Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA

Associate Portfolio Manager
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

Does Canada need more investor education, or more advisor education?

At the end of a recent meeting, a client asked me if I ever wonder why everyone in Canada isn’t knocking on PWL’s door.  The conversation usually goes that way when people hear the story of our investment philosophy and business model, but it isn’t something that I wonder about. The vast majority of Canadian investors use a financial advisor to invest, and about 75% of Canadian financial advisors are only licensed to sell mutual funds. Getting mutual funds licensed is much easier than getting securities licensed, and finding a commission based job selling mutual funds is much easier than finding a job with an independent fee-based brokerage firm. I started my career in financial services as a commission based mutual fund salesperson. I will be forever impressed by the quality of sales and financial planning training that was given to newly recruited financial advisors, but there was a massive disconnect when it came time to make an actual investment recommendation. 

Advisors with next to zero knowledge of financial markets are expected to choose from thousands of available funds while under pressure to make commissions. Making it worse for the client is the fact that only high-fee mutual funds pay the commissions that new advisors need to make a living. With strong sales skills and a knowledge of financial planning the product becomes less important and being a financial advisor becomes a matter of managing relationships, something that people with little to no knowledge of financial markets can do successfully. With a highly skilled and motivated sales force that does not always fully understand what they are selling, and an investing public with minimal financial education, it is obvious to me why Canadians have been relatively slow to adopt low-cost tools like index mutual funds and ETFs. At PWL we get a lot of people coming to us because they are fed up with the fees they have been paying and the service they have been receiving. It’s not always pretty, but we are happy to be the light at the end of the tunnel.

By: Ben Felix | 2 comments

How does your financial advisor decide what to invest your money in?

Financial professionals are obligated to offer their clients a suitable investment, but there are many things that can affect which suitable investment your advisor will recommend.

Licensing is one constraint that has the potential to affect a recommendation; some advisors are only licensed to deal with specific types of products such as segregated funds or mutual funds. In some situations an advisor may be mandated or strongly encouraged to deal exclusively with proprietary products produced by their firm - this can be seen with bank advisors or firms that operate with a captive sales force. Once an advisor has established the pool of investment choices that they are able to offer you, how do they narrow it down? Many financial products will pay the advisor for recommending them to a client, and some products pay more than others. If there are two similar products to choose from, it is possible for an advisor to be swayed by higher compensation.

If we eliminated all of those outside influences, then what would they invest your money in? It's still not an easy question to answer. Some advisors might pay for research to find the fastest growing companies, or the most undervalued companies. Maybe they would recommend a dividend strategy, or a portfolio of bank stocks. They might cite the latest economic data with the intention of directing you towards the most profitable country to invest in. There are countless ideas and methods of investing that an advisor might pitch, and they will likely be based on some level of prediction.

When you are building your investment portfolio, you don't need to be able to predict the future. It is important to be very wary of making investment decisions based on the financial news or Jim Cramer's latest tip. There is a wealth of data and peer reviewed academic research that can serve as a guide to building a robust portfolio that does not rely on prediction. It is possible to use the whole market as a tool rather than trying to guess which company or geography to invest in, and by building a globally diversified and rebalanced portfolio the emotion is removed from making investment decisions.

At PWL, we mitigate compensation related conflicts of interest by avoiding commission-based products. By harnessing years of academic research and empirical evidence we give our clients everything that financial markets have to offer without subjecting them to our intuition or predictive abilities.

So next time your advisor makes a recommendation, be sure you know what they are licensed to offer you, how they are being paid, and the logic behind their final decision. If there seems to be a conflict of interest, or they start talking about how China's economic growth is going to affect their favourite stocks, run far, and run fast.

By: Ben Felix | 0 comments

The State of the Industry

Today I received an email from a former colleague that continues to work with actively managed mutual fund providers to serve his clients. He sent me a document that a fund company had produced for him showing that actively managed mutual funds have consistently beaten their benchmark ETFs, and asked me what I thought. My response follows:

Thank you for thinking to send this over.

I think it’s very interesting that the active management vs. ETF/passive debate is important enough for this fund company to have made this document. I think it is even more interesting that they are pushing their advisors to sell their active funds while they are also making ETFs on the side.

The thing that you have to understand is that there will be funds that outperform just like there will be stocks that will outperform. I could go and find a bunch of stocks that have beaten a benchmark over the last ten years and say that it’s possible to beat the market. It's important to understand that with a mutual fund, any time you are not holding the whole benchmark there can be periods when you outperform and periods when you underperform. I could go and find a bunch of funds that have not beaten their benchmark over the last ten years just as easily as they found ones that did.

The key though, is that you or I, or even the fund managers don’t know when they will be winners or when they will be losers. You can go and say "ok, the XX fund was up 11% over the S&P/TSX last year, I’m going to put my client in that one". But you know as well as I do that past performance does not indicate future performance. You are betting on that fund doing well on your client’s behalf based on how well it did last year; you have no idea if it will be up or down in the future. If you don’t know what the fund will do in the future, why not just accept the market’s returns and get rid of the high MER instead of hoping that the fund happens to be up during the period that your client is invested?

Picking funds falls into the same category as picking stocks in my opinion. You can say "well this manager has tons of experience and the fund has done well in the past" and so on, but that’s no better than looking at the financials of a company and saying "oh they have strong earnings, good management, and a stable dividend I will pick that one". There is simply too much information in both cases to make an accurate prediction AND your clients are paying high fees for you to place these bets... it just doesn’t sit well with me.

By: Ben Felix | 0 comments

Looking for yield in all the wrong places

The current low-yield environment has made it very easy for investors to question the value of holding bonds in their portfolios.  With interest rates staying low as long as they have, concerns have surfaced around frustratingly low yields, and the fear of rising interest rates decimating the value of bonds. If bond yields can be matched by GICs, and GICs won’t lose value if interest rates rise, why would anyone hold bonds at all? Let’s consider this question while ignoring the interest rate environment altogether. 

Bonds reduce volatility in a portfolio and provide an asset class that does not move in lock step with equities; they are not added to a portfolio to produce higher expected returns, but to allow investors to weather the inevitable swings in the equity markets.  When an investor looks at their fixed income allocation as a source of yield rather than a source of risk reduction, they are looking for yield in the wrong place.

In a strong economy with low yields, some investors begin to feel that they can simply replace their bond allocation with dividend paying stocks. This strategy eliminates the risk reducing effects of a fixed income allocation and leaves the investor fully exposed to fluctuations in the equity market.  When investors begin searching for yield in their fixed income portfolio, they end up taking on additional risk rather than managing it.  Looking at bonds strictly as a risk management asset class changes the nature of the yield discussion.

At PWL, we don’t claim to predict the future.  It is obvious that interest rates are low today, but nobody knows what they will be tomorrow.  When we build portfolios, we focus our equity allocation on risks that have proven to have higher expected returns while keeping a bond allocation in place to manage overall portfolio volatility.  Due to the fact that we are not chasing yield, it becomes possible to construct a fixed income allocation using investment and higher grade short-term bonds. These securities will have lower yields than low-grade or long term bonds, but they also carry less volatility. Implementing this fixed income strategy allows us to reduce interest rate risk in our bond allocations while also maintaining the liquidity that is necessary to systematically rebalance - something that is lost with GICs.

Every investor should appreciate the effects of exposure to riskier asset classes with higher expected returns, but it is important to understand that regardless of their yield, there is no replacement for bonds in a robust portfolio. So what will we do if interest rates rise and the value of your bond allocation decreases?  We will follow our rules and rebalance the portfolio by buying more high quality short-term bonds at the new, higher rates.

By: Ben Felix & Max Lane | 0 comments