The Things That People Say...

I read a blog over the weekend that actually suggested that interest rates were going up and that this would be good for preferred shares. Seriously?

Well as I suggested in Friday's offering, bond markets lead other financial markets and record low yields are likely not a harbinger of higher interest rates (as uncertainty drives investors to safer assets such as government bonds, pushing their prices up and their yields down):

In fact, mortgage rates may be heading lower if the bond market direction is any indicator (and it usually is because banks set their mortgage rates based on bond market yields).

Equity market traders caught on to that signal finally, and as we had predicted, volatility spiked:

It is nice to have more than average amounts of cash (or cash equivalent investments) in your portfolio when volatility spikes, probably helps you sleep better.

As uncertainty over the June 23 UK referendum to determine whether to stay in or depart the European Union builds (polls now show the "leave" camp with a slight edge), we can expect volatility to continue to build.

This will not sit well with investors who have too much risk in their portfolios (in many cases, over-priced risk). 

At High Rock we invest in the exact same models (and securities) as our clients. Want to hear more about our thoughts on our strategy?

Today is webinar Tuesday at High Rock, where we will discuss what is going on in the global economy, in financial markets, including our views on the preferred share market and anything eles that we feel is important in the management of our and our clients' wealth.

We will post the recorded version on our website at http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html at or about 5pm EDT.

Your feedback is always greatly appreciated...

scott@highrockcapital.ca

If you would like to have this blog sent directly to your inbox...

bianca@highrockcapital.ca

Brace Yourselves!

Bond markets lead all financial markets and global bond markets are hitting record low yields (and yield curves are flattening). There is a message being sent about the global economy and stock markets (especially in the US) have yet to get it.

Volatility has been subdued since it jumped in January and February of this year and easy monetary policy on a global scale has given equity investors a false sense of hope.

We continue to hammer home the over-valued nature of equity markets relative to their fundamentals, yet traders and investors continue to drive equity prices higher in hope that others will join them in pushing equity prices up (S&P 500 got to within a stone's throw of its all-time highs this week). 

Emotionally and psychologically, nobody wants to see equity prices move lower, because in most cases it means that their portfolio values will also go lower. That means that many advisors will likely tell you to sit tight and ride it out. 

In the long-term this may make sense. A balanced and diversified portfolio of 60% equity and 40% fixed income fully recovered from the financial crisis (after about a year and some) and went on to get back to average levels of growth about 3 years later.

If you are emotionally and psychologically prepared to do that (wait it out), then that is what you can do.

If you are not, or need your portfolio to provide a steady stream of income, you need to make sure that you have enough cash on hand to ride out the storm (if and when it happens).

Cash (and low yielding cash equivalents) is always a problem for investors (and some advisors) because they think of it as sitting "idle". This can be a huge error in judgement if you force that cash (new money into a portfolio) into over-valued assets. This is what has been happening, especially in US equity markets. 

Cash can be defensive. Especially if you pick the right time to put it to work:

Candian equity markets were over-sold in January and February (and few were willing to take a good look at that value because of the prognosis for oil) and if some of the cash found it's way into those assets, they performed well. So if you had re-balanced during that time (at High Rock that was one of our recomendations on BNN in December), that may have been an appropriate time to put cash to work (and we did!).

That is what our clients pay us to do.

That raises the question of "market timing". 

Many investors are warned about the disadvantages of market timing (and there are academic studies that prove over longer periods of time that this strategy is less productive) and are encouraged to take a more passive approach. 

However, employing market expertise to apply a more active strategy can also be effective in the short-term to add value and cushion the potential downside of an equity market sell-off.

I am not suggesting to go to all cash. Only to consider a higher (over-weight) allocation to cash: Our global equity model is close to 50% cash, which would put a 60% equity 40% fixed income portfolio at or close to 25% cash (if some of that equity allocation was also placed in our tactical value model). In the meantime there are other parts of the portfolio that are working:

One of our top picks on BNN a number of weeks back was 30 year Government of Canada bonds. Up about 5% since then. Annualized (over 60%) that is a pretty significant additional return to client portfolios.

There is a place for short-term timing and active portfolio management in a portfolio.

That is something that you pay fees for.

Be careful out there: Brexit anxiety is picking up. Volatility might spike.

Thanks for all the continued feedback...

scott@highrockcapital.ca

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

bianca@highrockcapital.ca

Your Portfolio: Advice Or Management

Lots of questions and conversations lately from / with readers and prospective clients on the difference between financial advice and portfolio management:

In essence, in my way of thinking, they should be combined as part of a holistic wealth management offering.

However, it really depends on who is looking after you and how they are licensed, who they are employed by, how they are paid and by whom. 

When I was at Raymond James, I was licensed as a Financial Advisor and Portfolio Manager by IIROC (Investment Industry Regulatory Organization of Canada), my title was Senior Vice President, Private Client Group. I was an employee of Raymond James and paid a commission based on the revenue generated by our wealth management practice.

Many advisors may not necessarily have their Portfolio Manager licensing. This actually becomes important, because without it they must find a third party to provide portfolio management for their clients (which comes with additional costs: everybody involved gets paid). These types of advisors can also select a number of securities to sell to their clients on a per transaction basis, or as part of a non-discretionary, fee-based (trades are free and there is a fee charged against the total value of the assets in the account) platform.

The difficulty, from my way of thinking, is that I was never comfortable "farming" my clients money out to the third party managers because it meant a loss of control. If a manager under-performed, it would then fall back to me to explain to the client why they had to pay me my fee (and what exactly they were getting for that) and the fund an MER and yet there was no recourse (for poor performance), other than to move to another manager.

So we used ETF's because it did not rely on the manager to perform (and only approx. 20% of managers beat their target benchmarks anyway), the ETF's matched the indexes they were designed to track.

However, in hindsight, this did not add performance value (otherwise known as "alpha") for the client. To add value we needed to find a way to justify (or lower) the fees and costs to the client. ETF's still had MER's (albeit lower than most mutual funds).

Certainly the service part is very important: this business (of financial advice) is about looking after people.

But now, we (at High Rock) have also found a better way to add value: lower costs (fewer ETF's and MER's) and a more tactical approach , but one that we have control over (because we manage the money "in-house") and where a client, if they wish, can speak directly to the person who manages their money. In fact some advisors actually use High Rock (with our expertise and experience over decades of deep research and investment management) as their third party manager.

Low cost (totally transparent) wealth management, financial advice and portfolio management all wrapped up into one package with planning (wealth forecast) and first rate client service.

Add the independence of a wholly owned (by its partners) asset management company, where the partners are invested in the exact same models as the clients (no conflict of interest) and a great deal of expertise and experience in research and trading as well as wealth management advice and you have the whole package.

It is the best possible of both worlds, reasonably priced.

The world of financial advice and investing is evolving: you can go "robo" if personal service is not important (and low cost is) to you or you can opt for something more personal if you wish.  

It is great to have a choice.

Please keep the feedback coming....

scott@highrockcapital.ca

or, if you would like to receive this blog into your inbox directly...

bianca@highrockcapital.ca

Stock Price Fundamentals

If interest rates are going up, the economy must be good: buy stocks!

If employment growth is stalling, interest rates won't be going up: buy stocks!

So what is it?

It is traders trying to find a way to get investors back into the stock market: by trying to create some hype (because they have a vested interest in getting some market movement...hype sells!).

Friends, forget the hype.

Look at the fundamentals because that is what tells you whether or not there is value in owning stocks.

Corporate earnings / profits have had 4 consecutive quarters of negative growth and are about to (if the forecasts are correct)  enter into another quarter of the same (not seen since 2008-2009).

Why do we invest in stocks?

To participate in a company's future earnings growth.

But companies are not growing earnings.

So don't get caught up in the hype!

It is webinar Tuesday at High Rock and we will host our weekly client webinar where we will discuss the state of the global economy, financial markets and how it all impacts their portfolios and the management of their wealth.

We will post the recorded version at http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html at approx. 5pm EDT. Feel free to tune in.

Thank you for all of the great feedback, please keep it coming...

scott@highrockcapital.ca

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

bianca@highrockcapital.ca

Uncertainty = Volatility

(answer: "rock stars")

Financial markets have their lenses trained on the US Federal Reserve for the next moves on interest rates and the Fed has just had a bit of data that flies in the face of their expectations.

As I repeat (ad nauseum) often enough, especially when it comes to the monthly US employment data: one month's data does not necessarily imply a trend (especially when the revisions to previous months data can be considerable).

However, the wide variance from the expectations: +38,000 new jobs vs. the expected 160,000 is considerable and will certainly leave the Fed waiting to see what happens next.

Their mandate is to acheive price stability and full employment:

Inflation remains below target and employmnet growth is slowing.

As for the trend: yearly job growth continues to follow the down-trend that began well over a year ago:

The Fed wants to "normalize" interest rates, but if they do (raise them) it means recession will likely follow soon there after, so now they are uncertain as what, if anything that they can do.

Corporate profitability growth has been negative for 4 consecutive quarters and is expected to show up again in Q2 2016. Therein lies the answer to the employment issue: companies need to cut costs to get profitable. The first to go will be expensive employees (it may already be happening).

That won't be good for a consumer (no longer employed) with a high debt load.

More uncertainty:

The UK referendum on whether to stay in the European Union (aka Brexit) is less than 3 weeks away and it is going to be close:

And how about these guys becoming friends?

The US presidential election is drawing closer and so are the poles:

Friends, cash is a defensive (albeit temporary) asset for uncertain times, you will likely want to have more of it in your portfolio for the next little while.

Thank you for all the great feedback, please keep it coming (and their is no such thing as a "stupid" question):

scott@highrockcapital.ca

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

bianca@highrockcapital.ca

Sorry Friends, My Real Job Has Been Getting In The Way Of My Blogging!

It has been a busy week with all sorts of new and returning client activity. I think that this can be taken as a sign of things to come.

Old style, buy and hold, passive portfolio management is no longer cutting it for many investors because we are in a low growth, low return environment and our more tactical approach is gathering lots of interest.

Greater economic minds than mine agree: 

http://www.barrons.com/articles/bill-gross-the-past-40-years-are-a-unrepeatable-gray-swan-1464901708

The problem is, that getting those returns that many have enjoyed over the past 40 years or so have become somewhat elusive and to keep the levels of risk and volatility down in a passive portfolio approach is getting significantly more difficult and does not justify the returns (or lack thereof) anymore.

There are 2 options: 1) increase the level of risk that your passive approach will have (wider swings in gains and losses of portfolio value) or 2) take a more tactical approach and at the same time, reduce the potential risk and volatility.

What helps you sleep better at night?

If  portfolio A with 5% cash generates a 2% total return (over the course of a year) or portfoliuo B with 25% cash (for defensive / opportunity purposes) generates the same 2% return over the same time frame, which has the stronger risk-adjusted return?

You guessed it, portfolio B!

So sometimes, having more cash, can in fact be strategic.

In time, how you utilize that cash (and when) is also strategic. So we are finding that folks who want to get the strongest risk-adjusted returns are finding their way to our style of thinking and investing.

I call it "good busy" (when I have less time for writing). But I am having lots of positive discussions around the style of more active portfolio management and how that is adding value to client portfolios. That is what people want these days and so they should, because the days of 7% average annual returns over multiple years may be behind us as the years of low growth / low return tend to be lingering.

If you want to discuss this in greater detail or provide any feedback: scott@highrockcapital.ca

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

bianca@highrockcapital.ca

Thrilled!

...and excited and touched by all of the support that surrounded  the New Circles fundraising event in which we took part on Monday (US Memorial Day, with US markets closed).

http://newcircles.ca/get-involved/events/golf-classic

I came accross New Circles a number of years ago through a colleague who participated in the "Holiday Angel" program (http://newcircles.ca/get-involved/seasonal-giving/holiday-angel-program ) and invited us to donate alongside. 

The outpouring of thanks that we received (letters from little children and their parents) were so full of gratitude that it touched me deeply and I decided that I wanted to be more involved. So we did: at the personal level and the corporate level.

In a nutshell, New Circles provides a wonderful avenue of support for those in need of clothing, so that they can focus on the necessary resources to properly shelter and feed themselves (especially new Canadians who have need of winter things, etc.).

And they do it in a way that allows those families to shop for those clothes (free of charge) in a dignified way, in an appropriate store-like setting.

I have taken a few of my Friday mornings over the last few months to help sort clothes and believe me, the quality of those previously "gently loved" outfits are truly like new (or they are donated elsewhere). It is remarkable how much really good stuff they are able to draw.

Beyond clothing, New Circles also offers skills training, social programs (language tutoring) and youth programs to help integrate these folks into the community.

All the of the staff and volunteers that help out also offer an excellent example of how a community can come together in all races and creeds to assist those that are in need.

I cannot put into words how uplifting that can be.

So when founder Cindy Blakely approached me to thank me for our contributions, all I could say to her was: "no Cindy, thank you for giving me the opportunity to rub shoulders with people like you. It is utterly inspiring!"

I love your feedback, please keep it coming!

scott@highrockcapital.ca

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

bianca @highrockcapital.ca