Happy Birthday High Rock Private Client (Wealth Management) Division

It is actually a bit belated, but with all that has been going on recently it actually had slipped my mind until I was asked a few questions by a prospective client this morning which I will share further along in this blog. We were supposed to celebrate with a gathering of our clients, prospective clients and friends at The Albany Club (across King Street from our office at 1 Toronto Street) yesterday evening with a special guest appearance from our friend David Rosenberg. Given the current pandemic and subsequent lock-down, the timing (planned well-before this all happened) was not so good. In hindsight, though, I would really like everyone to hear David's outlook on the current reality that we face. David's input and critical thinking was, over the last year, vital in helping us maintain a defensive strategy that has been paramount for our clients avoiding the huge swings and frightening volatility of the last couple of months. 

As of yesterday, our 60% fixed income, 40% equity clients were basically flat on the year (this is general, because every client portfolio and strategy is specifically tailored to their own situation: goals, time horizon, risk tolerance). The 40% fixed income, 60% equity clients somewhere between -2% and -4% on the year (again depending on their asset allocation mix). And, as you all should know, historical returns are not a guarantee of future performance.

So while we don't like how history has unfolded thus far in 2020, we can quietly celebrate keeping volatility to a minimum in our client portfolios, despite the crazy market swings (which, as you may have guessed, if you read my little blog regularly, are likely not over, or at least that's what we think, anyway). You can believe in the optimist's  narrative touting a "V" recovery and we sure hope that they are right! They appear to be looking beyond the recession. However, even the sometimes overly optimistic U.S Federal Reserve said yesterday that 

"the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term".

Medium term friends, to me that is 3-5 years. So we think more of a "W" recovery. It might be best not get too comfortable in the first "V".

Back to High Rock:

Q:  When did you start High Rock?

A: Paul started High Rock in 2010 as an institutional portfolio management company, managing (sub-advising on) 4 mutual funds for Scotia Bank. We started our Private Client Division in 2015 (I bought ½ of High Rock at that time). Our bio’s are on the website highrockcapital.ca/team for further detail. We both shared a similar philosophical rationale for molding a wealth management firm that was more client focused vs. the “one size fits all” approach, specifically because we felt the former was better and different than the industry direction that is moving towards scale, favouring shareholders and commissions over client advice and service.

Q: What alternative strategies do you use besides Fixed Income and Equities?

A: We are very focused on liquidity for our clients, which allows us to maneuver quickly when we need to (and provide cash flow to clients when they need it). We have owned REIT’s in the past, but are a little skeptical of their distributions (Paul is very cash flow focused with his research on any company we own that pays income or dividends). Turned out to be a good thing as they got clobbered recently. When the time is right we may look at them again. Private Equity and other forms of real estate ownership tend to be less than liquid. I would be happy to discuss our Tactical model strategies in more detail if you wish.

Q:   I think as we navigate this economic turmoil and COVID ; It is clear we have a simple objective nothing fancy like you spoke about knowing they can sleep at night and while there are ups and downs that are beyond anyone's control but the ship is actively managed and while we may not hit homers we are often more right than wrong with singles .  Wealth management with the ideal goal would be 7-8% interest annually manage the down side and understand there is a sacrifice on the upside. 

A: Historically, 7-8% was achievable. Believe me, I would love to get back to those days. But for the near-term anyway, I would suggest that with interest rates near 0% and economic growth likely to be no better than 2% over the next few years, getting 7-8% might be fraught with higher levels of risk (that would make sleep less easy to come by). It is doable, but for my own portfolio I would not want that level of risk, so I would ask the risk question first because everything we do is about managing risk first. Return per unit of risk taken / or risk-adjusted returns. I think that once we get to the other side of Covid-19, I would be cautiously optimistic of getting back to 6-7% as inflation returns and yields move higher, but that may take a while.

Q:   We are realizing that Pooled funds may be less our appetite; not portable, less transparency and hard to be fully tax efficient 

for both our corporations and personal

A: We utilize the Separately Managed Accounts (SMA) to help harvest tax losses when they are available to offset gains. Everybody has tax strategies and we find it helpful to align ourselves with their tax professionals to ensure a seamless and synchronized strategy. It also helps us to direct client holdings to more tax efficient accounts when it is available. i.e. higher income (less tax efficient holdings) to tax free and tax deferred accounts when available.

Q:   How active are you in the portfolio ?  in changing positions/ rebalancing etc.

A: There are 3 reasons for rebalancing:

1) Cash flow in

2) Cash flow out

3) Price adjustment in holdings (that take % allocations out of the desired range).

These can be ongoing and tend to be client specific (which is why we also prefer SMA accounts).

Changing positions is tactical and we will do so when we get what we consider to be a good opportunity. For example: We took Global Equity Model positions to under-weight in 2018, added some back in early 2019 (perhaps not enough though) and further reduced in 2019 (profit-taking), simply because markets looked expensive. As markets fell in 2020 we started to add some back, gradually. Yesterday we started to sell (we will sell more if markets continue higher). Taking advantage of volatility is one way to add alpha (earn our fees).

Q:  How many different iterations of portfolios exist — I recall you talking about a bespoke approach and the returns of I believe your portfolio from the presentation  typical of the  avg high rock client ?

A: We have three basic models (and some “special opportunity” models for more sophisticated clients): Fixed Income, Global Equity, Tactical. I would be happy to go into greater detail on a call. But each client family, (RESP’s and children over 18 have their own strategies) has an allocation of the 3 basic models. The structure of that allocation is based on a combination of the client families goals, time horizon and risk tolerance as set out in a Wealth Forecast and then strategized in an Investment Policy Statement (IPS) that we advise on and determine in conjunction with you. These are target ranges that give us some latitude for tactically building and managing the portfolio. Paul has the greatest weighting in the Tactical model at 25% (which he runs). I am set up at 40% Fixed Income, 45% Global Equity (which we manage mostly from a macro perspective) and 15% Tactical.

I love what I do!