The post What’s best in giving back – a foundation, DAF or endowment? | Canadian Family Offices appeared first on Tacita Capital.

The post Proposed increase to capital gains tax requires action | Investment Executive appeared first on Tacita Capital.

Broadly speaking, these factors can be distilled into the following categories:

1. Value: Stocks that are low-priced in relation to earnings, dividends, cash flow or book value, on average, have outperformed growth stocks over long time horizons.
2. Size: Stocks of small and mid-size companies have earned, on average, higher returns than stocks of large companies over long time periods.
3. Momentum: Stocks that have exhibited positive momentum – i.e., have performed relatively well over the past 3 to 12 months – have outperformed, on average, over long time horizons stocks that display negative momentum.
4. High Yield: Stocks of companies that pay higher dividends, on average, have earned superior returns to lower and non-dividend paying stocks over the long run.
5. Quality: Stocks that have evidenced superior profitability in relation to capital have, on average, outperformed firms with poorer profitability in relation to capital over long time horizons.
6. Low Volatility: Stocks that have exhibited low volatility have, on average, outperformed stocks that display high volatility over the long run.

There are two primary explanations for the higher returns associated with these factors. One is that the higher returns represent risk premiums – i.e. compensation to investors for incremental risks beyond that of the total stock market. For example, small company stocks are not only more volatile than stocks of large companies but are also much less liquid. Value stocks tend to include a higher proportion of heavily indebted companies which dramatically underperform the overall market during periods of extreme market stress.

The second explanation is offered by behavioural finance. Investors’ cognitive biases such as “myopia” and “overconfidence” can lead to the persistent mispricing of certain securities. For example, many investors are attracted to the episodic outsized returns of high volatility, low quality stocks and chase these types of stocks despite a pattern of longer-term underperformance. Overly optimistic investors overestimate the earnings prospects of growth stocks while underestimating those of value stocks; value stocks then generate superior returns as investors eventually realize that earnings in the value universe are better than initially expected. The “herding” behaviour of investors has been advanced as an explanation for the returns associated with the momentum factor.

Social phenomena such as the “bandwagon effect” can also distort prices. The “madness of crowds” – as evidenced by the railway mania of the 1840’s, the Florida real estate boom of the 1920’s, the Japanese bubble of the 1980’s and the internet mania of the 1990’s – is a well-documented recurring market spectacle. Investors’ infatuation with extremely expensive US growth names these last several years will likely be added to the textbooks as the most recent example.

Factor performance can vary because of business cycle influences, market sentiment, interest rate changes, sector composition and other variables. The following chart sets out the return earned by each factor globally in 2023 compared to the overall broad market. (See Appendix I for Sources).

Quality stocks came in first on relative factor performance with a whopping 29.5% return in 2023. Quality’s blistering return can be chiefly attributed to the resounding gains made by US technology mega-cap stocks that rode a wave of AI fervour throughout the year. 2023’s performance marked a full reversal of the dismal returns from just one year earlier – quality suffered the worst factor loss of 2022 at -23.4%. Broad market stocks followed quality in 2023 with a strong performance of 18.9% on the year. Small-mid size stocks also faired well, though not as well as the broad market, posting 13.5%.  Value, momentum and high dividend stocks followed with decreasing positive returns. Finally, low volatility brought up the rear for 2023 posting a middling return of just 5.5% versus the broad market.

While the outperformance of any one factor in any given year is unpredictable (making “factor timing” a mug’s game) diversifying across factors and systematically rebalancing allocations can augment portfolio returns over time. As illustrated by the following graph depicting the cumulative growth of $100 USD invested since 2000, the global multi-factor portfolio has created an incredible 43% more wealth than the global broad market index (see Appendix I for the indexes used and disclaimer).

Twenty years ago, “factors” were a fascinating corner of the capital markets but of little practical use to individual investors. Since then, with the advent of low-cost exchange traded funds and the creation of transparent, rules-based factor indices by a range of index providers, a multi-factor portfolio has moved from academic theory to concrete application. Patient investors finally have an empirically sound approach to pursuing market-beating returns.

Appendix

Disclaimer

Tacita Capital Inc. (“Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services.

Tacita research has been prepared without regard to the financial circumstances and objectives of any individual investor. The asset classes/securities/instruments/strategies discussed may not be suitable for all investors and certain investors may not be eligible to purchase or participate in some or all of them. It is not possible to invest directly in an index. Whether a particular investment or strategy is appropriate depends on individual circumstances and objectives. Investors should therefore independently evaluate particular investments and strategies or seek the advice of a financial advisor.

All investments involve risk including loss of principal. Past performance is not necessarily a guide to future performance; estimates of future performance are based on assumptions that may not be realized. Management fees and expenses are associated with investing.

Tacita research is based on public information and is prepared for informational purposes. While we make every effort to use reliable, comprehensive information, we do not warrant that it is accurate or complete. We assume no obligation to inform anyone should the opinions, estimates or information provided change.

Tacita research is not intended to provide tax, legal, or accounting advice. Investors should obtain their own professional advice in this regard.

Neither the information provided nor any opinion expressed in our research constitutes a solicitation by Tacita for the purchase or sale of any securities or financial products.

The post 2023 Global Factor Round Up appeared first on Tacita Capital.

Click here to learn more about TCI’s Canadian Momentum strategy.

The post Building a better Canadian equities portfolio | Investment Executive appeared first on Tacita Capital.

The post Elevated inflation risk requires portfolio modifications | Investment Executive appeared first on Tacita Capital.

The post 5 guidelines for investing in private credit | Investment Executive appeared first on Tacita Capital.

The post Alternative investments are rewriting the rules of risk management | Investment Executive appeared first on Tacita Capital.

The post Shift your paradigm to after-tax portfolio management | Investment Executive appeared first on Tacita Capital.

In contrast, an independent portfolio manager who works in an “open architecture” model has no such restrictions. Open architecture portfolio managers are free to access a comprehensive range of investments from a wide variety of global financial institutions on behalf of their clients.  In a true open architecture system, portfolio managers are not faced with any incentives or disincentives when it comes to selecting investment instruments for their clients, other than what is best for their clients’ portfolios.

An open architecture system provides numerous benefits for investors including:

1) Greater diversification

Savvy investors know that diversification is crucial to the construction of a sophisticated long-term investment portfolio. A well-diversified portfolio can better weather downturns while still participating in market upturns. By increasing the opportunity set available, open architecture allows an independent portfolio manager to better diversify their clients’ portfolios across a wide range of asset classes, sub-asset classes, investment strategies and managers.

A true open architecture portfolio management firm can access investments from the entire universe of investment vehicles including individual securities, exchange traded funds, low-cost mutual funds, closed-end funds, private pools, hedge funds, and private investments. This robust portfolio diversification can help reduce overall portfolio risk and increase the potential for superior risk-adjusted, after-tax returns.

2) Access to best-in-class expertise

While diversification is a foundational must when constructing an effective long-term portfolio, properly selecting from the gamut of available investment instruments to build out that portfolio requires deep expertise. In an open architecture model, independent portfolio managers can access and evaluate a variety of best-in-class investment managers beyond those within their own institution.

A true open architecture firm undertakes extensive manager searches across the full universe of available opportunities. The selected managers and their vehicles must meet rigorous due diligence requirements before they can be placed in clients’ portfolios. They are then monitored to ensure the manager and vehicle remains the best investment solution for the client.

An open architecture firm can also better capitalize on the rapid pace of innovation in the exchange-traded funds and specialty manager realms by actively seeking new vehicles that reduce costs, minimize taxes, and/or improve portfolio diversification.

3) Highly customized

Open architecture investing allows an independent portfolio manager the flexibility to build customized investment portfolios that are highly tailored to their clients’ specific needs and goals. They can select both broadly diversified and focused “niche” funds and combine them in a manner that best meets their clients’ specific investment objectives and financial situation. In addition, without any proprietary ties, they can adjust investment strategies and allocations more dynamically in response to a client’s liquidity needs, market trends, economic conditions, or changes in the client’s goals or risk profile.

4) Lower costs

With an open architecture model, investors may enjoy lower costs than those within a pre-set “closed architecture” model. This is particularly true since the advent and rapid expansion of low-cost exchange traded funds. An independent portfolio manager who is not restricted to any one provider can impartially evaluate the fees and costs associated with the potential instruments that might be used in a client’s portfolio relative to their merits. Because the manager is free to invest in any number of funds, they may also be able to access preferred “institutional” pricing for their clients. These advantages can help reduce their clients’ costs and improve their risk-adjusted investment returns over the long term.

5) Tax-efficient

Open architecture investing can provide several important tax benefits. Independent portfolio managers can optimize the tax efficiencies associated with their clients’ asset locations by strategically allocating a broader mix of selected investments across taxable, tax-deferred, and tax-exempt accounts. Managers can also better implement tax loss harvesting strategies by selecting from an unrestricted range of substitute investments to replace tax-driven sales. They are also free to choose from more tax-efficient investment vehicles such as index funds and ETFs, thereby reducing taxable events in their clients’ portfolios.

Greater choice also affords an independent portfolio manager more opportunities to select “niche” investments that align with their clients’ specific tax profiles and to adapt their strategies as needed.

Open architecture investing at Tacita Capital

Tacita Capital prides itself as a truly independent wealth manager that practices open architecture investing. We never offer solutions that we do not believe afford the opportunity for superior, risk-adjusted, post-tax long-term performance.

To learn more about how Tacita Capital’s open architecture investing can help elevate your portfolio, get in touch with us today.

The post 5 Benefits of Open Architecture Investing appeared first on Tacita Capital.

1. Excessive concentration in a particular asset is the foremost pitfall. Wealth concentration in a single stock, even one of a large company, exposes an investor to a host of risks that can permanently impair capital. Whether it’s due to the fading fortunes of an entire industry, management pratfalls or a changing competitive landscape, any single investment can easily lose value, sometimes precipitously. Unfortunately, many wealthy families get caught in the trap of overconcentration and never implement the solution — broad asset class and security diversification. The memory of past successes, the prospect of a nasty tax bill on gains and excessive optimism encourage inertia. Some are lucky and see things turn out well, but many aren’t so fortunate.
2. Too much leverage. Borrowing magnifies gains, but it also dramatically amplifies losses. The impact of excessive leverage is particularly pernicious in today’s bear market as falling values can trigger margin calls in brokerage accounts or demands for additional collateral on bank loans. These can result in the forced liquidation of investments at fire-sale prices. Unfortunately, in the blind pursuit of more money, many affluent individuals forget their paramount goal is to stay wealthy. The use of leverage needs to be judicious. In particular, the amount and terms of any borrowing should be fashioned such that the family’s wealth remains fundamentally intact should a “worst-case” scenario play out. Many family fortunes were destroyed in the financial crisis of 2008-2009 and its aftermath due to the failure to recognize that severe recessions and deep bear markets are inevitable — only the “when” is uncertain.
3. Chronic overspending is the third main pitfall. Budgeting for wealthy families is often a minor concern, if at all. This is rarely problematic when times are good and money is rolling in, but in periods of lacklustre returns, excessive spending can outstrip returns and erode capital. High-spending families then get caught in a downward wealth spiral, withdrawing an ever-growing percentage of their capital as incessant spending depletes their portfolio. Wealthy families need to scale their spending to their capital base. Those focused on long-term wealth preservation should keep annual spending at no more than 3%-4% of their portfolio value. Monitoring spending is also critical.
4. Excessive taxes are the fourth major cause of wealth destruction. Unfortunately, many high-net-worth families fail to fully integrate their investment, tax and estate planning to minimize this drain. Savvy families and their professionals take an integrated wealth-management approach to their finances.
5. Finally, family dynamics can impair wealth. Discord among family members, often after the death of the parents, can lead to intemperate decisions about the family business and other assets, or costly and protracted litigation. Another classic fiasco is the squandering of wealth by spendthrift children who were never educated in the stewardship of the family capital. Forward-thinking wealthy families have implemented formal governance structures, including regular meetings, co-operative decision-making, family philanthropic projects and financial education to better prepare the next generation for the responsibilities of wealth.

Many a wealthy family has found that preserving wealth can be as challenging as creating it in the first place. Would you like to learn how Tacita Capital can help your family preserve and grow its capital? Reach out to us today.

The post The 5 Biggest Financial Pitfalls for Wealthy Families appeared first on Tacita Capital.