1. Not for public distribution OMEGA Funds Preferred Equity September 2009 TM
2. Need for a stable source of income A solution that provides steady, tax-efficient income <ul><li>A strong increase in the number of people at or approaching retirement </li></ul><ul><li>combined with </li></ul><ul><li>Market uncertainty </li></ul><ul><li>results int the need for </li></ul>
3. Investing in preferred shares <ul><li>Preferred shares: </li></ul><ul><li>Provide greater security of principal </li></ul><ul><li>E nsure a stable income flow </li></ul><ul><li>Have priority over common shares for distributions </li></ul><ul><li>Provide downside protection to a portfolio </li></ul><ul><li>Have lower volatility compared to the S&P/TSX Composite Index* </li></ul>* Calculation based on historical monthly performance of Intact's Preferred Share Portfolio (institutional mandate) from July 1989 to December 2007 and the Omega Preferred Equity Fund from January 2008 to June 30, 2009. The fund had a monthly annualized volatility of 8.4% compared to 15% for the S&P/TSX Index.
4. Preferred shares from a taxation standpoint <ul><li>Preferred shares offer better after-tax returns than bonds of a similar quality and level of risk. 1 </li></ul><ul><li>The preferential tax treatment afforded to income trusts will disappear in 2011, enhancing dividend tax efficiency in a portfolio. </li></ul>1. Because of tax credits afforded to dividends. 2. This return varies based on your marginal tax rate and your province of residence. In this example, we used the most recent income tax rate (2008) for an investor in the highest marginal tax bracket, residing in Ontario. RBC 5.65%, Series AH Issuer Scotiabank 5.60%, Series 17 Great West 4.55%, Series H Power Financial 5.25%, Series E Price as at May 29, 2009 $23.18 $18.19 $20.17 $23.00 Dividend $1.40 $1.21 $1.31 $1.41 Current dividend yield 6.04% 6.65% 6.49% 6.13% C omparable yield of a bond 2 8.57% 9.44% 9.22% 8.70% Sample Pre-Tax interest equivalent yield
5. HOW CAN YOU SEIZE THESE OPPORTUNITIES?
6. The solution: The Omega Preferred Equity Fund Investment objective MER The Fund <ul><li>Ensure high dividend income </li></ul><ul><li>Focus on capital protection </li></ul>Management expense ratio is capped at 1.50% 1 <ul><li>First to offer a fund consisting primarily of preferred shares </li></ul><ul><li>Low volatility </li></ul><ul><li>High returns based on a yield enhancement strategy </li></ul><ul><li>Stable, tax-efficient income </li></ul><ul><li>In-depth analysis of credits </li></ul><ul><li>Major player in the preferred shares market with significant presence </li></ul><ul><li>Advisor Series. </li></ul>
7. The Fund manages the complex universe of preferred shares for you Split shares Callable/convertible Cumulative dividends Non-cumulative dividends Fixed rate/floaters reset Perpetuals Credit risk Retractables Wide bid- ask spreads Variable rates Interest rate risk Redemption risk Liquidity risk More than $6.4 billion in new issues in 2008
8. A diversified portfolio strengthened by a yield enhancement strategy Preferred shares universe $30 billion, more than 180 issues Extensive credit analysis Assessment of risk/return profiles Assessment of current market conditions Portfolio makeup Security selection Weighting of each of the securities within the fund Sector diversification Value added created through security selection Additional income and yield enhancement Identify opportunities in structural cycles + Proprietary active trading strategy based on DROP
9. What is Intact's Dividend Rollover Plan (DROP)? Purchase preferred shares shortly before the ex-dividend date* Sell the same preferred shares before the market discounts the value of the dividend The purchaser is therefore entitled to dividends * Ex-dividend date = Investors must purchase the share prior to this date to be eligible for dividends. The purchaser thus reaps the benefit of the dividends while reselling securities at approximately the same price This trading strategy is proprietary to Intact Investment Management Inc.
10. Example of DROP in a portfolio Quarterly distributions <ul><li>Intact holds Royal Bank (RBC) preferred shares in its portfolio from January 1 to December 31, 2008 </li></ul><ul><li>Dividend yield = 5% ($0.3125 per share payable quarterly) </li></ul>DROP strategy: Additional dividend <ul><li>Intact purchases and sells Scotiabank preferred shares </li></ul>
11. With the DROP strategy, the portfolio accumulates total earnings of $1.59 compared to $1.25 had the investor simply held Royal Bank preferred shares. $0.3125 (RBC) $0.3125 (RBC) $0.3125 (RBC) $0.3125 (RBC) $0.34375 (BNS) Timeline March July August Sept . Dec . Example of DROP in a portfolio (cont’d)
12. DROP <ul><li>Why use such a strategy? </li></ul><ul><li>Adds an additional dividend to quarterly distributions </li></ul><ul><li>Provides immediate returns on investments without increasing the level of risk for the Fund. </li></ul>
13. Opportunities in structural and economic cycles according to Intact <ul><li>Fixed reset rate </li></ul><ul><li>The weighting of fixed resets has more than doubled </li></ul><ul><li>A powerful tool should inflation ever spike </li></ul><ul><li>Fixed rate </li></ul><ul><li>The weighting of fixed rate securities was trimmed because of long-term inflation concerns </li></ul>Fund makeup Retractables (non-perpetual) December 2008 26.6% August 2009 17.4% Perpetuals 73.4% 82.6% Variable rate 2.8% 1.9% Fixed rate - resets 16.6% 36.6% Floating rate - resets 2.6% 1.4% Fixed rate 51.4% 42.7%
14. Manager's comments (cont’d) August 2009 <ul><li>On the Canadian preferred market </li></ul><ul><li>valuation: </li></ul><ul><li>December 2007: Peak of valuation, expensive (spreads for fixed rates were around 140 bps) </li></ul><ul><li>December 2008: Extremely attractive valuation, cheap (spreads were around 330 bps) </li></ul><ul><li>Today : Still attractive compared to peak. </li></ul>The next tightening to follow will be slower to achieve It will require continued strength in the economy and in credit markets David W. Tremblay Vice-President and Portfolio Manager
15. Manager's comments (cont’d) - August 2009 <ul><li>On opportunities </li></ul><ul><li>Short-term: </li></ul><ul><ul><li>Expect further credit spread contractions over the next 12-18 months </li></ul></ul><ul><ul><li>A pullback would result in good buying opportunities </li></ul></ul><ul><li>Medium to long-term: </li></ul><ul><ul><li>The coupon is what we should make on preferred shares </li></ul></ul><ul><ul><li>The focus should be on credit analysis </li></ul></ul><ul><ul><li>A voiding defaults will create value in the portfolio </li></ul></ul><ul><li>The quantity of issues may become a negative aspect </li></ul>
16. Manager's comments - August 2009 <ul><li>Outlook and comparison to common shares </li></ul><ul><li>and bonds: </li></ul><ul><li>Compared to bonds, preferred shares have a fiscal advantage </li></ul><ul><li>Current climate of low interest rates and overvalued Canadian financial securities offer a relative advantage to preferred shares </li></ul>
17. Omega Preferred Equity Fund Sector allocation as at August 31, 2009 85.7% 6.5% Financial services Public services Telecommunications Consumer staples Consumer discretionary Materials 5.3% 1.4% 1.1% 0.0%
18. Omega Preferred Equity Fund Main Securities as at August 31 2009 Royal Bank of Canada Great-West - preferred CIBC - preferred Royal Bank of Canada - preferred Royal Bank of Canada – preferred National Bank of Canada - preferred TD Bank - preferred Bank of Montreal - preferred Sunlife Financial Credit rating DBRS 2.20% 1.90% 1.80% 1.70% 1.60% 1.60% 1.60% 1.50% 1.50% P1L P1L P1L P1L P1L P1L P1L P1L P1L Bond credit rating DBRS AA- AA- AA- AA- AA- AA- AA- AA- AA- Weight
19. Omega Preferred Equity Fund Fund makeup Retractable (non-perpetual) August 2009 17.4% Perpetuals 82.6% Variable rate 1.9% Fixed rate - resets 36.6% Floating rate - resets 1.4% Fixed rate 42.7% Current yield by preferred type Perpetuals – fixed Perpetuals – floating Perpetuals – fixed reset Perpetuals – floating reset Retractables 5.65% 3.39% 5.51% 3.39% 5.03% Duration (incl. Options): 6.35 years Duration (excl. Options): 9.61 years Data as at August 31, 2009
20. Omega Preferred Equity Fund <ul><li>Portfolio characteristics </li></ul><ul><ul><ul><li>Approx. Number of holdings: 140 </li></ul></ul></ul><ul><ul><ul><li>Canadian preferred equity allocation: min. 90% </li></ul></ul></ul><ul><ul><ul><li>Cash allocation: max. 10% </li></ul></ul></ul><ul><ul><ul><li>Benchmark Index: S&P/TSX Preferred Share </li></ul></ul></ul><ul><li>Management fees </li></ul><ul><ul><li>Advisor Series: 1.25% </li></ul></ul><ul><ul><li>F Series: 0.50% </li></ul></ul>Fund codes: Advisor series ISC: NBC480 DSC: NBC580 F Series: NBC780
21. Omega Preferred Equity Fund Intact’s Preferred Equity Portfolio was created in January 1987. Omega Preferred Equity Fund** Returns as at August 31, 2009 S&P/TSX Preferred Share 3.6% 10.1% 22.4% 6.0% 24.6% 2.8%* 1.25% 3.1% 8.1% 21.3% 6.5% 23.9% N/A 1 M 3 M 6 M 1 Y YTD Since inception Mgmt. fee N/A *The Omega Preferred Equity Fund was created in November 2007. **Advisor Series. For F Series, the management fee is 0.50%. Historical institutional returns - Pre-Tax (June 2009) Intact Preferred Shares Nesbitt Burns 50 Preferred Shares 1 year 3 years 5 years 10 years -1.1% -1.8% 0.8% 3.7% -0.2% -1.6% -0.2% 2.8% S&P/TSX preferred share 0,2 % -1,8 % 1,6 % N/A
22. About Intact <ul><li>Wholly-owned subsidiary of Intact Financial Corporation with more than 7,000 employees across over Canada. </li></ul><ul><li>Team consisting of 40 professionals working from offices in Montreal and Saint-Hyacinthe. </li></ul><ul><li>Specializes in active Fixed Income Securities and Canadian Equity management. </li></ul><ul><li>Has nearly $7 billion in assets under management in Canada. </li></ul>
23. About Intact <ul><li>Benjamin Jasmin </li></ul><ul><li>CFA, Canadian Equities Analyst </li></ul><ul><li>Associate portfolio manager for preferred shares </li></ul><ul><li>Equities analyst within Intact investment team </li></ul><ul><li>David W. Tremblay </li></ul><ul><li>M. Sc., CFA, Vice-President and Portfolio Manager </li></ul><ul><li>Manager of Preferred Equity and High Dividend Equity portfolios. </li></ul><ul><li>Currently managing close to $2 billion in assets for Intact Investment Management Inc. </li></ul>David W. Tremblay
25. Omega Funds ™ (the “Funds”) are offered by National Bank Securities Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with Fund investments. Please read the prospectus of the Funds before investing. The Funds securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. “Omega Funds ™ ” and the Omega Funds logo are trademarks of National Bank of Canada. The information contained herein was obtained from sources which we believe to be reliable but is not guaranteed by us and may be incomplete. This guide is provided for information purposes only and creates no legal or contractual obligations for National Bank of Canada, its subsidiaries or affiliates. For more details on tax treatments for your personal situation, please consult an accountant or tax consultant. 1-877-463-7627 www.nbcadvisor.com
26. David W. Tremblay, M.Sc., CFA Portfolio Manager, Preferred Shares and Canadian Equities Mr. Tremblay has been managing preferred shares, common shares, and income trust portfolios for seven years for Intact Investment Management Inc. He has more than eight years of experience in the investment industry. Mr. Tremblay is also actively involved in asset mix optimization, capital management, and risk management for the Portfolio Manager’s institutional clients. Prior to joining the Portfolio Manager, Mr. Tremblay worked for BMO Nesbitt Burns Inc. as an investment banking analyst. Mr. Tremblay earned his M.Sc. in Finance from the Université de Sherbrooke and is a CFA Charterholder. Benjamin Jasmin, CFA Investment Analyst – Canadian Equities Benjamin Jasmin has been with the Portfolio Manager since December 2005. Mr. Jasmin specializes in the analysis of the Preferred Shares. Benjamin also works on developing and analyzing quantitative and risk models. Prior to joining the Portfolio Manager, Mr. Jasmin worked for Landry Morin Inc. as a quantitative analyst and is a CFA Charterholder.