HighView Blog - Asset Management & Sustainability Advice
A boutique wealth management and investment counselling firm for Canadian families and foundations, we customize solutions for sustainable wealth. We were among the first Canadian investment professionals to successfully implement the outsourced CIO model to the benefit of our affluent family clients and the foundations they support.
Whether saving for a rainy day or creating wealth for the benefit of the next generation, investing by its nature is about the future. At HighView we take a goals-based investment approach, and as wealth architects, we look to design an investment strategy that meets our clients’ goals for their future. In our May 9 blog “Responsible Investing and Alignment with the Sustainable Development Goals (SDGs)” we explored how Responsible Investing is an important part of understanding and managing the financial risk of investments and an important element of ensuring that our clients meet their financial goals.
In listening and learning from our clients, we have found that many of them have goals that are not solely focused on financial return; but goals for their families, their communities, and their organizations. Many of our clients are deeply concerned about social and environmental issues and are trying to create a better world in their personal and/or professional lives, to ensure they leave a positive legacy for their children and future generations. With this in mind we have been continuing our exploration of investing that is often referred to as responsible, sustainable or impact investing.
The Global Impact Investment Network (GIIN) defines impact investments as: “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.” Some also call this investing for double or even triple bottom line (profit, planet, people).
It is an area that is growing exponentially. In their report Sizing the Impact investing Market GIIN found that over 1300 organizations currently manage $502 billion USD worth of impact investments up from just $60 billion in 2014. Approximately $15 billion is in Canada.
There are many factors contributing to this growing interest. Some investors would like to make sure they are using their investments to minimize harm, do positive, or contribute to solutions. Demographics and investing preferences of millennials or women, who tend to have different investing preferences are also factors. Several recent reports confirm the interest of high net worth individuals and Millennials in impact investment. Technology has facilitated greater awareness of growing global and local inequality or other issues and the challenges that governments and charities are facing as they try to address these issues with dwindling resources. At the same time there are greater expectations being imposed on corporations to justify their social license to operate by contributing purposefully to dealing with such issues. The willingness of consumers to walk with their wallets is impacting the performance of companies whose behaviour and values are misaligned or whose brand attributes do not resonate with their targeted customers.
We take a long-term view at HighView and we understand the differing and unique preferences of our clients. Many are looking for ways to utilize their investment capital to influence societal and environmental change. We want to provide those clients with choices that focus on sustainable wealth creation by recognizing the importance of investment planning that adapts to changes in private and public markets; and to society as a whole. For this reason, HighView will continue to explore Impact Investing opportunities and strategies. We look forward to hosting focus groups on this subject through the summer and having our strategic partner Rally Assets present at our upcoming Fall event in October. Our future blogs will focus on some of the key questions that are often raised about how to go about investing with impact while balancing risk and return considerations, and how to measure impact. Our goal for our clients is to follow an investment process that, as our friends at Rally would say, results in “investing that profits everyone”.
When families have built wealth over years or decades, and in particular when that wealth was largely due to an event such as the sale of a business, their attention quickly turns to getting peace of mind knowing that their wealth is protected. This is why we find most clients’ definition of excellence in wealth management is tied to the concept of sustainability. In other words, don’t lose our money!
But how do you make sure you are working with the right advisory firm, one that is not only credible but can competently manage your assets in a tailored and prudent manner?
We believe assessing financial advisors comes down to two key factors:
Credibility: Are you who you say you are and are you qualified to do it?
Competency: Are you good at what you do and will you help us accomplish our financial goals?
Please describe the history, size, ownership, and management of your firm.
Is your firm registered with a securities regulatory body?
Who are the key investment professionals in your firm?
What is your industry experience, financial education, and professional certification?
Have you and/or your firm ever received any regulatory and/or professional sanctions?
Please describe the investment professional and administrative support team who would be managing our wealth?
Although the answers to these questions help you decide whether or not you want to even consider engaging a given financial advisor, to determine if they’re actually good at what they do you need to assess a financial advisor’s professional competency.
Investor Profiling Questions
Please describe the process that you and your firm would use in determining client investment objectives?
Please describe the process that you and your firm would use in determining client tolerance for varying degrees of investment risk?
Asset Management Questions
Once a client’s investment objectives and risk tolerances are determined, please describe the process that your firm uses for creating client portfolios.
What role do the various investment securities used in client portfolios perform in terms of risk and return?
Do you use customized Investment Policy Statements for each client?
What are the due diligence processes that you and your firm conduct on investment securities prior to inclusion in client portfolios as well as on an ongoing basis?
Once a client portfolio has been implemented, what are you daily practices for ensuring that their portfolios adhere to the terms and conditions agreed upon in their Investment Policy Statement?
Please describe your client portfolio review & reporting processes?
What are your firm’s beliefs in the management of client wealth?
Please describe the structural and operational practices of the oversight body in your firm that ensures our wealth is being managed in a prudent manner and in accordance with my investment objectives, risk tolerances, and portfolio constraints.
How does your firm manage the potential conflicts of interest that can exist amongst custody, investment accounting, and investment management?
What are the monitoring practices for all investment professionals that will be involved in managing my wealth?
How are all of the investment professionals who will be involved in managing my wealth compensated?
What are the Codes of Conduct and/or Professional Standards that you and your firm adhere to?
Please describe how all client fees are calculated and charged?
How does a company go bankrupt because of a forest fire? How does an investment grade company fall to junk status in a week? Just ask Pacific Gas & Electric (PG&E) how 2018 stacked up for them. What can we learn from this to be able to ask our investee companies the right questions? Risk assessment and management has always been a fundamental element of the investment process. Understanding and anticipating the forces that can affect profitability, many would argue, is the most important element to managing a successful portfolio. Today’s risks require a new set of questions; flooding, fires, labour conditions, executive compensation, gender diversity and corporate governance issues all continue to make headlines and impact valuations. This year’s Responsible Investment Association’s (RIA) conference held in Montreal April 24-25 provided an excellent array of presentations and panel sessions on all topics regarding Responsible Investing as a way of managing risk, not just for client portfolios, but for our planet too.
As written in our previous papers, Making an Impact: Aligning Values with Investment, and Designing Investment Policy for ESG and Impact Investing, at HighView we believe that as Responsible Investing continues to gain ground, it is our role to ensure we are well versed and adapting practices in this space. Practices that allow us to better understand both the financial risk of our investments, as well as the long term risk of negative social and environmental impacts they could create. The world of maximizing short term returns without regard to long term impact will harm us all. As investors, we have a role to play in shaping outcomes through our investments.
The 2018 Canadian Responsible Investment Trends Report tells us that Responsible Investing continues to experience rapid growth in Canada, data from their survey tells us that Environmental, Social and Governance (ESG) factors are now important components of investment decisions, and in fact, Responsible Investing now comprises over 50% of all assets under management in Canada. The top four reasons for considering ESG are:
improving returns over time,
meeting client demand, and
fulfilling fiduciary duty.
Interestingly but not surprisingly, the topic of integrating ESG seem to be more prominent following significant disruptive events. Professor John Ruggie from Harvard University told us that two ESG spikes have occurred in the USA – one following the financial crisis of 2007-2008, and the second following the 2016 election of President Trump. There is a growing understanding that negative social and environmental impact is not without significant costs. We need to be concerned with the impact on human, social and natural capital, not just financial capital.
As Erica Karp of Cornerstone Capital spoke about in our lifetime we are witnessing unprecedented change – we need a regenerative economy and we won’t get there without changing the current system. The focus on maximizing short term shareholder returns distracts companies from doing what they should be doing – innovating, investing and renewing their strategies to take care of ALL stakeholders.
In September 2015, 193 countries of the UN General Assembly adopted the 17 SDGs that were developed by the UN to end poverty, protect the planet and ensure prosperity for all with an agenda for global sustainability by 2030. We believe it is important to consider the SDGs in the analytical framework that our investment managers employ. All companies make a social and environmental impact at some level, and through our allocation of capital and direct engagement with company management, we can push for more positive impact and improvement on ESG practices.
HighView continues to explore Responsible Investing. In early 2018 we initiated ESG as part of our ongoing due diligence with our investment managers and we will continue to build and report on this. We look forward to hosting focus groups on this subject through the summer, and having our strategic partner Rally Assets present at our upcoming Fall event in October. Our goal for our clients is an investment process where, as our friends at Rally would say, results in “investing that profits everyone”.
In many ways, creating an investment portfolio is like building a custom home. At the outset you have a variety of options in front of you with sizes, amenities, and styles. The role of the architect is to design something that will be the right for you. Only then can trained professionals—carpenters, plumbers, and electricians—come in to build according to the architect’s specifications.
This isn’t to downplay the important role played by those professionals, but ultimately the process needs to start with design (the architecture) before anything can be implemented.
And yet, when it comes to investments, the opposite often takes place. Too often people buy a collection of investment products before they have even considered or put in place a prudently designed investment plan to meet their unique objectives and respect their risk tolerances.
Understanding the Importance of Goals-Based Portfolio Design
At the end of the day, your wealth is there to do one thing: fund future financial and lifestyle goals. The role of the adviser is to spend time understanding your unique objectives, risk tolerances, and preferences—designing a tailored investment portfolio with those factors top of mind.
This type of portfolio construction is generally referred to as goals-based design, an approach that focuses on understanding the true “purpose” of your wealth (whether that’s supporting a certain lifestyle, maintaining a family legacy, continuing a tradition of philanthropic giving, or something else) and recommending solutions that will help you make it sustainable and achieve your goals.
Relative vs. Goals-Based Benchmarking
It’s important to emphasize that goals shouldn’t be forgotten or cast aside once planning has been done and portfolios have been created. Rather, goals should continue to be a driving force and the benchmark by which you determine whether or not your portfolio has been successful.
Watch the Relative vs. Goals-Based Benchmarking Video:
Relative vs. Absolute Benchmarking – Debunking the Investment Industry in Canada - YouTube
Creating portfolios centered around your goals will help you and your family stay committed to your investment strategy and build long-term, sustainable wealth.
Affluent families often find themselves seeking and needing guidance from a network of professional advisors—accountants, lawyers, and others. With advice coming from a variety of sources, how do you make sure it’s being put to use in ways that will best serve your family’s needs and help you build sustainable wealth?
Here, we look more closely at integrated wealth management, what it is and the difference it can make in helping your family achieve its long-term goals.
What Is Integrated Wealth Management?
When it comes to wealth management, affluent families typically have complex needs that extend beyond lifestyle or retirement funding, encompassing family legacies and philanthropic giving as well. There may also be sophisticated financial structures in place, such as holding companies or family trusts, that need to be established and overseen by lawyers, accountants, and other experts.
Focusing too heavily on money management at the expense of structural advice can result in a wealth management plan that doesn’t reflect the full scope or intricacy of a family’s situation.
The purpose of integrated wealth management is to bring together your network of professional advisors to make informed choices and create prudent, responsible, and holistic solutions that are specific to your family’s needs.
How Can Integrated Wealth Management Create Sustainable Wealth?
There are different ways to approach integrated wealth management, but not all are created equal. Two you may be familiar with are:
Large Financial Institutions with In-House Professionals: In recent years, more major financial institutions have adopted models where they retain their own teams of lawyers, accountants, actuaries, and other advisors. At the outset this may seem beneficial. Is it not convenient to find all that expertise under a single roof? The problem, however, is that families often find themselves trading convenience for competency, value, transparency, and other crucial qualities. We discuss each of these challenges at length in a previous article and encourage you to view it if you would like to learn more.
Individual Investors: Some individuals choose to integrate the wealth management advice they receive on their own, though this approach can also have disadvantages. Doing it effectively requires both time and expertise, they may lack access to certain types of investment options like private debt, and it may not be sustainable over the long term. We helped a family work through a similar situation, which you can read about here.
The third approach to integrated wealth management is professional collaboration through structured governance and oversight practices. This harnesses the combined skills of your family’s trusted advisors, bringing them together to close the gaps and provide cohesive, transparent, and informed wealth management solutions.
Some of the reasons affluent families prefer this process are:
They have peace of mind knowing their professional advisors are serving the family’s best interests.
Their advisors understand the complexity of the family’s situation.
They are true experts, being dedicated exclusively to their area of practice.
Ultimately, integrated wealth management is about ensuring all of your professional advisors are committed to helping your family achieve its goals and generate sustainable wealth.
Building and maintaining wealth is a journey. You start by taking the time to understand your needs and goals, and develop a plan and a portfolio that will help you realize them. But how do you make sure you stay on track?
Ongoing reviews are key to creating sustainable wealth. There are three types you need to understand—goals reviews, portfolio reviews, and policy reviews—and make sure you are receiving on a regular basis.
1. Goals Review
A goals review gives both you and your advisor the opportunity to talk about the financial and lifestyle objectives you have that may impact your investment goals and strategies.
The first goals review takes place when we begin working with you. We use this time to get to know you and understand your needs, aspirations, and attitudes so we canconstruct a goals-based portfolio and establish benchmarks against which results can be measured.
During this process, you can expect to spend a lot of time talking about:
Specific needs you have and goals you are trying to achieve.
Your time horizons (short, medium, and long-term objectives).
Past experiences with various forms of risk. How did you plan for and react to them? How have they shaped your perspective towards risk and uncertainty now?
Since goals and circumstances may change over time, we also conduct goals reviews on a quarterly basis as part of our ongoing review process. This allows us to capture any changes and, if necessary, modify your portfolio to keep pace with your evolving needs.
2. Portfolio Review
This type of review focuses on determining how your portfolio is performing in relation to your stated goals and risk tolerances.
Typically, it addresses questions such as:
Is your portfolio accomplishing what was expected?
Are your short-term cash flow needs being met?
Is your portfolio on track to meet your medium and long-term goal and aspirations?
Is your portfolio behaving in an anticipated way?
When assessing your portfolio’s performance, it’s crucial you understand how it’s being measured.
In our industry, there is often a predisposition towards what’s known as relative or index-based benchmarking, which in essence measures the success of your portfolio against external indicators like the behaviour of the market or your peers. This approach can result in goal disconnect and lead to problems like depleted capital, exposure to excessive or uncomfortable amounts of risk, and missed funding requirements.
Goals-based benchmarking takes your actual goals into account and evaluates success based on whether or not your portfolio is enabling you to meet your short, medium, and long-term needs.
Policy reviews, which HighView conducts on at least an annual basis, typically cover:
Changes to your portfolio’s structure, including any rebalancing your financial advisor feels may be prudent. Keep in mind that, although rebalancing can serve as an important risk management tool, it must be done using disciplined processes in order to be effective. Rebalancing too often can increase costs and prevent you from capturing the momentum of assets that are performing well, while not rebalancing often enough can expose you and your portfolio to excessive risk.
Building sustainable wealth requires determination and persistence. Reviews play a critical role in ensuring your portfolio continues to meet the needs for which it was designed, keeping you on track to achieving the long-term financial stability you seek.
With these large day-to-day (and intra-day) moves in equity markets, we have heard and read numerous comments about equities becoming more volatile due to the proliferation of computer-driven program trading, hedge funds, index funds, and/or ETFs. So we decided to take a look at the facts. Instead of looking at standard deviation (the traditional statistical measure of volatility), we chose look at the daily movements of the S&P 500 Index (price only) over a very long period of time to determine if in fact large swings have become more prevalent.
The first chart below shows the daily percent change in the S&P 500 from the beginning of 1928 to December 31, 2018. It’s difficult to garner much insight from this chart other than during extreme events (e.g. the late 1920s, early 2000s, and 08/09) the size of the daily moves seems to increase (no surprise here).
We then looked at rolling 1-year periods (1 year defined as 250 trading days) and plotted the percent of time the market moved up or down by 1%, 3%, or 5% (or greater). For example, in the first chart below the S&P 500 moved up or down in a single day by 1% or more (on average) 23.9% of the time (over rolling 250-day periods) from 1928 to 2018 (orange line in the chart below). At its peak in 1932 nearly 80% of the trading days saw the S&P 500 Index move up or down by 1% or more.
The next two charts show that moves of 3% (or more) and 5% (or more) in a single day are relatively infrequent, but not unprecedented. And large market swings tend to happen more frequently during times of significant market stress, such as the late 1920s and early 1930s, the early 2000s (tech wreck), and the 2008/2009 (financial crisis). What we don’t see is a pattern of increasingly larger day-to-day movements or increasing frequency of large day-to-day movements over this extended period of time.
Are ETFs and other things such as computer-driven program trading exacerbating market movements? Perhaps they are in some less liquid markets, however for the S&P 500 Index the facts do not appear to support this often-quoted belief.
Large market swings understandably can rattle one’s nerves, however all investors are would be wise to ignore the alarmist headlines that these moves generate and remember that this type of activity is quite normal and has been occurring for decades.
This Holiday season, we want to thank our clients and their other professional advisors for their continued support of HighView Financial Group over the past year.
At HighView, we believe in the importance of family and of philanthropic giving. In the spirit of the season for 2018, we’ve made our annual charitable donation to the Kerr Street Mission, an organization that provides those living in need in Oakville with both help for the present and hope for the future.
We wish the best of the holiday season to you and your family, and we look forward to an exciting 2019.
Regardless of how you acquired your wealth, there’s one thing all investors have in common—a desire to make sure their wealth will be sustainable and able to meet their needs over time. But what if your needs change? What if the initial portfolio structure and risk profile changed significantly due to market and economic changes? Are you monitoring your portfolio performance to make sure it continues to meet your financial goals?
In this blog, we look closer at the importance of portfolio monitoring. We start by discussing the importance of an Investment Policy Statement (IPS) before turning our attention to the questions of how success should be measured and how portfolios should be reviewed.
The Role of an Investment Policy Statement (IPS)
An IPS is a document drafted between an advisor and you, the client, which is used to outline your investment plan, providing a roadmap to success and a barrier against decisions that go against your wishes or could adversely affect your wealth.
Though the structure and length of an IPS will vary, it should address topics like:
The goals and objectives you have for your wealth.
Any specific timelines that need to be taken into account.
Your tolerance for risk.
Performance objectives for your portfolio and how they should be measured.
Asset classes your portfolio should be invested in and how, when necessary, they should be rebalanced.
How frequently you and your advisor will review the IPS.
Remember that your IPS is a living document intended to reflect your unique financial goals. Your advisor should review it with you on a routine basis to ensure your objectives and risk tolerances haven’t changed, and your portfolio should always be monitored in accordance with it.
Measuring Your Portfolio’s Success
Your portfolio needs to be measured against two dimensions—its structure and its performance.
The Structure of Your Portfolio
What asset classes does your portfolio include (equity, real estate, fixed income, etc.)?
From what geographic areas are securities accessed (Canada, U.S., international, etc.)?
What investment mandates comprise the portfolio (Canadian equity, U.S. mid-cap, Canadian Corporate Bond, etc.)?
What investment strategies are being used (long-short, long only, active, passive, etc.)?
What investment managers (including the advisor where applicable) are used and how much of the portfolio have they each been allocated?
What investment vehicles are currently used within the portfolio by each Investment Manager? What constraints have been placed around each type?
Assessing Performance Using Goals-Based Benchmarks
Benchmarking is meant to answer one simple question: has your portfolio been successful?
Our industry has traditionally favoured the use of relative, index-based benchmarks that measure the success of your portfolio against external factors like how the market or your peers are performing. Unfortunately, this framework can have a variety of negative implications (missed funding requirements, depleted capital, and exposure to too much risk) that may threaten the long-term sustainability of your wealth.
Goals-based benchmarking is an approach that takes your financial and lifestyle objectives into account, evaluating performance based on whether or not your wealth enables you to meet your needs.
One of the most persistent myths perpetuated by investment managers is that investors’ portfolios’ performance should be measured compared to a relative, market-based benchmark. How your portfolio’s performance is judged – the benchmark against which it is being measured – can completely change the way your portfolio is structured.
Reviewing Your Portfolio to Keep You on Course
Reviews play a crucial role in ensuring your portfolio continues to meet the needs for which it was designed.
The three types of reviews that should be carried out on a routine basis are:
Goals Reviews: These provide both you and your financial advisor with an opportunity to discuss changes to your own financial or lifestyle circumstances that may impact your investment goals and strategies.
Portfolio Reviews: This type of review looks at how your portfolio is performing in relation to your goals and risk tolerances.
Policy Reviews: These cover adjustments that may need to be made to your IPS or portfolio structure, including any rebalancing your financial advisor feels may be prudent.
Creating wealth that is truly sustainable requires diligence and perseverance. Ultimately, working with a firm like HighView committed to structuring a goals-based portfolio and monitoring it on an ongoing basis to make sure it stays on track will give you the long-term financial stability you seek.
I can’t recall the last time I discussed investments without “pot stocks” entering the conversation – whether at the gym, at lunch, and at the barber (not sure if he’s wealthy or not). The infatuation doesn’t match the insanity of the late 1990s tech boom. Back then, internet stocks soared based on reported website visitors instead of revenues and earnings. But investors speak of, and invest in, cannabis stocks with similar enthusiasm as dot-com investors did twenty years ago.
Many people are investing in cannabis stocks, and many have made a lot of money. As has been the case my entire career, my HighView partners and I have not joined this party, but our recent analysis of cannabis stocks’ investment merit left me feeling good for sitting this one out.
A Fundamental Perspective
I recently completed an analysis of North American cannabis stocks to assess the industry’s investment merit. I did not examine the industry stock-by-stock in an attempt to find the best individual companies. My analysis was instead a high-level one, focused on the aggregate ‘basket’ of stocks that make up the Horizons Marijuana Life Sciences Index ETF (HMMJ). I aggregated some financial statistics for this group of stocks, made some assumptions about future growth and profitability, and valued the broader group of stocks based on a few scenarios.
For this group of stocks I modelled scenarios, based on recent prices, whereby the industry grows revenue like Google and Facebook for the next decade, realizes profit margins like tobacco and spirits companies, and keeps growing at double digits forever while maintaining those same fat profit margins. In one scenario, I even assume that those profit margins start today. These scenarios paint a rosy picture for investors, but there is only one problem. Any level of scrutiny or realism applied to key assumptionsshows cannabis stocks to be a money-losing investment over time.
This isn’t a comment on the businesses so much as it is a comment on the prices and valuations. Too many investors get caught up in the story behind the investment, and too few investors take the step of evaluating the financial implications (i.e. what you’re paying for the story and whether the price makes sense). That was my focus, and the outcome isn’t good for investors.
Picking Winners Is Tougher Than You Think
That’s not to say that you can’t make money investing in cannabis stocks, but the odds of any reasonable success look razor thin. If you believe my analysis, the entire sector is extremely overvalued. The only hope of investing profitably, then, is to: a) make a quick trade (but that’s pure speculation) or b) to successfully pick the relatively few companies that will survive and thrive as the industry evolves.
If you think it’s easy to identify those companies, look up the history of automobile manufacturers over the past century or so and note the many names you have never heard of because they didn’t make it. Or look up the list of dot-com companies from twenty years ago that enthused investors but quickly died.
But let’s assume you pick a winner – itself a tall feat. And let’s assume that your pick stages impressive revenue growth, strong profitability, and retains a strong competitive advantage. This, also, is highly unlikely given the uncertainty of evolving regulation and pricing power. Get all of this right, and sky-high valuations could easily make your picks horrible investments.
If you don’t believe me, refer to the poster child for this scenario: Cisco Systems.
The Risks of Excessive Valuation
If you rang in the new millennium by buying shares of Cisco Systems you selected a quality, profitable technology business. You would have also purchased a business that would see revenues nearly triple over the subsequent eighteen years while growing earnings per share by more than 600% (or about 12% per year) thanks to expanding margins.
But had you made this purchase and held it until October 2018, you’d have seen the share price tank by 17% in U.S. dollars
Source: Morningstar.com, accessed on October 15, 2018
So even if an investor can be guaranteed to pick the relatively few cannabis businesses that are sure to survive and thrive longer term, today’s excessive valuations seem destined to kill an already-challenged investment. This is why none of our chosen money managers have made any cannabis investments, and it’s why we’re in no hurry to see them do so.