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Making improvements: Updating our portfolio strategy to better achieve your financial goals


A lot of change can happen in 10 years. For the modern investor, the industry has grown and evolved considerably. There are more investment options available today than ever before. For example, we've seen the popularization of passive investing, the rise of alternative, private and other institutional-quality investment opportunities. Even tax rules have changed, impacting what assets may be best suited for your portfolio.

In order to meaningfully include these new investment considerations and properly balance returns, diversification and risk, we are evolving the strategy we use to construct your portfolios. We are fortifying and modernizing our approach to strategic asset allocation by introducing the new and improved MD Precision Portfolio Strategy.

Strategic asset allocation is the foundation of your portfolio

Strategic asset allocation (SAA) is the long-term asset mix of your portfolio that is typically determined based on your investment goals, comfort with risk and the amount of time you have to invest. Generally speaking, as your portfolio grows and fluctuates, it's rebalanced to maintain the strategic asset allocation mix so that your portfolio remains aligned with you goals, risk tolerance and time horizon.

In short, as we develop your financial plan, we learn more about your goals and objectives and line those up with a portfolio that will help you meet those objectives.

If your portfolio were a house, the SAA would be your foundation—it's not the glamorous thing people typically talk about or show off about their homes, but it is the central piece of infrastructure that quietly works away to keep everything in together.

This year, we're upgrading that foundation.

Adding meaningful diversification

Previously when constructing the right asset mix, our model would use the return expectations for various asset classes to come up with the optimal portfolio for your needs. Mathematically you got a portfolio that is expected to yield the best return for a set amount of risk. Return expectations, however, are not perfect. There is some variability from even the best estimates over time.

Going forward, we will balance this “optimal portfolio" approach with an added dimension—a diversified, well distributed risk approach. The result is a portfolio which yields similar returns per unit of risk as the optimal portfolio, but does so being much more diversified across asset classes.

Our goal is to balance risk across your portfolio, making it less sensitive to the possibility that some asset classes won't perform as expected. We've achieved a nice balance between a portfolio that is still quite efficient (maximum return for a given level of risk), but much more robust and diversified across that basket of available asset classes.

Modernizing asset allocation

As we discussed earlier, the modern investor has a wide variety of investment options at their disposal. Updating our strategy allows for the intelligent consideration and addition of different opportunities like the decision to be an active or passive investor (or both!), or to invest in alternative investments, private investments and other institutional grade investment opportunities.

Customization and choice are at an all-time high and making use of these new and exciting investment opportunities should not be an afterthought. Our new strategy can implement them from the get-go, building portfolios that we believe will ultimately provide better outcomes for you.

Reducing home bias and other expected adjustments

As our new strategy is implemented, you'll see a reduction in “home bias" or a reduction to our Canadian equity allocation. Our new strategy aims to achieve a more balanced distribution of risk. As a result, you'll see some Canadian equity allocation move to be invested in U.S., international and emerging market equities. It's important to be clear that this is not a short-term, tactical change resulting from a change in our expectations for Canadian equities. We are making these changes to provide you with a more diversified approach to risk.

For those invested in active fulfillment portfolios, you'll see a slight increase in our allocation to equities over fixed income. We are also recalibrating our bond portfolios to make better use of duration (the sensitivity of a bonds price to interest rate changes) in a rising interest rate environment.

Creating additional value by lowering fees

To create additional value for our clients, we are also lowering fees so that our strategy updates—increased exposure to foreign equities and potentially increase exposure to equities overall—do not create any additional costs. Combined with our expected return benefits, we believe our clients will be better off as a result.

As we upgrade our portfolio strategy, it may be a good time to review your portfolio. To learn more about the MD Precision Portfolio Strategy, the expected updates, or how your portfolio will be adjusted, please contact your MD Advisor.

About the Author

CRAIG MADDOCK, CFP, CFA, CIM, MBA, is Vice President, Senior Portfolio Manager and Head of the Multi-Asset Management team at MD Financial Management. He leads the team of portfolio managers and investment analysts responsible for managing the firm’s mutual funds and investment pools.

Profile Photo of Craig Maddock