Return Attribution (Part 1)

Good day,

Over the next two commentaries, I will provide info on the top two discretionary portfolio programs our team most commonly uses for client accounts and their responses to the recent market activity. Next week I will discuss the Hudson Total Mandate Portfolio which is generally only available to accredited investors or those meeting certain exemptions. For today, I will comment on the Willoughby Investment Pool which is available to most retail investors.

As a recap, we like the Willoughby Investment Pool (WIP) as it employs both fundamental and technical analysis in its security selection process. The pool seeks securities that are fundamentally of high quality. The portfolio managers measure quality by using a software which screens over 20,000 securities and filters down to those meeting certain criteria.

If one were to build a residential real estate portfolio, there could be hundreds of thousands of properties to choose from in a certain region alone. In order to filter down and look for those that are fundamentally of high quality, an investor would use certain criteria, such as properties where the median household income is over a certain threshold, properties close to high demand shopping centres and necessary amenities, and those close to public transportation, etc. The same type of analysis could be done for other securities including stocks, bonds, ETFs and other managed pools.

The predetermined criteria for the WIP’s filtration system includes the requirement for companies to be over a certain size (>$5 billion market cap for US companies & >$500 million for Canadian companies); have strong earnings growth (>7% compounded annually); be able to repay debt over time; have a competitive advantage in its respective industry; generate profit margins greater than 7%, etc.

Once the pool has identified a manageable number of fundamentally high-quality securities based on the aforementioned criteria, it also employs technical analysis on those recently chosen securities before it decides to invest or sell any of them. Technical analysis identifies the trading trend of a security. Just because a company is one of high quality and fundamentally sound, it doesn’t mean that the market has recognized this and it’s possible that the company has been ignored for a number of reasons.

There are decades of research that show companies in an upward trend tend to continue this trend for some time, and those in a downward trend tend to continue the decline. Perhaps the most valuable study on this phenomenon was the study conducted by James O’Shaughnessy, which was identified in the book, What Works on Wall Street, initially published in 1996. O’Shaughnessy did an 83-year study where he determined that between 1926 and 2009, the best-performing stocks on the broader US market over the previous 6 months outperformed all others over the next 6 months by an average of 3.65% (14.11% vs 10.46% for the market). He later conducted a second study called, Trending Value Portfolio Screen, which was published in the 4th edition of the book. The study concluded that the combination of fundamental analysis (based on certain criteria) and technical (trend) analysis, resulted in an annualized return which almost doubled the S&P 500 between 1964 and 2009.

As such, the WIP will only begin its purchase of high-quality securities when it has already seen upward momentum. As a means to reduce risk, the portfolio managers are happy to give up initial returns in order to be satisfied that the trend has indeed reversed. As mentioned above, history shows that these trends tend to last a long time, so this compromise is well worth it in an effort to reduce volatility and capture upside.

The most recent example of a major trend reversal is the market activity since the Trump electoral win. Prior to the election, technology, dividend-paying securities, and fixed income were in favour, which had served the WIP very well. After the election, US financials and energy companies began their rally while the pre-election winners softened. The rally wasn’t universal, as roughly 75% of the Dow’s post-election returns were driven purely by financials—a sector which had experienced weak returns for over two years, and one which the WIP rightly avoided.
During the last two months, the market hasn’t seemed to care about such fundamentals with greed and speculation taking over. Having said this, we can’t ignore the trend reversal and will continue to make adjustments accordingly. In November, Willoughby purchased Magna International (up about 10% to date) and Encana (up over 30%). Micron Technology, purchased in December, is up over 15% at time of writing. Most recently, the WIP has increased its exposure to US Small Caps and Energy, in order to take advantage of some of the current stronger sectors. Security fundamentals always prevail in the long run and our approach will not change in 2017.

Have a great weekend!


Danny Popecu CFP, CIM, FMA, FCSI

President & CEO


“I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.”

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