It’s been a good year

It’s been a good year.

Despite rising interest rates, market volatility, European debt woes, slow economic growth, the US housing disaster and all the pundits and doom-sayers, 2010 has been a profitable year for Turner Tomenson clients. Our 60-40 model, upon which we base most of our client portfolios (that’s 60% equity-40% fixed income) is at point of writing up by approximately 14% since the beginning of 2010.

Best performer (and who would have guessed?) has been the S&P/TSX SmallCap Index Fund (XCS). Reference: (http://ca.ishares.com/product_info/fund_overview.do?ticker=XCS)

Of this, 56% is held in the Materials and Energy sectors. While it makes up only 3% of our model, it is important that we have exposure to this particular asset class. Because we cannot necessarily pick which asset class will out-perform in any given time period, we want to have exposure to asset classes that have the potential to move higher and add to our model’s ability to achieve growth. This is part of what makes this diverse model so attractive. As you know, our goals are (a) preservation of capital and (b) making it grow.

With the potential for growth in this Small Cap Fund, however, is a greater risk (and potential for volatility) so we want to ensure we keep its weighting light, relative to the rest of the portfolio.

Our (boring) theme continues to be balance and diversity.

Some of the other asset classes that have performed well this year:

The iShares Russell Microcap® Index Fund
The iShares Russell 2000 Index Fund
The iShares Russell Midcap Index Fund
The iShares S&P/TSX Capped REIT Index Fund
The iShares S&P India Nifty 50 Index
SPDR® Gold Trust

Will these out-perform in 2011? Likely not, in fact we’re currently not buying them (and in some cases re-balancing client positions to take profits) because they have become too expensive for our liking. This is exactly what we mean by active management.

It’s also why we preach the discipline of balance and diversity: in all likelihood, one of this year’s underperformers will be next year’s outperformer:

Horizons AlphaPro Gartman ETF (“HAG”)
The iShares MSCI EAFE Index Fund (CAD-Hedged)
The iShares FTSE China 25 Index Fund

As well, we have the Fixed Income stabilizers in the portfolio that focus on interest income and dividends and perform as our model’s anchors when markets become volatile. And we certainly expect more of that in 2011.

Late this year, Equity markets have become stronger as the US Fed has chosen to inflate assets with quantitative easing, but there are perils and uncertainties that can turn the euphoria into fright with one nasty economic or political shock and investors must always guard against complacency.

A large increase in volatility can and may be just around the corner.

Having balance and diversity in a portfolio is the key to limiting the impact of this potential volatility.

We wish you a happy, healthy, prosperous and Balanced New Year.

www.turnertomenson.ca