A new approach to portfolio construction has us looking to slowly shift to a new way of investing.

The market is evolving on a daily basis.

If we don’t do the same, we are losing ground on a daily basis. We have devised a set of investment principles that we believe will lead to higher long-term returns. This set of investment principles does represent a paradigm shift from the more traditional portfolio theory we currently deploy in that there is a departure from the pre-set sector allocations and reliance on stocks domiciled predominantly in North America. Rather, we have decided on a focused approach that identifies 25 of our best ideas, regardless of sector or geography, that each receive a 4% allocation of your Equity sleeve.

This is in conjunction with our deploying of new investment tools not available to us in our previous work life in an attempt to increase performance across the board. From structured notes, to private debt and a more focused allocation in our fixed income sleeve, we continue to transition your assets to investments that we feel should add value to portfolios across the board.

At this point, returns have been encouraging to the point where we believe this process, which we began monitoring October 2nd, 2023, is working to the point where we are investing 100% of our investable assets. This is to ensure that the best interests of our clients are completely aligned with our own.

We will discuss the performance of this pilot project below, but keep in mind that the market has been steadily increasing since early November after experiencing a rather sharp drop in late October. We do not expect this type of performance to continue, nor do we believe it is an appropriate picture of the consistent performance you will experience in this portfolio. Currently, the performance has provided enough conviction in the process that will allow us to put our own money behind it.

The following performance reflects trades that have occurred since the October 2nd inception date until the time of this writing (market close on March 12th).

Currently outperforming all 4 of the indexes we are measuring ourselves against is, as stated above, enough that we feel confident to put our own money to work using this process. Given that the timeline is at this point, still less than 6 months, we will continue to monitor before releasing on a wide scale to client portfolios.

For the analytically inclined, or curious, the above picture gives an idea of the main metrics when used to gauge the risk/return of certain portfolios compared to that of the indexes. In this case, our Top 25 portfolio is being benchmarked against the S&P 500.

-The ‘alpha’ generated by our Top 25 is 4.06. Technically, anything above a 0 means that the portfolio has generated excess returns for the amount of risk it is taking against the benchmark.

-The ‘beta’ on the portfolio being 1.11 means that our Top 25 has less slightly more volatility than the benchmark (S&P500).

-The ‘sharpe ratio’ is a risk/return statistics that measures performance based on units of risk above the risk free rate. For every unit of risk that is added to the portfolio, the portfolio is returning 2.64 units of return.

-The upside and downside capture is a ratio that measures the performance of our Top 25 on a daily basis against the daily performance of the S&P. A simple example of this is as follows: When the S&P has a day when it is up 1%, our Top 25 portfolio is up 1.41%. On a day when the S&P is down 1%, our Top 25 portfolio is down .96%.

Bear in mind that as the time period of comparing against any index increases, typically, the Alpha will decrease and the disparity between the upside and downside capture will shrink. We will continue to provide monthly updates on this portfolio as we move forward.

Further to these statistics, we do have backdated information available upon request.

Now…..

One concern we are keenly aware of is from the client who wants to remain in the current portfolio or believes that the current portfolio they are employed in is a “worse” way of investing. This is not the case. This ‘Top 25’ we are working on is going to experience more volatility than the current portfolio. It is going to produce less income to investors than the current portfolio and is likely going to have vastly different swings in portfolio value during certain stretches of time. Our Top 25 is simply not for everyone.

It is not for investors in or around the age of retirement. Given our relatively short runway so far on this pilot project, we do not have years of volatility to give context on what is going to happen on the downside. We know we can preserve capital very efficiently in our current portfolio, which is a must for those who have constructed a finely tuned financial plan to carry them through retirement while maintaining a standard of living they are comfortable with. A sudden drop of 20% of their capital, while withdrawing to supplement income could have extreme consequences on the rest of your retirement years from a spending perspective.

This new Top 25 has sharpened us. We know the types of companies we are looking for. In a traditional, sector-based equity portfolio, we can zero in on quality companies, project more accurate price targets and execute buys and sells with more precision because of this new portfolio, not in spite of it.

See you next month!

This information has been prepared by James Hogan, who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.