Friday, April 28, 2017

Gap Widens Between US Economy And Stock Market 

We have been showing the above chart on our weekly webinar ( for the last couple of weeks.

Today the US Commerce Department announced that  US Q1 GDP rose at an annualized meager 0.7%, well below the Q4 2016 number of 2.1%.

Basically, the slowdown was a result of reduced consumer spending. The consumer, as you all may recall, represent about 2/3 of the US economy.

They had been a confident bunch, with consumer confidence peaking in March, but that did not translate into spending in the 1st quarter. Consumer confidence slipped in April.

Economists widely believe that there will be an improvement in the 2nd quarter (and beyond), but that would only narrow the economy / stock market gap marginally. 

US stock valuations are running at about 20% above their 10 year average, something that hasn't been seen since the "dot-com bubble".

The benchmark All Country World Index (ACWI) that we use for measuring against our global equity performance consists of over 50% US equities, so all of this makes us a bit cautious.

There are plenty of positive emotions driving stock prices to their recent highs (known as the "Trump Trade") with all the promises (tax reform, deregulation and infrastructure spending) on the table. However the gap between when these promises are fulfilled and their eventual outcome (impact on the economy) are far from clear.

The longer it takes, the less confident the consumer may become.

Historically, shortly after consumer confidence peaks, a recession has ensued:

There are a great many moving parts to the current US and global economic outlook and this is just one, but it does give us pause.

When we look for value in the assets that we want to purchase, we try to identify risk, which is a very important aspect of the work that we do for our (High Rock) clients and ourselves (because we invest in the exact same assets as our clients).

If we see risk that we find unsuitable, we are comfortable remaining in a defensive posture towards investing (until risk moves lower and value returns). Cash and cash equivalent holdings are defensive assets.

When stock prices are at their highs, so is the risk that they will move lower in price. The gap between the US economy and stock prices tells us that risk is high (and value is low) in owning that particular asset class.

You don't always have to be "fully" invested. 

Click on the link for:

Wednesday, April 26, 2017

Building Trust And Backing It Up

The Small Investor Protection Association (SIPA) put out a report titled Web of Deception just about the same time that we were putting the finishing touches on our Our Voluntary Code of Conduct for the Stewardship of Your Wealth

Which you can find on our website on the home page:

While we are only part of the 3% of financial advice givers who absolutely must put their client interests ahead of their own (see Paul's blog on Fiduciary Duty ( because we are required to do so by law, we are not required to have an Independent Review Committee.

However we do so to provide our clients with the comfort that we are doing what we say we will do.

 Commit to having an Independent Review Committee (IRC) for complete transparency

In fact, we are the only portfolio management company in Canada (to the best of our knowledge) who manages client money on a Separately Managed Account (SMA) platform who does this.

Each quarter, with their portfolio summary and client note, our clients receive a letter from Wychcrest Compliance Services:

In a nutshell, it informs clients that our policies and procedures are in order, that our Ontario Securities Commission (OSC) registration is in good standing (and providing our fiduciary responsibilities) and that there are no outstanding complaints against us.

More importantly, it states that:

We have also reviewed the accounts of the principals of High Rock Capital and can confirm that their personal investment accounts largely reflect the same securities as your accounts

In essence, it is a follow-up to our claim that we invest in the exact same models (and assets that are in those models) as our clients.

In other words, we are "eating our own cooking".

Even if your advisor tells you that her / his portfolio is 60% equities and 40% fixed income, will they tell you exactly what securities they own?

Reminds me of that scene from the Wizard of Oz when the truth is revealed:

"pay no attention to that man behind the curtain"

What an absolutely bang-on parallel to what SIPA has been reporting on and as a former investment advisor and branch manager, I have seen it all, first hand.

There is an alternative to the old style investing norms and we (at High Rock) are leading the way in building and maintaining trust with our clients through complete transparency.

Want to discuss this further and in more detail?

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Monday, April 24, 2017

Focus Returns To Inflation, Trump Policy Among Others After French Election

Euro-risk has been significantly reduced with the outcome of the French election as it appears that the centrist candidate will become the next president. The French appear to have found the middle ground. What an idea!

So now focus will turn to Washington to see what will transpire with the budget, the wall, health care and tax reform, which is supposed to be announced this week. Also, avoiding a government shutdown (before Saturday) is on the agenda. We must also keep an eye on developments with North Korea, Russia, Syria and Afghanistan.

Behind the headlines:

Central banks (the Bank of Japan and the European Central Bank meet this week to announce their latest policy decisions) will be focused on the latest developments in inflation, which for March saw some significant set-backs in the move towards their 2% targets.

In China, regulators have been trying to curb speculation by tightening rules on leverage trading. Chinese markets have dropped significantly in recent days as a result. 

At the same time, Emerging Market corporate debt in $US continues to pile up, which leaves another set of global economic vulnerabilities if interest rates rise and economic growth falters:

There is plenty of risk still to monitor and equity market prices that remain approximately 20% above their 10 year averages.

We shall discuss all of this and lots of other global economic, financial market and wealth management issues with our clients on our weekly webinar tomorrow. You can tune in to the recorded version at this link: High Rock Private Client Weekly Webinar at or about 5pm tomorrow.

Friday, April 21, 2017

Your "Real" Return

The latest Canadian Consumer Price index data (for March) has been released and I know that you will all be hurrying to your spreadsheets to determine what the actual increase in your cost of living is. Right?

If you dine out more than the average, tipple an adult beverage more than the average or drive more than the average, you likely have a higher cost of living than the average and that is an important factor to consider when you are forecasting your lifestyle costs into the future.

And it is not just what you consume, it is where you do your consuming:

If you are consuming in Newfoundland, New Brunswick, Ontario and / or BC, it is costing you more than the average.

If you are getting an average annual return of 6% after fees and taxes on your investments and your cost of living is rising at 2%, your real return is 4%.

However, if your cost of living is increasing at 3% per year, then you are going to have (over time) a lower real return (3% average annual return) and when compounding this over 30 to 40 years, it will have a significant impact.

Just like the fees you pay for wealth and investment management. Do you know exactly what fees (including hidden MER fees) you pay? 

(for more discussion on fees, see our High Rock  Introductory Webinar)

It all adds up.

Furthermore, the Bank of Canada's core inflation data, where they look for trends in their specific measures of Consumer Prices:

 They are all well below the 2% lower band of their target, so those of you concerned about the cost of servicing your debt can be comfortable in knowing that the BOC will not be raising rates anytime soon. 

Thursday, April 20, 2017

How Is Your Financial Plan Progressing?

One of the most fulfilling aspects of my job is the part where I get to review the progress of a client's Wealth Forecast with them (prepared every 6 months by our Certified Financial Planning Professional, CFP).

Yesterday we met with a couple who had planned to retire at 62 (currently they are 55 and we have been working together for over 12 years). Turns out that they might be able to change that goal and move it up a couple of years because they are nicely ahead of schedule. We will run a scenario for them to see if it is feasible. 

But how great to be able to have options!

When we create our Wealth Forecasts we stress that they are "working models" and need to be monitored, reviewed regularly and updated as is necessary.

Not only are they a planning tool for our clients (we can create "test" scenarios, based on a variety of assumptions and / or time horizons) but they are imperative for developing the appropriate portfolio strategy. 

These particular clients were definitely happy with average annual returns of over 8.5% (after fees) over the last 4 1/2 years (vs. our Benchmark at 5.6%) while our assumed average annual return (for forecasting purposes) was 5.5% (before fees and taxes).

But the most important question they asked: "what sort of risk do we have?". This is the type of question asked by a "steward" of their family's wealth (as opposed to the "gambler" who asks: "if the stock market is up 12%, why are my returns not up 12%").

First and foremost, there will be risk involved in attaining any growth levels better than you might get with Government of Canada 90 day T-bill (at or about 0.50% per year).

But we (at High Rock) are extremely aware of all the risk and work diligently to make sure that we are working to get the best possible risk-adjusted returns for our clients (return per unit of risk, see table below).

More importantly, we will never perform as does the "stock market" because there is too much risk in owning just one asset class. We want to have diversity across a number of different asset classes as a means to lowering risk. We also want to be selective as to what asset classes we are exposed to and when. At the moment, we (at High Rock) feel that stocks are over-priced and expensive (and have believed this for quite some time now), so we will own a reduced allocation to this asset class while we look for value in other asset classes (or wait for better value in the stock market).

The "stock market" (whether it is the S&P 500, the S&P TSX or the All Country World Index, ACWI ETF) has had better absolute returns, but has not been able to achieve the same return per unit of risk as our client portfolio (measured over the last 2 years). 

When stock markets turn lower (and they will), investors who have too much risk will feel a great deal more pain than those who have less risk.

These are the conversations that we love to have with our clients, because our relationships with them are intended to be long-term: throughout the duration of their lives.

It is why we put emphasis on strong and regular communication in our voluntary code of conduct

#4 Make ourselves available for ongoing reviews, updates and anything else you may want to discuss 

Do you have a plan and / or a strategy?

We are always happy to help...

And, as a reminder....
Past returns are in no way a guarantee of future returns. However, at High Rock we work very hard for our clients (and ourselves) to get the very best risk adjusted returns as possible.

Wednesday, April 19, 2017

Whose Money Is It Anyway?

It may be your money, but when a financial advisor / salesperson "gathers" your assets for their commission based remuneration (assets under their administration), they get a sense that they are now their assets and they are not going to want to see them leave (because there goes their revenue stream).

I wrote a blog back in November (
about a client who was fired by her advisor because she and her husband decided to buy a house against the advisor's advice (which meant taking a chunk of their savings away from his assets under administration on which he earned revenue of 1%). 

They bought the house over a year ago and the house that they bought was in Toronto. We know what prices in Toronto have done over the last year.

Needless to say, that particular advisor was not thinking of what the client wanted or needed, just his own bottom line.

A week or so ago, one of our High Rock clients decided that they wanted to build a strategy into their Wealth Forecast for the purchase of a vacation / retirement home in a warmer climate. So we did just that. They were a particularly astute couple and had done their homework and provided a spreadsheet of costs and potential rental revenues. We counseled them on the risks (currency conversion rates, interest rates, $US bank account, $US Visa card, possible tax and estate issues, etc.), but in the end after all the inspections were completed, it was a go!

We executed the $US purchase at the wholesale rate yesterday (they pay us a fee on the investments that we manage for them, so we do not take any additional points on foreign exchange transactions). At the time, their bank's website offered a conversion rate at approximately $12,000 more expensive than what we were able to get for them (one of the many benefits of working with an Asset Management firm).

A dream realized (at a reasonable cost)! And the $US is considerably higher today, so risk well managed as well.

Are those assets that we might otherwise have managed? Possibly, but that is not our purpose here. Our purpose is to help clients achieve their goals. If that means helping them utilize $ that we might otherwise have managed, then that is how it goes. It is, after all, their money.

#3 Respect that our client’s money is theirs to take whenever they wish (with no costs for moving money out of our care) 

So that is how it should work. 

There is an alternative to the old ways of doing things and we (at High Rock) are paving the way forward.


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Thursday, April 13, 2017

Protectionist Policies Are The Big Risk For The Bank Of Canada Outlook

Not necessarily "fun" reading for the weekend, but if you are at all concerned about interest rates, what may likely happen next and why and when, (and whether to float or fix your mortgage or HELOC), you may want to have a peek at the latest Monetary Policy Report put out yesterday by the Bank of Canada.

You may note that the usually more upbeat report (for the last few years the Bank of Canada has issued somewhat more positive views than what has actually occurred) is not particularly so this time around: basically discounting recent economic improvements as temporary and painting a fairly cloudy and uncertain view of the future.

Most of that has got to do with the lack of certainty of US policy initiatives, but also the tendency to view the rise of protectionist policies as potentially economically disturbing:

"An increase in protectionist policies could, depending on their degree and extent, have a significant impact on the Canadian and global economies. The rapid pace of trade liberalization from the late 1980's to the early 2000's helped increase global economic growth."

"A notable global shift toward increased trade protectionism would pose a risk not only to short-run demand but also to long-run growth and prosperity. A move to a significantly less-integrated global economy could also involve a lengthy adjustment process and could require difficult reallocation of workers and resources across industries."

Needless to say, under these conditions it is hardly likely that the BOC is going to be raising interest rates any time soon.

Even if US interest rates are expected to go higher, don't necessarily expect Canadian rates to keep pace.

For our (High Rock) clients we have to consider all the risks (part of our diligence, deep research and discipline), which in some cases are not always obvious, especially when the "animal spirits" of optimism are forging ahead with emotion.


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