“Portfolios” is an ongoing series that discusses various asset-allocation options. In this issue, Investment Executive speaks with Daymon Loeb, associate portfolio manager at Goodman Private Wealth Management in Toronto, and Beat Meier, senior client advisor at UBS Bank (Canada) in Calgary.



A 42-year-old Ontario woman with two children, ages 10 and 12, is forced to deal with the financial consequences resulting from her 43-year-old husband’s untimely death, which occurred two months ago after he suffered a heart attack.

The woman has limited knowledge of investments but is conservative by nature. Her husband tended to take the lead on the couple’s investments and he was also conservative. They were prudent with their finances and managed to save enough to have $400,000 in RRSPs and to have set aside $40,000 and $48,000 in RESPs for their two children.

Given the recent tragedy, she is especially concerned about ensuring that she has adequate resources to continue with the plan for her children that she had developed with her late husband.

The children are currently attending a local public school, but she would like to send them to private school when they are in high school. She expects tuition and extras will cost approximately $25,000 in today’s dollars per child per year for both private school and then university away from home.

Another big goal of hers, relating to the children, is to leave them an estate worth $3.5 million in today’s dollars.

The woman has a law degree and practised family law until her first child was born. She returned to work seven years ago and has been practising at her old firm for two days a week ever since, earning $40,000 annually; she is also eligible for medical benefits. (She recently took a leave of absence to settle her family’s affairs.) Her intention is to get back into the labour force gradually as her children get older and eventually to work full-time, once her youngest child starts high school, which is in four years.

Her late husband was a lawyer with a major law firm and earned $500,000 per annum in his last year of practice. In prior years, he had earned between $150,000 and $300,000. He also had taken out a life insurance policy of $2.5 million through his law firm, which has already been paid out. In addition, he had capital in the firm of $200,000, which the woman expects to receive in six months’ time.

The couple recently had traded up and bought a larger house, which is worth $800,000 and on which they had taken out a $200,000 mortgage. They had taken out mortgage life insurance, which extinguished the debt upon his death. They also had a modest mortgage-free cottage worth $300,000, which she expects to keep.

She expects to start working again part-time in three to six months and would like to go full-time in four years, but would like to have some flexibility given that she is now a single mother. This may mean that she would earn closer to $100,000 per year initially and work up to a full schedule, earning $200,000 once her first child goes to university. She also expects to be made a partner at her law firm.

Her income goal is about $100,000 annually after taxes in today’s dollars, before school fees, until the children are through school and out of the nest, which would be when she’s about 54 years of age. Then, it drops to $70,000 — and she wants to be able to count on that until she’s 95. She would like to retire at age 60 and expects to require this same $70,000 after retirement because the costs associated with the travel she would like to do once retired would be offset by the decline in her work-related expenses.

Both Loeb and Meier say her goals are more than achievable. Meier’s analysis suggests she probably would have about $8 million in today’s dollars at age 95. Meanwhile, Loeb did his projections out to age 60 because he would expect her asset allocation to change when she retires. This showed financial assets of $11.6 million in 2025 dollars, which even with simply a 3% return, would provide about $350,000 in income, or twice the $170,000 to which the 3% inflation he’s assuming would push her income goal up.

@page_break@Loeb is assuming an 8% return after fees, or 5% real, while Meier is using a 6% return, or 3.5%, real given his 2.5% inflation assumption.

Given the traumatic stage the client is in, Meier says, it’s critical to quickly get the $2.5 million life insurance proceeds into investments that address her needs, so she can deal with her grief knowing that she will have the income she needs.

Leob also strongly advises that the client should meet with an estate lawyer to see what she can do to minimize taxes through vehicles such as setting up trusts or corporations in her children’s names. Both Loeb and Meier think she should continue to contribute to the RESPs, as long as her children qualify, for the grants and the income sheltering they provide.

Neither advisor thinks she needs insurance with this much capital, reflecting their confidence that returns from a properly diversified and well-managed investment portfolio will yield higher returns than a life insurance policy would offer.

Loeb and Meier suggest discretionary managed accounts because of her lack of experience in investing and her time constraints, given that she has two children and a part-time job. They would both also invest most of the assets in individual securities, but with different asset mixes.

An important difference is that Meier would include 15% in a global multi-strategy fund of hedge funds while Loeb would put only 2% alternatives in an emerging-market hedge fund. Meier believes alternatives provide both diversification and reduction of risk without sacrificing return, while Loeb thinks a hedge fund is the best way to invest in emerging markets.

Another difference is that Loeb would have 10% preferred shares in the fixed-income portion while Meier wouldn’t have any. UBS stays away from these shares because of their lack of liquidity and the scarcity of high-quality preferreds. Loeb agrees that they are relatively illiquid, but says if you can hold them for the long-run, the yields are attractive because they qualify for the dividend tax credit. He notes that they are particularly attractive in the current environment given Goodman’s expectation of lower interest rates.

The two firms also have different investment styles. Goodman’s is deep value; it invests only in companies that are trading at 66% of their intrinsic value. The approach is all about preserving capital, Loeb says.

At UBS, risk reduction and management are front and centre, hence the use of hedge funds, which can extend to currency and which Meier recommends for this client because she lives in Canada and doesn’t need foreign currency or the risk that comes with foreign currency exposure.

The UBS investment style is also based on “intrinsic value,” which is calculated by taking all future cash flows and discounting them at an appropriate rate. But the firm doesn’t wait until stocks are deeply discounted; rather, it will buy a stock whenever it is significantly below that calculated level, and sell whenever it’s above. As a result, the firm invests in growth as well as value companies.

Meier would have an asset mix of 5% cash, 30% fixed-income, 50% equity and 15% alternative investments. The fixed-income would be a bond ladder going out 15 to 18 years and would include some global bonds.

Canadian equity would be only 12% of the total portfolio that Meier proposes, with the U.S. at 21% and international at 17%, of which 2% would be in an emerging-market fund. Meier says the U.S. is a great market, but UBS is also finding lots of opportunities in Europe and in emerging markets. He notes the huge growth potential in emerging markets and says they are “very confident” for this market.

Sector diversification is crucial in Meier’s view. He considers it more important than geographic diversification because so many companies are global. Sector weightings change depending on economic and market prospects, and he is currently overweight in financials, information technology and energy.

Loeb suggests an asset allocation of 40% fixed-income and 60% equity, which would include the 2% in alternative investments. A quarter of the fixed-income would be preferred shares with the rest in bonds, which he would actively manage.

Half of the equity, or 30% of the total portfolio Loeb suggests, would be in Canadian equities; 20%-25% would be in U.S. equities; and 5%-10% in international stocks. Goodman is currently finding “far more value” in the U.S. than in international markets. As a deep-value manager he doesn’t have allocations for sectors, but he does keep an eye on them and makes sure no sector gets overweighted.

Meier would not use income trusts, but not because of the recent tax change. He simply finds better value in Canadian stocks.

Loeb would continue to use them for 5%-10% of the total portfolio. He notes that Goodman has picked up some new names following the drop in prices that occurred after the tax change was announced.

Meier sees no reason to change the portfolio as the client ages. Loeb agrees that when aiming to leave an estate, the assets should be invested in a way that takes into account the children’s time horizon.

However, he adds the client may be more comfortable reducing equities, and thus risk, when she retires — and she can certainly afford to do so without compromising her estate goal. IE