How Things Change, But Line Items Look the Same



Bryson Milley

Financial Advisor & Portfolio Manager


How Things Change, But Line Items Look the SameOver the past 30 to 40 years, investment management styles and techniques have changed quite a bit. In the past, your investment advice would be from a stock broker who would watch stock performance to decide which stocks to buy/sell/hold. And you were lucky if you could hold as many as 25 different names in your portfolio. 

The concerning issues are how much true analysis is being done, how tied the broker’s company is to the specific stock, and the fact that the broker is only paid when there is a transaction… no activity, no income for the broker. 

For those with substantial sums of money, they could hire an investment management firm which would add the ability to do in-depth analysis of the companies to further strengthen the buy/sell/hold decisions. Instead of transaction commissions, they are paid a flat fee (dollars or as a percentage) for their services. It made for better analysis, and a more clear understanding of what was happening. 

Fast-forward to today and what was historically reserved for only the wealthy is now available to the masses. Anyone and everyone with $500 or more to invest can use professional investment management companies. This is the investment fund industry. And over the past 30+ years, this has evolved into an extremely competitive, detailed industry. Investment managers are now expected to be extremely intelligent financial people and to have a team of experts and analysts, all of whom travel tens of thousands of miles each year in their investigation of companies to determine their worth and make the key investment recommendations of whether to buy, sell, or hold a company. 

The reason I bring this up is because I had a client say the other day, "Bryson, I look at my portfolio statements over the past number of years and I see that my portfolio has not really changed, the line items are the same. But is it really the same portfolio as a number of years ago?" A very astute question... and the answer was “No”. 

He was correct in his assessment that the line items on his portfolio statements were the same… but what made up those line items was very different. Behind each line item were anywhere from 40-125 different holdings, each falling within a given mandate that the management team are charged to follow. Combined, this client had 6 different line items, each with a different reason for being in the portfolio (Canadian-focused equity, global blue chip equity, global small companies, bonds, etc.), and together there were over 250 different holdings. When we look through the history of each line item, the effect of the management team can be seen. 

Many investment management teams will turn over anywhere from 25-40% of their portfolio in a given year. This means that they will watch a company's stock/bond price move and, at certain points, they will decide it is time to make a change (positively or negatively). As economic metrics change, so will the portfolio. 

An example I can give is that, during the early 2000s, I watched one global equity manager make an effort to stay away from technology stocks. His mandate was steady capital growth in big, blue-chip equities, and technology stocks did not fit this mandate. Instead, he was heavily invested in global banks, utilities, railways, etc. His portfolio numbers did not look very good from 1999 to 2001, but he looked really good from 2001-2006. The irony is that there a number of big, blue chip technology companies in his portfolio now. Many of the tech companies that were small, growth-focused companies 15 years ago are now large, service-oriented companies, where their stock prices are much steadier, and some even pay dividends... which fit perfectly into his investment mandate. 

The example above is not in isolation; there are many stories with similar themes. Other examples can be based on global economic changes: North America versus Europe or Asia, the price of real estate, and/or the repayment abilities of one country versus another. Exchange Traded Funds (ETFs) and indices are not immune from this same conversation. Canada is not a good example of how an index/economy may change (we have been heavily focused on banks, energy, and mining companies for decades), but the US and Asian economies are. Many of these respective indexes see subtle changes over time. For instance, the S&P 500 in the US is no longer as much of a barometer of US economic strength as it is for global economic strength. This is because more than half of the S&P 500's revenue is derived from activities outside of the US. Think Coke or Microsoft. 

These trends are key to our investment management. If the manager is actively adjusting to the trend, or the ETF is evolving through the trend, and we agree the changes make sense for the portfolio, then we will not make a change to the line item in the client's account. It’s all part of what we are hired to do as we oversee, analyze, and give recommendations to our clients. We track, follow, analyze, and compare their investment decisions and outcomes against their peers to confirm who does it consistently well, and who does not. Not only do we follow third party information providers, but we meet individually with investment companies, the management teams, and respected independent economists to confirm our opinions. And as long as a manager's mandate remains relevant to our client's investment needs/portfolio, it is not uncommon for us to keep the holding in the portfolio for many years. 

Thus, the line items on client statements may be the same, but what makes up that line item may look very different from one period to the next. 
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