Utilizing evidence-based investment principles is the
corner stone of our value proposition to our clients.
Portfolio Construction

We construct our client portfolios with the Three-Factor Model in mind to maximize return and at the same time minimize risk. Whether that means investing our clients’ hard-earned money in appropriate index funds or managed portfolios makes no difference to us. As a fee-based advisory firm, our compensation is not dependent on where your money is invested. Our advisory fee is 1% of the assets invested regardless of where your assets are placed and this compensation structure removes the inherent conflict of interest that is prevalent with most other advisors.

Our base-case, cyclically neutral investment portfolios consist of 60% equities and 40% fixed income (bonds), rebalanced annually. This strategic asset allocation allows our clients to sell automatically the positions that have shown gains (potentially over priced), and reinvest in positions that have shown losses (potentially under priced). This disciplined approach removes the investment decision from the investor, who otherwise could be negatively influenced by fear and greed. However, there are rare occasions when deviation from the neutral balanced portfolio is warranted. A notable example of this tactical ‘meddling’ was in January 2009 when valuations were extremely low, and as a result we advised our clients to tilt their asset allocation from 60% equities and 40% fixed income to 80% equities and 20% fixed income. In June 2014, as valuations in developed markets increased, we returned to our neutral asset allocation stance of 60% equities and 40% fixed income.

Based on the above investment rules, the graphs below show sample client portfolios for their risk and return for the five-year tumultuous period of 2006 through 2010, as well as for the ten-year period of 2004 through 2013 to account for the full business cycle. These time periods include the Great Recession of 2008, the most severe financial crisis of the world since the Great Depression of the 1930s.

Portfolio Construction: Risk and Returns
Total Net Returns in Canadian Dollars for Periods Ending Dec. 31
Portfolio Construction
The Financial Crisis of 2008: 5-Year Period from 2006 to 2010
  Balanced Index Portfolio Diversified Asset Allocation
Annual Return 2.5% 4.2%
Annual Risk 11.4% 6.3%
The Full Economic Cycle: 10-Year Period from 2004 to 2013
  Balanced Index Portfolio Diversified Asset Allocation
Annual Return 5.0% 5.8%
Annual Risk 9.0% 7.2%
See source and description of data. Risk is defined as the standard deviation of annual returns. Past performance does not guarantee future returns.

Whether index or managed portfolios, asset allocation reduces risk as per the illustration above. It also confirms that during the illustrated time period a carefully selected and monitored managed portfolio outperforms index funds after management and investment advisory expenses. This is the case on an absolute basis, but especially on a risk adjusted basis. Lower risk means a lower probability that our clients succumb to their fear during a market down cycle and switch into the perfectly wrong asset class – cash – at the perfectly wrong time.

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