Managing Client Portfolio Risk

By Mark Barnicutt on November 21, 2010

With the capital markets volatility of the past few years, and the increased risk aversion of investors, we’re frequently asked how HighView Financial Group rebalances client portfolios.  The purpose of this article is to highlight our approach below.

Overview:

When constructing portfolios for our clients, we conduct a thorough process of quantifying their investment goals, understanding their journey in life, and assessing their tolerances to various types of risk. We refer to this as the HighView Investor Profiling Process.

The output of this process is the creation of a customized Investment Policy Statement (IPS) for each client, which although it contains a number of key elements, the core focus is on ‘the promise” as to how their portfolio will be managed by HighView.  For more information on the content of our client Investment Policy Statements, please click here.

Once a client’s investment portfolio is established, HighView — as any other true investment fiduciary — is legally & ethically obligated to regularly monitor each client’s portfolio to ensure adherence to the standards outlined within each client’s IPS.  Such portfolio monitoring, which we refer to as the HighView Portfolio Monitoring Process, has a number of dimensions to it, a summary of which can be reviewed by clicking here.

As part of our role as an investment counsellor, and within the constraints of each client’s IPS, we conduct three types of Rebalances within HighView client portfolios:

1. Goal Rebalances:

All investors have various investment goals that they are seeking to satisfy.  Central to the HighView approach to managing client wealth, we construct a client’s overall portfolio such that it is comprised of distinct “goals-based” portfolios.  In other words, if a client had a Retirement Goal with a ten-year time horizon and a Children’s Education Goal with a four-year time horizon, we’d construct a distinct portfolio for each goal.  The aggregation of both of these portfolios would comprise their total investment portfolio.  The reasons for this approach, is part of the “back to the basics” philosophy that HighView believes.  Regardless of the type of goal, it is our view that all client portfolios have some form of either current and/or future consumption requirement.  For more information on this approach, please click here.

As client portfolios “march through time” the Goals-Based Portfolios can reach different levels of relative performance & valuation.  For this reason, HighView will discuss with clients, from time-to-time, the shift of assets, where possible, from goals-based portfolios that have exceeded objectives to goals-based portfolios that require more funding to satisfy investment objectives.   We refer to these asset shifts as “Goals Rebalances”

2. Mandate Rebalances:

Each client’s portfolio is comprised of a series of Investment Mandates, which are effectively the “building blocks” of each client’s portfolio.  Example of Investment Mandates include Canadian Bonds, Canadian Equities, Global Equities and Canadian Short-Term Bonds.  At HighView Financial Group, we believe that each Investment Mandate has a “purpose” for being included in a given client’s portfolio, the combination of which, are ultimately tied to the pursuit of each client’s investment objectives, matched against their unique tolerance for risk.

Each client’s IPS contains a “promise” as to what percentage targets we’ll manage each Investment Mandate as a percentage of their overall portfolio as well as how much variation we’ll permit around the percentage target.  For instance, let’s assume a client portfolio had two Investment Mandates – Canadian Bonds for 60% and Canadian Equities for 40%.  In this example, our promise to this client would be that we would target their portfolio to be comprised of 60% Canadian Bonds and 40% Canadian Equities.  Given the reality, though, of shifts in capital market prices, as well as transactions within portfolio – such as client income distributions, etc. — it’s common for the relative valuation of both the Canadian Bond and Canadian Equity portions of the portfolio to change.

Based upon extensive historical research and practical experience, our approach at HighView is to rebalance Investment Mandates when they shift by 20% on a relative basis.  Using the example above, this means that we’d rebalance this client’s portfolio back to its target weights of 60% Canadian Bonds & 40% Canadian Equities if the Canadian Bonds moved up/down by 12% of their target (ie: to 72% or to 48%) or the Canadian Equities moved up/down by 8% (ie: to 48% or to 32%).  Our rationale for this approach will be a subject of a future article.

3. Security Rebalances:

At HighView Financial Group, each Investment Mandate has a “single” Investment Manager that has been engaged by HighView.  Although we conduct a rigorous Investment Manager Search & Due Diligence Process, once engaged we establish a Statement of Investment Policy & Goals with each Investment Manager.  This document, which is similar to an Investment Policy Statement, spells-out the detailed terms as to how each Investment Manager will operate our Investment Mandate.  Within each Investment Mandate, each Investment Manager is ultimately selecting a set of prudently researched investment securities, typically either equities and/or fixed income securities.  As part of their ongoing portfolio risk management processes, each Investment Manager has a targeted percentage weight of each security within their Investment Mandate.  Although it varies by Investment Mandate, each Investment Manager employs an ongoing process of “security rebalances” which happens when individual securities become overvalued or undervalued.

Portfolio Risk Management:

This HighView Portfolio Monitoring Process provides three advantages to investor clients:

1. Policy Adherence –> It forces ongoing adherence to each client’s customized Investment Policy Statement.

2. Risk Mitigation –> It causes client assets to shift from overvalued areas of their portfolio to undervalued areas.

3. Goals Focus –> It keeps client & Portfolio Manager focused on the purpose of the money….which is the diligent pursuit of each investor’s goals!

About Mark Barnicutt

As HighView’s President, CEO, and Co-Founder, Mark Barnicutt is knowledgeable in all major functional areas of the family wealth business. He is an expert in wealth management, leading HighView with over 25 years of experience in the industry.
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