Martin Pelletier: Here’s a way to get a good night’s sleep, knowing your goals aren’t dependent on near-term market moves
There is a rapidly growing portfolio management approach that eliminates benchmarking altogether through something called planning-led, goals-based investing. Photo by Getty Images/iStockphoto 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.
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However, there is a rapidly growing portfolio management approach among registered investment advisers in the United States that eliminates this kind of benchmarking altogether through something called planning-led, goals-based investing.
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The first step in this philosophy is to determine what specific investment return is required to meet a client’s financial goals and objectives, which are derived from what we call an advanced wealth plan.
A portfolio is then custom designed with diversification among asset classes, regions and sectors according to ability and the willingness for risk. Near-term volatility is managed and minimized via strategy diversification, which accounts for important considerations such as risk drag and return patterns.
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For this to work, the client must be satisfied with not fully participating in the market upswings in order to minimize participation during market corrections. The goal is to set a target mean return for the portfolio while tightening the distribution curve of the portfolio’s variability of returns as much as possible.
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.
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We made the switch to this approach approximately four years ago and haven’t looked back. We get a much more consistent investment return profile, which aligns with our client base that understands the philosophy and process.
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.
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Assuming it stays negative over the entire five years, note holders will get all their money back if these stocks are not 30 per cent below today’s already depressed levels.
Recommended from Editorial Cryptocurrency blowout shows disruption fuelled by easy money often only disrupts your portfolio Searching for yield in private debt markets is enticing, but there are lower-risk alternatives Market corrections are where returns are made so don’t head for the sidelines Investors need to leave the past in the past and focus on doing the right thing in the present 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.
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Article content We think this planning-led, goals-based approach will start to gain a lot more momentum with others, especially if both equity and bond markets continue to fluctuate based on various interpretations of the interest rate outlook.
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.
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