MBA, CIMTM, Fin. Pl.
Investment Specialist, Products Knowledge
Expectations, despite everything
The ups and downs that the markets have experienced since the health crisis, and now the resumption of activities, have brought to light a fact that is very obvious to anyone with an investment portfolio: whatever the situation, we all want to be able to count on an effective portfolio, which allows us to plan our future with confidence and whose returns meet our expectations.
Not just in Egypt
In a recent article, we brought to your attention the concept that portfolio performance has three main components: static allocation, strategic allocation and tactical allocation.
We also saw that these three components did not all have the same impact on the overall performance of a portfolio. To illustrate, imagine the shape of an effective portfolio to be that of a pyramid, as you see it here.
Now let’s move from the conceptual to the practical. In a series of three articles, we will explain how the Financial translates this concept in the management of its clients’ investment portfolios, focusing on the importance given to each segment of this pyramid.
First, the investment policy
But before we begin our exploration, it’s essential to mention the importance of your investment policy in the composition of your portfolio and in achieving your goals.
The reason is that this policy must in all respects be aligned with your financial situation, your risk tolerance and your investment horizon. An optimal allocation between the fixed income portion and the equity portion of your investment portfolio is essential. It must also evolve and be closely aligned with your stage of life and the various factors that influence your professional and personal situation.
The more closely your investment policy reflects who you are and what you’re looking for, the greater the likelihood of achieving your goals. This is a key decision, which you make with your advisor when opening your account, and it is the one that will have the most decisive impact on your future as an investor.
So take the time to establish this policy with your advisor, and then move on to the next steps.
Now let’s go back to our pyramid and take a look at its foundation, static allocation.
Static allocation is the underpinning of your portfolio’s performance. In fact, it accounts for no less than 80% of the return that will be generated and it concerns all the elements that make up the portfolio.
In this regard, let’s take a closer look at our Private Management at the Financial. We pay particular attention to the choice of the different managers, both internal and external, who are involved in the management of the funds that make up the approach chosen for each portfolio. For example, if you are invested in Private Portfolio Management with the growth approach, you can count on 14 different renowned managers for the day-to-day management of your assets!
Our mutual funds are also run by several managers. For example, our FDP Balanced Portfolio, which is found in the investment portfolios of many of our clients, benefits from nine different managers. In addition to our internal team, prestigious managers such as Fidelity Investments Canada, Manulife Investment Management, MFS Investment Management Canada and Mawer Investment Management are at the helm of our FDP Portfolios and our FDP Private Portfolios.
A rigorous selection
To be selected, each of these managers must pass a diligent and rigorous analysis which includes several stages. First, a quantitative analysis looks at the numbers, such as manager performance and various risk ratios. Overall, thirty criteria are evaluated and compared in order to retain only the best managers in their category. Another analysis, this one qualitative, is carried out at the same time. Here we focus on assessing the manager’s style, including their investment philosophy, their complementarity with the other managers already in place and their integration of ESG criteria into their portfolio management.
- Three to seven managers are selected to move on to the next stage, which includes one-on-one meetings and a detailed questionnaire of about twenty pages.
- The three finalists are then submitted to our investment committee, which makes the ultimate choice of the manager.
The process does not end there: when an external manager is given a mandate, they are monitored on a daily basis and must undergo a statutory review each quarter with our Manager of Managers team. Every effort is made to place each of our funds and each of our Private Management approaches on a solid footing, because this component is the one that will have the greatest impact on the performance of your portfolio.
When change comes
Always in the spirit of offering the best to our clients, from time to time we change managers for different reasons. Thus, over the past two years, Desjardins Global Asset Management and TD Greystone have been given new mandates, while we ended our association with the firms Copper Rock, Formula Growth, Connor Clark & Lunn, as well as Lincluden (in Private Securities Management only).
Rigour and expertise
Creating and managing a portfolio is a complex process that goes far beyond simply combining a few funds. The construction of a portfolio whose performance is superior to its peers is done according to a very specific dynamic. One could even argue that a portfolio’s performance pyramid is similar in a way to Maslow’s hierarchy of needs pyramid: its foundation must be sound before moving on the next level.
The choice of managers and of different management styles, as well as their complementarity, are the major source of return. So it’s essential that the selection process criteria be adhered to in order to achieve the desired result.
If we look at the process in terms of prioritization, this means that constructing a portfolio with an emphasis on tactical deviation first, for example, would be like building your pyramid upside down. Such a structure would be very unstable and could collapse at any time.
Trust our experts: they have been serving professionals for over 40 years!
To learn more or if you have any questions, contact your Professionals’ Financial advisor.
Stéphane Girard, MBA, CIMTM,Fin.Pl.
Product Manager, Professional Practice
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.