portfolio management bob trask financial advisor

Portfolio ManagementPortfolio Management

Bob TraskBob Trask

Financial AdvisorFinancial Advisor

Raymond James LtdRaymond James Ltd

Goals and ObjectivesGoals and Objectives

The goals and objectives of the investor The goals and objectives of the investor must be determinedmust be determined• Institutional Account – pension planInstitutional Account – pension plan• 70 year old retiree70 year old retiree• 45 year old high income earner45 year old high income earner

Use an investment questionnaireUse an investment questionnaire

Portfolio reflects objectives and tolerance Portfolio reflects objectives and tolerance to riskto risk

Asset ClassesAsset Classes

CashCash Fixed IncomeFixed Income EquitiesEquities Commodities Commodities (gold, oil etc.)(gold, oil etc.)

Real EstateReal Estate

Asset AllocationAsset Allocation

Varies depending upon objectivesVaries depending upon objectives

Most portfolios contain only cash, Most portfolios contain only cash, fixed income and equitiesfixed income and equities

Commodities gaining popularityCommodities gaining popularity• goldgold

Sample PortfoliosSample Portfolios

ConservativeConservative• 15% cash/t-bills, 50% bonds, 35% equities15% cash/t-bills, 50% bonds, 35% equities

ModerateModerate• 10% cash/t-bills, 35% bonds, 55% equities10% cash/t-bills, 35% bonds, 55% equities

GrowthGrowth• 5% cash/t-bills, 20% bonds, 75% equities5% cash/t-bills, 20% bonds, 75% equities

Re-BalancingRe-Balancing

Assets grow at different ratesAssets grow at different rates

Asset mix will change over timeAsset mix will change over time

Periodically adjust portfolio back to Periodically adjust portfolio back to appropriate asset mixappropriate asset mix

DiversificationDiversification

Important to include assets that have Important to include assets that have a low correlation to each othera low correlation to each other

Asset classes react differently to Asset classes react differently to economic eventseconomic events

Creates more consistent returns and Creates more consistent returns and provides some defense against provides some defense against volatilityvolatility

CorrelationCorrelation

High Correlation = 0.7 to 1.0High Correlation = 0.7 to 1.0

Low Correlation = 0.1 to 0.7Low Correlation = 0.1 to 0.7

No correlation = -0.1 to +0.1No correlation = -0.1 to +0.1

Negative correlation = -0.1 to -1.0Negative correlation = -0.1 to -1.0

MisconceptionsMisconceptions

Global equities provide adequate Global equities provide adequate diversification in a portfolio of Canadian diversification in a portfolio of Canadian equitiesequities

Global economy – equity markets are Global economy – equity markets are highly correlated regardless of geographic highly correlated regardless of geographic locationlocation

Canadian and Global Equities Canadian and Global Equities • Correlation = 0.74 Correlation = 0.74 (Fidelity Portfolio Pro)(Fidelity Portfolio Pro)

CorrelationCorrelation - Examples - Examples

Canadian Equities to Canadian BondsCanadian Equities to Canadian Bonds• Correlation = 0.12 Correlation = 0.12 (Fidelity Portfolio Pro)(Fidelity Portfolio Pro)

Canadian Equities to Cash/t-billsCanadian Equities to Cash/t-bills• Correlation = 0.34 Correlation = 0.34 (Fidelity Portfolio Pro)(Fidelity Portfolio Pro)

Canadian Equities to Gold BullionCanadian Equities to Gold Bullion• Correlation = 0.30 Correlation = 0.30 (Fidelity Portfolio Pro)(Fidelity Portfolio Pro)

VolatilityVolatility

Measurement is historicalMeasurement is historical

Considers range of performance over Considers range of performance over preceding three years – preceding three years – one standard deviationone standard deviation

Future volatility will vary from previous Future volatility will vary from previous yearsyears

Use as a guidelineUse as a guideline

Volatility - ExamplesVolatility - Examples

Measured as variance around average Measured as variance around average returnreturn• Return = 5%Return = 5%• volatility = 7%volatility = 7%

Range of returns over a 3 year period Range of returns over a 3 year period approximately -2% to +12%approximately -2% to +12%

Returns periodically fell outside of these Returns periodically fell outside of these parameters – parameters – beyond one standard deviationbeyond one standard deviation

Cash/T-billsCash/T-bills

Less than 1 year to maturityLess than 1 year to maturity

Low returnLow return

Very liquidVery liquid

Low volatilityLow volatility

Historical T-bill ReturnsHistorical T-bill Returns(Globefund)(Globefund)

3 year annualized return = 3.83%3 year annualized return = 3.83%

3 year volatility = 0.29%3 year volatility = 0.29%

Range of returns = 3.54% to 4.12%Range of returns = 3.54% to 4.12%

Rates are currently fallingRates are currently falling

BondsBonds

Longer term – up to 30 yearsLonger term – up to 30 years

Typically higher returns than cashTypically higher returns than cash

Volatility depends on quality of issue and Volatility depends on quality of issue and term to maturityterm to maturity

Low correlation with cash and equitiesLow correlation with cash and equities

Historical Fixed Income ReturnsHistorical Fixed Income Returns (Globefund)(Globefund)

3 year annualized return = 2.52%3 year annualized return = 2.52%

3 year volatility = 3.30%3 year volatility = 3.30%

Range of returns = -0.78% to +5.82%Range of returns = -0.78% to +5.82%

EquitiesEquities

Represents ownership of corporationRepresents ownership of corporation

PerformancePerformance• Share price appreciationShare price appreciation• DividendsDividends

Low correlation to fixed income and Low correlation to fixed income and cashcash

Historical Equity ReturnsHistorical Equity Returns (Globefund)(Globefund)

3 year annualized return = -4.80%3 year annualized return = -4.80%

3 year volatility = 18.30%3 year volatility = 18.30%

Range of returns = -23.1% to 13.5%Range of returns = -23.1% to 13.5%

Performance NotePerformance Note

Current performance numbers are Current performance numbers are skewed by the second worst stock skewed by the second worst stock market decline since 1825 market decline since 1825 (Morgan Stanley)(Morgan Stanley)

Result - decreased performance Result - decreased performance numbers and increased volatility numbers and increased volatility numbers for equitiesnumbers for equities

Long term expectations for equities?Long term expectations for equities?

Secular Bull & Bear MarketsSecular Bull & Bear MarketsCrestmont ResearchCrestmont Research

Valuation of EquitiesValuation of Equities

Variety of valuation methodologiesVariety of valuation methodologies

Basic method – Price Earnings RatioBasic method – Price Earnings Ratio

Historical PE RatiosHistorical PE Ratios

Current PE RatioCurrent PE Ratio

S&P 500 Index valued at approximately S&P 500 Index valued at approximately 875875

2009 Earnings estimated at approximately 2009 Earnings estimated at approximately $60 $60 (David Rosenberg – Chief Economist, Merrill Lynch)(David Rosenberg – Chief Economist, Merrill Lynch)

PE Ratio at today’s level = 14.5PE Ratio at today’s level = 14.5

Market more or less fairly valuedMarket more or less fairly valued

Dow Jones Industrial AverageDow Jones Industrial Average

Provides longest time frame for Provides longest time frame for measurement of growthmeasurement of growth

Average annual growth in value since Average annual growth in value since 1900 = 4.5% per year1900 = 4.5% per year

Average dividend yield = 2.5% per yearAverage dividend yield = 2.5% per year

Total long term return Total long term return from fair valuefrom fair value = = 7.0% per year7.0% per year

Positives for GrowthPositives for Growth

Increasing earningsIncreasing earnings

Increasing PE RatiosIncreasing PE Ratios

Negatives for GrowthNegatives for Growth

Decreasing earningsDecreasing earnings

Contracting PE RatiosContracting PE Ratios

Fees and commissionsFees and commissions• Mutual fund management expense Mutual fund management expense

ratiosratios• Stock trading commissionsStock trading commissions

ChallengesChallenges

Investors tend to favour asset Investors tend to favour asset classes that have shown above classes that have shown above average performanceaverage performance• Buy highBuy high

Investors tend to disfavour asset Investors tend to disfavour asset classes that have shown below classes that have shown below average performanceaverage performance• Sell lowSell low

DisclaimerDisclaimer

All correlation, volatility and rate of return All correlation, volatility and rate of return measurements are based on the measurements are based on the corresponding indices.corresponding indices.

Measurement of performance on individual Measurement of performance on individual securities will vary widely from the index securities will vary widely from the index numbersnumbers

Investors can expect to achieve less than Investors can expect to achieve less than index returns because of costs associated index returns because of costs associated with managing a portfolio.with managing a portfolio.

SummarySummary Determine investment objectivesDetermine investment objectives

Set realistic expectationsSet realistic expectations

Construct appropriate portfolioConstruct appropriate portfolio

Adjust portfolio for economic conditions Adjust portfolio for economic conditions and personal circumstancesand personal circumstances

Rebalance portfolio to appropriate Rebalance portfolio to appropriate allocationsallocations

Suggested ReadingsSuggested Readings

““Unexpected Returns – Unexpected Returns – Understanding Secular Stock Market Understanding Secular Stock Market Cycles” by Ed EasterlingCycles” by Ed Easterling

““Bulls Eye Investing” by John MauldinBulls Eye Investing” by John Mauldin

““Crash Proof” by Peter SchiffCrash Proof” by Peter Schiff

Questions?Questions?