Almost Halfway Through 2019: Perspective

While the first half of 2019 clearly improved on the second half of 2018. For the most part, financial markets, at least the 4 represented in the above chart: S&P 500, All Country World Index ETF (ACWI,), S&P/TSX and the Canadian Bond Index ETF (XBB) have pretty much gone sideways over the past year and a half. The S&P 500, clearly displaying the most volatility, for the moment has offered the best total return (according to Bloomberg TRA, daily analysis) with an annualized 8.87%. That may be a little tenuous, if as we suspect, volatility continues. A little more on that in a minute.

A fully invested balanced (60/40) portfolio with some Canadian equity exposure (which most Canadians have too much of as a result of "home country bias") some global equity exposure (ACWI) and some bond exposure (XBB), probably has seen somewhere in the vicinity of a 4 to 4.5% annualized return (again using Bloomberg TRA, daily analysis), depending on your asset allocation: if you had more bonds, you likely did slightly better as XBB has returned an annualized 5.2% total return since the beginning of 2018.

For the most part that is what is supposed to happen with a balanced portfolio: bonds and fixed income assets are intended to reduce the volatility (noise) from risk assets, like stocks, over shorter time frames.

Over longer time periods, short-term volatility becomes even further subdued as annual averages become more entrenched:

As an example, one of our long standing High Rock private clients (with me from before my High Rock days) can boast an after fees and costs multi-year (records back to October 2012) annual average return of 6%, with a return of about 0% over the last 12 months, in a balanced and diversified portfolio:

The down-ticks along the way become minute in the grander scheme.

Nonetheless, as I have often discussed in this blog, we are all human beings and we have our own sets of biases developed through our experiences and of course, the media bombardment that we receive. It is easy to get caught up in all the short-term noise, especially when it is so loud (at this particular moment in time).

As a manager of people and their wealth, we also have a role in managing peoples expectations.

Volatility will continue, there is no shortage of political, economic and environmental uncertainty, perhaps now at  multi-year highs. Stock market bulls and cheerleaders think that the U.S. Fed and other central banks will bail them out. We believe that economic and earnings fundamentals could spoil the party. 

We can sit passively by and endure it (but don't be peeking at your portfolio performance through this period), or we can ready ourselves to take advantage of it.

We encourage a little of both in our strategies, which means that we are a carrying a little more than average cash equivalent (very liquid) assets that can be deployed when (and if) turbulence from uncertainty unseats stocks and better prices and values unfold.

Our High Rock Private Clients don't have to pay much more than they would for passive portfolios (robo, etc.), but they do have us available for conversation when (and if) they take a quick peek at their portfolio values in a volatile time and become unnerved.

And, of course, past performance (as in the above client performance chart) is no guarantee of future returns, but at High Rock, we work darn hard to get our clients the best possible risk-adjusted returns as is possible.

Wishing you all a Happy Canada Day!!

Consumer Prices In Canada Are Up. 

What About Your Household's Cost Of Living?

Statistics Canada announced today that over the year ending May 31, it cost 2.4% more to purchase the basket of consumer goods that it monitors.

Basically, this is how that basket is structured:

Shelter = 27%

Transportation = 20%

Food = 17%

Household operations, furnishings and equipment = 13%

Recreation, education, reading = 10%

Clothing and footwear = 5%

Health and personal care = 5%

Alcohol, tobacco, (recreational) cannabis = 3%

Of course, your own cost of living weights will likely differ. As an experiment, you may want to try to determine by how much.

Why should we care?

When we create a Wealth Forecast, one of the most important assumptions we make is the annual increase in your cost of living. The rate of growth of your net worth needs to at least keep up with the rate of increase in your cost of living, otherwise you will start to see an erosion in your total net worth and ultimately the value of your estate. 

When we are in the business of building wealth, this is obviously crucial. When it comes to maintaining your comfortable lifestyle in later life (and avoiding the risk of running out of money), it is paramount.

For those who have not had the time to figure out exactly what your cost of living is, we can fall back on Statistics Canada's data, but it will be a little less accurate. What you consume and where you consume it is going to be different for every household.

The long-term historical average is about 2.1%.

You will need to get at least that annualized return (possibly more depending on your own circumstances) to be able to stay even over time.

The current risk free rate of return (a 3 month Government of Canada treasury bill) is about 1.6% (before fees and taxes). Depending on your marginal tax rate, that will slip closer to 1%.

So, inevitably, if you do not want to see the value of your net worth decline, you are likely going to have to take some risk with your investments. 

How much risk is going to be contingent on what your goals are and what your cost of living will be into the future, that is why it is such an important assumption, especially when you are looking out 30 - 40 or more years.

The more planning that you do, in advance (like trying to determine your annual cost of living increase as accurately as possible), the more likely you are going to understand what risk you have to take and what you need to do to be able to meet your goals.

Any business would not be successful without a business plan. Why would a household be successful without a financial plan?

Once we have a handle on what amount of risk we need to take, we can build a strategy around getting the maximum growth possible, while at the same time, taking as little risk as possible. Why take more risk than absolutely necessary? Taking more risk than necessary could jeopardize  your long-term growth needs.

At High Rock, we manage risk first, so as to not put a well-crafted plan (Wealth Forecast) into jeopardy.

Manage your risk, manage your costs (of investing) manage your plan and you will have a successful future.

And The Noise Just Keeps Getting Louder

The politics of trade, the politics of populism, the politics of war, the politics of climate, the politics of immigration, the politics of health care, the politics of stock markets, the politics of interest rates, the politics of currencies, the politics of politics!

In my job I am front and center with the "breaking" news of the day, but we are all bombarded with it through the new "speed of information": regular media and social media and all the analysis (our friend David Rosenberg refers to them as "bubbleheads"!) that goes along with it. News sells and it is big business. It is also increasingly manipulated.

There are no shortage of facts ("alternative" and otherwise), data and opinions being tossed about and so many want to spread their own particular influence and histrionics.

It is just so much noise (or at least the great majority of it is). 

For investors (and I mean real investors, with long-term perspectives) it is always difficult to keep our focus when we have so much information crossing our respective paths.

The worst advisors will use the noise and hype to create uncertainty and sell you their "next best thing": is it the 10 best dividend stocks to own in a recession? or even worse, a mutual fund that will take a good chunk of those dividends away (in MER's) from you while investing in the same stocks? Supposedly, to get you through whatever fear has been elevated to champion whatever is happening now in the headlines. Remember the "shiny object" syndrome?

The best advisors will always take a more circumspect position, focusing on the path that is laid out by your long-term plan and advising you to stick with it, because recessions happen (they have before, they will again and we even recovered from the "great" recession of 2007-2008). In three or four years it will likely not matter (in any significant way, other than some opportunities that may arise from the volatility for investing purposes): you will still be growing your wealth (i.e. sticking to the plan) and the politics of yesterday will simply be in the history books. 

The best advisors will be ready to take your calls / emails if and / or when you start to feel a little queasy and confused about all the noise and hype out there. There are never any bad questions.

At High Rock, we are always standing by.

What Is A Portfolio Manager?

According to the Portfolio Management Association of Canada (PMAC), of which High Rock Capital Management Inc. is now a member (application approved!) : "Portfolio managers are firms and people who manage investment portfolios on behalf of private clients, foundations, endowments, and pensions. Portfolio managers differ from mass-market or retail investment managers because they manage large amounts of money for fewer clients. This often results in lower management fees."

Is a portfolio manager right for you?

If you are reading this, there is a good chance that you are already a High Rock Private Client and hopefully you will celebrate with us, that we not only are licensed by the Ontario Securities Commission (B.C. and Alberta too) and therefore already held to a higher degree of accountability for our clients, but that we have also been accepted into the elite group of portfolio managers that make up PMAC. If, for no other reason than, there is a high level of credibility that goes with that, we are thrilled.

But we are also thrilled with our membership because we now have resources at our finger tips to continue to progress and maintain the advanced standards necessary to be a part of this association:

What are the benefits of working with a portfolio manager?:

1) Fiduciary Responsibility:

According to PMAC: "Portfolio managers and their firms have a fiduciary duty to act with care, honesty and good faith, always in the best interest of their clients. Investment decisions must be independent, free of bias and what is right for you".

If you have not recently visited our website and reminded yourselves of our commitment to you, you can always head over and read (re-read) our High Rock Code of Conduct.

In regular conversations with clients, I am often asked about a specific and reasonably well-known blogger/advisor (not a portfolio manager) and his/her opinions on financial markets and investment matters. It's just noise and hype, but like all journalists, he/she has something to sell and like all folks with something to sell, there is bias, without doing the necessary homework to determine what is really "right for you". He/she may make grand pronouncements about what he/she thinks is "right for you" (what one astute client referred to as "blow-hard"), but it is just not possible. The cookie-cutter, one portfolio for all, is not part of good portfolio management. Everybody has unique circumstances and that should determine the appropriate investment strategy. Often there is a failure, implied or not, to include the disclaimer: "past performance is not a guarantee of future returns".

As a member of PMAC we have a higher standard to live up to.

2) Professional Qualifications:

"As fiduciaries, securities regulations require the highest level of education and experience in the investment industry".

Paul is a Chartered Financial Analyst (CFA), Bianca is a Certified Financial Planning (CFP) professional, I am a Chartered Investment Manager (CIM), so our High Rock Team has all the knowledge to offer independent, unbiased advice.

3) Investment Policy Statement:

"Your IPS is the basis upon which your portfolio manager selects an appropriate mix of investments and makes discretionary adjustments to your portfolio."

4) Personalized management of your portfolios: 

"Your investments are managed based on the personalized objectives and risk tolerance outlined in your IPS. Typically, you give discretionary authority to your portfolio manager to make investment decisions without getting prior approval from you for each transaction".

In the "above and beyond" category, High Rock's CFP prepares a Wealth Forecast (financial plan), which outlines the goals and time horizon's to achieve those goals. This is how we prepare the IPS for each of our clients. While most CFP's who offer fee-for-service financial planning will charge btween $2500 and $4000 for a plan, High Rock includes the cost of this plan in the 1% management fees (which includes semi-annual reviews and updates). Or, if you wish, you can pay for a financial plan upfront and if you wish to eventually have us manage your portfolio, have a reduced management fee when you become a full-time client.

I have said it many times in this blog: you cannot have an appropriate investment strategy without a plan first. Whatever advice you receive, one size does not necessarily fit all. Period. End of conversation!

5) Fees:

"Portfolio managers charge a percentage of the investments they manage. This fee is transparent and generally much less than retail management and distribution costs. Fees are fully transparent on client statements and typically go down as a percentage of your portfolio as your assets grow. Fees are not paid by commission based on volume of buying or selling investments and are significantly lower than typical mutual fund fees."

At High Rock: 1% management fee under $2mm AUM plus the Raymond James Correspondent Services (RJCS) fee which is .15%. All tax deductible in a non-registered account. 

Retail management and distribution costs (Mutual fund MER's) are not.

Fees can considerably dent an investment portfolio over time, it is so very important to know what you are paying and why!

6) Safekeeping of Assets:

"Your money resides with a third party bank or other financial institution (known as a custodian) who is responsible for the safekeeping of your assets. This provides an extra layer of protection and safety for a small additional fee."

For more on RJCS, click here. 

7) Registration:

"Both the firm and the individual who is managing your investments are registered as portfolio managers with provincial securities commissions".

High Rock is currently licensed in Ontario, B.C. and Alberta, but if we are able to get a critical mass of clients in any other jurisdiction to cover the licensing fees, we would be thrilled to take on those clients that reside in other provinces (or states).

8) Legal requirements of firms:

"Firms registered as portfolio managers must meet strict financial reporting, capital and insurance requirements to further protect your investments."

High Rock is compliant with all the requirements.

We are excited to part of PMAC, to be held to the higher standards that we know that our clients expect and deserve, but hopefully it also adds a layer of confidence and trust that you are not just going to be treated as just another "number" as you may in a bank or other large financial institution.

In this world of technology substituting the human experience, we can stand out and offer a true relationship for helping to steward your wealth.

Stock Market Focus On Fed Is Misleading

In trader jargon, the recent stock sell-off (most of the month of May) which saw global equity markets down by about 6%, created a technically "over-sold" situation, so markets were ripe for a bounce-back (fun for the stock market "cheerleaders"). U.S. Federal Reserve Chairman Powell helped yesterday with a suggestion that he could respond with rate cuts if the economic outlook deteriorates (more fun for the cheerleaders).

So that has all the analysts running to check on the history of stock market returns after the Fed does cut rates in the face of economic slowing. Marketwatch has a story with a table provided by Barclays: the average and median response by the S&P 500 after a 12 month period was higher by about 7-9%. Most recently, however, the 2001 cut was followed by a 12 month drop of -11.2% and the 2007 cut was followed by a 12 month drop of -13.7%. 

Suffice it to say that, if the economy is deteriorating, corporate earnings will also likely be deteriorating and stock prices that rise on lower earnings because the Fed cut rates, is a recipe for disaster. The big question then will be: how much will the U.S. economy deteriorate?

Equity traders are placing their bets.

But we do not gamble with our own money and especially with our High Rock Private Client's money.

The World Bank weighed in on their expectations in their June 2019 Global Economic Prospects report yesterday and it has lowered its projections across the board: "Global growth in 2019 has been downgraded to 2.6%, .03% below previous forecasts, reflecting weaker-than expected international trade and investment..."

At the risk of falling into the behavioural trap of confirmation bias, our friend David Rosenberg suggests this morning that: "Well, one thing we know about yesterday's monster rally in equities, and sell-off in bonds was that they had little to do with anything real or fundamental". Obviously I agree with David, but there are plenty who see something else (stock market bulls and cheerleaders).

The bulls are, in my humble opinion, suffering from another behavioural bias, which is recency: when the Fed has added liquidity, as they did with QE post 2008, stock prices tended to rise and they now live by that mantra. Until it no longer works. Remember the Fed has been draining liquidity since 2016 with their balance sheet reduction, which is akin to quantitative tightening. In 2018, this reality came into play and the declining monetary base started to push volatility into the stock market: (monetary base in blue, S&P 500 in orange)

Certainly the Fed wants stock markets to remain calm and as they did in late December (rising stock markets do affect consumer confidence in a positive way and vice versa) are using their speeches to talk markets down from their volatile swings.

Unfortunately, it is a short-term band-aid on a more difficult prognosis and without actionable and quick follow-up, will only exacerbate the problem. i.e. The 'boy who cried wolf' syndrome.

So for those of us sitting on cash or near-cash at the moment, stocks are hardly looking like a place to offer good investing value. Volatility will bring opportunity and staying patient will likely end up being the smart move. In the interim, there are alternative asset classes worth looking into. High Rock private clients have exposure to them.