Portfolio Management

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Portfolio Management

• Bob Trask
• Financial Advisor
• Raymond James Ltd

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Goals and Objectives

• The goals and objectives of the investor must be
  determined
• Institutional Account pension plan
• 70 year old retiree
• 45 year old high income earner
• Use an investment questionnaire
• Portfolio reflects objectives and tolerance to
  risk

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Asset Classes

• Cash
• Fixed Income
• Equities
• Commodities (gold, oil etc.)
• Real Estate

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Asset Allocation

• Varies depending upon objectives
• Most portfolios contain only cash, fixed income
  and equities
• Commodities gaining popularity
• gold

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Sample Portfolios

• Conservative
• 15 cash/t-bills, 50 bonds, 35 equities
• Moderate
• 10 cash/t-bills, 35 bonds, 55 equities
• Growth
• 5 cash/t-bills, 20 bonds, 75 equities

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Re-Balancing

• Assets grow at different rates
• Asset mix will change over time
• Periodically adjust portfolio back to appropriate
  asset mix

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Diversification

• Important to include assets that have a low
  correlation to each other
• Asset classes react differently to economic
  events
• Creates more consistent returns and provides
  some defense against volatility

8
Correlation

• High Correlation 0.7 to 1.0
• Low Correlation 0.1 to 0.7
• No correlation -0.1 to 0.1
• Negative correlation -0.1 to -1.0

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Misconceptions

• Global equities provide adequate diversification
  in a portfolio of Canadian equities
• Global economy equity markets are highly
  correlated regardless of geographic location
• Canadian and Global Equities
• Correlation 0.74 (Fidelity Portfolio Pro)

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Correlation - Examples

• Canadian Equities to Canadian Bonds
• Correlation 0.12 (Fidelity Portfolio Pro)
• Canadian Equities to Cash/t-bills
• Correlation 0.34 (Fidelity Portfolio Pro)
• Canadian Equities to Gold Bullion
• Correlation 0.30 (Fidelity Portfolio Pro)

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Volatility

• Measurement is historical
• Considers range of performance over preceding
  three years one standard deviation
• Future volatility will vary from previous years
• Use as a guideline

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Volatility - Examples

• Measured as variance around average return
• Return 5
• volatility 7
• Range of returns over a 3 year period
  approximately -2 to 12
• Returns periodically fell outside of these
  parameters beyond one standard deviation

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Cash/T-bills

• Less than 1 year to maturity
• Low return
• Very liquid
• Low volatility

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Historical T-bill Returns(Globefund)

• 3 year annualized return 3.83
• 3 year volatility 0.29
• Range of returns 3.54 to 4.12
• Rates are currently falling

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Bonds

• Longer term up to 30 years
• Typically higher returns than cash
• Volatility depends on quality of issue and term
  to maturity
• Low correlation with cash and equities

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Historical Fixed Income Returns (Globefund)

• 3 year annualized return 2.52
• 3 year volatility 3.30
• Range of returns -0.78 to 5.82

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Equities

• Represents ownership of corporation
• Performance
• Share price appreciation
• Dividends
• Low correlation to fixed income and cash

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Historical Equity Returns (Globefund)

• 3 year annualized return -4.80
• 3 year volatility 18.30
• Range of returns -23.1 to 13.5

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Performance Note

• Current performance numbers are skewed by the
  second worst stock market decline since 1825
  (Morgan Stanley)
• Result - decreased performance numbers and
  increased volatility numbers for equities
• Long term expectations for equities?

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Secular Bull Bear MarketsCrestmont Research
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Valuation of Equities

• Variety of valuation methodologies
• Basic method Price Earnings Ratio

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Historical PE Ratios
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Current PE Ratio

• SP 500 Index valued at approximately 875
• 2009 Earnings estimated at approximately 60
  (David Rosenberg Chief Economist, Merrill
  Lynch)
• PE Ratio at todays level 14.5
• Market more or less fairly valued

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Dow Jones Industrial Average

• Provides longest time frame for measurement of
  growth
• Average annual growth in value since 1900 4.5
  per year
• Average dividend yield 2.5 per year
• Total long term return from fair value 7.0 per
  year

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Positives for Growth

• Increasing earnings
• Increasing PE Ratios

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Negatives for Growth

• Decreasing earnings
• Contracting PE Ratios
• Fees and commissions
• Mutual fund management expense ratios
• Stock trading commissions

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Challenges

• Investors tend to favour asset classes that have
  shown above average performance
• Buy high
• Investors tend to disfavour asset classes that
  have shown below average performance
• Sell low

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Disclaimer

• All correlation, volatility and rate of return
  measurements are based on the corresponding
  indices.
• Measurement of performance on individual
  securities will vary widely from the index
  numbers
• Investors can expect to achieve less than index
  returns because of costs associated with managing
  a portfolio.

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Summary

• Determine investment objectives
• Set realistic expectations
• Construct appropriate portfolio
• Adjust portfolio for economic conditions and
  personal circumstances
• Rebalance portfolio to appropriate allocations

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Suggested Readings

• Unexpected Returns Understanding Secular Stock
  Market Cycles by Ed Easterling
• Bulls Eye Investing by John Mauldin
• Crash Proof by Peter Schiff

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Questions?