“Portfolios” is an ongoing series that discusses various asset-allocation options. This issue, Investment Executive speaks with Don Fraser, vice president at Connor Clark & Lunn Private Capital Ltd. in Toronto; Don MacDonald, portfolio manager at Goodman Private Wealth Management in Toronto; and Adam Pion, senior client advisor with UBS Bank (Canada) in Vancouver.



A husband and wife, both 50 years old, have $5 million in non-registered assets, which they acquired when they sold their business to a multinational firm.

The husband has taken a consulting job with the firm and will work in that position for five years, making $200,000 annually until he retires at age 55. At that time, the firm will pay him a pension of $100,000 a year in today’s dollars.

They have two houses worth $1 million in total, and no mortgage debt.

The couple would like to travel extensively; they view themselves as citizens of the world. They see themselves as risk-takers but do not want to suffer more than a 20% decline in the value of their assets at any given time. They believe they will need an annual income of $200,000 in today’s dollars (including pension income), or about $125,000 after taxes, from the time of the husband’s retirement until they are 95. They have children still in school and want to leave them an estate of $5 million in today’s dollars, including real estate.



With $5 million in assets, the couple shouldn’t have any financial problems. But it could be a stretch to leave an estate worth $5 million.

Fraser doesn’t think the couple can run two houses and travel extensively on $125,000 a year. He expects they will end up spending more and suggests they plan to withdraw $165,000 a year in today’s dollars instead.

Fraser also notes that most people find it too difficult emotionally to watch what another owner does with their company, which makes it unlikely the husband will stay with the new owner for five years. That means that, unless the husband has a firm contract that will provide him with $200,000 a year for five years — whether he’s working at the company or not — he will use up assets to meet his annual income goals. If, for example, he is paid for only one year and spends $165,000 a year, Fraser projects that at age 95, the couple will have only $800,000 in today’s dollars, excluding real estate. That assumes an average annual nominal return of 6% and a 3% real return.

The real estate could, however, fill in the gaps, depending on the annual growth in real estate values. If the value of the two houses rises 3% a year in real terms, the real estate could provide $3.7 million by 2051, which would result in a total estate of $4.4 million. An annual real increase of 2% would value the real estate at $2.4 million in today’s dollars in 2051, while a 1% a year gain would leave it at $1.6 million.

MacDonald and Pion, on the other hand, stuck with the $125,000 a year that the couple say will be enough to finance their desired lifestyle. And both calculate that the couple will have an estate of over $5 million in today’s dollars at age 95 with the real estate included. MacDonald bases his assumption on a 7% average annual return on their portfolio, after fees. Pion based his on a 7.7% average annual return.

Neither Fraser nor MacDonald thinks the couple needs to take out life or medical insurance. It’s likely that the husband’s pension will include a benefits package, and there’s plenty of money to cover any additional medical or long-term care requirements that arise. Medical and long-term care insurance is very expensive, MacDonald points out, and the couple will probably be able to cover most such expenses out of income because it is unlikely they will be travelling if they have serious medical issues.

Pion agrees that health and long-term care insurance probably aren’t needed, but suggests the couple might want to consider them. What they must have, though, is travel insurance, given their plans.



The recommended asset allocation is conservative. The couple may think they are risk-takers, but, Fraser points out, real risk-takers have to be able to stomach more than a 20% drop in the value of their portfolios. Based on historical returns, Fraser suggests the couple go with a balanced growth portfolio to avoid the possibility of more than a 20% drop. The asset mix would be 63.5% equities, 30% fixed-income and 6.5% alternative investments.

@page_break@Pion suggests 60% equities, 25%-30% fixed-income, 5% cash and 5%-10% alternative investments. He thinks the couple needs a larger equity component because of their desire to leave a $5-million estate.

Both Fraser and Pion recommend alternative investments and suggest funds of hedge funds. They have low volatility and higher returns than bonds. In addition, they add diversification to a portfolio.

MacDonald, however, would not use alternative investments. He thinks single-manager hedge funds are volatile and have more downside risk than equities. He admits that funds of funds, which Fraser and Pion recommend, are better but are expensive. As he says, all the managers used have to be paid.

MacDonald looks at the asset-allocation decision from the point of view of how much risk the couple needs to take, and comes up with an even more conservative suggestion of 45% equities and 55% fixed-income. With $5 million in assets, he says, the couple doesn’t need to take risks. But with interest rates low and expected to remain so, it’s tough to meet most clients’ goals without some equities.

At Goodman, advisors normally start with a 50/50 equities/fixed-income split and then adjust that to a mix that’s comfortable for the client — and delivers the desired asset growth. Usually they target a return of 8%-10% because the firm’s long-term track record is north of 11%. But this couple doesn’t need that high a return and can benefit from the lower volatility that comes with a smaller equity component.

None of the three advisors would expect to change the asset allocation as the couple ages because of the couple’s desire to leave an estate. When thinking in terms of the next generation, the goal is to leave as much as possible and, as a result, the advisors tend to choose an asset mix that reflects the heirs’ life expectancies rather than the clients’.

All three recommend discretionary managed accounts because the couple will be travelling and won’t be easily accessible to make investment decisions. CC&L and Goodman charge similar fees, which average about 1%: At CC&L, the fee is 1.25% on the first $2 million and 0.75% on the anything above that; at Goodman, the fee is 1.25% on the first $1 million, 1% on the next $2 million and 0.75% thereafter. At UBS, the fee would be 1.2%-1.3% and would include transaction and custodial costs.

Fraser recommends the couple put the money into a CC&L balanced growth pool that includes alternative investments. The pooled funds are based on CC&L’s best ideas, and he doesn’t think a customized portfolio can necessarily do better.

MacDonald and Pion would buy individual securities, although they would use pools for emerging markets, small-cap, high-yield and/or alternative investments. MacDonald suggests a portfolio of about 25 stocks and 10 to 15 bond maturities. He says the couple can minimize taxes wherever possible, offsetting capital gains by selling holdings with losses.

MacDonald, who doesn’t like too much foreign-currency exposure, would invest half the equity portion outside of Canada. Fraser suggests 58% and Pion recommends two-thirds; they both think foreign equities tend to have higher returns and are less volatile, partly because of the broader sector diversification available globally. Currency exposure doesn’t bother Fraser; CC&L actively manages it and hedges when it thinks it’s appropriate.

Only Pion suggests equal amounts of U.S. and international equities. MacDonald favours more U.S. because it’s a very liquid market and there are lots of good companies. Fraser suggests more international because CC&L remains somewhat bearish on the long-term prospects of the U.S. dollar.

Pion is the only advisor of the three to recommend emerging-markets exposure, which he would put at no more than 5% of total assets. He argues that investors increasingly need to be in emerging markets because those markets are growing so fast and becoming a bigger part of the global economy.

The other two advisors prefer to avoid the risk involved in those parts of the world.

Pion was also the only one to suggest investing in small-cap stocks, both globally and at home, although Fraser does suggest buying small-caps in Canada. MacDonald feels this couple does not need to take on this added risk.

Sector diversification is important for all three; it is, of course, one reason for recommending significant foreign exposure. Indeed, Pion believes it’s more important than geographical diversification. At UBS, the advisors decide on sector weightings and then pick the best companies globally in each sector. They keep an eye on country exposure, but sector weightings are more important.

Canadian investments tend to be in energy, materials and financials, although there are good companies in other sectors. Pion says his Canadian suggestions would tend to be one-third each for resources, financials and a combination of investments in other sectors.

All three advisors would include income trusts. As Pion points out, they are becoming a bigger and bigger part of the market and they are needed to get the best mix of Canadian investments.

At Goodman, advisors have the advantage of having a lot of income trust expertise; as a result, MacDonald would put 10%-15% of this couple’s equities into such investments.

Goodman advisors use a value investment style. CC&L’s balanced growth style uses a multi-manager, multi-style approach that includes both value and growth and is currently tilted toward value. UBS uses the price/intrinsic value approach, which is also tilted toward value but considers growth.

Fraser usually uses a pooled fund for fixed-income but can take a segregated approach if clients prefer. The other two would use bond ladders — supplemented in Pion’s case with a high-yield bond pool; in MacDonald’s case, with preferred shares. MacDonald considers preferred shares to be fixed-income because they have a maturity date and a set distribution. He likes them for the tax advantages available through the dividend tax credit. He also prefers to buy bonds at a discount — again, for tax reasons. IE