My Returns are Better than Yours!
Ludovic Siouffi - Jun 16, 2016
I met with a potential client the other day, and within a few minutes of seeing our portfolios, he said: “Well my performance is better than yours, so why would I need you?” He said it with such confidence that I was curious to learn more, and if it was actually true.
Now before I continue it’s important to note that performance is merely one part of all the metrics we use to differentiate ourselves from our competitors. Although important to know that you’re doing well financially for your clients, there are plenty of qualitative metrics that we excel at, which are hard to measure. For example, we’re always available to our clients and try to be proactive on keeping them up to date with their portfolios. We help deal with family members when a client passes away and has to deal with probate, and the list goes on and on.
Although these are all important factors to consider, this potential client was squarely focused on the performance numbers, and that’s it. So here is how it all played out.
As of the end of March, our growth portfolio was pretty much flat for the year, up 0.16%, while his portfolio was up approximately 25%, in only 3 months. You don’t have to be an investment advisor to know that that’s a MASSIVE difference. By the same token, it’s also not fair to just look at 3 months and call it a day.
When he mentioned that he was already up 25% for the year, I right away knew 2 things; 1) his portfolio most definitely wasn’t just all large cap, dividend paying stocks, 2) his performance last year most probably wasn’t as great given the recent volatility.
There’s the kicker. In 2015 our Growth portfolio was up 7.88%, while his was down approx. -17%. So yes, there’s no question that his portfolio had done well in the short-term, but peel away the curtain, and look over the years past, and volatility was clear.
Although by March 31st, his and our portfolios were close in total value, his account had gone through a wild ride. That’s the key benefit to what we’re trying to show clients; growth, at a disciplined pace.
This leads me to an important lesson in financial metrics:
A loss is far more impactful than a gain.
This is one of my favorite charts, and the perfect way to showcase the previous statement.
Source: Picton Mahoney.
The chart above highlights something quite interesting. A 10% loss in your portfolio would mean that you need 11% return to get back to par. That difference in loss/return required grows exponentially the further you go down to the right. To the extreme, an 80% loss in your portfolio, which some may have suffered during the 2008 financial meltdown, would mean that you now need a +223% return, just to get back to even.
To put the previous into context, if you suffered a 70% loss in your portfolio, it would take 15 years and 8 months to get back to where you started. That assumes an 8% annual rate of return.
The moral of the story is this; slow and steady growth wins the race. Beyond strong annual returns, here are two important variables my team and I look for when adding a portfolio manager to our offering:
Look for “Upside and Downside Capture” figures. This simple measure lets you know the portfolio manager’s performance versus the index, in either an up-trend, or downturn.
For example, let’s assume a portfolio manager has a down-side capture of 60%. In this scenario, the portfolio only declined by 60% versus the index during that period of time. That’s great downside protection.
The lower the downside ratio, and higher the upside percentage ratio is, the better.
One easy and universal measure of volatility is standard deviation. This percentage measures how often the performance deviates from its mean. The higher the percentage, the more volatility and/or deviation there has historically been.
For example, take two separate portfolio managers with identical mandates and performance. However, one of them has a standard deviation of 12% and the other of 6%. In this simple scenario, it would be fair to say that the PM with the 6% of volatility achieved the same level of returns with significantly less risk and volatility, then the one with 12%.
The lower the standard deviation percentage is, the lower the amount of volatility within the portfolio will be, resulting in smoother returns.
You’re probably curious about whether or not he became a client. The answer is yes. With retirement around the corner, he was getting tired of watching his portfolio on a daily basis, and wanted ideas around capital preservation versus growth.
In conclusion, performance is great, but don’t be shy to ask more questions and to dig deeper. Ask for referrals, understand the risks and make sure all costs are properly outlined, so that there are no surprises down the road when you need to sell.
All the best,
Ludovic Siouffi, MBA, CIM, RIAC
Canaccord Genuity Corp.
The comments and opinions expressed in this newsletter are solely the work of Ludovic Siouffi, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author Ludovic Siouffi does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.