HOW DOES THE GUIDED PORTFOLIO PROCESS FIT INTO OUR DISCIPLINED INVESTMENT APPROACH?

Utilizing a non-discretionary disciplined investment approach reduces risk, improves your control over the investment process, and, essentially, ensures peace of mind.

Developing the Investment Policy Statement:  Initially, CW Delorme & Associates of RBC Dominion Securities builds a comprehensive investor profile based on your unique circumstances and, consequently, creates a personalized investment policy statement. The investment policy statement will serve as the framework for all subsequent investment decisions, thereby becoming your personal investment roadmap. Your investor profile is developed based upon your individual income requirements, capital growth expectations, time horizon, risk tolerance, tax circumstances, and any other relevant criteria and/or relevant constraints.  Your investment policy statement will be reviewed on a regular basis dependent on your unique needs, and will duly reflect any changes in your personal and financial circumstances.

Designing the Portfolio:  The team prepares a target portfolio using the investment policy statement. The design of the portfolio is a synthesis of your investment objectives and the current outlook on capital markets. Upon reaching an agreement on the target portfolio composition, the team develops a transition strategy to minimize the cost of portfolio redesign.

Asset Allocation:  The team determines the appropriate asset mix for your portfolio by incorporating our strategy committees current recommendations into your investor profile. A target asset mix is set along with minimum and maximum ranges for each asset class.

Cash & Cash Equivalents:  T-bills, bankers acceptance notes, and money market funds are used to maintain necessary liquidity and to ensure capital preservation.

Fixed Income:  A laddered bond portfolio with an emphasis on quality issuers is the Team preferred starting point.  Federal and provincial government bonds along with select corporate bonds will set the foundation of the income portion of your Portfolio.  The duration of the Portfolio is actively managed to take advantage of any changes in the bond yield curve.

Equities:  The Guided Portfolio Process provides the ongoing guidance required to ensure that your equity portfolio always reflects current and anticipated market conditions. The Guided Portfolio Process governs both Canadian and U.S. equities. Select third party managers may be used in conjunction with exchange-traded funds (ETFs) for global exposure. ETFs may also be used for actively managing equity exposure. Real estate investment trusts and income trusts may also be included based on income needs and cash flow requirements.

Portfolio Monitoring and Review: The starting point for any portfolio review is your investment policy statement, which is periodically updated to reflect any changes in your individual objectives, time horizon, or your level of risk tolerance. Asset mix is reviewed to ensure compliance with the parameters outlined in your investment policy statement. Individual investments are reviewed to ensure conformity with our strategy committees recommendations (Guided Portfolio Process) and congruence with your investor profile.

THE GUIDED PORTFOLIO PROCESS

Comprehensive Solution for Managing Canadian and U.S. Equity Portfolios

The Guided Portfolio Process (GPP) was developed by our Toronto-based Investment Strategy Committee to provide our clients with an actionable and easy to use tool for the ongoing management of equity investments.  The GPP, which has an impressive track record dating back to 1984, is the synthesis of top-down (big picture) analysis, bottom-up analysis of individual securities, and the daily monitoring of stock holdings.  The result is streamlined system that determines what to buy, relative weightings of holdings, and most importantly what and when to sell.

Top-down Analysis

Every quarter, our top-down strategy process forecasts the key variables on which our macroeconomic view is based: the expected direction of interest rate moves, the level of economic growth, the level and growth of corporate earnings and, the prevailing valuations of equity markets. This process forms the foundation for the recommended sector over-weights and under-weights within equity portfolios.

We then assess the underlying fundamentals for each sector. Our process considers relevant factors such as valuation and the appropriate industry dynamics. These factors are measured both on their own, and relative to other sectors, taking into consideration our economic forecast. We utilize the 10 sectors outlined in the Global Industrial Classification Standards and followed by Standard and Poors, as seen from the table below.

Industrial Sectors

  • Financials
  • Telecommunication Services
  • Utilities
  • Consumer Discretionary
  • Consumer Staples
  • Health Care
  • Industrials
  • Technology
  • Materials
  • Energy

Our portfolio consists of 20 stock positions plus one cash position. For every 5% that a sector comprises of the Standard and Poors 500 index, that sector is entitled to 1 stock position within the portfolio. Consider the following examples:

The Health Care sector is approximately 14% the Standard and Poors 500. If the sector were to be represented at market weight, 3 stocks out of 20 would be devoted to Health Care.  We limit the degree of sector bets to 50% above or below market-weight, subject to rounding at our discretion. In the Health Care example, at the maximum over-weight there could be as many as 5 stocks and at the maximum under-weight there might be as few as 1.

For sectors where the market-weight is less than 5%, market-weight is considered to be 1 stock and the allowable range would be 0 to 2 stocks.

Bottom-up Analysis

Our bottom-up stock selection procedure is multi-disciplinary and uses only the Standard & Poors 500 and the stocks in the Toronto Stock Exchange / Standard & Poors Composite.  Together, this represents a universe of approximately 750 stocks. Each stock is scored by the following three disciplines:

Fundamental Score:  Using a variety of fundamental analytical resources available to RBC Global Investment Management, each stock is assigned a fundamental score. This takes into consideration factors such as the relative attractiveness of different companies business models within an industry, the strength and focus of their products, the depth and strength of management, the health of a companys balance sheet, its ability to generate free cash flow and the relative attractiveness of various companies valuations.

Technical Score:  Each stock receives a technical score that attempts to capture the longer-term strength of both its absolute trend and relative trend against the stock market. This score also incorporates a momentum indicator of both absolute and relative strength designed to be a leading indicator of future trend changes.

Quantitative Score:  A proprietary objective screen in which a model of past financial performance coupled with other inputs, like estimate revisions, is used to form a cumulative rank of individual growth, momentum, value and predictability scores:

Value:  Companies whose share prices are relatively low compared to different measures of their fundamental value;
Growth:  Companies that have shown attractive earnings and dividend growth and returns on equity through time;
Momentum:  Companies that are currently delivering strong earnings and revenue improvements;
Predictability:  Companies that have exhibited a high degree of earnings stability through time.

Stocks that score well across the three disciplines form the pool of candidates for final selection.

Sell Discipline

Importantly, our sell discipline is very well defined and unambiguous:

Stocks are monitored on an ongoing basis from a fundamental perspective. A change in the minimum fundamental score or a change in the perceived risk/return characteristics results in an immediate sale;

At the end of each month, the technical score is revisited focusing on minimum levels of absolute or relative strength as determined by our proprietary model. Deterioration in this score causes removal;

The number of stocks positioned in each sector is revisited each quarter. A change in industry outlook that triggers a change in the number of stocks allocated to that sector would cause a sale;

Each quarter, the three discipline scores are determined for each stock and those exhibiting deterioration in their scores are removed.

It is the intention of the process to be fully invested. However, in the event of a sell signal, we will be in contact to discuss what actions should be taken.

  • We could sell the security at the time of removal and replace it with another company in the same sector. The replacement trade does not have to take place at the exact time ofthe removal of the previous stock;
  • We could hold the stock until the next quarterly update or a more timely point for sale;
  • We could sell the stock and hold the proceeds in cash until the next quarterly update.

The Guided Portfolio Process Summary

Determine the number of stocks to be included in each of the four sectors in your portfolio based on the current recommendations for the quarter.  This reflects our assessment of which sectors offer the best potential and adapts the portfolio in a changing environment.

  • Select individual stocks to include in each of the four sectors.  The total number of stocks should add up to 20.  This ensures that the portfolio always owns stocks that are highly ranked.
  • During the quarter, sell any stocks that are downgraded to a 3 (Neutral) or less, providing a sell discipline that will assist in dealing promptly and decisively with any stocks whose outlook deteriorates.  This forces you to deal with negative developments promptly and eliminates one of the most common mistakes in personal investment management: emotion.
  • At the beginning of the new quarter, adjust the portfolio to match any changes in the sector allocation recommendations from the Strategy Portfolio Advisory Group.
  • The Guided Portfolio Process is non-discretionary in nature, thereby enabling clients to participate in all aspects of the decision making process.  Following the Guided Portfolio Process facilitates client education and ensures regular contact between client and advisor.

RBC Dominion Securities Inc. is a member company under RBC Investments. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. Investment Advisors are employees of RBC Dominion Securities Inc. Member CIPF. Trademark of Royal Bank of Canada. RBC Investments is a registered trademark of Royal Bank of Canada. Used under licence. Copyright 2003. All rights reserved.  Please note that rates are subject to change.