Between 1926 and 2022, $1 invested in US large cap would have yielded a growth of $11,500 while the same dollar in US small cap would’ve netted you $28,700.
Growth in the economy asymmetrically benefits the small over the large. The most well-known large-cap companies also tend to follow the same themes, which can create overexposure (e.g. supply chains, customer profiles, partnerships, etc.).
Through small and mid-cap investments, we diverge from these overlapping themes to find better returns in neglected parts of the market.
In the 20-year period between 2003-2022, Denmark had the highest annualized returns of any country globally at 13.4%. This performance was followed by Australia, Sweden, and USA, in that order.
Canada ranked at #6 overall with an average return of 7.7%. If we look outside of our home country for growth, we’ll find that there is an abundant amount of opportunity for enhanced return and diversification.
We achieve exposure to these returns by researching and investing in North American companies which have strong international operations, giving us potential to capture international upside and cushion ourselves from North American-centric market volatility.
Most of the market return in recent history has been driven by the largest stocks. As inflation and interest rates return to historical averages, we believe value companies, with strong balance sheets and profitability, are better positioned to succeed.
We actively rebalance to reduce exposure to ‘trendy’ securities and invest in securities with a fairer price.
This can take one of three forms: purchasing new securities, adding funds to existing securities, or selling existing securities - we factor in the client’s current tax liability and personal goals to understand which approach is right for them.
Private equity, venture, and hedge fund exposure command higher returns because they are more illiquid than traditional investments.
We incorporate these into our clients’ portfolios to increase expected returns over a long-term horizon, since they often target innovation and don’t always necessitate greater risk.
Mutual funds have embedded, hidden fees which drastically reduce returns. These fees have a large, compounding effect over time.
We only build portfolios with a combination of individual securities and low-cost ETFs, with no transaction costs.
Bedrock: Protecting Your Principal
You take on unnecessary risk if you try to predict which stock, industry, or asset class will perform well over a large span of time. Almost no one can do this.
To protect your capital, we research how our investments will react differently to changing economic and political conditions. We don’t try to predict what the world will do - we just protect against what it might.
Having this diversification reduces correlation. We want to avoid everything going up together because that would mean that it will also come down together.
We do this to smooth your portfolio’s volatility and reduce losses. As an example, to recover a 20% loss, you will need to gain 25% or more. We make sure you don’t find yourself here in the first place.
Rebalancing is a control so that your portfolio can remain at your asset allocation target, and reduce concentration risk + emotional decisions.
We rebalance systematically to counteract our clients’ built-in biases - feeling like they want to hold on to an overvalued stock a little longer or thinking that a historically successful stock is objectively a good purchase today, are both common examples.
Adding bonds to a portfolio can enable you to save for a major purchase coming up while avoiding losing out to inflation.
Discounted bonds also have a unique feature where most of their return is capital gains vs. interest income (capital gains have more favorable tax treatment).
Paper returns are great, but post-tax returns are what end up in your pocket. We help you become tax-efficient in four ways:
We make sure each client takes full advantage of all registered accounts available to them (TFSA, RRSP, FHSA, RESP, Spousal RRSP, etc.) and minimize their tax liability.
We strategically place certain securities in certain accounts. Some assets are less tax-efficient than others because of the tax treatment of income types: dividends, capital gains, and interest. Optimizing this placement is a simple win to increase the compounding effects of their capital early on.
Realizing gains should not only be based on price appreciation, but also with respect to the individual’s tax situation. We help our clients choose when to exercise these gains over one fiscal year, or many, depending on personal goals because each scenario will have a unique impact on them.
We monitor each portfolio for tax-loss harvesting opportunities (selling an investment at a loss and buying it back after 30 days). It is an important strategy to reduce the cost base of securities and ensure you take advantage of market movements.
In the last decade, low interest rates fueled a rise in valuations and business value was not attributed to company earnings or shareholder’s equity - growth equities outperformed value equities by an annualized ~3%.
Inflation and interest rates were low compared to several previous decades, giving high-growth businesses access to cheap money to succeed. Value companies did not perform as well.
Conversely, value companies outperformed growth companies from 1963-1990. Economic conditions are unpredictable and we believe that hedging against these unpredictable, long-dated changes is the right way to construct a portfolio and focus time on determining what companies have strong fundamentals instead.
