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Growth versus preservation of capital: Can you have both?

Bill Harris, a partner and portfolio manager at Avenue Investment Management in Toronto.

Avenue Investment Management/Avenue Investment Management

If you had a million dollars, would you be satisfied or would you want more?

Suppose your every investment turned to gold – and your gold investments gained.

"That was easy," you might say, rubbing your hands as you eye your portfolio. "Now for the next million." You'd be feeling confident, even a little cocky. You'd want to take even bigger risks than before. And why not? After all, you've been right in the past.

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Hold it right there. You want to make more money, not make the same money over and over again. With markets roaring and fainting on alternate days, it wouldn't take long for your capital to shrink. Remember, if your investment drops 50 per cent in value, it has to rise by 100 per cent just to break even – not an easy feat.

Fortunately, having a million dollars of investable assets opens doors that are mostly closed to investors of more modest means – doors to the offices of professional money managers. For an annual fee, portfolio managers endeavour to balance growth and risk in a way you might find difficult, whether from lack of experience or simply lack of time.

If you are an entrepreneur, you'll understand the concept. Entrepreneurs take an idea and build a company around it, but at some point they have to hand over the reins to professional managers for the good of the company.

"It's great to have a million dollars and it feels good once you've got it," says Bill Harris, a partner and portfolio manager at Avenue Investment Management in Toronto. "But it's not that much money. You really want to hold on to it." The firm manages portfolios for people with $500,000 or more to invest and charges a fee of 1.5 per cent. Its rate of return since inception in 2004 is roughly 7 per cent a year.

Suppose you are depending on your investments to support you in retirement. That could be a long time, Mr. Harris points out. Take that million dollars and spread it over 30 years, for example, and the most you can spend each year without risking your principal is 4 per cent, he says. "You can spend $40,000 a year." That's not the style of living to which you've become accustomed.

Another door that opens to people with at least $1-million to invest is on the complex and sometimes very profitable world of alternative investments, in particular long-short equity and fixed income strategies. While some hedge fund managers aim to shoot the lights out, the best of these strategies seeks the greatest possible return with the least possible risk.

Unfortunately, the financial bar can be high, with top hedge fund managers closing their funds to new investors and top money managers upping the minimum investment a million dollars at a time until only the very wealthy, and pension funds, can take part.

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Other money management firms take a more democratic approach, offering a combination of hedge funds for big investors, closed-end hedge funds that trade like stocks on the stock exchange, and mutual funds, among them Front Street Capital of Toronto.

"These are challenging times for investors and for portfolio managers," says Gary Selke, president and chief executive of Front Street. The firm's Front Street Strategic Yield Fund Ltd. is up about 7 per cent year-to-date. Add to that the fund's tax-deferred distribution of 5 per cent a year and the total return is about 12 per cent. The closed-ended fund trades like a stock on the Toronto Stock Exchange.

"That's a spectacularly good result in a difficult market environment – and with low volatility," Mr. Selke says.

While index fund and exchange traded funds are gaining in appeal, "we try to provide clients actively managed portfolios that are not mirroring the index," Mr. Selke says. The firm offers three closed-end funds, nine mutual funds and two hedge funds, the Front Street Canadian Energy Resource Fund and the Front Street Canadian Hedge.

So in the tug of war between wanting more (growth) and wanting to hang on to what you have (capital preservation), can you have both?

"It's always possible and it's always challenging," Mr. Selke says.

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Indeed, the relatively new Front Street Growth and Income Fund, a mutual fund managed by Prakash Hariharan, aims to do just that, combining shares of growth companies with high-yield bonds and other securities, using option-writing strategies to generate premium income. Front Street says the fund is suitable for investors seeking yield and long-term capital growth with a low to medium risk tolerance.

The fund aims to pay out 5 per cent a year and grow its net asset value by 20 per cent over the next two years. It avoids stocks that comprise the big stock indices.

"We got interested on account of the massive downdraft in the equity market in 2008," Mr. Hariharan said in an interview. "This is a great opportunity to get into a growth/income vehicle in a tax-efficient manner." The fund is part of a corporate class group that allows investors to switch from one fund to another without triggering taxes.

Finding a money manager can be a big challenge

People with substantial sums to invest have the option of hiring an independent portfolio manager for an annual fee. Choosing a suitable manager can be a challenge.

Weigh House Investor Services (, an independent financial planning firm that sells no products, has a service that will help you choose a suitable investment manager to implement your portfolio plan and select securities for your account. Weigh House looks at the manager's experience and credentials, evaluates its investment philosophy and strategy and assesses its risk management procedures. Then it weighs these against your needs.

"Only capable and compatible managers are invited to compete for your business," the firm says on its website. Its fees are paid by you, not the managers. Also for a fee, Weigh House offers financial planning, portfolio assessment and investment monitoring programs.

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