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Posted by Brett Gustafson on Jun 5th, 2023

Portfolios With a Purpose – Know What You Own Part II: Equities

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, advisors can leverage our work and insights for their own practice, helping their decision-making process. A better process helps improve outcomes which helps the end client.


If portfolio construction is akin to manufacturing an automobile, the equities are, without a doubt, the engine. Equity is the piece of the car that most often makes the portfolio go, and the engine has never promised a smooth ride. Equities capture such a wide swath of potential strategies and exposures; simply calling the allocation "equity" is almost a disservice. Small-cap Canadian venture capital companies are equities, as are trillion-dollar global technology giants and commodity producers located in emerging economies. Add to this list different active management strategies and various passive strategies, and the variations are limitless.

With the endless opportunities available, we go back to our main goal, simplifying the portfolio for ease of management. Digging into equities, we have found several additional lenses crucial for understanding the overall portfolio's exposures and risks.


The starting point of any underlying investment lens resides where that investment is positioned geographically. Typically, the main goal of the portfolio is to maximize return while minimizing risk, and what better way to do so than diversifying your allocation amongst a wide array of countries? Global economies and markets do not always move in unison, allowing investors to reduce the correlation in their equity portfolios. Plus, the composition of markets is very different. For example, Canada and Europe lean more towards a cyclical value-driven style of investing, while the US market has a more growth factor composition. Using the diversification tools available to you allows the portfolio to capture exposures such as global pharmaceuticals or consumer brands that are not available in such markets as Canada.

Equity - geographic and market type allocations

Going one step further, there are benefits to investing in developing economies. But investing in emerging markets allows for even more diversification potential. While there are many benefits to investing globally, it is not all sunshine and rainbows. From an overall level, keep an eye on how much currency risk and political risk there is amongst the nations you invest in. We all know that investing works in cycles, and this is especially true for Emerging markets. Typically, EM will underperform DM in the late stages of a cycle, and vice versa; in the early stages, EM can outperform DM. This is not to say we are proponents of market timing, but being acutely aware of exposure to EM is a consideration when determining the risk level of a portfolio.

When managing the geographical exposure of a portfolio, it is important to have a set baseline for each region the portfolio is invested in. This allows the portfolio manager to articulate specific overweights and underweights within the portfolio to respective clients. There is no exact science behind setting up a baseline. It can be rather arbitrary and certainly changes based on your country. Some may call it "Home Base Bias," but there is a strategic element to having a bit of a country bias.

As Canadian investors, our teams' baseline is 40% Canada, 30% USA, and the remaining 30% split between Europe and Asia. That is not how we are positioned, but that is how we base ourselves. 40% Canada may seem a little high to some investors, but there are benefits to having a decent chunk of your investment dollars in Canada. Most notably, from an asset-liability perspective, when you retire in Canada, a majority of your future liabilities are in Canada. The risk of your retirement would increase if the Canadian dollar suddenly took off and you had many of your investments outside of Canada. In addition, there are also benefits from a tax perspective, such as the dividend tax credit.

The takeaway is to be certain of your current positioning and how changes to the geography of the portfolio impact the factors that drive risk and return. For example, if an investment says "global" in the name, ensure that is the case. Many times, "global" investment is simply 60% U.S. equities, which may not be global in terms of your overall portfolio. On top of the country exposure, if the risk is a concern, be certain of the developing nation exposure you would be adding to the portfolio.

Size, style & cyclicality

Moving from geography to the next investment lens, consider the portfolio's style, size, and cyclicality. If equity is the engine, then these three portfolio factors are the pistons. The style and size of an investment product are typically fairly static, while the cyclicality can change given the manager's outlook on economic conditions. For example, if a manager runs a large-cap value fund, that is what an investor is expecting out of the allocation to their portfolio. It is not very often that the manager will transition to buying up small-cap growth companies—it's much more likely that a manager may believe we are in the trough of the business cycle and accordingly tilts toward more cyclical industries moving forward.

The goal is to align the portfolio tilts based on style, size, and cyclicality with the overall outlook view while remaining diversified, as sometimes outlooks simply don't work out as expected. Monitoring the below portfolio exposures makes it much more manageable to control the underlying tilts of the portfolio. If your outlook is that value will outperform growth or cyclical will outperform defensives, adjusting the portfolio weightings is as simple as that.

Size, style & cyclicality

Monitoring these equity allocations of an overall portfolio is crucial to success. While globalization has increased the correlation amongst global equities, there are still benefits seen with diversifying internationally. There have been strong divergences between style performance, which depending on how you are allocated, can either contribute to the success or downfall of a model. Within a portfolio, every piece of the pie has its job, and as Henry Ford famously said, "Nothing is particularly hard if you divide it into small jobs."

Insights with Purpose

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 make managing portfolios simpler 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 have discussions surrounding the rationales. We aim to keep this discussion going quarterly, and this is not a one-and-done service. We want to build our relationships with advisors so that the end client has a 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, and 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.

If you want to know what exposures your equity portfolio is tilted toward, feel free to reach out to our team. As the great Peter Lynch once said, "Know what you own and why you own it."

— 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.