Thank you to all who attended this year’s Annual Update at the Royal Vancouver Yacht Club, and helped make it a great success. For those who couldn’t make it, we would like to take this opportunity to sincerely thank you for your business and support.
The past quarter saw the return of volatility in financial markets. With volatility comes fear, and with fear comes selling. The question is: Is now the time to sell? Or is it next week? And if we sell now, can we buy back at a lower price in the future? What we are talking about is market timing, and the problem with market timing is not only do we need to determine when to sell; we need to determine when to buy back. Determining the right time to buy is even more difficult than the right time to sell.
The Wall Street Journal recently referenced a study from Dalbar, Inc., that found the average US investor in funds underperformed the S&P 500 by 7.4% annually over the past 30 years. The cause? Investors sell when things are bad, and buy after a period of good performance. This “buy-high, sell-low” behavior, causes investors in a typical fund to have a lower average return than the fund itself. A good example is the Fidelity Magellan fund run by Peter Lynch from 1977 to 1990. Fidelity found that their average investor actually lost money during this period even though the fund delivered an amazing 29% average annual return! How was this possible? According to Fidelity, investors sell during periods of poor performance and buy in after periods of success.
Chasing performance is an affliction of many investors. It is something we try to help our clients avoid. There’s an old adage worth repeating: What’s important is time in the market, not timing the market.
ZLC Wealth was founded in April 2000 with idea of delivering prudent, conservative investment management. The most important thing we do is help our clients find the right managers to meet the investment objectives and risk tolerances of long-term investors. We rely on good management, not market timing. The true capital allocators are our managers. Their funds are not individual static investments but are mixes of assets actively managed by the best capital allocators we know.
Canadian Securities Administrators now require us to address the topic of “benchmarks”.
Investment benchmarks are measure of the return generated by a specific asset class over a given period. They are often referred to as an “index” since this is their most common form – the S&P/TSX for Canadian stocks, the DEX Universe for Canadian bonds, or the S&P 500 for U.S. stocks. Interestingly, the Dow Jones Industrial Average is, in contrast, an “average”. To be relevant, a benchmark should replicate the security or portfolio as closely as possible. For a portfolio composed of securities from several asset classes, the appropriate benchmark may be a blend of indices weighted to the portfolio’s asset mix.
Comparing a portfolio’s performance to an appropriate benchmark can be a useful exercise for monitoring purposes, and can help investors determine if their investment approach is delivering the desired results. Benchmarks can also help investors develop realistic investment expectations.
We have traditionally not included benchmarks in our client statements as we have always focused on maximizing absolute returns, not just returns relative to a benchmark. However, Vertex One does publish their returns measured against benchmarks. Matt and John’s funds compare very favorably to their benchmarks:
– Vertex Managed Value Portfolio has produced a 15-year average compound returns of 9.8% (after all fees), higher than both the S&P/TSX Index of 7.7% and the S&P 500 Total Return Index in Canadian dollars of 3.0% for the same period.*
– Vertex Fund has done even better with 15-year compound returns of 15.1% versus the same benchmarks above.*
– Vertex Strategic Income Fund has produced a 3-year average compound return of 9.5% versus 4.4% for its benchmark for the same period. Its benchmark is a blend of 60% DEX Mid Term Total Return Bond Index, 20% S&P/TSX Preferred Share Index, and 20% S&P/TSX Composite Total Return Index. **
*Returns shown are for Class A shares for the period of September 30, 2014. ZLC Wealth is owned 25% by Vertex One Asset Management. The funds are not guaranteed; their values change frequently and past performance may not be repeated.
**Returns shown are for Class F shares for the period of September 30, 2014. ZLC Wealth is owned 25% by Vertex One Asset Management. The funds are not guaranteed; their values change frequently and past performance may not be repeated.
If you have any questions about benchmarks or anything else, our team – Francesca, Christine, Chen, Lisa, Tomas, and I – are happy to take the call!