By Mark Barnicutt on September 29, 2010
Today, we had the opportunity to meet for an update with one of our investment managers: Dixon Mitchell. This Vancouver-based investment manager operates our Total Canadian Equity Mandate for our affluent families & institutional clients. We’ve had a long-standing relationship with Dixon Mitchell primarily because of the alignment of their philosophical beliefs and processes to the manner in which HighView manages our client wealth. Specifically, they are a “back to basics” investment firm that focuses on core and proven investment metrics such as price, cash flow, yield which seems to be a lost concept with so many money managers these days who perpetually chase relative performance. For this reason, Dixon Mitchell doesn’t have a strong institutional consultant following — which in our view is a good thing — but they have a very strong alignment with entrepreneurial wealth who connect and value money managers who speak their language of price, cash flow, yield and risk management.
During our meeting, one of their partners spoke about two types of investors: Return Seekers & Risk Managers.
In Dixon Mitchell’s view, Return Seekers have the following attributes:
• Which stock has the highest target price?
• What is the hottest sector right now?
• How can I make money?
In contrast, Risk Managers have the following characteristics:
• What is this stock worth if things go wrong?
• Will this company be larger, more profitable in 5 or 10 years’ time?
• Am I being compensated for the risk in owning this asset?
Unfortunately, most of the global investment industry is centred on “benchmark risk” or whether or not a manager “beats the market”. Instead, Dixon Mitchell believes that managers should focus on investment risk. For most clients, risks are cash flow oriented: assets are invested either to provide cash flow today or in the future. As a result, rather than matching equity assets to benchmark composition, most portfolios should be managed to offset cash flow liabilities.
Given Dixon Mitchell’s “back to basics” approach of investing, with a downside protection orientation, they are clearly a strong fit with investors who view themselves as Risk Managers. In our view, these are the investors who have worked hard to accumulate their wealth and don’t want to create it twice! They are seeking to preserve what they’ve built but seeking growth that is responsible.
Given the HighView perspective that risk can be controlled but not return, we clearly have a strong philosophical alignment with investment managers such as Dixon Mitchell. In fact, when constructing portfolios for our clients, we always talk about the potential future “behaviour” of their portfolio……in other words, the anticipated “ups-and-downs” of their portfolio. This is so important to helping clients ensure that they don’t just think about potential returns (ie: upside) but also the potential risk (ie: downside) to their portfolios. We call this “The Ride” and have written about it in another blog post on The Wealth Steward. To read it, please click here.
As a result, when we’re constructing portfolios for our clients, at HighView Financial Group, we believe that:
• Management of risk, not return, is the primary determinant in structuring a portfolio
• Risk and Return are directly correlated.
Risk
• Risks can only be managed if they are identified and understood
• Understanding risks involves assessing their probability and magnitude
• Risk of loss must be considered in terms of both income and capital
• The risk of losing money is far more important to clients than the risk of underperforming an index
• Loss avoidance is the primary risk metric to consider in designing an absolute return oriented portfolio.
• Excessive concentration exposes a portfolio to imprudent levels of risk
Returns
• Returns cannot be managed as they are a by-product of portfolio structure and process
• Returns must be considered in terms of both income and capital.
• Excessive diversification can be very dilutive to long-term investment results.
• Clients should have a bias toward absolute returns
• Net (after cost) returns are what really matter to clients.
All of this is not to say that Returns are not important — as they are — but an investor cannot talk about Return without also speaking about Risk…they are “two sides of the same coin“. As an example, simple mathematics proves the necessity of attempting to minimize loss. If a total 100% equity investment falls 20% over a given period, it will require a gain of 25% to return the investment to pre-loss value. In contrast, though, if the total 100% equity investment were reduced by 30% prior to the fall and then reinvested prior to the gain (granted, a perfect scenario for the purposes of illustration), the gain required reduces to 16% to return the investment to pre-loss value. This is a very important concept in today’s world of relative investing, as portfolios with strong downside/risk management protection preserve capital and can help contribute to better longer-term total returns for clients. In other words, if investors avoid “the torpedos“, they don’t have to be aggressive on the “upside” in order to achieve attractive overall total returns!
So, if you’re an investor, the next time you’re chatting with your Financial Advisor, ask yourself: “Are you a Return Seeker or a Risk Manager?“
- An Investment Fiduciary – The Integrity of Your Portfolio - January 24, 2024
- Future of Family Wealth Preservation: Virtual Family Offices - September 13, 2023
- 7 Reasons for Changing Your Investment Advisor - September 8, 2023
