portfolio management bob trask financial advisor
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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?