Observations And Questions
Hi Scott,
Just listened to this week's webinar - I do appreciate
the work that goes into every Tuesday - thanks.
I do have an observation and a few questions to share /
ask . . .
First, an observation . . .
The fact that all the central banks are still in a
loosening and easy credit world seven years after the financial crisis is
troubling.
There is no historical precedent for what we are seeing.
As a result, the financial trends that we have become accustomed to for the
past 3 to 5 years are changing in a significant way - the 60 / 40 model
performance for the past three to five year will not be easily matched with
strengthening deflationary pressures.
It's my assumption that you are subtle trying through
blog postings to prepare clients for this realization - though I find the 3 to
5 year performance reference within the webinar(s) counters the messaging.
Questions
It's my impression that a 60 / 40 model provided
satisfactory returns during normal economic environment (past 3 decades) - it
may not be well suited for our present historical precedent.
1) The corporations domiciled in the US (50% portfolio) +
(26% other (international)) . . . all these boats have risen in the past with
significant central bank liquidity. A great many may not under deflationary
pressures, e.g. financials. Is the equity ETF component heavily weighed in
financials?
2) Regarding the bond ETF, what type of bonds are within
the model portfolio?
3) NIRP (negative) interest rates is an attempt by
central banks to monetize deflationary debt - soon they maybe forced to unleash
helicopter money, hence inflation. Is the High Rock tactical strategy flexible
and robust enough to counter these opposing financial environments as they
unfold in the future with non-correlated alternative investments?
I welcome your thoughts and comments.
Kind regards,
As always, excellent questions, Thank you!
We are certainly in uncharted territory and record low
(or close to) bond yields tell us that, at least for the time being, safety is in
demand.
In the meantime, equity markets are more like a
casino every day (and I loathe
gambling). The very low risk-free rate of return, as a result of central bank
stimulus, drives those who desire to get a higher rate of return into riskier
and riskier assets.
But that is today and could possibly last until the next
recession re-adjusts the way investors are currently thinking. Behavioral
Finance experts suggest that one of the human emotional "errors" (of
investing) is to project the current circumstances out into the future
indefinitely (termed: Recency Bias). In actual fact, economic periods cycle:
low growth, low inflation into higher growth and higher inflation and back
again, although the time frames for this may vary.
Long-term rates of return will also cycle.
So we must accept that, in time, the average rates of
return will move higher and lower (above and below average) as well.
But we must also always remember the fact that historic
returns are in no way a guarantee of future returns.
There was a time in 2010-2013 when investors wanted a
greater risk-premium for owning equities (and they were relatively cheap in
terms of earnings per share). 2014 to now has seen that risk-premium evaporate
and earnings per share metrics take a back-seat to the gambling mentality (with
the desire for more "immediate gratification"). As we evolve through
the cycle, this too will change, but again, the timing is not necessarily
predictable (although we do try to give it our best "guesstimate").
ACWI
XBB
For more detailed information on these
"benchmarks" please check the links for the fact sheets that should
give you all the information that you are looking for.
Remember that (for us) these are just performance gages
(and by no means a recommendation for purchasing them). In other words, if you
just bought these index ETF's in your portfolio and (avoided paying us our fee)
you would get the advertised return (less the small MER).
So our job (as portfolio managers) is, over time, to give
you a better return than you might get by just owning the ETF's.
That is why we like to show them, so that clients can
make a determination as to whether we are doing our job as far as returns are
concerned. (It is not necessarily always about return, so clients must also put
a value on the qualitative aspects of what we do as well).
I remember a discussion with the president of the bank
firm who had recently taken over the independent firm that I had been with (we
had always had performance on the on-line, client facing, portfolio reporting
site, the bank did not) whereby he told me that most IA's (Investment Advisors)
at the bank didn't want clients to see their performance. Really? Now why would
that be?
Interestingly, the new rules are forcing the reporting of
performance and the fees that those advisors take. So clients can make the
determination with more information. I would suggest that this transparency
will bring about some movement of clients who will now realize that they are
not getting what they paid for.
We will welcome them with open arms (and total
transparency).
Finally, as you suggest, inflation will return (and the
cycle will progress) and there may be a period of time when traditional asset
classes do not offer the historic average returns. This is why we have added a
third dimension to our offering. The "tactical" (value / opportunity)
model. We want to be able to add value when the traditional 60/40 portfolio mix
is not giving us the growth that we desire (and yes it could very well hold
"non-correlated" assets, if, in our judgment, that is a sensible
approach to enhancing risk-adjusted returns.
I hope that this helps and as always, we are more than
happy to discuss this in greater detail if you wish.
Warmest regards,
It is great to be able to discuss what matters to readers...
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