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Recommendations report card
Performance update of past advice

About twelve months ago, I outlined a number of suggestions within the context of an individual's portfolio strategy. While my advice is not intended to be for a one-year period, I may not be writing this stuff in five years. Hence, it's time to follow up last year's general strategy advice and specific fund picks.

Bonds

A year ago, many managers and fund companies were trotting out the Fed Model to make the case for stocks. Last year, I took the stance that investors and advisors should resist the urge to go overboard on stocks when good relative value could be found in corporate and high yield bonds - with less risk to boot.

Along with this suggestion, I recommended seven different corporate and high yield bond funds. The average gain, on a year-to-date basis (through November 30) was 9 percent. While four of the seven funds were above the median, the overall gain (assuming an equal weighting of all seven funds) was just about equal to the median high yield fund.

Within the bond asset class, this turned out to be a good call since government bonds posted a YTD return of just over 4 percent. Canadian stocks outperformed but not when compared to the pure high yield class of corporate bonds - which saw credit spreads cut roughly in half.

Stocks

Within the equity class, I made three main recommendations: overweight value managers, overweight overseas stocks vs. U.S., and to hold a 'normal' weight in Canadian small caps. Overall, these worked out okay.

I have to admit that I'd recommend that value managers get the lion's share of the equity money in portfolios no matter when you ask me. In 1999, I looked like a goofball. For the last three years I look smart. So, there is surely some luck on my side when this recommendation works out well - and against me when it doesn't.

Among mid-to-large cap Canadian stocks, value edged out growth - according to style indices tracked by Barra - by about 3.5 percentage points on a YTD basis. Using the same source, small caps handily outperformed their larger counterparts (by more than 15 percentage points). However, growth stocks outperformed value in the small cap space.

As for overseas stocks, the fall of the U.S. dollar - in and of itself - made this recommendation a good one in relative terms. In Canadian dollars, the S&P 500 has gained 0.4 percent through (YTD November 30) while the MSCI EAFE rose 6.2 percent. In last year's article, I listed the only five overseas stock funds I recommend. Through November 30, these funds posted an average gain of 7.8 percent (vs. 4.7 percent for the median).

Hard assets

Finally, I commented generally on the broad class of investments known as hard assets. I define the group as natural resources, base/precious metals, and real estate. While this group had already had a good run a year ago, I recommended a 'normal' weight in such assets. As it turned out, an overweight position would have worked out best as equally weighted holdings in resources, metals and real estate would have returned about 23 percent YTD.

Overall, my advice from a year ago worked out pretty well. However, there's always a bit of luck on my side and neither my advice - nor yours - should be evaluated over such a short period (that is, unless that's the intent). Annual updates should serve more as a progress report. And changes shouldn't be made only because things don't work out in twelve month. Rather, strategies should be reviewed from a fundamental standpoint to verify if it remains valid.

Have a safe and happy holiday season. Next article: January 9, 2004.

Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
 
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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...