Perhaps the most important question you can ask a new financial professional is: “What is your style?”
We are not talking about fashion, but rather their approach to investing for clients. There are many different styles, and meeting with a few different advisors and asking the style question will provide you with more information to make an informed decision. One might think that advisors within the same firm would all have the same philosophy when it comes to investing, but that is not the case.
Over the years, we have been asked this question many times, and being able to clearly articulate how we do things helps ensure we are a compatible match to the style our clients are seeking. Below are the top 10 discussion items that define our style.
1) What we don’t do
One of the first things that we discuss with prospects or new clients are the things we don’t do. For example, we will discuss how we don’t recommend speculative holdings and have zero high-risk positions in our model portfolio. By speculative holdings, we mean investments such as penny stocks, foreign currency trading, cryptocurrencies, emerging markets, start-ups, derivatives, alternative investments, and short-term trading.
Another thing that we don’t solicit is leveraged investing. We focus on risk management, and leveraged investing falls into the high-risk category. This type of investing is only suitable for those with a high-risk tolerance.
2) Precious metals, industrial metals and other materials
One of the biggest hypes that we see on social media is around junior companies and their exploration activities. It almost feels like the gold rush is back on when you read some of the articles. These companies are often linked to various metals and materials — all have a high level of speculation and risk.
Precious metals can range from rare materials such as rhodium, ruthenium, iridium to the more well-known materials such as palladium, platinum, silver, and gold or industrial metals such as iron ore, copper, aluminum, lithium, cobalt, and zinc. Other materials may include coal, bitumen, uranium, limestone, etc.
Given the high level of speculation and risk, we feel there are better alternatives and have excluded precious metals, industrial metals, and materials from our model portfolios.
3) Bottom-up versus top-down
With a bottom-up approach, the primary focus is on security selection. We look for stocks that have a low price-earnings ratio that are trading at a discount to book value.
The top-down approach will begin by first looking at macroeconomic data and microeconomic analysis to forecast direction for the Canadian, United States, and global economies. The top-down approach has more frequent trading by shifting asset mix and shifting between sectors based on projections for economic conditions.
Our approach has a slight bias toward the bottom-up style of investing versus the top-down approach. We have a dozen names within The Greenard Group model portfolios that have been longer-term holds. Modifications to sector weightings and asset mix are always done in the context of the top-down approach.
4) Value versus growth
With a value-oriented approach, we look for companies that are undervalued and that will continue to increase in value over time. The value companies that we select have a lower price-earning ratio, and the focus is on the best quality businesses. They have a history of stable earnings, high dividend yields, and are leaders within their respective industry.
The value stocks we pick have two primary objectives, to pay income and capital preservation; however, we also anticipate getting growth in the share price over time. For example, if value Company A makes $3.00 per share, and pays a dividend of $2.40 (approximately 80 per cent earnings), we would still anticipate that Company A’s share price would appreciate over time.
Growth stocks are those where the share price is expected to grow at a faster pace than non-growth or value stocks. For the most part, growth stocks retain a larger portion of their profits to grow their business — their dividends are often very low or possibly zero.
For example, if growth Company B makes $3.00 per share, and does not pay a dividend, we would anticipate that Company B’s share price would climb faster than if the company had paid out dividends.
The focus is always on the total rate of return which is the dividends plus the change in the share price. There are many great companies that either pay a low dividend or don’t pay a dividend at all.
The Greenard Index model portfolios have a heavier bias on value stocks; however, we also have several growth stocks that have been long-term holds.
5) Discretionary or non-discretionary
The approach your Wealth Advisor (non-discretionary) or Portfolio Manager (discretionary) takes is often dictated by their licensing.
As Portfolio Managers, we have the ability to execute trades on behalf of our clients as set out in the client’s customized Investment Policy Statement (IPS).
By comparison, a Wealth Advisor must verbally confirm each trade prior to executing it. If a Wealth Advisor is trying to exit out of one equity holding and purchase another with the proceeds, it might take weeks to finally get a hold of each client, where a Portfolio Manager could execute a block switch trade in a matter of minutes.
Our approach is to focus on discretionary accounts and use our own model portfolios. The Greenard Group models consist of a combination of cash, fixed income, and equities, that we combine to achieve an investment objective or risk tolerance of our clients.
6) Importance of liquidity
Many portfolios that we have provided second opinions on have holdings that are not liquid. We have also reviewed holdings that can be liquid but at a cost. Our approach is to have every investment liquid and easily accessible.
We have regular communication with our clients, and one question we ask every time we meet is what their cash flow requirements are. Outside of meetings, we also expect our clients to inform us of any cash flow needs that have not been communicated to us previously. This is an important part to ensure we have cash set aside for at least 12 to 24 months.
Rebalancing is the perfect time to assess any upcoming cash flow needs from your investment portfolio. Our clients all have an IPS that outlines their cash flow needs for the portfolio. Once their cash flow needs are determined, we set up what we refer to as a “wedge” in the money market to earmark funds for the required cash flow.
We do this with every client to ensure that when markets decline, we are only selling cash equivalents to fund their cash flow. Having cash equivalents for cash flow needs ensures we are never forced to sell equities at the wrong point in the market cycle. This approach is essential for those individuals requiring cash flow from their investments.
7) Mutual funds, exchange traded funds, or stocks
Financial professionals may choose how they want to invest; however, those choices may be limited to the licenses that they have acquired. For example, if an advisor is licenced only with the Mutual Fund Dealers Association (MFDA), then they are limited to only talking about mutual funds.
We made the decision early on to get licensed with the Investment Industry Regulatory Organization of sa国际传媒 (IIROC), now known as the Canadian Investment Regulatory Organization (CIRO). This enables us to offer all possible investment options to clients and not limit us to one type of investment.
Our approach has always been to avoid mutual funds, exchange traded funds, and any structured products. We focus on direct holdings that we manage through The Greenard Group model portfolios.
By focusing on direct holdings, we are able to focus our efforts on owning the best companies in the world. Owning direct holdings also allows us to control the position size of each holding, sector allocation, geographic allocation, and customize portfolios to our clients’ unique financial circumstances.
For example, if we have a client that does not want to hold a specific stock that is within the Greenard Group Model portfolios, we are able to remove that particular stock from their portfolio. This allows for a greater level of customization for our clients.
Another reason we prefer the direct holdings approach has to do with fees. Mutual funds, exchange traded funds, and other structured products all have various layers of fees. In most cases, using our approach, we can cut those fees by more than half if someone was previously only invested in mutual funds.
Some clients have chosen to invest in Index ETF’s as a low cost option. We prefer to focus on high quality individual holdings rather than an Index ETF that can hold hundreds of holdings of varying quality.
We have written numerous articles on the topic of mutual funds and ETFs that go into much greater detail. Here are two of those articles:
- My investment approach is to avoid mutual funds
- Ten reasons to be cautious with Canadian equity ETFs
8) Our approach to stock selection
Having a disciplined and consistent approach in many areas of life is important, and it’s no different when selecting stocks. When you take emotions, headlines and short-term trends out of the decision-making process, you can focus more on what makes an investment a good choice.
We focus on the fundamental things that make a company a good pick such as corporate profitability, high capital efficiency, low leverage, high cash flow, or competitive advantages to name a few. We also make sure that the company we are looking at is prudently managed and has good corporate governance.
Before all of this, we stay away from smaller and medium-sized speculative companies and focus on large capitalized companies only. We have more details on our approach to stock selection in an article we wrote The Greenard Groups 10 principles for picking stocks.
9) International, global or domestic
When prospects come to us with their statements, we often find that they are invested only in sa国际传媒. While sa国际传媒 has some great companies, we find that by limiting investments to your domestic market only, you are missing out on a big part of the global economy.
One of the many reasons we like large blue-chip companies is because they often have operations across the globe. This allows investors to buy a stock on a U.S. market and participate in the global economy.
If you take a stock like Apple, their revenue sources are approximately 43 per cent from the Americas (40 per cent of that is from the U.S), 24 per cent from Europe, 18 per cent from China, six per cent from Japan, and seven per cent from the rest of Asia.
This means that by owning this stock, you are participating in not only the U.S. economy but also the global economy, given the sources of revenue for the company.
When you add more large blue chip names to the portfolio, you are then able to achieve a good balance between international, global, and domestic markets.
10) Placement of investments
We often refer to an article we wrote titled The Greenard Group’s six principles of placement when meeting with clients and prospects. We focus on structuring our clients’ investments properly to ensure that each holding is held in the right type of account. There are four types of investment income: capital gains, dividend income, interest income, and foreign income. Each of these are taxed differently, and we take care to ensure that each investment is held in the correct type of account.
By thoughtfully structuring your investments and taking care of which holdings you place between accounts, you may end up with more in your pocket, after-tax. This is why we carefully map out a placement plan for our clients between their registered and non-registered investment accounts.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit .
