Wednesday, February 22, 2017

Earnings Expectations Are Falling
While Prices Continue To Rise

On the surface the euphoria continues. Behind the scenes, analysts are lowering Q1 forecasts for earnings growth.

The full year expectations for earnings growth in 2017 have also been reduced from 11.5% at the beginning of the year to 10.2% currently (data according to FactSet).

This has brought the Price to Earnings (P/E) ratio to the highest level in 14 years at 17.6 times.

Which is well above the 14.4 times, 10 year average. 

At current levels, to get back to the 10 year average (and we know that in time most things revert back to the mean), either earnings growth would have to grow at about a 20% better than currently expected rate or prices would have to fall by about 20% (or a combination of both).

As we mentioned in our client webinar yesterday ( 

We are not interested in putting our clients into that kind of risk.

We would prefer to find assets with better value (via deep research) to invest in (and our track record shows that we have been able to provide a better return per unit of risk as a result).

That is our discipline.

And...the usual disclaimer... historical returns are no guarantee of future returns, but you know that at High Rock, we work darn hard to always provide the best possible risk-adjusted returns.


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Tuesday, February 21, 2017

Responsibilities To Our Clients:  
A Voluntary Code Of Conduct

Hoping that you all had a wonderful Family Day. My family provides me with my daily dose of inspiration: each day they plow so much energy into their lives, it truly does leave me in awe! It is all that I can do, just to keep up.

My life's work, to help other families reach their goals, especially their financial ones, is what drives my day to day existence and it is what I pour my energy into: trying to make their experience working with us as rewarding and fulfilling as possible.

This weekend, we (at High Rock) spent some of our time ruminating over how our commitment to our clients culminates in exactly how and why we interact with them.

First and foremost is our duty to, at all times, act for the benefit of our clients: we must always put their interests ahead of our own (which means that we can not have any conflicts of interest). 

Of course we do need to be paid for our work (we have expenses to cover and tables to put food on), but it should be completely transparent to our clients as to what they are getting for the fees that they pay.

Our investment strategy for each client and client family needs to be specific to their particular circumstances: their objectives, their tolerance for risk, the time horizon required to achieve their goals, their need for liquidity and cash flow, any financial constraints or other relevant information that might affect their investment policy.

We call this preparation a Wealth Forecast (and I have written frequently on the need for a plan and the fact that without a plan, it is not possible to properly create an investment strategy).

This is what drives our High Rock mission statement: that "managing a family's wealth is about three things and we strive to do all three extremely well".

Planning is the beginning.

Investment management is the essence of what we do: based on deep fundamental research (both micro and macro) and keeping our "ear to the track". We act with skill, competence and diligence to have a reasonable and adequate basis for all of our investment decisions.

This is not financial or investment advice. It is portfolio management, which at all times is  based on getting the best possible risk-adjusted returns (another topic which I have come back to on numerous occasions in this blog) for our clients within the framework of their Wealth Forecast.

The only way we can create credibility for our actions is by investing in the exact same assets as our clients. If we don't buy them for ourselves, how could we justify buying them for our clients if we truly put their interests ahead of our own.

Just to ensure that we do what we say, we have an Independent Review Committee that reports directly to out clients each quarter to provide this comfort.

To deal fairly and equitably with every one of our clients, all transactions occur simultaneously for everyone and clients receive their "fills" before we do.

The third and equally important facet of our responsibility to our our clients is communication: 

To make it relevant, a Wealth forecast needs to be monitored, reviewed and updated. At a minimum this should happen twice per year. At the same time, a client's investment strategy has to be reviewed and adjusted accordingly.

Quarterly portfolio summaries and client notes are part of the communication process as are frequent blogs and our 24 /7 availability.

There you have it, a lot of what makes us unique (different and better), inspires trust and drives our effort to be the best that we can be for our clients.

Our conduct is how we roll. That is our discipline.


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Friday, February 17, 2017

 Capital Gains Tax: Whispers Of An Increase

You may want to have a look at the article above, but basically, it says:

Gluskin Sheff + Associates chief economist David Rosenberg says he has been hearing whispers that the federal Liberals will table a “soak the rich” budget in the weeks ahead – one that includes a steep hike in the tax rate on capital gains.
Mr. Rosenberg said in his morning note that the capital-gains inclusion rate could rise to 75 per cent from the current 50 per cent, which has been the rate since 2000. Returning the rate to that level, combined with the most recent uptick in the top marginal personal income tax rate, would mean that Ontario investors would pay as much as 40 per cent tax on capital gains.

This would be significant. If your "buy and hold" strategy has amassed a large unrealized capital gain in your non-registered (sometimes referred to as a "cash") account, you may want to have a chat with your accountant about the ultimate implications. Especially if you are retired and rely on the sale of non-registered assets for your cash flow. It will certainly have implications for your estate or any other circumstances where a "deemed distribution" (deemed to have disposed of/sold assets) might be necessary.

Depending on how this scenario is phased in (if in fact it actually happens) it could have serious implications for the selling of stocks, bonds, ETF's, mutual funds and secondary (investment) real estate. Needless to say, the impact on these asset prices would be negative.

It is why a Wealth Forecast is a dynamic process or "working model" (monitor, update, re-assess) because as new scenarios evolve in your financial life, you want to be able to build in those new scenarios (and assumptions) to understand how this will impact your net worth into the future.

Of course this is pure speculation at the moment.

However, it is better to be prepared than to be caught of guard, if it actually does happen. 


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Wednesday, February 15, 2017

Are You Getting Value For The Fees That You Pay?

In his column in yesterday's Globe Investor: "A novel way to react to advisor fee shock", Rob Carrick suggests asking for more advice (to cover the cost).

I have a better solution: Forget the "old school" Investment or Financial Advice channel because more than likely they are just "middle-men" who will want to sell you mutual funds or a basket of ETF's (they all have embedded MER costs and it is not required by the regulators that these have to be revealed).

Instead look at the Private Client division of a portfolio management company (like High Rock) who does all the investing "in-house" and if and when ETF's are utilized, will show you exactly what that means to your total cost:

For example:

And make sure that there is a process and stewardship:

I have said it before and I will say it again (and again), you cannot have a proper portfolio strategy unless the portfolio manager(s) know your goals.

A good portfolio strategy needs to be tailored to your very specific needs and it has to be reviewed regularly on an on-going basis (at least semi-annually) to ensure that you are on the path to your targeted goals.

There has to be a reason that you are invested in the assets that you are invested in. The buy and hold, one size fits all type of portfolio is easy to achieve without advice at all. Save yourself the 85 basis points (or more) of the middle-man Investment / Financial Advisor and buy a basket of ETF's.

If you want to get the index average return, buy a global equity index ETF and a bond index ETF and voila, you have a "balanced", buy and hold portfolio".

If you want real portfolio management, turn to a real portfolio manager and get what you pay for.


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Tuesday, February 14, 2017

Economic Growth, Inflation And Central Bank Policy

Fed Chair Yellen testifies in front of the Senate banking Committee today and the house financial services committee tomorrow.

Financial markets will look for clues of the timing of the next rate increase from the Fed. At the moment, nothing is expected for the March meeting, but there is some expectation of a rate increase in June.

In all likelihood, they are waiting for fiscal policy detail from the Trump Administration and the February data on the PCE (Personal Consumption Expenditure) core price index, which is their preferred measure of inflation. Currently it sits below their 2% target at 1.8% (see the chart above).

Globally, inflation is inching higher with the latest data from the UK showing an increase (to 1.8%), however this was mostly related to the lower pound and the higher cost of fuel. Core inflation was 1.6%.

For the moment, there are no expectations of any short-term changes in monetary policy.

Needless to say, we are all looking to the future and without the detail of US fiscal policy (although we are lead to believe that there is a tax plan coming soon, deregulation as well and infrastructure spending to follow).

According to a Bloomberg report, Goldman Sach's economists suggest that 

“An increase in the effective tariff rate on imports seems likely and we now assume a somewhat bigger decline in net immigration flows than we did immediately after the election,” they wrote.

Hatzius and Stehn compiled a “full Trump” case that includes $450 billion in fiscal stimulus through a combination of infrastructure and tax cuts, tit-for-tat tariffs, and immigration restrictions that reduce the labor force by 2.5 million from the pre-election baseline underpinning the Federal Reserve’s September projections.

As you can see in the chart above, their assumptions show some immediate benefit, but it is short-lived over a longer time period.

As we are more concerned with longer-term wealth growth for our (High Rock) private clients, we will continue to focus on value and risk as the main tenets for our portfolio strategies. We don't believe in short-term "hype" (and there is plenty of that at the moment) until we are able to ascertain that risk is at a reasonable level. At the moment, risk remains high (most certainly so in equity markets).

In honour of Valentine's Day ('s_Day), we have postponed our weekly webinar, so that those of us and our clients with romantic inclinations can focus on those! (Back to our normal schedule next week).

Happy Valentine's Day!

Monday, February 13, 2017

Equity Prices Are Rising While Earnings Expectations Are Falling

According to FactSet (Earnings Insight) data, S&P 500 companies earnings for 2017 at the outset of this year were anticipated to grow by about 11.5% (after basically flat earnings growth in 2016). 

For the 1st quarter of 2017, 57 (out of 82) companies issuing forward guidance have issued negative guidance: lower than expected earnings per share (EPS).

For all of 2017, expected earnings growth has been lowered to 10.3%.

The forward 12 month price to earnings ratio has jumped to 17.3 times.

Remember that the S&P 500 provided a total return of 11.3% through 2016, while earnings were, as I said basically flat. Which in simple terms, means that investors were looking ahead to 2017 for growth (even though the P/E ratio remained well above its 10 year average at 14.4 times).

So far this year, the S&P 500 is higher by about 3.5%.

In other words, earnings need to grow by close to an additional 15-20% (above the current 2017 expectations of 10.3%) to bring the P/E ratio back to its 10 year average (if S&P 500 prices remain at current levels).

Needless to say, we have more than built in a "phenomenal" US tax plan (if, as and when it becomes a reality) and buyers are pushing emotion to higher levels, while the fundamentals are showing us that prices are rather expensive on a relative basis.

As always, with our (High Rock) focus on the long-term, we think that short-term caution is the order of the day.

Equity market risk is rising and that becomes a warning signal. 

Have you looked into the risk levels in your portfolio?

Happy to help.


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Thursday, February 9, 2017

"Have I Got A Deal For You":
Advisor Conflict Of Interest

I get feedback, a fair bit of it sometimes, depending on the topic, but recently I have received a significant amount asking about the difference between the "standard of care" that is required by IIROC (Investment Industry Regulatory Organization of Canada) licensed financial / investment advisors ("brokers") and the "fiduciary duty" required by portfolio managers (like High Rock) licensed by the OSC (Ontario Securities Commission).

As it stands at the moment (because the various provincial regulators continue to kick the can down the road with "proposed targeted reforms") there is only a requirement of "suitability" for those who offer financial advice (from a bank or independent investment dealer, IIROC licensed). At best, pretty vague terminology. At worst, as the great majority of them are paid commission, wherein there is the potential for a conflict of interest. 

Even those who charge you a "fee" (fee-based account) are in fact paid a "commission" as a percent of that fee by their employer (the bank or investment dealer). If you are a "top producer" (generate lots of fees / commissions) you are paid a bigger % of that fee (as commission). If you are a top producer, you are put into the "Presidents or Chairman's Club (at your respected firm) and held in high (if not somewhat dubious) esteem. (see Paul's blog: :I Am Going To Blow My Top! 1/25/17)

Dubious because the standards you are measured by (generating revenue for your firm) are not necessarily in your clients' best interest (performance). I know this because I have been there. In fact, at one bank where I was a financial advisor (and Branch Manager), the president of the "brokerage" operation told me that they would not publish client performance returns on the client website because the advisors didn't want it. My response: "are you kidding me?", was not well received. I didn't last at that institution for very long (my decision). My moral and ethical standards were considerably higher than theirs were: Shareholders (and the bottom line) were their first priority. Not their clients (other than the revenue they generated).

So, in a nutshell, even as a fee-based financial advisor, they are incentivized to build their "assets under administration" (AUA), otherwise known as "asset gathering". This becomes, in and of itself a conflict because it may leave you, as a client, fighting for the attention of your advisor. How many times a year do you get to have a one on one with the girl/guy who "sold" you on joining her/his "wealth management practice" as a client?

If they are a "big producer", unless you are a "big client"... forget about it. I know, because I have been there. There is only so much available time in a day, week, month and year (and not enough to have a meaningful conversation), especially if the focus is on bringing in new clients (because that is where the $$ are).

Fiduciary duty requires that portfolio managers put their clients interests before theirs: no conflict of interest. Period!

So we ( at High Rock) have taken on a very challenging task of trying to change the existing order of things which is controlled, for the most part by the biggest financial institutions.

Not only are we (as a licensed portfolio management company, with our legislated fiduciary duty) held to a higher standard, we are trying to change the conversation about what exactly is a conflict of interest: selling mutual funds, structured notes (or new issue stocks, bonds and preferred shares) for a commission and trailer fees are fairly obvious,  but so is the pressure to have an enormous "book of business" over-populated with clientele.

So we limit the number of families that we look after. The personal contact is, for us, extremely important and we need the time to make sure that we are in touch. Regularly.

In the end, we don't sell. We serve. It is a very major difference. 

We are trying to change the conversation (and the world of financial literacy and "advice").

Join us!


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