Guided Portfolios

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Guided Portfolios

• Disciplined portfolio management

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• To invest successfully over a lifetime does not
  require a stratospheric I.Q., unusual business
  insight, or inside information. What is needed is
  a sound intellectual framework for making
  decisions and the ability to keep emotions from
  corroding that framework.
• - Warren Buffet

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Guided Portfolios

• A set of pre-determined rules and guidelines
  designed to bring discipline to the management of
  equity portfolios.

• The Guiding Principles
• Diversify the portfolio across industry sectors
  in a way that fits the global economic outlook
• Choose high quality companies in each sector
  according to objective guidelines
• Adhere to disciplined rules for making changes to
  the portfolio

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The Investment Strategy
The underlying investment strategy uses a
combination of top down (sector allocation) and
bottom up (company evaluation) analysis.
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Top-Down Analysis

• RBC Investments forecasts global macroeconomic
  variables (interest rates, economic growth,
  current valuations, etc.)
• Analysis determines which sectors are likely to
  outperform and which are likely to underperform
• End result is the recommended sector allocation
  for a portfolio

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Top-Down Analysis
Interest Rates
GDP
Growth Rates
Labour Costs
Inflation
Consumer Debt
Inventories
Currencies
Government Policy
Growth
Real short-term interest rates - U.S. Canada
Industry
Outlook
4.00
3.00
2.00
Canada
1.00

0.00
-1.00
U.S.
-2.00
-3.00
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Employment
Normalized Earnings
Commodity Prices
Capacity Utilization
Business Investment
Retail Sales
Fiscal Balances
Inventory Levels
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Bottom-Up Analysis

• Individual companies assigned a score based on
  three research disciplines
• fundamental, quantitative, technical
• Bottom scoring companies eliminated from universe
  of stocks
• Independent Selection Committee applies
  Qualitative Screen
• End result is a list of quality companies suited
  to the forecast environment

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Company Screening Process
1000s of Companies in Sector
Index Filter Only companies listed in SP/TSX
SP 500 Indices
Fundamental Screen
Short List of Companies in Sector
Quantitative Screen
Qualitative Screen
Technical Screen
EQUITY GRID
Companies eligible for portfolios.
Ideal candidates for new positions.
Independent Selection Committee
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Bottom-Up AnalysisAdding Value with the
Fundamental Screen
Canada
United States

Fundamental Score
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Bottom-Up AnalysisAdding Value with the
Quantitative Screen
Value Models Price/Recurring Earnings Price/Estima
ted Earnings Price/Normalized Earnings Price of
Growth Model Three Stage Dividend Discount
Model Dividend Yield Price/Book Value VALUE
COMPOSITE
Momentum Models Earnings Momentum Revenue
Momentum Total Return Momentum Estimate
Revision Earnings Surprise MOMENTUM COMPOSITE
QuaDS Score
Growth Models Earnings Growth Revenue
Growth Dividend Growth Return on Equity Estimated
Return on Equity Normalized Return on
Equity Normalized Return on Equity GROWTH
COMPOSITE
Predictability Models Total Return
Stability Earnings Stability Confidence of
Earnings Estimates Non-Recurring Item
Frequency PREDICTABILITY COMPOSITE
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Bottom-Up AnalysisAdding Value with the
Technical Screen
Two Time Periods
Two Trend Types
Intermediate Term
Absolute (is it going up/down?)
Technical Score
Long Term
Relative (is it going up/down relative to the
index)
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Stock Selection CommitteeAdding Value with the
Qualitative Screen

• Attributes Include
• A business model that generates excess capital
• A strong management team
• A strong competitive position
• A financially healthy customer base
• A favourable industry environment
• A history of product innovation and/or a
  competitive cost structure.

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How Important is Removing the Bottom Scoring
Stocks?
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The Resulting Portfolio

• Portfolio Structure
• The portfolio is structured appropriately, with
  exposure to those sectors likely to outperform,
  while ensuring the portfolio is not overexposed
  to those sectors likely to underperform.

• Portfolio Components
• The portfolio only holds quality companies that
  have passed multi-disciplinary screening process

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Managing the Portfolio
A clear set of guidelines provide the decision
making framework required to manage equity
portfolios in a disciplined manner.
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• The decision to BUY, HOLD, and SELL, will be
  driven by the guidelines below.

• Match Sector Recommendations
• Only Hold Recommended Companies
• Rebalance Large Positions

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• Match Sector Recommendations
• What will be done?
• Top-Down analysis will from time to time dictate
  changes in the number of positions to be held in
  each sector in the portfolio.
• This may require that specific issues be replaced
  by ones in different industries.
• Why?
• These changes ensure the portfolio is always
  structured to fit the current market outlook.

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• Only Hold Recommended Companies
• What will be done?
• Recommended companies are monitored to ensure
  they meet the requirements to remain in the
  Guided Portfolio universe.
• Companies that no longer qualify are removed from
  the universe, and under the guidelines must be
  sold from the portfolio.
• Why?
• These changes ensure the portfolio always owns
  only companies that are highly ranked across the
  independent analytical disciplines.
• Forces the portfolio to deal promptly and
  decisively with companies whose fortunes
  deteriorate.

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• Rebalance Large Positions
• What will be done?
• Typically, new portfolios are approximately
  equally allocated across twenty stock positions.
• Over time, positions may grow to represent a
  greater percentage of the portfolio. Positions
  will be rebalanced if theyve grown past a
  certain threshold.
• Why?
• This process ensures the portfolio does not
  become overexposed to one particular company.

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Expectations Benefits
Managing expectations and avoiding key pitfalls
will help you realize the benefits and work
towards your long term objectives
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Expectations

• The portfolio will not always be buying at the
  low and selling at the high.
• But, the portfolio will always

• own the highest quality companies that have
  attractive potential within their peer groups
• be structured to meet the current economic and
  market outlook
• be appropriately diversified across various
  industries and sectors

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The Benefits

• Brings a business-like approach to a task that is
  too often emotionally driven.
• Forces the portfolio to deal with negative
  developments promptly.
• Adapts the portfolio to a changing economic and
  market environment.
• Ensures the portfolio always owns quality
  companies that have met high standards.
• Places emphasis on portfolio structure and not
  just on the individual companies within.