Doug Cronk has shaken hands with the smart money. The Vancouver-based money manager has spent more than 25 years overseeing portfolios, most recently a $3-billion private pension plan. Now the chartered financial analyst wants to help you invest the same way. After all, the Canada Pension Plan posted a 7.4% annualized return during the past decade, while the Ontario Teachers’ Pension Plan earned 9.6%. Not too shabby, considering there was a massive market meltdown in the middle of that period. And while it’s true you can’t mimic all of the professional fund strategies unless you have a 12-figure portfolio, you can learn a lot from how they’re managed. “The broad principles still apply,” Cronk says.
HOW DOES YOUR PORTFOLIO COMPARE?
Average asset mix among the 130 Canadian pension funds belonging to the Pension Investment Association of Canada
For pension fund managers, the key to a perfect portfolio starts with the asset mix: targeted levels of stocks, bonds and other asset classes chosen based on their rate of return and risk level. “A mentor taught me long ago, if you do nothing else, get the asset allocation right,” says Cronk, who writes a blog called Institutional Investing for Individual Investors. Yet most investors only pay lip service to asset allocation. (Try naming five stocks in your portfolio. Easy, right? Now, quick: what’s your overall ratio of equities to fixed income?) “Everything else is irrelevant if you don’t get the mix right,” Cronk says.
As a starting point, he suggests investors look to the Pension Investment Association of Canada, whose members manage the portfolios of some 130 pension funds. PIAC publishes the average asset mix of its members’ plans on its website: At the end of 2012, it was roughly 35% bonds, 40% Canadian and foreign equities, 15% real estate and infrastructure, and 10% other assets.
The small allocation to Canadian stocks may come as a shock to folks who believe diversification means owning Tim Hortons as well as the Big Five banks. But Cronk reminds investors that our country represents less than 4% of the global equity market. “There’s so much opportunity out there, and it’s not just an opportunity for diversification. It’s return generation as well.”
While it’s true that huge pension funds own assets that are off limits to the rest of us, including tracts of forest, malls and parking lots, Cronk doesn’t recommend trying to mimic them by using ETFs purporting to track these asset classes. “With these ETFs you are not buying timberland or infrastructure, like a pension fund would. You’re just buying companies that manage them.” However, you can diversify with an ETF that holds real estate investment trusts.
Once you’ve got your mix right, focus on the long-term. Ask a pension fund manager how her portfolio is doing and the answer may be, “We’re on track to meet our funding liabilities for the next 75 years.” Put the same question to a retail investor and you might hear how this or that stock performed during the past six months.
Your time horizon should be longer than you think. A 50-year-old who plans to retire at 65 may think her horizon is 15 years, but her “funding liability” is more like 40 years or more because it needs to last until she dies. That kind of perspective can help you ignore short-term performance. “But it’s tough for an individual to see beyond five years,” Cronk says.
One way to stay focused is to have a written investment policy statement outlining your financial destination and the road you plan to take. “Regulators require every pension plan to have a formal investment policy,” Cronk says. “Yet few retail investors have one.” An IPS lays out your objectives, time horizon, risk tolerance, target asset mix and rebalancing scheduling. It should also specify whether anything is off limits, such as microcap stocks, illiquid investments, or leverage.
Most pension funds revisit their strategy every three years to assess whether they’re on track, Cronk says. They don’t adjust their asset allocation or investing strategy with every shift in the wind. “You should only change your strategy when your circumstances change,” says Cronk. “Usually it’s a life event—a birth, death, marriage, divorce, windfall, a big raise at work, or getting out of debt and having more free cash flow.”
For everything else, just stay the course.
10 WAYS TO BEAT LOW RETURNS
To keep your retirement goals on track, your investments need to grow even when the market is tepid. Here’s how to do that:
- Overweight your portfolio in equities: Stocks offer more risk than bonds. But with most bonds barely keeping up with inflation, stocks are also the best way to get higher returns.
- Seek out preferred stocks: Shares offering a fixed dividend are less volatile than common stock but have better returns than many bonds.
- Consider emerging markets: The BRIC countries have been beaten recently, but growth rates in the emerging world still offer plenty of opportunity for high returns.
- Reduce your investing costs: When margins are slim, costs should be too. The best time to demand lower fees from your adviser is when investment returns are tepid.
- Pay down your mortgage: Reducing your mortgage debt faster is a savvy financial move if your mortgage interest rate is outpacing your rate of investment return.
- Negotiate a better rate on your GICs: Shop around. Banks will offer better GIC rates if you haggle.
- Invest in real estate: Canada’s largest cities may be overheated, but there’s still plenty of real estate value to be had in mid-sized markets.
- Think like an institution: Don’t panic. Think about returns in years and decades, not in months.
- Buy utilities: With long, guaranteed contracts that promise steady dividends, utilities are stocks that act like bonds but often offer higher rates of return.
- Minimize your tax burden: Talk to an adviser and arrange your investments to make sure you’re not paying a penny more than you have to.