It is the time of year on Bay St where Managers constantly ask each other, "how did the year go?". In essence, "what was your return for the year?". This process starts during the Christmas cocktail season and continues for the first few weeks of January.
I have had a bee in my bonnet over this for quite some time because it is not enough to ask "what were you up on the year?" without asking "how much risk did you take to get those returns?". Somehow, most people forget about the risk they took to get those returns, especially during a good year like this past year was for the TSX (+21% on a total return basis...but also note that over the past two years the TSX shows only a -3.5% total return per annum calculated on a daily basis as per Bloomberg). I can't tell you how many times I have heard friends, family, prospective clients say to me "my broker does ok for me. They make me money". That is the most insane way to look at investing. They do "ok" for you and they "make you money"? They make you money vs what and what type of risk are they taking in your portfolio?? These are two very important questions to answer.
At High Rock we focus on not only returns, but how much risk we are taking to produce those returns or, the "return per unit of risk". We call these "Risk-Adjusted Returns" where we calculate the total return for the period and the standard deviation of those returns over that same period.
The other key metric is what sort of benchmark you measure yourself against. If you measure yourself solely against the TSX (that is, you only own TSX companies and no fixed income, no foreign stocks and no foreign exchange..sounds like a hedge fund doesn't it? But to be sure, most clients who transfer in to High Rock are 100% invested in Canadian stocks...Zero diversification) then fine, the TSX is your benchmark. And the value-add from your Advisor should be measured against the TSX. So it would be easy each year to see how they have done for you by simply looking at the TSX. If they outperform the TSX year-in and year-out, then they are doing a great job for you (although you would still own a very undiversified portfolio and sh$% happens...nothing goes up forever).
So how did High Rock do in 2016?
Scott showed this on our webinar this past Tuesday but I will show it again. We are only allowed to show the performance of an Actual High Rock Private Client (HR PC or HRCMI Private Client). We chose this client because they have been with us since inception at April 1, 2015 and they are fairly representative of most of our clients (more later). We then compare their returns (before fees so we are comparing apples-to-apples) with the various Indices.
The first chart shows just how diversified our High Rock Models are. We do not manage just TSX stocks. It is diversified across asset class, geography and industry sector. Comparing this diversification to the TSX benchmark is not a fair comparison. There is always a home country bias to invest more than the global market allocates to your home market. For instance, Canada is only about 3% weight in the global Index for both Stocks and Bonds. We obviously have more than 3% Canadian exposure in our models but we are diversified enough globally to use the ACWI (ETF - exchange traded fund) as our Equity benchmark.
The second chart we will show is one we use frequently....Risk-Adjusted Returns. There is a fair bit of math behind here in an excel file but basically it shows the annual return up the left-hand side and the standard deviation (a measure of risk) along the bottom. The top-left quadrant represents the best risk-adjusted returns (higher return and lower risk). Now note that our Actual HR PC (gross of fees) is a fair bit above our benchmark 60/40 (60% of ACWI/40% of XBB - Canadian Bond ETF) with a higher return and lower risk. A good thing. Importantly, note the green triangle top-centre is the TSX and note the orange dot above our Actual HR PC which is the BAML C$ High Yield Index. As you can see, C$ HY had a very good year and our clients had an overweight exposure to this asset class.
Now putting it all together, we will look at the "Return per unit of Risk". This is the key. No more, "my broker made me money" comments, please! Has your broker ever done the math and showed you your return per unit of risk that you took? Here are all the above Indices and our Actual HR PC:
So here are a few things to note in the third graph:
Now that I have that off my chest, there are less bees in my bonnet.
Now I won't show you the math on a risk-adjusted basis but I will give you a few more select actual client returns for 2016 (those who were with us the entire year)...my household, my three son's RESP, our lowest client return and our highest client return. These are not meant to be representative (our Actuall HR PC in the above body is more representative of our client base) but rather to show you that each client has different needs and requirements and also, as you will see, that we try to find solutions for everyone:
A word on performance...although we manage our client portfolios to our three models, your performance will vary depedning on when you joined High Rock. It rips me apart to think that people who joined part way thru the year missed out on some great opportunities that we were able to take advantage of in the earlier part of the year when the market was getting hit hard. What is important to note is that the idea generation, the research and the work doesn't stop...it keeps going year after year.
If you feel like you would like to change your risk parameters and exposure to our various Models, contact Scott and we will see if it is appropriate for you. Remember, we do a Wealth Forecast for each client and our goal is to meet your future objectives by taking the least amount of market risk. Sounds simple, eh?
Another important word on performance: Past performance is by no means an indication, promise or guarantee of future performance.
Returns are calculated on an Internal Rate of Return basis from December 31, 2015 to December 31, 2016 on a monthly basis.