Investment Philosophy
Our philosophy has always been to start with an asset allocation strategy that combines cash, fixed income, and equity into a portfolio designed to meet your long-term investment objectives at a comfortable level of risk. This asset allocation takes into consideration your need for liquidity, your time horizon, your risk tolerance, the investment return required and historical volatility.
Asset allocation also provides a mechanical process for rebalancing the asset classes by forcing you to sell the asset class that has appreciated the most to buy the asset class that has underperformed. This tends to limit the volatility in the portfolio. We also make tactical asset allocation decisions based on a six to twelve month perspective.
Investment Strategy
We believe in an "open architecture" approach to investing for each asset class. This means that we use many different investment vehicles to try and generate returns at a reasonable cost. We also focus on making sure that the portfolio is well-diversified within each asset class. This limits the concentration risks of having a single position that could harm the total portfolio if it lost a significant amount of its value. Here is our Investment Strategy for each asset class.
Cash
There are a limited number of options but we use bankers acceptances, treasury bills, money market funds and the preferred interest rates for cash in Portfolio Partner accounts.
Bonds, Preferred Shares, Closed-end Funds and Structured Notes
Historically, we would buy individual bonds, or bond ETFs for RRSPs. Over the past several years, the quantity, and more importantly the quality of the bonds being offered has not been attractive. The other concern has been the low yield and high interest rate sensitivity across all the bond offerings. Because of these conditions, we have been actively seeking bond managers that can hedge the interest rate risk, the credit risk, and offer a yield that meets our return threshold.
In non-registered accounts we will also buy a diversified portfolio of preferred shares to access the more tax advantage cash flow. Preferred shares are a bit of a hybrid security, as they are technically equity, but most often are valued like a bond through a credit rating. We generally buy P1 and P2 preferred shares which are the highest credit rating. Sometimes we will buy a lower credit rating but we treat these purchases as a substitute for equity. We view preferred shares as offering an attractive risk/return profile.
Recently, we have been structuring CIBC notes that offer an attractive yield, and substantial risk control build into the investment.
Individual Stocks
Since Canada is our home market, we prefer to purchase individual stocks instead of mutual funds or managed assets for the Canadian equity portion of the asset allocation. We have established two portfolios using Morningstar/CPMS - an income portfolio and and a growth portfolio. Income focuses on yield and volatility, growth focuses on steady earnings growth, valuation, earnings surprises, and price movement. Most portfolios will have a blend of these two portfolios with the weights of each portfolio dependent on the mandate of the portfolio. For example an income portfolio would be heavily weighted to income stocks.
Each of the portfolios have significant risk controls embedded in the selection design so that the companies we select usually have better fundamentals than the market characteristics. It does not ensure that individual stocks will not go down, but in aggregate our portfolios tend not to fall as far as the market in difficult times.
It could also be said that our risk controls potentially limits some of the upside potential of market as it will likely eliminate many of the companies with high price/earnings multiples, as well as companies with very cyclical earnings. Our approach tends to be a bit more of a tortoise than a hare.
There are many of the global sectors that we can not easily access through Canada. In addition, many of the great global brands reside in the U.S. so it is important to have investments in the U.S. We use Morningstar/CPMS to create a concentrated portfolio of growth stocks that has a focus on quality companies. We use it to help us find opportunities in information technology, industrials, healthcare, consumer staples and consumer discretionary stocks in the U.S. We look for companies in these sectors with global brands, and/or unique capability and which derive some of their revenue from outside the U.S.
Professional Managers
We recognize that we are not able to invest in companies across the globe. With this in mind we seek out professional money managers that deliver excellent risk-adjusted returns and whose style compliments our individual stock positions. We focus on global managers where there is little overlap with our portfolios and where they add diversification through investments in geography or market capitalization. It also provides us with a tactical asset allocation overlay as these funds typically vary their U.S. exposure for 30-60% depending on where they feel the best value can be found. In most cases we invest in these managers through mutual funds or, for larger allocations, we will use a separately managed account.
Exchange Traded Funds / ETFs
Recently, we have been looking at approaching diversification from a sector-perspective rather than our historical geographic perspective. In tough time, the geographic correlation tends to get much tighter so you lose some of the risk controls. We have observed that more portfolio diversification can be achieved by adding to, or reducing specific sectors, commodities, or currencies. We prefer to use sector specific ETFs to meet these sector needs.
Each has unique characteristics that we use in different ways. Best of all, it provides instant exposure to a diversified portfolio of stocks within a sector, trades like a stock, and is low cost. We are using ETFs more and more as an alternative to individual stocks and mutual funds.
The number of ETFs available to us has exploded in recent years so our use has increased as well.
Alternative Strategy
Traditionally, investors used geographic allocations to add diversification to their portfolios. Recently, the correlation between these asset classes has become much tighter, which reduces the effectiveness of the diversification. In an effort to increase diversification, and add potential returns, we have sought out other asset classes like market neutral hedge funds, gold bullion, and commodities along with other structured products.
Summary
We firmly believe that our "open architecture" is the best solution for most investors. It allows us the flexibility to access the many different opportunities that are most appropriate given the long-term asset allocation and the short-term economic outlook.
® Portfolio Partner is a registered trademark of CIBC World Markets Inc. There are a maximum number of commission-free trades allowed each year, based on the value of your account. Trades and annual fees are prorated on an annualized basis. A standard trade fee applies to excess trades. A minimum household account balance of $100,000 is required.
CIBC ETFs are managed by CIBC Asset Management Inc., a wholly-owned subsidiary of CIBC and, therefore, an affiliate of CIBC Wood Gundy. The CIBC ETFs are connected issuers of CIBC World Markets Inc.
