Take January to revisit portfolio

By Mark Noble | January 1, 2009 | Last updated on January 1, 2009
5 min read

Clients tend to view the New Year as a new beginning, so it’s a great time to revisit your client’s investment objectives as their portfolio values start to hover back near their pre-recession values.

Clients caught off guard by the financial crisis that bottomed-out in March have been well served by staying invested in equities and riskier assets. Most of the “easy” gains to be had in the stock market have now been made, according to most market forecasts for 2010. Clients with a high equity weighting could have a lot more to lose than gain.

A monthly rolling poll of 1,500 Canadians conducted by Scotiabank shows more than half of investors (53%) feel the economy has stabilized. This has led to a notable increase in the level of confidence in the market. According to the poll, one in five investors are planning to increase their investments in the coming year.

Andrew Pyle, a wealth advisor with Scotia McLeod in Peterborough, Ontario, says clients should probably have a cautious outlook for this coming year. He’s using January to meet with clients and revisit their risk tolerance and investment objectives.

Pyle says many clients want to recover their market losses, but having recouped the majority of their losses, he says they have to make a hard decision as to whether they are willing to take on the extra risk for moderately higher gains.

“Over the last two years there have been significant changes in how investors view the market. Right now, there is a stabilizing of investment confidence, but clients really look in the mirror with their advisor and ask ‘have my investment objectives changed?'” Pyle says. “Consider what has happened since March, as much as we were shocked by the downturn in 2008 and 2009, I’ve been just as shocked at the recovery — this has been an unprecedented. With many clients back to levels where they wanted to be, do they understand what they’re going to risk?

“The equity market may improve for another few months as forecasted, but it would not be a surprise to have a pullback in the market sometime next summer.”

Pyle expects portfolio rebalancing to become a much more frequent occurrence over the next few years, due to an environment of intense market volatility. This last year has shown that shifts in market sentiment can be drastic, and even more troubling, they happen quickly. Pyle says clients need portfolios that can adapt.

“This is not a buy-and-hold environment anymore. This is an environment where you should probably be looking at a portfolio rebalance at least twice of year,” he says. “You should be looking at portfolios on probably a monthly or quarterly basis. In the next quarter, if equity markets add another 10 or 20 percentage points, the risk of a pullback drastically increases.”

The lingering threat of inflation

The impending risk of inflation is at the forefront of many investment conversations, giving rise to interest rate speculation: When will central banks hike rates, and how far will they go? Peruse the tomes of economic reports put out at year end and you’ll find most market strategists expect an increase sometime in mid-to-late 2010. How bad will it be is a topic of hot debate.

Star fund manager and founder of Sprott Asset Management, Eric Sprott is expecting a catastrophe, according to his latest market insight report released on Tuesday.

Sprott deconstructed the December 2009 U.S. Treasury bulletin, to determine who is buying the vast quantities of U.S. Treasuries that have been issued. From the data, Sprott essentially accuses the U.S. Federal Reserve of running a Ponzi scheme by buying its own treasuries in order to fund the country’s burgeoning deficit.

“The United States increased the public debt by $1.885 trillion dollars in fiscal 2009. So who bought all the new Treasury securities to finance the massive increase in expenditures?” Sprott asks.

According to his commentary, there were three distinct groups that increased their Treasury holdings in 2009. The first was made up of foreign and international buyers, who purchased $697.5 billion worth of Treasuries in fiscal 2009 — representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself, which increased its Treasury holdings by $286 billion in 2009, representing a 60% increase year-over-year. The third group was identified as “other investors” who represented approximately $510 billion in Treasury purchases, more than five times the amount purchased in 2008.

“The Treasury Bulletin identifies other investors as consisting of individuals, government-sponsored enterprises (GSE), brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, individuals and other investors,” Sprott writes. “Within this grouping, the GSE’s were small buyers of a mere $5 billion this year; broker and dealers were sellers of almost $80 billion; commercial banking were buyers of approximately $80 billion; corporate and non-corporate businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion. So who really picked up the tab? To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the ‘household sector’.”

Sprott says the household sector bought $528.7 billion worth of Treasuries in 2009, which means they own more Treasuries than the Federal Reserve itself.

Two conclusions could be made of this data. Either the U.S. deficit is being funded by highly leveraged American households or by the Fed itself. Sprott concludes it’s the latter, since the household sector is a catch-all category.

“So to answer the question — who is the Household Sector? They are a PHANTOM,” Sprott writes. “They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report,” Sprott says. “We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of U.S. debt are no longer buying, and it amazes us that the U.S. can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.”

Ponzi scheme or not, inflation is a real threat to the end investor, Pyle says. As a result he’s counseling his clients to prepare their portfolios for that eventuality.

“Today’s rates are still low, there is a tendency for investors to chase a higher yield by going longer term on the debt they hold — that’s probably not a prudent thing to do,” he says.

For equity investments, Pyle is favoring high dividend yielding blue chip stocks. These stocks tend to have a lower risk profile, and can provide a steady stream of return on top of potential moderate gains.

“That’s been a rule of thumb all the way through. If you’re going to be in the equity market, you do have to hold some substantial dividend-paying companies. These are companies that still crank out a dividend stream which gives you a partial offset to market volatility.”


Mark Noble