Building Your Portfolios One Step at a Time

Have you ever wondered how your investment portfolios are constructed? What if we told you that constructing a portfolio is similar to building your dream home? You need a goal and a well-defined process to help you get there. This is how it works!

To view full story, click here.

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Evolution of the Counsel Balanced Portfolio

We believe in the power of design and evolution. The Counsel Balanced Portfolio has undergone significant changes over the years as the investment landscape has evolved.

To view full story, click here.

Insight Fullblog Profile https://thehub.ipcc.ca/documents/1293029/1713473/Balance+Portfolio/6174b218-5ada-4f07-adbe-06ad6e878a05?t=1509117897873

Currency Hedge Increased for Counsel Retirement Income Portfolio

The Portfolio Management Team increased the currency hedge position on the U.S. dollar exposure for Counsel Retirement Income Portfolio to 90% from 65% effective October 20, 2017. The decision was based on the technical signals that the team monitors, which showed that the U.S. dollar had strengthened relative to the Canadian dollar to a point where it was trading above both the longerterm and mid‐term moving averages.

Despite this recent strength, the Canadian dollar is still forecast to rally against the U.S. dollar into 2018. Increasing the hedge now will provide protection against a Canadian
dollar increase and reduce any unwanted currency risk in this income‐oriented portfolio.

To view full story, click here.

Insight Fullblog Profile https://thehub.ipcc.ca/documents/1293029/1604360/Currency+Hedging/533ec39a-1fb4-4577-b338-01446cc61729?t=1503518388773

Value Stocks in the Growth Paradigm

Brandon Geisler, Portfolio Manager at Marsico Capital Management gives Marsico’s perspective on investing in this environment of high U.S. valuations and low volatility.  He also shares his thoughts on the current U.S. administration and potential changes to the Fed.

Marsico manages the Counsel U.S. Growth mandate. 

Insight Fullblog Video https://player.vimeo.com/video/237970439

Diversification, Defensive Equities and Low Volatility Equities

Donie O’Brien, Senior Quantitative Fund Manager at Irish Life Investment Managers discusses what he believes to be the current drivers of risk in the marketplace and Irish Life’s approach to managing risk. He also talks about increasing interest rates and the value of fixed income as a shock absorber in diversified portfolios.

Irish Life manages the Defensive global equity, Global low volatility equity, Global government bonds, and Emerging market debt and equities components of the Counsel Retirement Portfolios. 

Insight Fullblog Video https://player.vimeo.com/video/237968717

Canada: Better Relative Performer Going Forward

Stu Kedwell, Co-Head of Canadian Equities, Senior Vice-President, and Senior Portfolio Manager of North American Equities at RBC Global Asset Management weighs in on recent difficulties in the Canadian market.  Stu also shares the factors considered when assessing the likelihood of a recession, including the general direction of the stock market or market breadth.

RBC manages the Canadian Dividend component of Counsel Regular Pay and Counsel Income Managed Portfolios. 

Insight Fullblog Video https://player.vimeo.com/video/237954820

Not All Dollars Are Equal

To view as a PDF, click here.

You’re planning a trip to New York to catch a Broadway show this weekend. As you search for tickets, you notice that prices are reflected in U.S. dollars (USD) and Canadian dollars (CAD), and they have different values.

 

Why the different prices?
The difference has to do with how currencies are valued and traded. Currencies trade daily, just like stocks and bonds. If the value of a currency changes, it affects the exchange rate between them. The fluctuation in exchange rates and how it impacts what you pay for things is known as currency risk.

 

Currency Risk and Your Investments

When you invest in a mutual fund that buys stocks and bonds outside of Canada, you take on a currency risk. For example, a change in the USD/CAD exchange rate will cause the Canadian dollar value of your U.S. investments to go up or down. In short, a falling Canadian dollar increases the value of your foreign investments, while a rising Canadian dollar reduces it.

 

How is Currency Hedging Done?
Put simply, we enter into a contract with another financial institution to lock in an exchange rate, for example, at $1.00 USD for $1.24 CAD. If the Canadian dollar strengthens, your portfolio is protected and the fall in the value of the U.S. dollar investments is minimized.

 

Our Active Approach
We hedge the U.S. dollar exposure in a portfolio as it is typically the most significant currency risk. Our portfolio management team monitors the movement of the U.S. dollar carefully and actively adjusts how much of your portfolio is hedged. The goal is to minimize any losses due to currency risk in your portfolio. If the Canadian dollar shows signs of getting stronger, we may add a hedge. Conversely, as the Canadian dollar weakens, the hedge is reduced or removed so you can enjoy the benefit of an increase in the value of your U.S. dollar investments. 

 

"Targeted currency risk mitigation is just one of many value added investment
management services that we offer to help support your financial plan.”

 

Content powered by Counsel Portfolio Services, a wholly-owned subsidiary of Investment Planning Counsel Inc. Trademarks owned by Investment Planning Counsel Inc. and licensed to its subsidiary corporations. Investment Planning Counsel is a fully integrated wealth management company. Mutual Funds are available through IPC Investment Corporation and IPC Securities Corporation. Securities available through IPC Securities Corporation, a member of the Canadian Investor Protection Fund. Insurance products available through IPC Estate Services Inc.

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Impact of Interest Rate Increases on Canadian Real Estate

We asked our global real estate manager, Timbercreek Asset Management, for their view on interest rate increases in Canada and the impact on the real estate market. Here’s what they had to say: 

Our view on the Canadian interest rate environment is that the Bank of Canada is raising interest rates as a result of stronger economic growth rather than higher inflation. Stronger economic growth typically has a positive impact on real estate fundamentals. As economic conditions improve and companies expand, demand for commercial real estate space will grow, positively influencing occupancy rates. Higher occupancy rates and greater pricing power should result in higher market rents which ultimately leads to higher revenue and earnings growth.

If we look at the last four Bank of Canada tightening cycles going back to 1999, Canadian real estate investment trusts (REITs) underperform the S&P/TSX Composite Index (TSX) leading up to and immediately after the initial rate hike. However, that underperformance (which has already taken place) tends to be short-lived. Over the subsequent 12 months post the initial rate hike, Canadian REITs outperform the TSX by approximately 6%. We believe this outperformance is due to the reasons discussed above, which is an improving domestic economy positively influences real estate fundamentals.

In terms of the positioning of the portfolio, we are focused on owning Canadian REITs that can grow net asset value and benefit from a better growth outlook. The portfolio has positions in First Capital, RioCan, Allied and Canadian Real Estate to name a few, all of which have low leverage, own well-located portfolios and can grow organically. We believe stronger growth and an improving domestic economy should positively influence Canadian REIT share prices over the next 12 months.

 

Samuel Sahn

Executive Director, Portfolio Management

Timbercreek Investment Management Inc.

 

Timbercreek Asset Management Inc. manages Counsel Global Real Estate, a component in several of the Counsel Portfolios. Timbercreek's team of portfolio managers, analysts and investment professionals analyze the universe of global real estate securities by evaluating the location of the real estate and its market, the current income stream, the financial strength of the real estate entity, and the viability of the underlying security (whether common equity, preferred shares or corporate debt).

 

This report may contain forward-looking statements which reflect current expectations or forecasts of future events. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as: “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “preliminary”, “typical” and other similar expressions. In addition, these statements may relate to future corporate actions, future financial performance of a fund or a security and their future investment strategies and prospects. Forward-looking statements are inherently subject to, among other things, risks, uncertainties and assumptions which could cause actual events, results, performance or prospects to differ materiality from those expressed in, or implied by, these forward looking statements. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, the volatility of global equity and capital markets, business competition, technological change, changes in government regulations, changes in tax law, unexpected judicial or regulatory proceedings, catastrophic events and the ability of the investment specialist to attract or retain key employees. The foregoing list of important risks, uncertainties and assumptions is not exhaustive. Please consider these and other factors carefully and not place undue reliance on forward-looking statements. The forward-looking information contained in this report is current only as of the date of this report. There should not be an expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. The indices cited are widely accepted benchmarks for investment performance within their relevant regions, sectors or asset class, represent non-managed investment portfolios, exclude management fees and expenses related to investing in the indices, and are not necessarily indicative of future investment returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. 

North Korea: Market Grey Swan or Tempest in a Teapot?

To view as a PDF, click here.

WHAT IS HAPPENING?

In response to U.S. defence official documents, which state that North Korea has the capability to miniaturise a nuclear weapon and place it on one of its missiles, U.S. President, Donald Trump, issued an ultimatum for North Korea to reduce its testing or “face fire and fury like the world has never seen.” North Korean leader, Kim Jong-un, retaliated by threatening a strike on Guam, a U.S. Pacific territory and a major American military base. Inflammatory news headlines aside, there are few signs that the U.S. is planning a first strike on North Korea or that Kim will make good on threats to hit Guam.

Still, the antagonistic exchange between the two leaders appeared like a market grey swan (a known risk that’s always lurked in the background) causing uncertainty. Market volatility, which was already on the rise in June, increased dramatically last week. The broad-based S&P500 Index fell 1.4% on August 10, the largest downward move of the year, while Canadian stocks had their biggest weekly decline since June.

 

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. A higher number represents greater anxiety in the markets.

 

WHAT DOES IT MEAN TO YOUR PORTFOLIO?

There are three main news cycles that generate interest among investors: corporate, political, and geopolitical.

With the winding down of earnings season, and the U.S. Congress on vacation until September, it’s the geopolitical news that’s dominating headlines.

Economically, the greatest concern out of the current news cycle is for South Korea, which accounts for nearly 2% of the world’s economy and is home to companies such as Samsung Group and Hyundai Motor Company. A drop in business activity due to a war will have a terrible human cost and will affect growth in regional and global markets, negatively impacting equity markets. However, we do not expect war to breakout in the region. We recommend investors exercise patience and stay calm rather than get caught up in the headlines.

Much like we’ve seen with many other geo-political events, hopefully the volatility triggered by this news cycle will be short-lived. We expect to see a flight to safe haven assets such as fixed income, the U.S. dollar and the Swiss franc. We also expect price increases in commodities such as oil, as conflict concerns usually translate into higher demand for resources.

 

WHAT ARE WE DOING?

For now, we continue to stick to our disciplined investment strategy. Our portfolios are structured with a balance of fixed income and equity exposure to help minimize risk. It’s at times like these that we are grateful for the fixed income exposure, which can act as a shock absorber to a short-term downturn in equity markets.

The fundamentals of the global economy are good. Corporate earnings and revenues are strong. Monetary policy is still accommodative despite rate increases in North America. The breadth of the market is still strong at 68% advancers, but we are likely overdue for a short-term correction.

Historically, as the chart here suggests, markets have reacted strongly in the wake of American-led military operations, should one occur.

We will continue to see rumours and troubling headlines circulate over the next few weeks. This may cause even more volatility. The next headline could point to problems in Venezuela, Iran, Russia, Syria, or even in the U.S., as they start to focus on the debt ceiling. We consider this normal and we’ve been through it many times over the last few years.

Along with the investment specialists for your portfolio, we are keeping an eye on the news cycle, but we will stay above the noise and not be distracted by it.

 

Our goal is to mitigate the risks in your portfolio as we help you achieve your return expectation.

 

As part of our process, we are reviewing the portfolios for opportunities to rebalance (buy low, sell high) or to adjust our U.S. dollar hedge positions. We also have specific strategies in place for our portfolios that allow our investment specialists to preserve capital by switching out of volatile market sectors during periods of market stress. Our goal is to mitigate the risks in your portfolio as we help you achieve your return expectation.

By and large, we believe what we are seeing today is simply sabre rattling between the U.S. and North Korea, and will unlikely result in any meaningful deterioration in the global growth picture. This could well be just a tempest in a teapot and will soon pass.

 

 

DISCLOSURE

Trademarks owned by Investment Planning Counsel Inc. (IPC) and licensed to its subsidiary corporations. Investment Planning Counsel, is a fully integrated Wealth Management Company. Mutual Funds available through IPC Investment Corporation and IPC Securities Corporation. Securities available through IPC Securities Corporation, a member of the Canadian Investor Protection Fund. Insurance products available through IPC Estate Services Inc. Counsel Portfolio Services is a wholly-owned subsidiary of IPC.

This report may contain forward-looking statements which reflect current expectations or forecasts of future events. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as: “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “preliminary”, “typical” and other similar expressions. In addition, these statements may relate to future corporate actions, future financial performance of a fund or a security and their future investment strategies and prospects. Forward-looking statements are inherently subject to, among other things, risks, uncertainties and assumptions which could cause actual events, results, performance or prospects to differ materiality from those expressed in, or implied by, these forward looking statements. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, the volatility of global equity and capital markets, business competition, technological change, changes in government regulations, changes in tax law, unexpected judicial or regulatory proceedings, catastrophic events and the ability of the investment specialist to attract or retain key employees.  The foregoing list of important risks, uncertainties and assumptions is not exhaustive. Please consider these and other factors carefully and not place undue reliance on forward-looking statements. The forward-looking information contained in this report is current only as of the date of this report. There should not be an expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.  Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. The indices cited are widely accepted benchmarks for investment performance within their relevant regions, sectors or asset class, represent non-managed investment portfolios, exclude management fees and expenses related to investing in the indices, and are not necessarily indicative of future investment returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. 

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Advantages to Being Selective

Virginia Au, Vice President, Portfolio Manager
Invesco Canada Ltd.
Audio run time: 7:16 minutes

 

Virginia Au, Vice President, and Portfolio Manager at Invesco Capital talks about concerns around a correction in the market, which sectors they are finding opportunities in, and how small caps are doing against bigger names.

 

Invesco is responsible for managing the U.S. Small Cap mandate.
Insight Fullblog Video https://player.vimeo.com/video/224949071

Importance of Diversification in Fixed Income

Steve Locke, Senior Vice President, Portfolio Manager, Head of Team
Mackenzie Investments
Audio run time: 12:00 minutes

 

Steve Locke, Senior Vice President, Portfolio Manager and Head of Team at Mackenzie Investments offers his views on the Bank of Canada's rate decisions, the impact these will on us and the real estate market, as well as the importance of being selective and well diversified in fixed income.

 

Mackenzie is responsible for managing the Canadian core fixed income and fixed income mandates. 

Insight Fullblog Profile https://player.vimeo.com/video/224357217

Investing in Canada Makes Sense

Mel Mariampillai, Portfolio Manager
Sionna Investment Managers Inc.
Audio Run Time: 10:11 minutes

 

Mel Mariampillai, Portfolio Manager at Sionna Investment Managers discusses the challenges we're seeing in Canada, whether things are likely to improve, the impact of interest rates, and overvaluation. 

 

Sionna is responsible for managing the North American Value equities mandate.

Insight Fullblog Video https://player.vimeo.com/video/224360192

Why Choose a Canadian Portfolio?

There are several reasons why people may choose a Canadian-centric portfolio: currency risk, preferential dividend tax treatment, and familiarity-bias rank among the top. Watch Andrew Schredl, SVP, National Business Development at IPC in conversation with Kevin Hurlburt, our EVP of Product and Services, to find out more about Counsel’s new Canadian Strategic Portfolios and where they might fit into your plans.

Insight Fullblog Video https://player.vimeo.com/video/218050704

Staying Home has its Merits

To view as a PDF, click here.

It comes as no surprise that many investors – regardless of where they live – tend to tilt their portfolios towards their home countries. It’s a sentiment referred to as the ‘home-bias’. Canadians are no different.

 

There are several reasons why people may choose a Canadian-centric portfolio: currency risk, preferential dividend tax treatment and familiarity-bias rank among the top. A bias to strong historical performance may also be a contributing factor.
 

CURRENCY: Currency fluctuations can have a meaningful impact on the short-term performance of a portfolio. As such, an investor who is predominantly invested in Canada is able to take much of this risk off the table. “Currencies can be a problem,” says Kevin Hurlburt, Executive Vice President, Products and Services at Counsel Portfolio Services. “Currencies themselves can be influenced by significant factors, and don’t always correct back to fundamentals within a time-frame that is acceptable to many investors,” he explains.

 

“As an industry, we talk about long-term investing, but the words ‘long-term’ mean different things to different people. Given a shorter time horizon, it’s a challenge because currencies can move significantly out of line relative to where they should be, and they can stay that way for quite some time.”

 

To minimize this risk over the shorter-term, you want to ensure that you have a hedging strategy in place. “Over the long-term, currencies do tend to equalize,” he adds. “Foreign currency risk will reduce as a major factor the longer you are able to hang onto your portfolio, but not everyone has 15 years or more as their time horizon.”

 

"Currencies themselves can be influenced by significant factors, and don’t always correct back to fundamentals within a timeframe that is acceptable to many investors.”

 


PREFERENTIAL TAX CREDITS: Canadian dividends enjoy the best tax treatment of all income streams. So, if you’re income-oriented and invested in a non-registered portfolio, the dividend tax credit for eligible Canadian dividends is a strong incentive to keep your portfolio weighted towards Canadian dividend payers. It provides income stability and reduces the impact of fluctuations on your portfolio’s performance caused by other factors. Foreign dividend income is not eligible for this tax credit and may be subject to withholding tax.

 

FAMILIAR INVESTMENTS: Your preference for staying home may be rooted in a behavioral bias. Was Canada the first place you invested and was it a good experience? You may, consciously or not, be anchored to that reference point – and using this first experience to guide your choices. Perhaps, you simply prefer to invest in companies that you know and deal with on a day-to-day basis?

 

The constant exposure to companies you are familiar with, and knowledge of Canada’s comparatively strong corporate governance structures can have an influence on how you invest. This inclination to invest in that which you’re most familiar with is called familiarity bias, and it gives investors a degree of comfort.

 

PAST PERFORMANCE: This is another influencing factor. “Canada is certainly a great place to invest. In the case of the stock market, in particular, Canada has shown remarkable resilience, outperforming in 13 of the 17 calendar years since the beginning of this century,” notes Kevin (see chart 1).

 

 

CHART 1: CANADA VS. THE WORLD - SINCE 2000

 

“Canada has shown remarkable resilience, outperforming in 13 of the 17 calendar years since the beginning of this century.”

 

KNOW THE RISKS

Relying on historical performance should not be a core reason for investors to stay home. There are caveats to be considered.


There are several reasons why Canada has fared well in the past, Kevin explains. Relative to other markets, Canada was less impacted by the 2000-2002 tech-wreck because of its comparatively lower exposure to technology companies. In the recovery years that followed, higher oil prices drove Canada’s performance. Canada also emerged from the 2008 financial crisis fairly unscathed due, in part, to the strength of our financial system. “These were some important factors, forces which may not necessarily be repeated,” he adds citing why Canadians would consider diversifying.


Studies show that diversification reduces risk by spreading it across geographies and asset classes so no one single event is able to derail your investment plans.


It’s important to recognize that the Canadian equity market is small relative to major world markets. In terms of market capitalization, Canada accounts for less than 4% of the world’s total market cap, while our neighbour to the south weighs in at just under 60%1. Because of this, plus the fact that close to 75% of our market is concentrated to just a few economic sectors – financials, energy, and materials – Canadians who stay home may be missing out on opportunities to invest in great companies elsewhere and may sacrifice some returns in the long-run.


Similarly, when looking at fixed-income opportunities, he says “investors could enjoy better corporate bond yields if they were to include the North American market as a whole.” Beyond that, Kevin adds, “if you look at where growth is coming from today, Canada is not the strongest performing economic or equity market in the world. So, if you’re excluding global markets from your portfolio, you want to make sure you’re still finding ways to participate in the growth.”


The Counsel Canadian Strategic Portfolios have an exposure of up to 30% to foreign equities, including exposure to higher yielding U.S. dollar fixed income securities to provide investors with some downside protection. To minimize currency risk, we’ve added a dynamic currency hedge strategy on the portfolios’ U.S. dollar exposure.


CHOOSE A STRATEGY THAT FITS YOUR PREFERENCE, GOALS, AND OBJECTIVES

Choosing the right investment strategy or portfolio allocation boils down to several factors, including your investment goals, personal preferences, and level of tolerance for risk. “The informed investor should understand that, over the long term, investing with a more global perspective gives you opportunities for greater diversification and greater enhancement of returns through access to a much broader selection of investments and markets.”


Still, if a Canada-centric portfolio is right for you, there are ways to help you achieve your personal goals while respecting this personal preference. Working with an Advisor to determine exactly what is right for you as an investor is a key part of picking an appropriate portfolio.

 

Ask your Advisor about the investment strategy

or portfolio structure that can best target your

investment goals and objectives.

 

Counsel Portfolio Services added three new Canadian-focused investment solutions to its line-up:

Counsel Canadian Conservative Portfolio, Counsel Canadian Balanced Portfolio, and Counsel Canadian Growth Portfolio. Each new portfolio adopts a strategic asset allocation strategy and has at least 70% of its assets allocated to Canadian securities. In addition to the domestically-biased, income-oriented Counsel Regular Pay Portfolio and Counsel Income Managed Portfolio (a tactical strategy), these solutions are designed to give you more choice and the ability to better target your financial goals.

1. Source: MSCI World Index, Morningstar Direct.

DISCLOSURE
This report may contain forward-looking statements which reflect current expectations or forecasts of future events. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as: “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “preliminary”, “typical” and other similar expressions. In addition, these statements may relate to future corporate actions, future financial performance of a fund or a security and their future investment strategies and prospects. Forward-looking statements are inherently subject to, among other things, risks, uncertainties, and assumptions which could cause actual events, results, performance or prospects to differ materiality from those expressed in, or implied by, these forward looking statements. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, the volatility of global equity and capital markets, business competition, technological change, changes in government regulations, changes in tax law, unexpected judicial or regulatory proceedings, catastrophic events and the ability of the investment specialist to attract or retain key employees.
The foregoing list of important risks, 
uncertainties and assumptions is not exhaustive. Please consider these and other factors carefully and not place undue reliance on forward-looking statements. The forward-looking information contained in this report is current only as of the date of this report. There should not be an expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. Commissions, trailing commissions,managementfees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. The indices cited are widely accepted benchmarks for investment performance within their relevant regions, sectors or asset class, represent non-managed investment portfolios, exclude management fees and expenses related to investing in the indices, and are not necessarily indicative of future investment returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Insight Fullblog Profile https://thehub.ipcc.ca/documents/1293029/1389803/banner/9a0dfa65-4cdd-42ef-a975-7548f7221525?t=1496692971000

What a Balanced Portfolio Really Means

by Sam Febbraro

While the concept of achieving a balance between work and leisure has been traced back as far as the early 1800s, it wasn’t until the 1990s that the phrase “work-life balance” found its way into common parlance. Today, it’s what everyone seems to want.

The same concept of balance can be applied to investing. But instead of a choice between work and leisure, investment balance is based on a mix of risk and return.

A balanced portfolio requires weighing an investor’s objectives, time horizon, risk tolerance and investment knowledge. Once these factors are well understood, an advisor should consider the following variables: asset mix, asset allocation style, investment management style, geographic bias, market capitalization and rebalancing parameters.

Let’s define each.
  • Asset mix refers to the combination of equity, fixed income, cash and other assets to create diversification. Equity classes can be further broken down to include specific sectors, such as real estate, financial institutions and consumer staples. Fixed income classes may include federal, provincial or municipal bonds, high-yield corporate bonds and debentures. Cash typically refers to treasury bills, banker’s acceptances and commercial paper. Some managers also include alternative assets like commodities. Generally, a balanced portfolio has 50% to 60% in equities, and 50% to 40% in fixed income and cash instruments.

  • Asset allocation style refers to several methods. The three most common are strategic asset allocation, tactical asset allocation and a concentrated or focused asset allocation. Strategic asset allocation focuses on a balance between risk and return mapped along what is called an “efficient frontier” (a curve that plots the maximum reward for a given amount of risk). The benefit of this approach is it minimizes an emotional response to market volatility. The disadvantage is that it may be too disciplined or rigid in the short term to take advantage of market fluctuations. An example of strategic asset allocation is always being at 50% equities, 50% fixed income, no matter the market conditions. Tactical asset allocation may start with an optimized asset allocation, but will allow a manager to increase or decrease exposure to equities and/or fixed income within a prescribed range. This style can take advantage of short-term market anomalies, such as buying opportunities when a stock, commodity or resource drops in price and is likely to rebound within an acceptable timeframe. But a tactical manager may act too early or too late to maximize a return due to an over- or under-allocation.

    Finally, a concentrated or focused asset allocation may focus on a specific sector, region or company size (usually referred to as “market capitalization”). Some would suggest this is a highly speculative approach that doesn’t allow for proper diversification. However, it may be appropriate if a client is diversified in other personal or corporate investments that provide exposure to other asset classes. In this case, this approach can be very targeted given certain market cycles, conditions or client requirements.
     
  • Investment style can be based on different preferences including value, growth, or GARP (growth at a reasonable price). A value-based approached is used by investment managers who seek a margin of safety by investing in what they deem to be undervalued stocks. Alternatively, growth investment managers seek momentum in a particular company, industry or sector. This momentum can be driven by events such as the launch of new products, an increase in housing starts, or a decrease in interest rates that may fuel growth in the mortgage and lending sector. A neutral position may include 50% exposure to value and 50% exposure to growth. GARP investors seek companies that are showing consistent earnings growth above broad market levels (a fundamental of growth investing) while avoiding companies that have very high valuations (a key tenet of value investing).
     
  • Geographic consideration provides an opportunity for an investor to diversify assets across different locations. Although many Canadians are drawn to investing in Canada, the local market represents only 3% of the world equity market. As a result, most balanced investment portfolios will blend holdings across Canadian, U.S. and global equities and fixed income to capture the greatest diversification.
     
  • Market capitalization preference refers to choices made based on the size of the companies held in an investment portfolio. The most common holdings in most portfolios are large blue-chip companies that are often considered less risky as they have been in business for a long time, are covered by many analysts, are frequently in the news and are familiar to advisors and investors. However, a market capitalization approach may also provide exposure to micro-cap companies that are not well-known, or small and medium-sized companies that may be well-known only in a particular region or industry. The balanced investor may seek exposure to each of these to gain diversification.
    Just as the definition of work-life balance will vary by person, a balanced approach to investing may vary by investor. For example, some may choose a 50/50 or a 60/40 asset blend of income and growth, while others may prefer a strategic approach instead of a tactical one.
Rebalancing
With work-life balance, it’s important to maintain a rebalancing policy so you don’t swing too far in one direction. In investing, rebalancing is how frequently, or at what threshold of deviation from original investment objectives, changes are made to a portfolio. Rebalancing allows an investor to buy or sell assets in a portfolio based on under- or over performance in a particular asset class relative to other asset classes. This activity essentially forces investors to buy low and sell high without emotion to maintain the original asset allocation. As a result, it is often known as the industry’s last free lunch.

While a balanced approach is arguably the most common investing approach today, it’s not new. At a recent event in Toronto, a colleague reminded me of advice dating back over 500 years from a German banker aptly named Jacob Fugger the Rich. Fugger recommended investing equally in four assets: stocks, bonds, real estate and gold coins, and he expected losses in any one of these components at any given time. During inflationary periods, an investor may be penalized by bonds, but rewarded by gold and real estate. The opposite will be true during deflation. As the market performance fluctuates and creates imbalances, Fugger also recommended rebalancing back to four equal parts. No wonder he was rich.

Which brings us back to the similarities between work-life balance and balanced investing. If your New Year’s resolution is to work a bit less and work out a bit more (or to spend a bit less time in the TV room and a bit more time in the boardroom), you might be seeking balance in your portfolio as well. If so, keep these guidelines in mind.


This post was first published in Advisor.ca on January 16, 2017.
 
Insight Fullblog Profile http://www.ipcc.ca/documents/1293029/1293319/374x210_balance.jpg/c823da0b-efbe-4a0e-a535-42dd2ff9a127?t=1494126551000

Momentum in Canada

David Picton, President, CIO and Portfolio Manager
Picton Mahoney Asset Management
Audio run time: 6:54 minutes


David Picton, President, CIO and Portfolio Manager at Picton Mahoney Asset Management discusses the momentum we’re seeing in Canada, what Trump might mean for us Canadians, and shares his concerns about the markets.


Picton Mahoney is responsible for managing the Canadian Growth Equities mandate for Counsel Portfolio Services.

Insight Fullblog Video https://player.vimeo.com/video/212251513

High Valuations a Cause for Concern?

Tim Rudderow, President
Mount Lucas Management
Audio run time: 4:20 minutes


Tim Rudderow, President at Mount Lucas Management talks about rising rates, the energy sector, and whether high valuations are a cause for concern.


Mount Lucas is responsible for managing the U.S. value equities mandate, the global trend strategy and the Retirement Income Portfolio.

Insight Fullblog Video https://player.vimeo.com/video/212139726

The Trump Effect

Roger Edgley, Director of International Research
Wasatch Advisors
Audio run time: 10:50 minutes


Roger Edgley, Director of International Research at Wasatch Advisors offers his perspective on where people might look for opportunities, concerns around the market crashing, and the effect of Trump on small caps.


Wasatch is responsible for managing the international small cap mandate.

Insight Fullblog Video https://player.vimeo.com/video/212139640

Quarterly Commentaries

Each quarter Counsel's Chief Investment Officer, Corrado Tiralongo, provides his perspective on what happened in the markets over the quarter, and how our portfolios are positioned. 

Read Latest Commentary

Insight Fullblog Profile https://portal.uat.ipcc.veriday.com/documents/1091173/1122780/Market+Monitor+Commentary/b8e55d3f-c3ea-4db5-8a41-08ffee8b33f2?t=1494351193000

How to use Batting Average when Choosing Managers

by Sam Febbraro


In the late 19th century, Henry Chadwick, an English statistician and cricket fan, introduced the concept of batting average to the masses. In simple terms, batting average is the number of hits divided by at bats, reported to three decimal places. If a baseball player is higher than .300, then he or she has an excellent record relative to other players. But the same cannot be said for investment managers. In fact, a batting average of .300 would be below the threshold for success for most investors.

In the investment world, batting average is the percentage of periods (quarter or months) when the investment manager outperforms his or her benchmark. If the batting average is 0%, then the investment manager never outperformed their benchmark; the higher, the better. In most cases, a minimum threshold of 50% is used by most analysts and investors in the industry.
So how can we use this tool, among others, to select managers?

As all mutual fund prospectuses state, “past performance is not indicative of future returns.” While the average investor is attracted to strong recent performance, the fine print is true in most cases. Coupled with qualitative information and other quantitative tools, batting average can play a key role in selecting fund managers who will deliver fewer surprises. More specifically, batting average shows:

1. the reliability and consistency of outperformance; and
2. how often a manager adds value.


The batting average score also removes the bias that occurs when investment results are skewed by one strong period or, conversely, a period of mediocre or poor results.

Batting average works best with other measures
Success is a multi-dimensional concept. Batting average is only one measure; it will not consider the amount of risk taken or take into account the degree of over- or underperformance in various periods. As such, it’s critical to understand risk control and downside protection when evaluating or pairing individual managers in a diversified portfolio. An investment manager who outperforms the benchmark consecutively every seven to eight months with one or two months of underperformance is better than someone who outperforms the benchmark once every nine to 10 months with a relatively higher return. That’s because the latter manager generates asymmetric payoffs and high negative skewness. So, investors who are averse to blow-ups and skewness should choose managers with relatively high batting averages.

Diversifying by batting average
Diversifying a portfolio of managers is like diversifying a portfolio of stocks. A well-diversified portfolio of stocks minimizes unsystematic risks in a portfolio. For example, a portfolio of companies in various industries that are highly geared to the energy sector would have little, if any, diversification benefits. Similarly, a portfolio of managers who all have high batting averages may not provide the diversification benefits an investor wants. The goal of adding a manager to a diversified portfolio is to create a result greater than the sum of its parts. In other words, a properly selected portfolio of managers should produce a batting average that is greater than each individual manager over a market cycle.

Batting average works best when combined with other key analytical tools to assess an investment manager’s performance. For example, alpha measures a manager’s performance contribution based on their skill (relative to risks assumed) instead of market movement. Beta, in contrast, compares the manager’s return volatility and correlation relative to the market benchmark. When combined with batting average, an investor can formulate a more informed decision about a manager’s track record. There are also other tools to consider, including r-squared, standard deviation and the Sharpe ratio, just to name a few.

Each of these measures is given equal weight to get a quantitative picture of the strategy’s performance over a multiple instead of single periods. Looking at one quarter or month will result in huge information loss on how the manager/portfolio behaves through different economic cycles. What’s important is to determine if the investment process described by the manager matches the results. For instance, a traditional long-only manager with a low R-squared to their stated benchmark would be a major red flag. However, a deep value manager who uses cash extensively is expected to have a low R-squared.

That being said, the most important starting point in any assessment is choosing the right benchmark and doing your due diligence to understand the portfolio manager’s investment strategy and various benchmark constructions.

Qualitative measures such as the investment management team’s people, philosophy, processes and regulatory track record add another critical layer of analysis in the decision-making process. Combining quantitative and qualitative information together helps determine who to select, how to monitor and when to replace investment managers.

Qualitative and quantitative monitoring is an ongoing process. Managers can submit quarterly questionnaires that provide insight about their firm, their people, and their portfolio’s contributions and challenges. Then, you can score those managers quarterly on both quantitative and qualitative measures, and benchmark them against their respective farm teams: industry peers with the same investment style. This provides a holistic view of a manager’s performance and helps identify changes that may occur before they impact performance.

Ideally, when an investment manager’s style is in favour, we expect positive outperformance relative to the benchmark. Subsequently, when their style is not in favour, we want to see the manager underperform by a small margin. As a result, it is better to hit singles consistently, rather than going for home runs each at-bat and risk striking out


This post was first published in Advisor.ca on November 8, 2016.
 

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