| Our Risk Management System |
| An Investment Policy Statement is a crucial step
in determining an investor's optimal asset mix and by extension their risk profile.
Through consultation with each individual, appropriate weightings of each asset class
can be arrived at. Allocating a percentage of their holdings into real estate, guaranteed
bonds, cash and equities helps to reduce the volatility and risk associated with investing.
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| Unfortunately, most risk management efforts
stop there. To address this issue, we have implemented an additional filtration process
to monitor the "price risk" associated with market securities. |
| Rationale:
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| The information age, corporate malfeasance
and one of the greatest bear markets in modern history have illustrated to the retail
investor the inherent weaknesses of the retail investment industry. More than ever
before, the investor has become acutely aware and critical of the value they receive
for the management fees paid. |
| Until the year 2000, a mutual fund holder
may have believed "if I am paying for professional money management, I assume that
the money manager will consider the risk to my capital and take our money out of a
company or market where the risk becomes too great. That's what I pay them for." What
retail investors have since realized, is that there are generally no systems in place
today that protect their equity capital from enormous market declines. Mutual funds
are not able to move their capital in and out of markets, their size and regulation
makes this impossible even if the managers wanted to do so. |
| Our Solution: |
| We have developed a system to provide
this service. This method for the individual investor provides risk management without
style drift or emotionally charged investment decisions. A process based on prescribed
quantitative filters that are not subject to anyone's opinion or conjecture. WE
DO NOT FORECAST MARKET DIRECTION, but rather monitor the relative price risk at all
times. |
| Assumptions:
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| • |
Most active managers consistently under-perform
the market index |
| • |
As small funds find success, their performance
reverts to the mean. They then become "closet" index funds with added fees, and therefore
are doomed to under-perform. |
| • |
By utilizing Exchange Traded Funds ("ETF's") only,
we avoid the cost and risk of individual stock picking (i.e., Enron, Worldcom, Nortel).
|
| • |
Asset allocation is merely the first step in reducing
risk of capital erosion, reducing Systemic or market risk is the other. |
| • |
Although we realize history does not repeat
itself, investor behavior does. |
|
| Our equity universe is comprised of ETF's
of the world's stock markets and individual broad sectors: (example) |
| • |
Canadian Index
(60 companies) |
• |
S&P Index (500 companies) |
| • |
NASDAQ Index
(100 companies) |
• |
International Index
(900 companies) |
|
| Stated allocation to equities is divided
amongst various ETF's; when we have a "buy" signal on each respective asset. When
we have a sell signal, the capital shifts to money market and waits the next "buy"
signal. The shift between ETF's and money market is based on a unique quantitative
process developed by Venable/Park. |
| Benefits to Our Clients: |
| Mutual fund managers have difficulty
matching index returns consistently. |
| Mutual Funds assume an institutional or
infinite investment time horizon, when in fact an individual's sensitivity to market
declines should increase with age since they have less time to make back losses. Simply
utilizing asset allocation to tailor a portfolio to an individual's time horizon still
leaves their equity holdings vulnerable to substantial market declines. As we have
witnessed, this wastes precious time and has negative psychological impacts on the
investor, causing them to question their approach, their holdings and their advisors. |
| Our method uses objective criteria, which removes
the noise of personal opinion and general market speculation re 'where things are
headed next'. It reduces risk by monitoring money flow in and out of the market i.e.,
"a rising tide lifts all boats". The result is above average returns, a reduction
in standard deviation and an approximate 1/3rd reduction in the over all time in the
market, compared to the 100% exposure of the typical buy and hold approach. The
reduction in risk offers much greater peace of mind. Although more and more investors
are using exchange traded index units, or index mutual funds as investment vehicles,
that approach still lacks any consistent set of rules or policy guidelines to reduce
market losses. Our method imposes the discipline required to make superior risk-adjusted
returns. |
| A highly competitive market means that
mutual fund managers are being forced to compete on shorter and shorter performance
time frames, i.e., 1, 3, 6 months, year to date. Few investors are content to wait
full business cycles to see results. Style drift in this environment is a fact of
life, as fund managers reach for returns, as opposed to focusing on risk management.
By keeping our focus on risk management first, we have greater success at creating
and preserving the growth of client assets over their lifetime. |
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| Does Buy and Hold have you down? |
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This publication is intended to convey
information only. It is not to be construed as a solicitation or offer to buy or sell
any of the securities mentioned in it. The author has taken all usual and reasonable
precautions to determine that the information contained in this publication has been
obtained from sources believed to be reliable and that the procedures used to summarize
and analyze such information are based on approved practices and principles in the
investment industry. However, the market forces underlying investment value are subject
to sudden and dramatic changes and data availability varies from one moment to the
next. Consequently, the author cannot make any warranty as to the accuracy or completeness
of information, analysis or views contained in this publication or their usefulness
or suitability in any particular circumstance. You should not undertake any investment
or portfolio assessment or other transaction on the basis of this publication, but
should first consult your advisor. The author accepts no liability of whatsoever kind
for any damages or losses incurred by you as a result of reliance upon or use of this
publication in contravention of this notice.
All performance data represent past performance and are no indication of future performance.
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