One of our biggest complaints about the Canadian investment industry is that it is still heavily influenced by inherent behavioural flaws such as encouraging benchmark chasing based on the performance of the hottest segment of the market.
Obviously, the higher the target return, the larger the width of this distribution curve — after all, there is no such thing as a free lunch — but it should be less variable than owning the broader market for equity investors or a traditional 60/40 portfolio for balanced investors.
The point is one must be completely agnostic about investing styles, such as value versus growth, new world (technology) versus old world (energy and commodities), and bonds versus stocks. Instead, the focus is on achieving these target returns while minimizing portfolio risk as much as possible.
For example, our overweight in 20-year Treasuries really helped offer material downside protection during the March 2020 meltdown, and our replacement of this 10-to-15-per-cent weighting with energy positions did the same this year.
We have also taken down our fixed-income exposure to the lowest allowable levels and replaced it with structured notes instead of going into more volatile equities or, worse, illiquid privates.
For example, last week we underwrote a five-year note with the Bank of Montreal on Canadian Natural Resources Ltd., Enbridge Inc., Keyera Corp., Pembina Pipeline Corp. and TC Pipelines LP that if in 12 months these stocks collectively have risen above zero per cent, it will be bought back and closed out, but with a 17.5-per-cent coupon. If not, it will roll over to year two where it will pay a 35-per-cent coupon and close out if these stocks collectively have risen above zero per cent.
The totality of our goals-based strategies has resulted in our internal balanced fund protecting against all the downside in this year’s correction, while most of our peers were down more than 10 per cent. Over the past five years, our fund has been able to achieve its annualized goals-based target of five to seven per cent while our peers struggled to post an annualized 3.5 per cent.
Instead, it might be better to step away from all this bother and get a good sleep at night, knowing your goals are not dependent on near-term market moves or, worse, what everyone else is doing.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
