Why Elementum Growth?
Markus Muhs - Apr 25, 2019
Why did I create a discretionary portfolio for my clients on our Private Investment Management platform and what's it all about?
This is the first in a series of blog posts I plan to write explaining the thought process behind my new Elementum Growth Portfolio. The intent here is to provide a general overview on my Portfolio Management page while providing financial nerds and other curious onlookers more detail through a series of blog posts.
To be notified of subsequent blog posts, subscribe to my eNewsletter
Discretionary Portfolio Management
So to begin with, why did I go down the path of creating a discretionary portfolio under our Private Investment Management (PIM) platform? First, a primer:
In the wealth advice industry there are primarily two types of client-advisor relationships: Advisory relationships, where investments are recommended to the client and the client has to give the final go ahead. In Managed or Discretionary relationships, the client agrees to a general mandate for an account and the portfolio manager (either the advisor, if properly accredited, or a third party) makes all investment decisions independent of the client. The vast majority of the industry operates on the former model, as I have for most of my career. The Elementum Growth Portfolio is built on the latter.
Why the latter? Why wrest control over their investments away from my clients?
For one, the discretionary model is one I've found to be in demand by my long-term clients for quite some time. "Markus, we trust you; if you think that's right for the portfolio please go ahead and purchase it" is more or less the standard response I get when recommending a change to a portfolio.
Second, technology just makes things that much easier to manage a client base of around 100 households on a discretionary basis, and to do so in a much more diligent way, providing that much more value to my clients in terms of tactical investment allocations.
By obtaining my Chartered Investment Manager designation in 2015, and then registering as a Portfolio Manager in 2016, I became one of the small minority of advisors in Canada able to operate on a discretionary basis. It should be noted that the Portfolio Manager registration also puts a much greater onus on me to at all times put my clients' interests ahead of all else. PMs are advisors and financial stewards in the truest sense, as opposed to investment salespeople.
Now, I don't want to say that I condone wholesale market-timing, but from time to time opportunities present themselves in the markets that are just too slap-in-the-face obvious, and I feel compelled to pursue them for my clients.
One such example was the 2016 Brexit referendum. In the days following the unexpected referendum outcome European markets plummeted. The baby was being thrown out with the bathwater as a lot of great multi-national companies, which just happened to be based in European countries, saw their stock prices punished. Even in regard to companies operating mostly in the UK, the markets in their usual erratic wisdom priced those stocks as if the island of Great Britain was about to be overrun by White Walkers.
I took it upon myself over the three days following the Brexit vote to call all clients (those with the appropriate risk threshold) to devote an allocation to a purely European equity fund. It took three to five days to get through the list of clients and get most of my voicemails returned, and clients obtained entry prices (into the Euro fund) at various levels as European stocks already started to bounce back. Turned out to be a good trade. The Vanguard European Equity ETF isn't the particular fund I used, but to best illustrate what those markets did after Brexit, below:
For most clients I have not, to this day, recommended an exit from the extra European position as I still think European stocks are cheap (they have a discount applied to them because of all their crackpot politics over there), but obviously a good exit point could have been identified along the way, whenever prices had come back and the political environment was relatively calm.
April 2017's election of Emmanuel Macron in France - a rejection of a right-wing populist party - saw the markets spike in Europe and might have been a good exit point. Doing so would have been another tough chore though and, again, wouldn't have been that necessary as European stocks were still attractive. Still, there might have been an opportunity missed to take that capital and redeploy it elsewhere.
Above is what the Tactical Sleeve in the MWP Elementum Growth Portfolio aims to make possible. I'll write another blog post with more detail on it in the future, but essentially the trading platform I use to manage this portfolio makes it easy for me to buy and sell securities in all of my clients accounts at the same time with just a few clicks of the mouse. As opposed to having to make 100 phone calls.
To be totally honest, the way my portfolio management software works is that I have my very own RRSP set up as the "model". All other accounts linked up to the MWP Elementum Growth Portfolio are automatically managed to approximate the investment allocation of my RRSP. Not only am I investing alongside my clients, but even if I were so self-centered that I only cared about my own RRSP, ahead of my clients', that misallocated diligence automatically transfers to all my clients' portfolios!
The Focus is Financial Planning
I was reluctant to even pursue the Portfolio Manager route at first, believing as I always have and still do, that I'm a financial planner first and foremost. This is what matters most to the client, even if they don't know it. It's not what you invest in, it's how you invest and all the other financial decisions made along the way. So, why should I devote a bunch of my time to managing a portfolio?
As is apparent in the example I mentioned above, being a Portfolio Manager, can actually be a massive time-saver and it allows for more time to be devoted to actual financial planning. Even when you just consider the usual annual client review meeting, where we spend a portion of the time reviewing and rebalancing the portfolio: there's no need to devote time to this anymore if the portfolio is already being rebalanced every quarter and I know everything is up to date in the portfolio.
In the first 6 years of my career, at a major bank, I was limited to only using commission-based mutual funds to fulfill the investment strategies of my clients' financial plans. Even then, I was fairly fee-conscious and favored funds from companies that kept their fees minimal. As these often weren't the preferred products that the bank wanted me to push, an ethical conflict sent me packing and I've now spent the past 6 years with Canaccord Genuity Wealth Management, where index-based ETFs have been taking an increasing share of my clients' portfolios. A future blog post will discuss my opinions on indexing versus active investing.
My overall goal, where costs are concerned, is to minimize as much as I can the amount of product MERs (Management Expense Ratios) going from my clients' accounts to highrise offices in Toronto housing all the big mutual fund companies. At the same time I don't want to completely compromise quality of the portfolio, and I'm open to some active management for parts of the asset allocation, where worthwhile.
I've set for myself a cap of 0.50% overall weighted average product MER for the portfolio. If it ever approaches that figure, I'd make some changes to reduce costs. I charge a management fee, which covers the costs of portfolio management as well as comprehensive financial planning, which ranges from 1% to 1.5%, depending on client household investable assets. Even with all the services provided, given the low-interest and potentially low-growth markets of the future, I'd want my clients' total investment and advice costs to be below 2%. A future blog posts will compare our costs with the competition and the much greater value for those costs we offer.
Lastly, the major impetus for creating this portfolio for my clients was to offer them what I consider to be an "evidence based" portfolio; much different than what is otherwise available on the market.
What exactly is "evidence based investing" (EBI)? I think it's a definition that's still up to debate. To some, EBI means simply creating portfolios on the efficient frontier out of the lowest cost index funds available, following the principles of modern portfolio theory (MPT). Clearly, that's evidence based, as historical evidence has backed up MPT as well as having proven that over the long-term most active management has failed to beat their benchmarks (therefore indexing and EBI go hand in hand).
My aim, with Elementum Growth, is to ensure that every facet of the overall strategy and every investment selected for the portfolio is backed by some sort of evidence. I chose to go with an allocation of 20% to extra-boring aggregate bonds, and in a future blog post I'll present the evidence as to why. If I choose one ETF over another, or choose a particular actively managed mandate for a part of the portfolio, I'll again back it up with evidence.
In other words, there's no selling one particular brand of product here, as there is at the banks, it is truly putting the clients' interest first. This is after all my own RRSP we're talking about here; I'm not going to sacrifice on performance because I feel compelled to sell particular products or get commissions behind the scenes.
Stay tuned for more
Either come back to the website, follow me on Twitter, or sign up for my eNewsletter to be notified of future blog posts on the Elementum Growth Portfolio, which will take a deeper dive on each of the following:
- Passive versus Active investing
- Asset Allocation, Rebalancing, and the Efficient Frontier
- Tax Efficiency
- The Canadian Equity Sleeve
- The U.S. Equity Sleeve
- The International Equity Sleeve
- The Tactical Sleeve
- The True Value of Advice
Markus Muhs, CFP, CIM
Investment Advisor & Portfolio Manager