, which in turn will help advisors respond to their clients’ concerns. But how can you help clients do that?

“Simply saving isn’t enough. Pre-retirees’ savings need to retain value if they want to leave behind as much as possible to their beneficiaries, their kids, and their spouses.”

— Philippe-Olivier Dumas, Head of Product Development, Guaranteed Investment Funds and Annuities at Desjardins Financial Security Life Assurance Company

Solution

Let’s take a typical example of a 55-year-old pre-retiree. He’s married with children in their 20s. He has worked hard his entire life as an executive at a world-renowned firm, and wants to ensure his children and spouse receive as much of his hard-earned money as possible.

One of the solutions that could ensure clients like this achieve their planning goals is Guaranteed Investment Funds (GIFs), which are funds that are guaranteed at maturity and death, and contain a mix of equities and fixed-income investments.

To ensure inflation protection for that pre-retiree, Desjardins offers two types of guarantees: 75/100i or 100/100i within Helios2 insurance contracts. Each offers inflation protection—up to the client’s 75th birthday—through automatic annual resets of the minimum death benefit.^[1] Each year, the amount will be reset based on the greater of the inflation-adjusted value and the market value. So, despite market downturns, the death benefit won’t decrease*.

For instance, let’s say the 55-year-old pre-retiree makes a $100,000 deposit. Desjardins will follow the inflation-adjusted value of the contract, and each year the issuer will increase the amount according to the CPI.

So if inflation is 2.5% per year, for example, the compounded inflation-adjusted value of the contract will be $102,500 after Year 1, $105,063 after Year 2, $107,689 after Year 3, and so on.

“Each year at the contract anniversary until age 75, the guarantee will grow by at least the amount of inflation. You’re guaranteed that your estate will not lose value in regard to inflation and purchasing power,” says Dumas, adding that Desjardins is the only issuer in Canada to offer inflation protection through its guarantees, according to Desjardins internal data as of October 2021.

Looking at the example above, let’s say the client dies in Year 12 of the contract. He’d get close to $130,000, notes Dumas, whereas without inflation protection, he’d only get around $120,000 from the previous market value reset in Year 7 near the peak of the market.

“It’s really close to $10,000 more in his pocket,” he explains. “It’s better to have inflation protection than to have only a reset to market value.”

Remember, having inflation protection is always important, adds Dumas, since it ensures your clients are able to leave as much as possible to their loved ones.

Digging deeper

Aside from inflation protection, many clients also want access to higher returns when the market is up. Both Helios2 – 75/100i and Helios2 – 100/100i offer this benefit.

If the market is up and above inflation, the annual market value reset will make sure the client locks the increased value into their minimum death benefit.

“Also, the contract value is always at least equal to the market value of the funds the client has selected,” says Dumas. “This is true for the maturity and death guarantee. The client will receive the higher of the market value or the guaranteed amount. If you have good market performance, you’ll add it at the end. And that’s thanks to the strong emphasis we put on manager selection and performance.”

Additionally, many pre-retirees want to ensure their beneficiaries receive as much of their estates as possible in a quick and efficient manner. The Helios2 contract offers creditor protection and bypasses probate fees (must meet certain requirements to be eligible).

“Probate fees can be as much as 10% of the value of the investment, so it’s something that’s significant,” says Dumas. “The benefit is paid to beneficiaries within five business days, which means they have quick access to the funds (must meet certain requirements to be eligible: death certificate/beneficiary).”

Again, your clients want to ensure their estates are protected against inflation risk and can pass on to beneficiaries quickly and easily. GIFs that offer inflation protection could provide solutions for your clients and, in turn, can help advisors respond to their clients’ concerns.

Learn more about Desjardins Helios2 – 75/100i and Helios2 – 100/100i. 

* Given no withdrawals are made

^[1] Desjardins Helios2 Contract, Guaranteed Investment Funds, Representative’s Guide, page 16: https://www.webi.desjardinsassurancevie.com/en/DocumentsWebi/13185E.pdf

Legal Notes:

DESJARDINS INSURANCE refers to Desjardins Financial Security Life Assurance Company. In addition, DESJARDINS INSURANCE and its logo are trademarks of the Fédération des caisses Desjardins du Québec used under licence.