Skip to main content
the buy side

A meeting I had with a prospective client a few years ago has always stuck with me. She told me her adviser had done well for her in the previous five years, but had been letting her down more recently. After reviewing the data, we discovered the opposite was true. Her portfolio was actually holding up well in the current year relative to a weak market, but had performed poorly over the longer term – the return didn't nearly reflect the strength of the post tech-wreck markets.

Most investors know how a few of their individual stocks have done, some may have a sense of whether a mutual fund has been good or bad, but a vast majority have no idea how their overall portfolio has performed. This knowledge gap, which is especially evident at this time of year when clients are opening their year-end statements, is a unique and disappointing element of wealth management.

How has it come to be? There is plenty of blame to go around. Investment companies spend time and money selling products with the promise of better returns, but rarely show returns on their statements. Buy side firms (investment counsellors) do a better job than sell side dealers (brokers and banks), but no one is where they need to be. And neither are the clients. Few investors maintain any kind of discipline around monitoring their portfolio, despite the fact that their financial health depends on it.

In the face of this sad state of affairs, our firm just updated a report that helps clients assess their returns. It covers a wide range of topics, but some key themes permeate throughout.

This is important!

With the decline of the defined benefit pension plan, responsibility for investing is increasingly falling to the individual. To make the necessary decisions about asset mix and security selection, investors need to know how they're doing and what's working for them. Without an accurate assessment of the past, making future decisions is challenging to say the least.


As my story at the beginning illustrated, what's most often lacking when clients assess their results is an understanding of the environment their portfolio is operating in. They don't know if losing 2 per cent last year or earning 4 per cent over the last five years is good or bad.

Ideally, investors should construct personalized indexes. This default portfolio, or benchmark, would blend the returns from various market indexes in proportion to their particular long-term asset mixes (cash, GICs, bonds, Canadian stocks, foreign stocks). The investors then have something to compare their returns to, and assess how their strategies and hired help have done.

Unchanging criteria

Too often a fund is bought for long-term reasons and then judged by how it's done for the short time it's been in the portfolio. It doesn't make sense. If a fund was selected using the four Ps – philosophy, process, people and performance (long-term) – then it should be consistently measured against those same criteria.

This is particularly important for investments that have been weak performers. After all, not all components of the portfolio do well at the same time (if they do, then the portfolio is not properly diversified). Staying focused on the initial selection criteria will help investors determine how likely it is that the laggards will one day take their turn carrying the load. And importantly, it will give them the confidence to allocate money to these areas of weakness when their plan calls for it.

I should note that it's hard not to focus on the laggards when reviewing a portfolio, but it's important to also look critically at the current winners. Short-term glory shouldn't obscure the need for an ongoing assessment.

Action and inaction

In the end, a thorough portfolio review produces lots of grey. Black and white conclusions, such as consistently poor performance, personnel or philosophy changes, and excessive fees, are the exception, not the rule. Most performance gaps require more study and patience. On that note, I can say unequivocally after 28 years of observation and painful experience, the biggest weakness investors have is impatience. They don't wait long enough for their strategies to play out and as a result, sell when the assets are most attractive. In my view, a proper performance assessment helps foster that much-needed patience.