In mid-August, I wrote a series of three blogs that described, in a fair bit of detail, our High Rock Research Process. The last of these blogs can be read here: www.highrockcapital.ca/pauls-blog/archives/08-2016. (As I pull this old blog up, I am reminded of my injuries - which have largely healed a month on - but my precious bike is still not repaired and back in my possession).
Today, I thought I would continue this theme and tell you how we manage risk in our collective client portfolios (remember, at High Rock we manage our own employee portfolios exactly the same as our client portfolios). Also, it is important to note that High Rock is registered in Ontario, BC, Sask and Alta with provincial regulators as a Portfolio Management company which means we have the necessary licenses, based on education and experience, to manage money on a fully-discretionary basis...that is the key here and most Investment Advisors in Canada do not possess this license with their regulator, the Investment Industry Regulatory Organization of Canada (IIROC) which is a self-governing body owned by the Canadian banks/dealers themselves (believe me when I say the OSC sets a much higher bar on registration, oversight and compliance than IIROC does...bit of a pet peeve about it here).
I have been very busy the past few weeks initiating a new research file on a company that is proving to be somewhat complicated. That research was then put on hold as all hell broke loose in the global capital markets, as you are probably aware. So I needed to put my head down, swallow some pride, and make portfolio adjustments (Quickly!) to changes I saw in the market.
So how do we trade at High Rock when we buy or sell securities?
First, we (Bianca) runs a weekly report (as part of our Investment Committee Meeting) that tells us where every single portfolio is in relation to every single security in our model. As an example, I might say, "I want to have a 1% weight in XYZ stock". If we are only at .65% weight in XYZ stock then I will need to make a valuation and market judgement about whether to add .35% weight or wait for a better entry point. We do this for every security in our models so we know the risk at all times..
Over the past week, when I noticed changes in global capital markets (www.highrockcapital.ca/pauls-blog/archives/09-2016), we needed to move quickly on making adjustments in quite a few securities in every single client portfolio. And to do that, we have everything we need at our finger tips: every client portfolio, their risk weightings in every security and the weight to our desired models in every security. Then I go out and buy/sell in block trades (larger size) with some bank/dealer on the street, be it in a stock or a bond. Remember, all of this is possible because we manage money on a fully-discretionary basis. That is to say, we can trade in all client portfolios in an instant...as soon as I feel the need.
These block trades are an extremely efficient way for us to execute trades in our collective portfolios: 1) it is one phone call to one bank/dealer for one price and 2) we get better pricing on block size, especially in bonds.
Although we manage our Private Client portfolios on a Separately Managed Account basis (IE not a Fund) we do manage Funds for Scotiabank. They way we trade in the market between the Private Client accounts and the BNS Funds is exactly the same way though...in bulk. That is to say, we do one larger trade with the bank/dealer and then we (Bianca, again) allocate it afterwards across all accounts. So if we sold 25,000 shares in XYZ, Bianca will then allocate it across all clients, which is why our clients see odd sizes in their portfolios. It also helps that we are well-covered by all the major banks/dealers in Canada and some in the USA on an Institutional basis (the synergies between our Institutional and Private Client Divisions are not fully-appreciated but believe me, it is hugely beneficial, especially when dealing in bonds which are an Institutionally-traded market).
Any idea of how quickly we can adjust our portfolios by trading this way? The answer is; VERY. I was extremely busy reducing some risk in some areas, taking profits in some securities and adding some risk in other securities. All with block trades (more work for Bianca to allocate all of these trades but she is happy to do so). This type of bulk trading helps High Rock capture profits in the marketplace and adjust risk in a very efficient manner.
So back to my original question:
- Does your IA have to call and tell you or ask you if he/she can do a trade in some securities in your account?
- And how do they call every single client at the same time and do a trade at the same price?
- Do they give preference to some clients (bigger ones) over others?
- How many days, weeks or months would it take them to buy/sell even just one security, especially if they have a "large book" of clients? Is bigger always better?
- Why isn't your IA registered with IIROC on a fully-discretionary basis (to be sure, some are, just not the majority)? Is it because they lack the education or experience? That, in and of itself, says something, doesn't it?
Part of the reason we started our Private Client Division was to get all the synergies of block trading in our own household accounts, especially in bonds.
There is a better way.