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The investible portion of the Total Fund lost 0.2% for the quarter but earned 7.5% for the year ended March 31, 2001. The Total Fund including the Notional Accounts gained 0.2% for the 3 months ended March 2001, and 7.1% for the year.
The Long Term fund is invested according to the Investment Guidelines and is achieving its benchmark. 82% of the Long Term Fund is invested in Real Return Bonds which declined in value in the quarter as a result of an uptick in long-term yields. In addition, all the equity markets in which the Long Term Fund participates declined in value both in the first quarter and over the year ended March 31. The portions of the Long Term Fund earmarked for Canadian
equities, US equities, International equities and Canadian
Universe bonds, are all invested in pooled funds operated
by the money manager with the objective of tracking their
respective market indexes. The Universe bond fund, the US
equity fund, and the International equity fund are all within
their mandated tracking ranges for the year ending March,
however, for the reasons stated below the Canadian equity
fund outperformed its benchmark index in the year.
The Short Term Fund is invested in 200 issues and its sector allocation is similar to the Scotia Capital Short Term Bond Index. There are no securities with less than a BBB credit rating, and the duration of the Short Term portfolio is within 0.07 years of the benchmark index. The investment of the Short Term Fund complies with the Investment Guidelines.TD QUANTITATIVE CAPITAL ("TDQC") We attended the offices of TDQC on March 23, 2001 for purposes of reviewing the firm for the 1986-1990 Hepatitis C Settlement Trust Fund (the "Fund"). The FirmTDQC is a division of TD Asset Management Inc. (TDAM) which, in turn, is wholly-owned by the Toronto-Dominion Bank. In 1996, TDAM purchased Quantitative Capital from AMI Partners and merged its own quantitative and indexing operations with Quantitative Capital to form TDQC. During 2000 TDAM acquired $1.7 billion in assets from Greydanus Boeckh & Associates, a quantitative fixed income investment manager based in London, Ontario in addition to the quantitative products offered by Canada Trust totaling $1.8 billion. TDQC now has over $43 billion in assets under management, up from $39 billion last year at this time. Operations are centralized in Toronto where they perform research, manage the portfolios and do the trading. During the year TDQC moved from their old location in the TD Tower to new facilities in the former head office of Canada Trust in BCE Place. The investment staff all work in a bright and open trading area which has plenty of room to expand. While the staff has grown from 55 to 65 over the last year there has been no turnover of key investment staff. We have noted below those responsible for the various portfolios and pooled funds in which the Hepatitis C Settlement Fund (the "Fund") participates. The assets of the Fund are managed by Bruce Geddes, a member of the TDQC fixed income team. The Fund's AssetsMost of the assets are managed on a segregated basis, however, the Long Term Fund also participates in several pooled funds described below. Positive cash flows are used to rebalance the fund. TDQC tests the Fund mix daily, however, no securities are sold for purposes of rebalancing until the ranges in the Investment Guidelines are in fact breached. All disbursements are being made out of the Short Term Fund. The four pooled funds in which the Fund has an interest are all mutual fund trusts. TDAM has filed a prospectus for these funds and distributes units in these funds in the institutional and retail markets. They are not "pooled fund trusts" which are more typical for the tax exempt institutional investor. This has several ramifications which are noted below for each fund. Because they are mutual funds TDQC has not been able to involve these pooled funds in securities lending. However, with the change in OSC regulations, TDQC intends to begin lending the securities held by these pooled funds. The revenues will be split 50:50 between the bank and the pooled fund, with the bank providing an indemnity for broker default, i.e. failure to return the securities. (Securities lending within pooled funds is permitted under the Investment Guidelines). Equity FundsAll the equity index funds essentially fully replicate their
respective index. The stocks in each fund are held within
3 - 5 basis points of their weight in the index. Cash is kept
to minimum and cash balances are "equitized" using
futures contracts and exchange traded funds. (The use of derivatives
for this purpose is permitted under the Investment Guidelines).
Established in 1991, the Emerald Canadian Equity Fund, in which the Hepatitis C Fund is invested, was valued at $3.1 billion at the end of February. TDQC reports that they have $16 billion in Canadian equities under management and that this gives them the necessary internal liquidity to "cross" over 50% of their trades reducing market impact and brokerage costs for their funds. Crosses and in specie transfers are all priced at the closing price for that day. 1/2¢ per share commission is paid to brokers if the crosses are done on the exchange. Brokerage paid for normal trades is between 2 ½ - 3¢ per share. Because the fund is a mutual fund it was unable to add to its position in Nortel stock at times when Nortel represented 25% or more of the market value of the pooled fund. While this meant that the tracking error was negative in the early part of the year, in the latter part of the year the fund outperformed the index as Nortel's stock price fell. Hence the large (for an index fund) positive tracking error for this fund. TDQC now offers a pooled fund in which the holdings in any one stock are limited and consideration should be given to switching to this fund in order to prevent any one stock from dominating the Fund's Canadian equity returns to this extent in future. However, administratively TDQC restricts admission to this pooled fund to tax exempt investors. The Canadian equity team is headed by Enrique Cuyegkeng
with support from Terry Horaski and Thomas Kain.
The Emerald U.S. Market Fund, in which the Hepatitis C Fund is invested, was established August 29, 1997 and was valued at $202 million as at the end of February. Initially this fund did not include all 500 stocks. However, it now fully replicates the index and holds all securities within 5 basis points of their index weight. Notwithstanding the pooled fund's size they have been able
to negotiate commission rates down to 2¢ per share
or less.
TDQC's International Equity Fund was managed for them by State Street in earlier years but is now managed internally. The Fund essentially fully replicates the MSCI EAFE Index by holding approximately 909 out of 913 shares. As at the end of February the pooled fund was valued at $315 million. Rather than equitize cash with exchange traded funds they tend to use index futures contracts. The U.S. Market Fund and International Equity Funds are both managed by Tim Thompson and Craig Gaskin. Both of these funds are subject to foreign tax on their dividend income. As a practical matter there is probably nothing that can be done about this. We have used as benchmarks for each of these funds, "net of tax", returns so the withholding does not show up as tracking error in this report. TDQC reports that the tax paid by these funds is roughly 20 basis points for the U.S. fund and 30 for the International.
TDQC's Emerald Canadian Bond Fund was established in August 1991 and was valued at $7.0 billion as at the end of February. The fund is managed using stratified (cellular) sampling to replicate the performance of the SC Universe bond index. The universe of securities is broken down into a matrix with sectors and maturity along each axis. Each cell of the matrix is analysed and representative bonds are then selected from each cell based on liquidity, supply, convexity and term. In all the fund holds roughly 580 issues whereas the index has 958 (as at the date of our meeting). Credit analysis is performed to review the credit quality of corporate holdings, however, the Emerald Canadian Bond Fund does not invest in corporate bonds rated lower than A . The fixed income team consists of Kevin LeBlanc, Lori MacKay and Bruce Geddes.
No significant issues with TDQC. While consideration could be given to switching to the Emerald Canadian Capped Pooled Fund Trust, this would require documentation of the Fund's tax status. We met with representatives of Royal Trust on March 19, 2001 to identify any problems with respect to the investment of the Fund. They did comment that the tax status of the Fund was still not documented. This means they would be unable to file claims for any foreign taxes withheld on the Fund's foreign income. Currently the Fund's foreign investments are in mutual funds which are taxable in foreign countries in any case, therefore, documentation of the Funds tax status would not make any real difference to the Fund's returns. RT confirmed that their "AutoCredit" system verifies the interest and dividend income of the Fund. This system covers all the major markets and credits the Fund with income when it is due regardless of when it is received. RT does not use their STIF (Short Term Investment Fund) program for the Fund, therefore, all cash balances are invested by TDQC. While the statements show short-term deposits with the Royal Bank, these are arranged by TDQC, and are otherwise permitted under Investment Guidelines and the Trustee's Terms of Appointment. RT does not lend the segregated securities of the Fund. (Securities lending is not permitted under the Investment Guidelines other than in pooled funds). The segregated bonds in the Fund are priced by RT using prices published by FRI, an external pricing provider. For the TD Emerald funds they use the unit values established by TDQC.
No significant issues 1On investible portion only. |
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