After Fees, What's Left?

As we do each week in preparation for our (High Rock) weekly client webinar, we prepare a table of a combination of benchmark returns by blending the All Country World Index (ACWI) equity ETF and the Canadian Bond Universe (XBB) equity ETF for comparison purposes:

What stands out to me is that if you have a blended 60% equity (ACWI) and 40% fixed income (XBB), buy and hold balanced portfolio and are paying a fee of 1.15%, that over the last 2 years with a total return close to 4.5% (total return calculated on a daily basis to May 30, 2017, source: Bloomberg), you are netting only about 3 1/4%. Over 3 years, the same blended, balanced situation has captured only about 3 3/4%. That is pretty significant when you think about it.

2 or 3 years of lower than average returns which includes a 1 year return ( in the most recent year) of close to 10.5%, after fees!

The 5 year return has been a substantially better, 7 1/2%.

It means that volatility over the last 3 years has been pretty high and that the standard "buy and hold" philosophy has not been working because the correlations between stock and bond prices have not fulfilled their historical role. 

When I first started writing these blogs back in 2015, one of my themes was that we were going to be in a low return environment for quite some time.

That is why, a couple of years ago, we (when we started the  High Rock Private Client division) came up with an idea to add a third dimension to the standard "buy and hold" portfolio. One where we had to work a little harder to earn our fees, but one where we could add extra value that would help elevate returns, while at the same time, also helped to reduce risk (especially in times of higher volatility).

The point here is that volatility has not gone away, it is just dormant. When it re-appears, back to 2015 and 2016 levels (likely when central banks reduce the cushion of liquidity that has subdued recent volatility), portfolio returns (for the balanced blend) are going to continue to remain low and what we have experienced over the last 6 months will become an aberration.

So investing will require a better approach than the simple "buy and hold" methodology.  

What you have to wonder is, what are you going to be paying fees for?

Is It Ethical?

In our Our Voluntary Code of Conduct for the Stewardship of Your Wealth under the heading Investment Management:

 We are governed by the CFA (Chartered Financial Analyst) Institute’s Code of Ethics and Standards of Professional Conduct 

A Chartered Financial Analyst / CFA is the "most respected and recognized investment management designation in the world".

The CFA Program "provides a strong foundation of advanced investment analysis and real-world portfolio management skills".

Obtaining the designation requires a rigorous, approximately 900 hours of study and three, separate six hour exams.

More importantly, a practicing CFA charter holder is required to abide by the Code and Standards or face disciplinary sanctions:

"The CFA Institute Code of Ethics and Standards of Professional Conduct are fundamental to the values of the CFA Institute and essential to achieving its mission to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. High ethical standards are critical to maintaining the public's trust in financial markets and in the investment profession".

So not only do we (at High Rock) have our own code of conduct, but we are held accountable legally (discretionary portfolio management vs. non-discretionary financial / investment advice) and bound by the CFA Institutes's Code and standards. 

We certainly do not take this lightly.

It is why we don't just stick ourselves and our clients into a basket of ETF's that represents a single solution for everyone: a "one size fits all" type of investment portfolio. That's the easy way, when you have so many clients that you can't manage to give them enough individual attention.

That would not be putting the client first. That would be putting the "business operation" first. That, in our opinion, is not ethical.

There is an alternative to banks, investment dealers (brokers or financial advisors) and robo-advisors and at High Rock we are challenging the "old-school" way of thinking and leading the way forward with low cost, transparent, ethical, and fiduciarily responsible client-friendly planning and investment strategy.

Join us!
scott@highrockcapital.ca

No Surprises From The Bank Of Canada

As we suggested in our weekly client webinar yesterday, current core consumer price data will hold the BOC's policy interest rate at 1/2% as the key data remain below the bank's 2% target.

For those of you who have debt, it remains best to continue to keep it at a floating rate (which is based on prime and is set based on the Bank of Canada's policy interest rate) if it makes sense for your personal situation: this is something that you should of course discuss in more detail with your Certified Financial Planning (CFP) professional. 

If you need one, let me know, I know a really good one.

We (at High Rock) have been focusing on debt and interest rates as a key theme for 2017. CBC reported yesterday that a Manulife Bank survey has suggested that when interest rates do rise:  

"Almost 3/4 of Canadian homeowners would have difficulty paying their mortgage every month if their payments increased by as little as 10%".

That would be a $200 increase on a $2,000 monthly payment.

This is certainly something that has raised red flags at the Bank of Canada and should definitely be of concern to policy makers and lenders that when it does come time to raise rates that the fall-out could be particularly severe.

This is why we have to keep a close eye on the Bank of Canada's core rates of inflation. Should they start to elevate above the 2% target level, the BOC may have little choice over the necessity to raise interest rates as their mandate specifies that their job is to maintain price stability. Raising rates and tightening monetary policy is the tool that they will use to counter inflationary trends (if and when they begin to appear).

What will happen if they have no choice but to raise rates should leave anyone with significant equity tied up in their homes feeling a tad squeamish. The report from Manulife highlights this. If you can't afford your mortgage payments, the banks become less friendly. If close to 3/4 of homeowners can't afford their mortgage payments, it will not be pretty.

For the moment, Canadian interest rates will remain where they are (and the good news is that debt servicing at current levels remains affordable), but we need to be vigilant on the inflation indicators and Bank of Canada monetary policy for what may come next.

Feedback...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

There Is Still Plenty Of Punch Left In The Punch Bowl (For The Moment)

So, you may be wondering: why is it that volatility (which spiked last Wednesday) is so quick to drop back to it's lower levels in spite of all the uncertainty surrounding the global financial markets and the Trump administration?

The simple answer is liquidity (and the perception of liquidity). Which is all controlled by the central banks.

What is scary about liquidity is that once the central banks decide to reduce liquidity (pull the proverbial punch bowl away from the party) the reality of the next era for financial markets may be not so pretty (or fun).

Those that have been using the down days to add to equity positions will be using the up days to lighten up.

So the reality of the "Trump" trade (as it has been so nick-named) is really a function of the continued "easy" monetary policy at the US Federal Reserve, despite their continued threats to raise interest rates (warning shots) on multiple occasions over the course of this year and into next year.

However, until all the other central banks: European Central Bank (ECB), Bank of Japan (BOJ), Bank of England (BOE) and Bank of Canada (BOC) all decide to join in to tighten monetary policy, there will continue to be plenty of liquidity available.

The enormous risk in the financial markets is the very inelastic follow-through that could occur when liquidity is curtailed (global monetary policy tightened) because all asset classes (save for cash) will become correlated and the selling could be significant.

All central banks have a mandate to create price stability (keep inflation at or near a 2% target). Thus far (except in the UK, because of the post-Brexit depreciation of the Pound), inflation has remained subdued. It is widely expected to pick up (especially in the US) as economic growth picks up. So mounting pressure will come to bear on the central bankers.

As a case in point: in the world's second largest economy, China,  monetary policy tightening (draining of liquidity) to counter the enormous growth of debt in that country has had its impact: slowing economic growth in April and sending the Shanghai Composite down some 7%.

The party is alive as long as the punch bowl remains. When it is removed, everyone will be heading for the exits (all of them) in a hurry.

We will talk about this and lots of other influencing factors for the decisions that we make in the management of our and our client's money on our weekly webinar today. You can tune in to the recorded version, at or about 5pm EDT today.

There is an alternative to banks, investment dealers (brokers or financial advisors) and robo-advisors and at High Rock we are leading the way forward with low cost, transparent and client-friendly planning and investment strategy.

Join us!

Lower Cost Of Living For Canadians (Apparently)

April consumer price index rose 1.6% (over the last 12 months) vs. 1.7% in March.

It depends on what you consume:

But it also depends upon where you live:

If you purchased men's clothing in Ontario in April, they experienced the largest decline in 12 months. Nova Scotia had the biggest decline in fresh vegetable prices in the last 12 months.

More here: Statistics Canada: Consumer Price Index, April 2017

If you know what you spend and what you spend it on, it becomes material in working out the increase and / or decrease in your cost of living (year over year) which impacts the "real" return on the growth of your net worth.

If you can get an average annual return of 6% (after fees) on your assets (over multiple years) and your average annual cost of living is 2%, then your real return is 4% and you should be able to compound that growth nicely over time.

Those kind of returns won't happen without taking some risk. The "risk free" rate of return (90 day Government of Canada T-bills) yields about 1/2%.

How you take that risk becomes extremely important. 

Even balanced portfolios (depending on the balance and diversification) were sideswiped on Wednesday of this week: The benchmark indexes that we use, the All Country World Index (ACWI) ETF gave up a little over 1.5%, while the Canadian Bond Index (XBB) ETF added about .85%. Which means that a ( fully invested) 60% equity / 40% fixed income portfolio gave up about 0.56%. That is a pretty big swing considering that the same 60/40 combination only garnered a 3.35% (before fees) return over the 2 years ending March 31st, 2017 (see table below).

Everybody can make their own comparisons, but even that kind of volatility can become unnerving. That is why we (at High Rock) focus so much on risk. 

We can tell each of our clients what their return per unit of risk is. 

Can your advisor tell you that?

Ask him / her.

If you have to take risk to beat the cost of living, best to understand what risk you are taking:

There is an alternative to banks, investment dealers and robo-advisors and at High Rock we are leading the way forward with low cost, transparent and client-friendly planning and investment strategy.

Join us!

scott@highrockcapital.ca

Stock And Bond Market Correlations:

They Are Just Not As Reliable As They Used To Be

The thesis for passive portfolio management stems from a long held view that bond prices are inversely correlated to stock prices and that over longer time periods: a balanced portfolio of stocks and bonds is a safe place to keep your hard earned savings.

The basic idea was that in times of higher stock market volatility, you would get a cushion out of the "flight to quality" that pushed bond prices higher as stock prices tumbled. At the same time, in years when bond yields had a 5 handle on the coupon, you were also able to receive a nice stream of income when they were not adding the price cushion: you were paid to own them.

Times have changed.

As inflation and interest rates have fallen, so too have bond yields so you are just not getting paid the same to own them. That also doesn't give you the same kind of cushion if and when stock prices get volatile.

January 2016 was a prime example. Balanced investors got a pretty hefty scare seeing their balanced portfolios clipped by 7-10%.

A year later, the 2 year returns are looking a little better, but not back to an annualized 5% average return. 

And if over-priced equity markets take another tumble?

The bond portion of your "balance" is not going to have the same shock-absorber effect as it might have had in earlier times.

So while everybody is feeling like their portfolio is looking awfully good at the moment, there is going to be a time when this complacency becomes a problem.

As portfolio managers, our job is to be "ahead of the curve", which basically means that we are anticipating the next major move. It is why we are always calculating risk metrics, so that we know how our portfolios will react to the next big shock.

Buy and hold, passive and robo strategies do not take these things into consideration. All of their strategies are based on old-school investing techniques. Its part of the reason that ETF strategies have become so successful and are all the rave at the moment. Certainly they took investors out of the hands of the over-priced mutual fund world, but they did not take investors out of the world and risk of potential volatility.

Volatility has not gone away, it is just lurking, ready to catch investors off-guard just when they become most complacent.

Given the nature of changing correlations, this could be a rude awakening for many.

We discuss this stuff with our clients every Tuesday in our weekly client webinar , which we post in a recorded format on our website. Feel free to tune in after 5pm EDT.

There is an alternative to banks, investment dealers and robo-advisors and at High Rock we are leading the way forward with low cost, transparent and client-friendly planning and investment strategy.

Join us!

scott@highrockcapital.ca

"Just Keep Doing What You Are Doing"

For each of our clients and client families we make certain that we "chase" them down for a review at least once every six months. Sometimes they really don't have a need to see us, but for us it is important to try and keep up with any changes in their lives that might render a change in investment strategy.

Importantly, they talk directly with me, the guy who signed them up (or Paul, our CFA and Portfolio Manager or Bianca, our CFP professional or a combination of all three of us). So many of our newer clients have come to us complaining that they never got to speak to their advisor (other priorities perhaps), but are relegated to a junior member of the staff.

We make it very clear in our Our Voluntary Code of Conduct for the Stewardship of Your Wealth:

We will always:

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

You won't get that with a large advisory practice (unless you have priority, which means you that you are a multi-million dollar client) and you certainly won't get that with with a Robo-advisor.

At High Rock, you get to speak with who you want, when you want because we believe in the importance of the relationship.

As I stated earlier, some clients we have to chase: Bianca has a standing instruction not to let a particular client off of the phone when he calls to advise on the amount of his monthly deposit because otherwise I can't get him to set up an appointment.

Then there was the review that I had this morning that gave me the title for my blog. It happened at the end of our discussion on how we had rebuilt her portfolio back in 2015 (because it was previously in a "one size fits all" type of portfolio before moving over) into a very specifically tailored portfolio. Yet another of Our Voluntary Code of Conduct for the Stewardship of Your Wealth points under the Financial Planning heading:

We will always:

 Treat each individual client and / or client family independently of other clients in tailoring their investment strategy specifically to them 

We turned it around nicely, avoided the volatility in 2016 and have her well ahead of her target for this year. Others who had similar portfolios (same advisor) were crushed in 2015-2016 and are just getting back to break-even now. As I tell many of them, the unfortunate thing is that they just don't fully grasp the risk that they are carrying.

And in a non-discretionary advisory relationship, the advisor has no legal reason to be held accountable (if the initial transaction was deemed suitable at the time of the trade).

http://www.theglobeandmail.com/globe-investor/globe-advisor/most-regulators-abandon-proposal-to-require-advisers-to-act-in-best-interests-of-clients/article34954746/

But we (High Rock) are held legally accountable because our discretionary portfolio management makes us a fiduciary.

So we will "just keep doing what we are doing" because it works for our clients.

Finding Value Part 2: Home Trust Notes

If you have not read Paul's blog : More On Home Capital, I would highly recommend it. It is an important example of our  (High Rock) Voluntary Code of Conduct for the Stewardship of Your Wealth, under the heading Investment Management :

We will always: 

 Act with skill, competence and diligence to have a reasonable, adequate and disciplined basis for all of our investment decisions

As I stated in my Monday blog "finding value then becomes one of the important ingredients to a stable long-term rate of growth".

As I write this note, the S&P 500 is down about 1/2% from close to its all time highs yesterday. In the grand scheme of things that is not enormous and in a balanced portfolio with 60% equity, if bond prices are basically unchanged, then a .30% decline is not much to worry about.

However, if (as will happen sooner or later) you get a 10% correction (and you are fully invested), your equity portion is going to drag your total portfolio down by 6%. Hopefully the fixed income portion (40%) will provide some cushion. But as we stress each week in our Tuesday webinars (ad nauseum), the historical correlations have not necessarily been performing as they have historically and that could be a problem for those who hope that they will.

When we began our High Rock Private Client Division, a little over 2 years ago, we brought a third, more tactical component into the mix for this very reason.

To take advantage of opportunities that we found through our diligence which would add value, but reduce risk.

The Home Trust Notes were just one of many that we have utilized. We owned Rona when Lowes bought them at about 2X what we paid for the shares, Paramount Energy which about tripled in just a few months after energy prices hit bottom in early 2016 among a number of other names (Perpetual Energy, CVR Energy, Air Canada, Great Canadian Gaming, Pine Cliff Energy, Canexus and a very well-timed preferred share switch) that have propelled the tactical model's performance (not every trade works out necessarily as planned and past performance is never a guarantee of future performance, although at High Rock, we work very hard to

find and take advantage of these opportunities).

You see friends, you don't necessarily have to be fully invested in equity markets to achieve decent returns and it truly does help lower your risk profile when you carry an overweight amount of cash equivalent assets waiting for some of these opportunities / anomalies to present themselves. A little patience perhaps may be required, but in the end, it works.

There is a reasonable, transparent and low cost alternative to getting better risk-adjusted returns (in a fiduciarily responsible way) and at High Rock, we are bringing this to our private clients.

Join us!  

scott@highrockcapital.ca

If you would like to receive this blog or Paul's blogs directly to your inbox...

bianca@highrockcapital.ca

Finding Value

We often discuss value when it comes to investing, simply because it does not make sense to buy assets that are over-valued (and buying assets that have a greater chance of coming down in price in the near-term is a high risk proposition). So we do a significant amount of research to determine where there might be value before deciding to make a purchase.

In (High Rock's) Our Voluntary Code of Conduct for the Stewardship of Your Wealth under the heading Investment Management:

We will always

 Manage risk first. Strong risk-adjusted returns are the result of properly managed risk 

That is why when a new client transfers their hard-earned savings into our care, we don't just run out and buy a set basket of ETF's just to get them fully invested immediately, without first stopping to determine whether the prices they are paying make any sense.

It is the same when an existing client transfers in new cash.

It means that we have to do a great deal more work in making our determination as to what and when to buy, but from our perspective, that is what we are being paid to do.

Any advisor can get you fully invested immediately. As we discussed on this blog last week (http://highrockcapital.ca/scotts-blog/discretionary-or-non-discretionary), that likely ends their legal obligation to you (but they may still charge you an on-going fee). 

Might our more tactical approach take a little longer to get a client fully invested? Quite possibly, but over time our clients will be less vulnerable to the swings in market prices (volatility) which means that the key factor for compounding year to year growth (stability) is easier to achieve.

Ultimately it is compounding (and active re-balancing) that will be the reasons for long-term growth to achieve your target annual average returns.

Finding value then becomes one of the important ingredients to a stable, long-term rate of growth (better risk-adjusted returns) in your investment strategy.

Discretionary vs Non-Discretionary: Part 2

http://highrockcapital.ca/index.html

From Our Voluntary Code of Conduct for the Stewardship of Your Wealth, under the Investment Management heading:

We will always

 Trade for our clients first and simultaneously so as to give no particular client priority

With a non-discretionary account this just can't happen. Every trade has to be approved by the client (see yesterday's blog for the legal ramifications) and that means one client at a time.

So who will be first when it comes time to sell, buy or just re-balance? Whoever are the most important clients. Likely the ones who pay the biggest fees or commissions, which are likely the ones with the most assets. If you are in the middle of the pack in a stable with a large number of clients, it may take days or weeks to get looked after. You may never even talk to the "senior" advisor about the whys, the wherefores and rationale for giving your approval.

As a discretionary portfolio manager (at High Rock), we do one trade and every client is looked after instantly and simultaneously (as employees, our personal trades are the last ones to be filled) at the same price. 

We have a report that continuously updates us on how each client portfolio sits relative to their asset allocation and portfolios are automatically re-balanced when they "drift" away from their allocation % (as prices change).

If we have something that needs to be bought or sold quickly, no client or client family is at a disadvantage.

That cannot happen with a non-discretionary advisor.

A huge disadvantage for the non-discretionary client.

I recall a situation back in 2014 (when I was a non-discretionary advisor) when the falling market did not quite get to our prices on some  ETF's that we wanted to buy and we had a substantial number of (good until cancelled, GTC) client orders in for those ETF's.

When we decided to change the prices we wanted our clients to pay, we had to set up hundreds of calls to make the changes. It took months to contact every client who had one of those orders. Of course they all did not get the same prices.

I said to myself... never again!

There is an alternative to the old ways and we are leading the way forward at High Rock.

Join us.

scott@highrockcapital.ca

If you would like to receive this blog or Paul's blogs directly to your inbox...

bianca@highrockcapital.ca

Discretionary or Non-Discretionary?

Quite simply put, when you get non-discretionary advice and agree (because you must approve each and every trade) to the transaction (purchase and/or sale of a stock, bond, ETF or fund) all the responsibility shifts to you. You have little recourse once you have signed the account application and followed the advice of the salesperson on whom you have just placed your trust (salespeople are good at talking it up, its their job). 

However they do not have a Fiduciary Duty to provide you with on-going advice (when to exit the trade, for example, because the risk profile has changed). Only a standard of care that it was a "suitable" trade in the first place:

IIROC Rules:

3500.2. Definition of account relationship types (1) An “advisory account” is an account where the client is responsible for investment decisions. The registered representative is responsible for the advice given. In providing this advice, the registered representative must meet an appropriate standard of care, provide suitable investment recommendations and provide unbiased investment advice. 

More here:

http://www.iiroc.ca/Rulebook/MemberRules/Rule03500_en.pdf

My friends, those are some very broad strokes beyond which you own the liability. So if you are up to it and capable of it and want to do all your homework (basically Do It Yourself / DIY type of stuff), away you go. But there is enormous risk and few have any real concept of what that risk is and it is no longer the advisor's responsibility, it is yours. Period.

Did you realize that?

Now for the legal stuff...

http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20121025_33-403_fiduciary-duty.htm

Canadian courts have identified five non-exclusive and interrelated factors to assist in this determination: vulnerability, trust, reliance, discretion (over the client's account or investments), and professional rules or codes of conduct (see "When does a fiduciary duty arise at common law?" in Part 3 above).

The fourth factor, discretion, is an especially important element in the context of an investment advisory relationship because the advisory industry generally distinguishes between clients based on whether they have discretionary accounts or non-discretionary accounts. A discretionary account (also known as a managed account) is a type of client account for which an adviser or dealer has the discretion to make investment decisions and transact in securities without the client's express consent to each transaction; in a non-discretionary account, the client must consent to each transaction.

Accordingly, a common law fiduciary duty will virtually always arise where the client has a discretionary account. A fiduciary duty may also arise where the client has a non-discretionary account depending on the actual power or influence that the adviser or dealer has over the client, and the extent to which the client relies on the adviser or dealer. On this point, the Supreme Court of Canada recently stated that:

"[t]he nature of this discretionary power to affect the beneficiary's legal or practical interests may, depending on the circumstances, be quite broadly defined. It may arise from power conferred by statute, agreement, perhaps from a unilateral undertaking or, in particular situations by the beneficiary's entrusting the fiduciary with information or seeking advice in circumstances that confer a source of power"{34} (italics added).

Sorry for all that legal stuff, but it is so very important:

Discretion places the responsibility on the adviser.

Where do you want to place your trust? 

In someone who has a legal responsibility to provide you with that trust or someone who wants to create a trusting relationship to sell you something so that they can be paid a commission (with a potential conflict of interest)?

The world of investing and advice is going to change and we (at High Rock) are paving the way forward, providing solid wealth and discretionary portfolio management at a better cost and with better service than all the old school style financial (non-discretionary) advice givers.

Join us...

scott@highrockcapital.ca

If you would like to receive this blog directly to your inbox...

bianca@highrockcapital.ca

For Investing, You Don't Need A Financial Advisor

http://www.moneysense.ca/save/investing/financial-advisor-or-adviser/

You need a plan. Which requires a qualified planner, specifically a Certified Financial Planning (CFP) professional.

More importantly, you need a plan that is not biased by a sale of some financial product or loose promise that you will be taken care of (somehow).

In our Voluntary code of Conduct for the Stewardship of Your Wealth we specifically highlight this:

We will always:  Build investment strategies in keeping with our client’s goals and objectives, risk tolerance, timelines and liquidity needs 

If you are put into a buy and hold, 60% equity and 40% fixed income strategy with all of the other clients for the sake of simplicity for the Advisor, so that they might be able to spend the bulk of their time "gathering assets", then this is not a strategy that is tailored specifically to you or your personal or family goals.

Your plan (at High Rock we call it a Wealth Forecast) needs to be detailed and specific and written.

Then it needs to be strategically translated into an asset allocation that meets your criteria on what risk you wish to take, the timelines required to accomplish your goals and your needs for cash flow.

Only then will it be truly yours.

And it certainly does not require being sold a fund, an ETF or stock.

It requires a portfolio manager (Chartered Financial Analyst, CFA or Chartered Investment Manager, CIM) who has the knowledge, skill and experience to guide (steward) your portfolio appropriately.

A salesperson / Advisor can claim to have a license, but they are merely a "registered representative" of the financial institution by which they are employed (even if they have fancy Vice President or even "Senior" Vice President titles). Once upon a time, not so long ago I was a "Senior" Vice President at a financial institution. So I know that it is merely a function of how many assets you have gathered (or perhaps it was that I was over 55!).

Without the appropriate credentials (having studied for and passed a series of exams) and approval by the Ontario Securities Commission (or perhaps IIROC), they are not portfolio managers.

As simply "registered representatives", they can not provide discretionary portfolio management, which means that as a client you must first approve every transaction.

This also means that when a trade is necessary, you may be on a long list waiting for a call to approve a trade.

But that will be a blog for another day when I discuss the point of fairness in executing trades especially in portfolio re-balancing.

There is an alternative and we (at High Rock) are leading the way forward for our clients.

Join us!

scott@highrockcapital.ca

If you would like to receive this blog directly to your inbox...
bianca@highrockcapital.ca