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.