How Discipline Has Worked So Far?

One of the first things we did at High Rock back in April was to put our heads into some rigourous re-evaluation of our investing models. We structured the basis for 3 models: a fixed income model (with government, corporate investment grade, high yield bonds and preferred shares) a global equity model (broad cross-section of equity ETF's) and a tactical equity model (small and mid-size Canadian companies).

Clients would have the ability to use all 3 of these models to form their strategy based on their goals and risk tolerance as determined through their wealth forecast.

My portfolio strategy, for example, is 40% of the fixed income model, 50% of the global equity model and 10% of the tactical/growth model.

Others with a more conservative portfolio have 60% fixed income, 35% global equity and 5% tactical / growth. Any combination of the 3 models can be structured to for a tailored strategy.

As we began the process for re-balancing out of the old 60% equity model, we undertook a significant amount of research to determine: 

1. How each model should be structured.
2. How we would transform the / my existing model into the new ones.

Structure:

Based on our fundamental view (I have talked often in this blog and on our weekly webinar  about our 2015 "investing themes" since January), it was our decision to be cautious and defensive with our and our clients capital (for at High Rock we invest in the same models as our clients) .

Discipline

This meant that in our fixed income models we would use bond market weakness (which we got in May) to add government bonds, but we would remain defensive about adding corporate and high yield names. We bought T-Bills for capital protection as well.

In our global equity model, our discipline to remain defensive and protect our and our clients capital  followed the theme that we believed that equity markets were at that time very expensive. As we went about replacing higher cost ETF's with lower cost ones (also a result of rigourous research efforts throughout the month of April) we under-weight most of our purchases and raised our cash weighting.

We also took advantage of some short-term $C strength in May to add $US as we felt that, at that time, the $C was likely to move lower based on the BOC's monetary policy surprises. Holding $US can help in times of higher volatility as the $US becomes a safety haven. Bond markets lead other financial markets and April's bond market volatility was telling and was a warning flag for things to come.

Our tactical / growth model was active in a couple of names, but when they ran their course we were able to take our profits and get to the sidelines. Cash is a defensive asset and while it is not a growth asset, when necessary, it is better to be in cash than to see our capital erode.

My portfolio is positive on the year with all of the adjustments. Most equity markets are negative on the year, some bond markets (not government) are negative on the year, the Canadian preferred share index is negative on the year.

Any new clients that have joined us since April are "barely" invested (still have the bulk of their portfolio in T-bills), so they have not been subjected to the extreme volatility.

You cannot completely avoid volatility, but with disciplined investing, you can seriously reduce the consequences. 

And that is what we have done so far this year.

www.highrockcapital.ca