When we formed our Private Client division over two-and-a-half years ago, we wanted to do something unique in our ability to display trust. Our answer was to form an Independent Review Committee (IRC).
By way of background, all prospectus-based funds (mutual funds, closed-end funds, ETF's) all have to have an IRC of at least 3 members. The closed-end fund we manage in our Institutional division (AHY.un) for Scotiabank has an IRC. I meet with the IRC of that fund at least four times per year. The IRC is responsible for all compliance matters on that fund and, most-importantly, they need to ensure that the fund (and the Portfolio Manager managing the fund...High Rock) is managing the portfolio exactly within the confines of what the prospectus states. That is to say, we are not permitted to stray outside of the restrictions stated in the prospectus. So to ensure that, the IRC pours over the portfolio, checks all the numbers and grills me about certain positions, etc. It is a very important role they play to ensure compliance at all times.
But in our Private Client division, we do not manage "funds". We manage all of our private client assets in Separately Managed Accounts (SMA). That is to say, each client has it's own account(s) and, although we do trades in their accounts, they own the securities in their accounts at all times. Managing client money on an SMA basis has many benefits but most notably it is way cheaper for the client and they also have complete transparency of the securities in their account at all times.
Now because we do not manage funds in our Private Client division but rather on an SMA basis, we are not obligated by the Ontario Securities Commission to have an IRC. However, we wanted to go the extra mile and do something no one else in the country has done...we formed an IRC for our Private SMA Clients. (We believe we are the only Portfolio Management company in the country, managing money on an SMA basis, to have formed an IRC...unique indeed).
So without further ado, here is Jonathan Heymann from Wychcrest Compliance services, in his capacity as our IRC, to help explain in more detail what he does on a quarterly basis for the sole benefit of our Private Clients:
If ever a client, or a prospective client, would like to speak to Jonathan at Wychcrest Compliance Services and get more detail about his role as our IRC and what makes High Rock different than the Investment Advisor community, please contact us and we will put you in touch with Jonathan directly.
Scott wrote a great blog this morning on how most in the wealth management business want to sell you on the next big opportunity. Read it here if you haven't: highrockcapital.ca/scotts-blog/in-a-world-that-demands-instant-gratification-its-hard-to-sell-boring.
I thought I would add a bit to his blog on "opportunities". We really don't sell anything at High Rock, other than to act as the stewards of your family's wealth and our internal capabilities and experience to manage that wealth within the asset management firm that is High Rock.
When Scott used the term "opportunities" though, it immediately rang a bell because I was just looking at the performance of one of our sophisticated clients on a year to date (ytd) and since inception basis. This was a client we provided a "solution" to for an investing need they had.
This idea of providing a solution actually started as a theme for another sophisticated client back in February 2016. This client (call him Client A) and I were sitting across the street at Lavazza in the King Eddy having coffee (I am there at the same table 2-3 times per week with various folks sharing ideas/research etc) and discussing investable themes when a lightbulb went off in my tiny head. He told me what he was doing at the time and I suggested that he round out his theme with my light bulb idea. We had been discussing for two hours and I said, "hey, why don't we buy a portfolio of Canadian High Yield Energy bonds?". This seemed to be a great solution and add-on to what he was investing in on his own so off to work I went and created a highly concentrated portfolio in some high yield energy bonds I knew quite well. Now keep in mind, this was not me selling him an "opportunity" but him requesting a "solution" to round out his theme.
With Client A's approval, we did talk to a few other existing clients whose Wealth Forecasts provided for the ability to utilize such a portfolio as a solution for their overall needs. We did term this High Rock Opportunity Model I when we were talking to people. Keep in mind that it was called an "Opportunity Model" but it was meant for existing clients and meant to provide a solution...not gather in more assets by promising the next big thing. No, this was a very specific solution and, in the end, Client A was the only direct participant in Opportunity Model I...fair to say, it takes certain risk-tolerance and a high level of sophistication to invest in only 5 Canadian High Yield Energy bonds when every single one of those bonds was for sale! And remember, all of our clients participated in this investment theme as 3 of the 5 Energy bonds were bought in our Tactical Model so if you were invested with us in January 2016, you got a nice lift on your portfolio over that cup of coffee I had with him in February. (I don't actually drink coffee but rather tea).
I won't tell you what Client A was/is up on that portfolio but suffice to say the solution/opportunity worked out better than expected and that Client A had the best performance of any High Rock client across 2016 by a wide margin.
On to solution number two - High Rock Opportunity Model II. We have another highly sophisticated client (Client B) who came to me last July 2016. He said he wanted to put X$ into the beaten down Preferred Share market. Now I wouldn't have described myself as a Preferred Share expert a year ago. I told Client B that I would need to do a fair bit of work/research first. Not my style to call myself an "expert" in anything, not even High Yield, but I would say that by October 2016 I became intimately knowledgeable on the true drivers of the Pref Share market. In fact, two weeks ago I was on a Horizon's Pref ETF presentation webinar call. I thought I would hear what this PM at their sub-advisor had to say about the Pref market. Seemed like a nice guy but seriously lacking in-depth research on the true drivers of the Pref market. Maybe he was "dumbing it down" for the Investment Advisors who were on the call? Either way, I was not impressed when they only took emailed questions on the call and they wouldn't address the two more complex ones I submitted. A marketing guy from Horizon's called me after the webinar and when he found out we didn't own any of his Pref ETF, he basically hung up on me. I felt like asking "why on earth would we own your ETF when we know exactly which Prefs to buy and we can save ourselves and our clients the MER?"
So began a three month process starting with a wickedly complex Pref Share excel macro that was generously shared with me by an old friend. This macro was more complicated than any I have worked with and I needed three months to get comfortable with the drivers of valuation in the very specific part of the Pref Share market I felt exhibited the best risk-adjusted returns. What I can now tell you is that, these Pref Shares are the most complicated cash securities in the Canadian market. Investment Advisors use them as a Fixed Income proxy. Big mistake. A lot of older, retired folks lost plenty of money on certain parts of the Pref market because their Investment Advisor just didn't understand the true drivers of these things. Pref Shares are not Fixed Income! They may have a yield attached to them but make no mistake, they are Equity, more succinctly Senior Equity but, Equity nonetheless.
Again, with Client B's knowledge, I showed about four other existing clients Opportunity Model II as we felt like it would have been a good fit for them, including Client A. Alas, only Client B felt like it was the right solution. Fair enough, holding a concentrated portfolio of 9 Pref Shares isn't for everyone.
By November 2016, we began investing and quickly accumulated our target Pref Shares. We had pretty good timing as November and December performed nicely but 2017 ytd has been excellent. Again, I won't tell you what Client B is up 2017 ytd or since November 2016 but, suffice to say again, that Client B's Pref Share portfolio has the best performance of any client over that period by another wide margin (and lots more than the Horizon ETF and with no MER!). Not for everyone, but it was certainly a good solution for him.
Once again, all of our Private Clients participated to a certain degree in this trade as we sold the prefs we did own and bought the same Prefs as Client B and all at the same time and price according to our Fair Trade Allocation Policy within our Policy and Procedures Manual (ask your current Advisor if they have such a Policy...newsflash, they don't have to. High Rock is required by the OSC to have such a policy but even if it wasn't required, we would because it is the right thing to do). The Pref switch trade we did in early October 2016 has added considerable value to all of our portfolios...just a lot more to Client B due to the concentration he held.
Are we selling Opportunities? Not at all. We are providing solutions to our existing clients. Could some of our existing clients have benefited from these two Opportunity Models if they invested directly in those two Models? Sure, but we all need to be comfortable in our investments and ensure that any such solutions are specific and in keeping with our Investment Policy Statement and our Wealth Forecast. You may not go broke making money but nor do you go broke by missing opportunities.
We can't create opportunities but what I can tell you is that we have the experience, the knowledge, the access and the network to constantly search for themes that might provide solutions for our clients. In fact, I spent 2.5 hours yesterday with Client A at lunch to discuss various investing themes. And Client B is going to share a bottle of wine with me in the backyard next week to do much the same. And this morning I was at Lavazza for a one hour meeting with another asset management firm PM to discuss some investing ideas. I know what you are thinking..."he seems to go out for coffee and lunches a lot and spends evening's drinking". Coffee/tea is quick, cheap and efficient. I pack my lunch from home 21 out of 22 work days a month and eat at my desk. And I only drink wine on those weeknights when it is absolutely required...honestly.
And remember, ALL of our clients participate in these themes/solutions/opportunities so even though you may not feel like Client A or B right now, the rest of us benefit nonetheless. And when we come up with a theme/solution/opportunity, we will show you if we think it fits into your Investment Policy Statement and Wealth Forecast. If you are an existing client, and feel you have a need for a specific solution (no, we can't print money in the back room), then ask Scott or I to sit down and have a chat. We will absolutely refer to your Investment Policy Statement and Wealth Forecast as we discuss your requirements and any potential solutions.
Past performance is in no way a guarantee of future performance. This blog was meant for informational purposes only to our existing clients and not a solicitation to prospective clients.
As promised yesterday, and in advance of tomorrow's US Unemployment survey, I will show you one of Scott's favourite US recession predictors.
First of all, the US unemployment report is largely flawed in many respects. Number one, it is actually a survey of employers, not actual hires the past month. Secondly, the unemployment rate is a single number and doesn't take into account the split between full-time and part-time workers (full-time usually make more $). Also, it doesn't take into account the Labour Force Participation Rate, which right now, is near an all-time low (not a good sign).
All it's failings aside, the unemployment rate can be a good predictor of a recession.
Scott shows this chart most months when he blogs about the US unemployment data (which he will likely do tomorrow). I am only showing it today as an add-on to my blog yesterday:
Explained as follows:
Notice that every time the US unemployment rate (white line) crosses up through the downward-moving 36 month moving average, a recession begins right at that time.
As you can see in the bottom-right in the white box, today, we are still a little ways out from a possible recession. For this historical metric to work again, we need to start seeing the unemployment rate bottoming and starting to tick up while the 36 month moving average will keep going down. When they cross...beware of history.
Tomorrow 8:30am will give us another data point to watch.
Scott and I have stated in some blogs and on our weekly webinars (highrockcapital.ca/private-client-division.html) that past US recessions all started with the Federal Reserve Board hiking up their overnight Fed Funds interest rate (the rate at which commercial banks lend to each other). Usually the recessionary result is due to the fact that the Fed hiked rates prematurely.
But the question is, how long after they started hiking Fed Funds, did a recession begin? What is the lead time?
Given we think this is exactly what is happening in the US right now (and now Canada too, and to an even great extent, given our deteriorating housing market), I thought I would look at what that lead time has been over the past few recessions.
As you can see below, the Average time (in months) from when the Fed first hiked Fed Funds to when a recession started is 29 months (beige line). In blue, you can see where we are today at 18 months from their Dec 2015 hike.
If we extrapolate the average, the US would hit a recession in July 2018 (11 months from now for a total of 29 months from Dec 2015).
If we use the shortest period (1999-2001), which was only 21 months, then the US could hit a recession by Nov 2017, which is only 3 months away.
You may ask, "what on earth is going to lead to a recession? Stocks are at all-time highs". How about the Fed and the faltering economic numbers that really matter?
Note the white line a "Hard Economic Data". Hard Data has been trailing off since late last year, although it has ticked up a bit the last two weeks of July. The yellow line is "Soft Economic Data" (like surveys etc) which climbed higher right thru till March but is now coming off as well. And the green line? ...the S&P 500. Interesting chart.
Just a couple of reasons why we are investing more cautiously right now.
Remember, at High Rock, we are managing our own capital the exact same as our clients and everything we do (for all) is based on risk management and protection of capital.
Tomorrow, in advance of Friday's monthly payroll data, I will try to post another interesting comparison on the same topic.
You can't make this up.
I drove all the way to North York mid-afternoon yesterday to visit a lovely older lady (not even a client) who I have helped with on everything from buying a new vehicle through my friend who owns Performance Auto Group www.performanceautogroup.ca/ (another shameless plug for my friend) to a full-on Wealth Forecast created by Bianca only weeks after giving birth (second shameless plug in one sentence!) with multiple scenarios on selling her house, buying a condo or the status quo. Lots for her to think about.
Also, I have gone through, in detail, her existing portfolio held at a life insurance company's Broker/Dealer arm.
The contents of her "portfolio" (and I use quotes because it is NOT a portfolio) are something we see frequently when new clients transfer their existing portfolios to High Rock to work with us.
Without going into a lot of detail, this "portfolio" sits in 100% mutual funds (where all-in fees are about 2.75% vs our 1.20%) and 65% in Equities and 35% in a Balanced Fund...not even a Fixed Income Fund or a Bond to be seen. This for a 70yr old lady without the benefit of a work pension or health insurance? Sounds more like hedge fund-style concentrated risk to me. And the poor lady has no idea of the inherent risk in her portfolio. As an aside, I would have to think that if the Ontario Securities Commission (OSC) found a registered Portfolio Management company, like High Rock, had a client that age, in that financial situation and with that portfolio, they would do more than slap us on the wrist. Totally inappropriate a portfolio, at least for her. Therein lies the difference between being registered under Investment Industry Regulatory Organization of Canada (IIROC, self-regulated by the banks/dealers) where her Advisor is registered and the OSC (a gov't agency reporting to the Min of Fin of Ont), where High Rock is registered. I could go on about the differences, but that is for another post.
And the worst part is, when I told her what she was paying in fees, she tells me that she has been asking her current Advisor what she pays in fees but keeps getting the runaround from the Advisor. I couldn't believe I was hearing this so soon after just writing on the topic. I told her I just wrote a blog on this exact topic last week: (highrockcapital.ca/pauls-blog/report-on-business-article-on-fees-rob-carrick-help-my-adviser-is-blowing-smoke-on-investing-fees)
I drew out our Fee Structure infographic on the back of a piece of paper for her to see. I hoped like heck she realized just how honest and transparent High Rock is about our Fees.
And if the fact that I just wrote a blog on how Advisors avoid conversations about fees, as I am sitting on her couch in her living room, I get an email from Scott on my iPhone. I read about half of the contents of that email and just passed my phone over to her to read in it's entirety. I know Scott wants to distribute this heartfelt email from one of our clients so I won't steal his thunder...unreal timing!
As I said, you can't make this up.