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Posted by Brett Gustafson on May 1st, 2023

Portfolios With a Purpose - Know What You Own Part I

Our vision at Purpose is to build meaningful relationships with advisors by playing a small part in overcoming everyday challenges in your practice. Through working with dozens of advisor practices, we have found that our team at Purpose can provide the most value through insights into our portfolios and our process. In a rather secluded industry, we aim to set the tone by being as transparent as possible about how our team builds and monitors multi-asset portfolios. With that transparency, we strive to achieve a more comprehensive investment experience for the advisor and, ultimately, the end client.

When we meet with advisors to provide insights into their portfolios, the first question that we always begin with is, "How do you manage money, and what is your strategy when it comes to portfolios?" It may seem like a rather basic question, but it is perhaps the most important one.

Many advisors allow us into their process and allow us to understand their money management techniques. It is almost always followed up by, "Am I doing anything wrong, or is there something I should change?"

Our response is always that there is no wrong way. If there is one thing, we have learned throughout conversations with advisors over the years, every strategy for managing investments is unique. You rarely meet an advisor that is enacting the same strategy as the advisor across the hall from them. It is the correct strategy for everyone to be different. The process of building a portfolio is a personal one. Determining a particular mix of assets to hold in your portfolio can vary for many reasons, but most logically, it remains with risk and return objectives. The client's time horizon and ability to tolerate risk determine the overall asset allocation.

An advisor has a multitude of roles within a client's life. The impact is strongly seen through family security, estate preparation, and investment monitoring. I have even seen many advisors go to great lengths to serve their clients, such as sourcing healthcare services or negotiating the purchase of a new vehicle. The advisor is many things to their clients, but arguably the most important is a behavioural coach. Ensuring clients do not make mistakes along the way and emotions are kept in check when the markets take a turn for the worse. Also, vice versa, when the markets are on a decade-long run, as we saw in the 2010s, a common mistake is getting more aggressive with the portfolio only to end up in the gutter due to a higher risk tolerance than initially comfortable. The market will do what it wants to do, but it is behavioural coaching that keeps the train on the tracks.

When it comes to investing, there is no such thing as a one size fits all portfolio. But this is also the beauty of portfolio design and why more and more advisors become discretionary portfolio managers every year.

From a client's perspective, changing risk tolerances on a dime brings convenience to their eyes. For example, if a client is unhappy with their returns, a simple discussion regarding an increase in risk tolerance is much more manageable with well-thought-out portfolios.

From the advisor's perspective, shifting asset allocation becomes much more manageable. If the outlook on U.S. equity is not as high as it once was, the portfolio allows you to reduce the holdings allocated towards that country and into one with a more positive view. On the other hand, if the goal is to free up more time to enjoy the benefits of being an advisor by focusing on high-impact offerings, then the portfolio is the solution.

Overall Asset Allocation

Building portfolios can seem like a daunting task.

When initially starting to work with portfolios, we prefer to break the process down into three steps, the "Three D's" – designing the portfolio, discussing the different strategies with clients, and deploying the client's preferred strategy into the family accounts.

We feel we provide the most value and insight towards the design part of the process. We will leave the strategy for discussions and deploying up to the much more experienced professionals such as yourselves.

The main idea here is to simplify. The simpler the portfolio, the easier it is to manage in different market environments and discuss changes and opportunities with your client base. This frees up more time to engage in activities clients truly care about. Clients are typically satisfied with the investment strategy as long as the investment goal set out in the initial discussions is achieved over the long term.

Breaking down the portfolio into basic pieces of the pie is the best solution we have found for discussions with clients, namely, cash, fixed income, and equities. This might not seem like rocket science, but you might be surprised at the overcomplication we have seen. The past complexity is justified; we were in an environment for many years with low yields. If a client wanted more income in their portfolio, advisors were left with no choice but to deploy more complicated strategies to achieve those yield goals. The type of investing environment around us does affect overall portfolio design.

There is a case for alternatives, but we like to think of the alternatives as a sidecar strategy to the overall portfolio. The basic portfolio is there to take advantage of opportunities efficiently. The alternative sleeve is present to increase growth and income or reduce volatility and correlation. Every client is different, and it is up to you to determine what they are comfortable with.

conservative, balanced, and growth portfolios

Keeping it simple allows for clear discussions with clients on return and volatility expectations. Past performance does not indicate future results, but it gives a sense of clarity as to how the specific portfolio has handled different market environments. Keeping a portfolio performance history is preferred, but back-tested performance can achieve similar goals. Depending on the client, the simplified breakdown of cash, fixed income, and equity can help them truly understand what they will own and the strategy moving forward. This is where every portfolio implementation and client discussion should start – the simpler, the better.

Insights With Purpose

It is a natural feeling to question your investment process. Our industry is very limited when it comes to advisor support. The financial industry is private, and advisors within the same firm are competing for the same business, let alone advisors across all firms in Canada. Ideas or strategies, for the most part, are kept under wraps. Even when you do get some insights into another practice, they are doing something completely different than you are. This is an unnerving feeling in any profession, but advisors persevere and make each practice their own. That is the beauty of the investment industry – there is no right or wrong way to invest money. If we were all the same, there would be zero perceived competitive advantage in clients' eyes.

At Purpose, we are attempting to change the status quo within the investment industry. Mainly, the enigmatic standards by which the industry operates. We are an open book when it comes to portfolio design and discussions surrounding our outlook and strategies. We want to simplify managing portfolios for advisors and act as a sounding board for ideas. We start by running portfolio comparisons between your portfolios and ours. Not to say ours is right and what you are doing is wrong, but to understand the differences and discuss the rationales. We aim to keep this discussion going quarterly; this is not a one-and-done service. Instead, we want to build our relationships with advisors so that the end client has a completely satisfactory investment experience.

Providing observations of portfolios over time and incorporating the whole portfolio is a lot more effective than a one-off discussion or simple fund comparison. Many portfolio analyses are presented with inaccurate data; at Purpose, we can ensure the underlying portfolio attributes are accurate. There will be no missing fixed income duration or a mutual fund being incorrectly captured in "Other." We believe this is the most important element of portfolio discussions. As the great Peter Lynch once said, "Know what you own and why you own it."

Stay tuned for Know What You Own – Part 2, where we will dive into the asset class of equities within a portfolio and which metrics are the most important to focus on.

— Brett Gustafson is a Portfolio Analyst at Purpose Investments

Sources: Charts are sourced to Bloomberg L.P.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements ("FLS") are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as "may," "will," "should," "could," "expect," "anticipate," intend," "plan," "believe," "estimate" or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Brett Gustafson

Brett is a Portfolio Analyst at Purpose. He is responsible for relationship management and advisor support and focuses heavily on portfolio analytics for advisors, our own proprietary models, as well as equity research. With over nine years of experience in the investment industry, Brett started his career out as an Investment Advisor at a Canadian independent asset management firm where he cared for several high-net-worth families. Brett graduated from the University of Calgary with a Bachelor of Commerce degree. He is currently pursuing his CFA designation with the goal of becoming a Portfolio Manager.