Risk and Return in 2016

Last week I wrote about why a more tactical approach was necessary for portfolio performance that could continue to out-perform the comparative benchmarks. Otherwise, you could just buy the benchmarks (via a couple of ETF's) and avoid paying advisory fees.

The All Country World Index ETF (ACWI) had a total return (source: Bloomberg TRA, daily basis) of 8.40% over the course of 2016 and a 2 year total return of -0.95% (remember 2015 was a difficult year for equity markets). ACWI is comprised of about 53% of US equities.

The Canadian Bond Index ETF (XBB) had a total return (source: Bloomberg TRA, daily basis) of 1.29% after a very tough 4th quarter with a total return of - 3.49%. The 2 year total return was 2.27%.

A combination 60% equity (ACWI), 40% fixed income (XBB) portfolio returned 5.78% over 2016 (after a -0.77% for the 4th quarter). The 2 year combined performance was -0.21%. 

For comparison purposes, using an actual  High Rock client portfolio who joined in January of 2016: 

This particular portfolio is comprised of a combination of 50% of our Global Equity model, 40% of our Fixed Income model and 10% of our Tactical (mostly small cap Canadian companies) model. Clearly the 7.79% total return (after our 1.15% fee) is nicely ahead of the benchmark combination, in large part due to the tactical model providing over-weight exposure to Canadian companies through the year (ACWI weighting for Canadian companies is 3%). However, that was not all. Despite a significant drop in bond markets through the final quarter of 2016, a tactical approach allowed us to minimize the impact by making an adjustment to the duration of our portfolio and adding a portion of floating rate assets (post Trump election) that improved by approximately 5% in December alone.

More importantly, we did not have to increase our risk exposure to pricey equities to get there. In fact our return per unit of risk was even less than the benchmark combination (including an average 20% cash equivalent weighting that is /was slated for future opportunity as well as risk mitigation):

The actual High Rock client portfolio (circled), after adding back 1.15% in fees for comparison purposes, had higher returns and less risk (risk increases to the right along the horizontal index) than the 60/40 (combination of ACWI and XBB). This is based on 1 year monthly total return analysis (TRA, source Bloomberg). 

As always, historical returns are in no way a guarantee of future returns.

We will be discussing this and our High Rock performance for 2016 in greater detail as well as our outlook for 2017 in our weekly client webinar today. We will post the recorded version on our website at or about 5pm today: http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html