By Drew Finerty
Like anything in our day-to-day lives, there are some things we choose to DIY, or Do-It-Yourself, rather than paying someone else to do it for us. We may be okay to change the oil in our vehicle and save some money, or even paint the inside of our house to give it a spark. But, unless you have experience and training, some things are best left to the professionals. I have a policy at our place…it’s okay for me to do small Drywall jobs, to fix up some mishaps, but when it comes to electrical and plumbing issues, I much prefer to pay someone that is a Pro, rather than burn down or flood my home.
When it comes to managing my investments, even though I have 30 years experience in this world, I still prefer to pay a Professional Money Manager by investing my own money in professionally managed financial products such as mutual funds…and I certainly advise my many clients to do the same. There are two strategies most commonly used in the art of building a financial portfolio…” Active” and “Passive” management.
Passive management became popular over the last 10-20 years, with the introduction of Online Discount Brokerages and ETF’s (Exchange Traded Funds). Most often, the reason I hear people choosing Passive as opposed to Active, is the cost of paying a Manager to do our research and make the decisions for us. If you are only going to buy/own Banks and long-term Blue-Chip companies through an online brokerage firm, it is possible to win at this game…if you can also provide enough diversification to avoid asset, sector & geographical fluctuations. However, that means it would take a sizable portfolio to get the reach you would need to provide downside risk protection. ETF’s can provide some safety in numbers, as you peg your portfolio to the specific index you choose, but in this scenario, you may miss out on the allocation opportunities other indices provide.
The benefits, in my opinion, of Active management, far outweigh the cost and risk an investor would save or incur by not having a professional team working behind the scenes to protect their hard-earned savings…especially in volatile times like COVID-19 has created this year. So, what is a Professional Actively Managed portfolio and how does it protect us? It means a team of very experienced, knowledgeable, and well-connected professionals working on your portfolio every minute of every day. They include the Researchers, Analysts, Fund Managers…and their support teams.
It starts with the Researchers. These people scan the globe (or their jurisdiction, if it is a Geographical Fund, like a Canadian Bond Fund) in search of well positioned securities that meet their mandate criteria. For the purpose of this piece, let’s consider a Global Growth Fund as an example. The Researchers will create a long list of companies, around the world, who possess a strong history of performance, with healthy cash flows, balance sheets, liquidity, and low debt ratios. From this list, they will cross off the candidates that don’t match their criteria and provide the short-list to the next stage of the process.
From here, the Analysts do their job by dissecting the short-list of companies to ensure their fundamentals meet the strict valuations that match the Fund mandate. There is a myriad of valuations that Analysts review and from there they shorten the list even further. The list then goes to the Fund Managers. They are the people that actually visit and speak with the CEO’s and CFO’s of each company around the world. It is their job to seek out the short and long term risks and directions of these companies, to ensure they present good opportunities for growth and can survive any short term risks, due to any type of crisis. The Managers use the appropriate Indices and others in their Peer Group to compare their performance. For this type of fund, they would compare their results to the MSCI (Morgan Stanley Capital International), a global index of more than 1,600 corporations throughout the world. There are also rating organizations like Morning Star, that rank their funds against peers in their domain. It is a very transparent way for an investor to measure the value and performance of their Management team.
Active Managers earn their pay during volatile periods like we are in now due to this virus that knows no borders. After reaching the market peak during the longest Bull run in history, on February 19th, it only took a few weeks to hit the floor, on March 23rd, after the global pandemic storm hit the entire world. America went from having the lowest Unemployment rates (3.5%) in history….to enduring the highest rates (15%) ever, when over 40 Million employees filed for unemployment benefits between March 15th and May 21st. During that period, the market sell-off was grossly indiscriminate, virtually throwing out the “baby with the bath water”, like no other time on record…even during the Global Financial Crisis of 2008/09 or the Stock Market Crash/Depression of the late 1920’s and through the 1930’s.
However, after the enormous sell-off at the end of March, the Active Management teams have been hard at work, going through the rubble to decipher what was a thrown out gem, what is salvageable and what was not worth rescuing. During times like this, companies will all look different after the carnage and it takes a strong re-evaluation of them to decide who are the great ones to add to and which ones to avoid. This is where companies with strong balance sheets, good cash flow, low levels of debt and the ability to survive the pandemic, will provide our portfolios with a mid to long term performance that will reward us for “holding” during the volatility. It must also be noted that there have been some sectors and lots of individual companies that have been incredibly strong performers coming through the change in our world. Technology and Science have been sectors that have advanced the markets on their coattails, showing incredible leadership. Another reason to be diversified and trusting the Team of professionals that are stewarding us through the coming months and years of recovery.
At a time like this…Passive management or leaving the decisions to the “inexperienced stock selectors”, becomes very risky. Following a specific index or being under-diversified, adds to the stress of managing one’s own portfolio. Also, worth mentioning, Portfolio Managers are somewhat more disciplined and less emotional on the roller coaster rides of the natural movements in the markets, than DIY’ers. This is evident by the conversations I have experienced with PM’s that found opportunity early in the new year to take some profit and move more into cash than the average investor would likely have done while the indices were moving higher before COVID hit North America.
Knowing when to sell and when to buy is an art and not an emotion the average person is equipped to handle. Holding high levels of cash when the virus slammed the market, created some wonderful buying opportunities.
For the average Canadian Investor, and myself, paying a small fee to have your money in the hands of the pros is invaluable. If you want to know more about Professionally Managed opportunities, contact us, or find us through our channels on social media.
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