PWL’s Strategies Hold their Own!

By: Cameron Passmore

In spite of the recent market volatility, it’s at times like these that our investment approach proves itself.

In spite of the recent market volatility, it’s at times like these that our investment approach proves itself. While we may not shoot the lights out at the peak of the market, we don’t expose our clients to the extreme losses that others may experience when the tide turns. And, in our books, that’s one of the most important components of investment success.

Active managers attempt to add value by timing the market. But the reality is that most active managers don’t beat market returns. In fact, 93%1 of Canadian equity mutual funds failed to beat the S&P/TSX in the five years ending September 30, 2008. One of the reasons for this is that, when markets begin to recover, the upturn often happens very quickly over a period of just a few days. Since no-one knows exactly when this will happen, market timers risk missing the bulk of the recovery period.

The fact is that more than 90%(2) of the varia-bility of your portfolio’s return over time is derived from the relative asset allocation between stocks and bonds, and 16 additional sub-asset classes, and not from a portfolio manager’s ability to forecast the future. At PWL Capital, we believe the additional risk of stock picking is not rewarded with returns.

This is what we mean by risk management – our portfolios diversify investment risk across many different asset classes; in addition, the equity  component is diversified globally and by market cap. By contrast, some investors believe that sticking with GICs is a risk-free way to invest. Nothing could be further from the truth. In fact, this type of investment carries a substantial risk – that of outliving your investment capital. With increasing life expectancy, it’s imperative to have at least some exposure to growth investments.

We have all lived through the cycle of market emotions illustrated on the chart below. But we need to remember that the lowest point of the emotional cycle also represents the point of maximum financial opportunity. This is not the time to bail out of the markets;  this is the time to stay invested and reap the benefits that are to come.

1 Standard & Poor’s, Index Versus Active Funds Scorecard For Canadian Funds, Q3 2008
2 Ibbotson, R.G., The True Impact of Asset Allocation on Returns, Ibbotson Associates, 2000