Stephen G. Fricker, B.Sc. CFP 8 Grandview Ave
CERTIFIED FINANCIAL PLANNER® professional Stoney Creek, ON L8E 5A5
firstname.lastname@example.org B: 905 667 2112
www.westdalefinancial.com F: 289 656 1605
© Financial Planners Standards Council awards the CFP™ marks in Canada under license agreement with the CFP Board of Standards Inc.
Dear Clients and Friends,
Investment Funds Update
One of the recent services we started was to help our clients, where possible, consolidate the many various individual investments held in an account into one “Tactical”[1. Some investment funds are in fact categorized as “Tactical” while others are classified as “Global Neutal Balanced” or “Global Equity Balanced”, as examples, as there is more restriction on the degree of making tactical shifts in the portfolio.] Investment Fund. Prior to this process beginning, although past performance is not indicative of future performance, we researched dozens of investments and found that several had a history of superior performance and less volatility compared to the customized account design service I was using. Our research covered many different time periods going back to the beginning of 2008 before the market crash began.
My hypothesis was that a Portfolio Manager, who in fact was successful in the timing of portfolio changes, may create an immediate benefit for the investors in the fund. By contrast, in the delivery of my customized investment account service, even if the portfolio changes I contemplated proved to be equally successful for a client, I can only visit one client household at a time.
Based on these results and my service restriction I was convinced that consolidating most of your various investments into one strategically managed mandate was to your advantage. My view has not changed especially as this current market cycle ages and the push and pull on market performance increases due to political changes around the world and ongoing unresolved debt issues here and abroad.
With that background our office created an initial “preferred list” of investment funds in early 2016 that was used as a guideline to help in account consolidation. Our promise however was to review the results of that initial list compared to others from time to time and to suggest changes where appropriate. We felt that now was a good time to do a comprehensive review. To do this all of the existing “preferred” investments in the Low/Medium or Medium risk category[2. In the near future a similar report will be completed for the Low Risk group.] (11) were compared to 39 others that were selected that currently enjoyed a 4 or 5 Star rating from Morningstar[3. Morningstar Inc. is a leading provider of independent investment research and is headquartered in Chicago, Ill.] and an A or B rating from Fundata.[4. Fundata is a multi-national data distributor and investment fund data and analytics company.] From there all were measured and scored[5. Scores assigned to each fund have been created by Stephen G. Fricker, CFP and were based on his interpretation of each fund’s performance and risk over the past three years ending August 31st, 2017] again based on a variety of risk and performance metrics.
Cambridge Asset Allocation Fund (Tactical Balanced)
One of the major results was a “downgrade” of the Cambridge Asset Allocation Fund in our “preferred list.” Since we have a large number of clients who own this product some comments are warranted.
Risk and Volatility: Of the 14 other investments reviewed in the Low/Medium risk category the average 3 year standard deviation score was 6.40[6. Standard deviation is one of the key fundamental risk measures that analysts, portfolio managers, wealth management advisors and financial planners use. It is a measure of the dispersion of a set of data from its mean. A large dispersion indicates how much the return on the fund is deviating from the expected normal returns.] while the Cambridge product produced a score of only 4.97…. almost 22% lower than the average. A low historical standard deviation score is indicative that the Portfolio Manager has excelled in minimizing volatility in the Fund over the past 3 years. In addition the 5 year standard deviation of the Cambridge product is 4.90.[7. Source: Morningstar Canada] This demonstrates that there has been little change in risk management over an extended period of time and is an indication of how risk will be managed in the future.
By contrast the fund with the highest standard deviation in the Low/Medium group we studied is the Dynamic Power Global Balanced Fund with a score of 12.28.[8. Source: Fundata] While this investment is not a “Tactical Balanced Fund (it is a “Global Neutral Balanced Fund”), it’s standard deviation is almost 100% greater than the average in our Low/Medium group, and in my opinion, this product should not be considered “Low/Medium” risk by investors. It’s 5 year standard deviation score is about the same….11.43…again indicative that the way risk is managed is not likely to change.
However these ratings are based on performance in the past and the consensus among Financial Analysts is that equity markets in Europe, Asia and Emerging Markets are cheaper than in Canada and the U.S; they represent less downside risk and have much higher projected economic growth. Indeed the results in these markets so far this year support this.
The Cambridge Portfolio Management team believes that valuations in the Canadian and U.S. stock market are at above average levels and this had led to a defensive bond mix and higher cash positions than normal this year. The Cambridge product also has a 93% concentration in North American securities and since their investment objective is to “invest in a combination of primarily equity and fixed income securities of Canadian companies, the rise in our Dollar has virtually offset the gains derived from the U.S. securities held in the portfolio. In addition the Canadian Stock Market has been flat most of the year. Finally since the Fund has very little exposure to the Europe and Emerging markets, which has performed well, the Fund’s performance this year has lagged much of its peer group.
I’ve spoken to my Cambridge representative several times recently and read the Portfolio Manager’s comments about the Fund’s performance. While they are prepared to reduce their cash position and buy into equity opportunities when opportunities arise, they are simply more concerned about downside risk in this environment.
The downgrade is based on my own analysis of many different risk and performance metrics and therefore investors in this fund should not necessarily transfer their market value out to a different product that has obtained a higher ranking in our study. The Portfolio Management team for the Cambridge Asset Allocation Fund has provided investors with excellent performance over the years. It is still rated “4 Star” by Morningstar[9. The Morningstar Rating is a risk-adjusted, cost-adjusted comparison of fund performance within fund categories. It is a weighted average of the rating of 3, 5 and 10 year time periods, with 50% or more of the weight being attributed to the longest time period.] and enjoys an “A” rating by Fundata.[10. FundGrade is an objective and completely quantitative measure that is based on a minimum of 2 and up to 10 years of a fund’s historical track record. The FundGrade rating system assigns grades ranging from an “A” to an “E”. For a fund to score a FundGrade “A” rating, the fund must substantially outperform its peers by finishing in the top 10% within its category in a given month.]
If you are not concerned about the lack of exposure this fund has to Europe, Asia and Emerging Markets and the past performance of the Cambridge Asset Allocation fund is acceptable to you and you like their risk management style then no action is required on your part.
|Fund Name||Category **||Risk *||Compound Return as of August 31st, 2017|
|1 Mo||3 Mo||6 Mo||YTD||1 Yr||3 Yr||5 Yr||Since
Alternatives to consider to the Cambridge Asset Allocation Corporate Class Series A
If you accept the view that more concentration outside North America has the potential to produce better performance and less risk, based on current and forecasted economic conditions, then a change to an investment fund that offers that allocation would be more suitable for you. In our study we have identified five (5) other funds that have 40% or more of their assets allocated outside North America… all are rated Low/Medium risk.. and all scored very well in our recent research.
|Fund Name||Category *||Risk **||Compound Return as of August 31st, 2017|
|1 Mo||3 Mo||6 Mo||YTD||1 Yr||3 Yr||5 Yr||Since
|Dynamic Global Asset
|CI Black Creek Global
|Sun Line Granite||2||LM||.57||-2.71||1.24||3.17||3.26||5.03||8.22||7.61|
1: Tactical Balanced
2: Global Neutral Balanced
3: Global Equity Balanced
** Risk: LM: Low to Moderate Risk
*** “The Dynamic Power Global Balanced Class Series A is classified as “Low/Medium” risk at this time however our research shows that the standard deviation score that is available (3 year and 5 year) (an acceptable measure of volatility of the fund) is about 100% higher than the average score of the investments researched in the Low/Medium risk category.”
Summary and Action Steps
As previously stated, if you are a Cambridge Asset Allocation investor, and current subpar performance is not as important as the products risk management and longer term track record, then no action is required by you. But we would love to hear your comments on this letter or any other aspect of your investments or our service. Give us a call or send a quick email.
If you are a Cambridge Asset Allocation investor and you are concerned with the current year’s performance and want your investment to have more allocation outside North America, then it would be suitable for you to transfer the “free” value to an alternative such as one of the ones listed on page 3. Give us a call or send us a quick email and we will fulfill your request as soon as possible.
Notice to Reader: The information contained herein is for general information purposes only and is based on the perspectives and opinions of the author only. The information is derived from various sources including commentary from Portfolio Managers from various firms. Index information has been obtained from the S&P/TSX Composite and S&P 500 historical data provided by Google Finance. It is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, or professional advice. The content of this page is not to be used or construed as an investment advice or as an offer or solicitation for any investment product without first consulting with your Advisor. Please contact us to discuss your particular circumstances prior to taking any action. The information provided herein is obtained from sources believed to be reliable. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any human or mechanical errors or omissions in this information provided. Please read the prospectus and the fund facts before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
The listing of the mutual funds above provides risk category and performance data information as of the date indicated. The indicated rates of return are historical annual compound total returns including changes in unit value and the reinvestment of all distributions and do not take into account sales, redemption, distribution, optional charges or income taxes payable by any security holder that would have reduced returns.
Mutual funds and some segregated funds provided by the fund companies are offered through Worldsource Financial Management Inc. All other products and services including tax preparation and financial planning are offered through Westdale Financial Services Inc.