Mutual Success Your Fund of Information

The Long and the Short of the Story

October 22 2008

When I was young my father would discuss many things with me often relating some life example to illustrate the points he was wanting to make and he frequently ended up by summarizing the points and moral to be learned with “and that is the long and short of the story”.  As we undergo the largest systemic collapse in eighty years, we have been looking at how best to respond to protect client capital.  We have had numerous discussions with clients this week and we have been considering the alternative strategies. There are essentially three strategies:   The Long Strategy that believes like Warren Buffet that in the longer term values will improve and that if you do not need the funds in the next five years or ten years you hold.   The Short Strategy that believes that markets still have a way down to go, and that you sell now, and buy back when the values are lower, and that you accelerate the profitability by borrowing stocks from others to enable more volume, or alternatively invest in bear indexes that do this for you.   The final strategy is the Sideline Approach. If you take this approach you essentially view the volatility in the current markets as waves that are too rough to comfortably weather and you make for land and keep what remains of your powder dry.   Portfolio strategy differs for each of us just as sailing does. For example a large portfolio may be likened to a cruise ship, in that its ability to handle big waves may leave the passenger seasick but a small portfolio or dingy dealing with the same waves may result in the passenger feeling like they might drown. So what is the best strategy?  The best strategy is to review your financial plan and establish realistic goals and objectives in order to establish the purpose of the investment portfolio. Then looking at both the objectives and the risk profile establish how to best to meet current and future cash flow requirements. To the extent that cruising in rough waters might make you seasick we would recommend that you take to land and hold on until the cyclone passes, as there will still be bargains to be had after the storm. If your portfolio is more modest perhaps now is the time to consider putting some insurance on the boat in case of more damage or worse.   Certainly for RRSP and RRIF accounts as well as a portion of corporate portfolios we are revisiting the role that insurance segregated funds may play.  Segregated funds are so called because the underlying investments are segregated (excluded) from the assets of the insurance company.  Thus their ownership remains with the investor in the event of a collapse of the company.  The segregated funds, dependent upon their specific design features, may offer maturity and mortality guarantees to protect the original capital value invested, or they can be designed to offer cash flow guarantees, notwithstanding the underlying market risks. As you might expect these guarantees bring with them some restrictions and come at a cost, but they do offer peace of mind, and dependent upon the investor’s goals may be well suited to helping create greater peace of mind. A number of the large Canadian insurers have developed segregated funds which offer these tools including Manulife Financial, Industrial Alliance Group and Sun Life. In short, segregated funds afford the opportunity to go long in the market with the downside protection at death or maturity.   As we watch the waves rise and fall around us, it would be prudent for us to remember that safe boating requires that you wear a life preserver and in inclement weather we should seek out calmer waters and a port for the storm. We have tried to be more defensive in asset allocation, but have been rocked severely by the sustained weakness of emerging markets, resources and precious metals.  With award winning managers licking their wounds, and scratching their heads as the impact of the credit crunch and deleveraging of hedge funds and private capital, it is difficult to predict what will happen next.  Uncertainty is never the friend of the investor, and so heading for dry land and waiting on the sidelines may prove the best interim strategy.  Best Regards,       Victor Whang      Malcolm Ross       Violet Smith 604.331.2524  604.331.2521    604.331.4465 DISCLAIMER: E&OE: Investment Fund values change frequently and past performance is not indicative of future performance. No guarantee is given or implied and there is risk of loss as well as the opportunity for gain when investing in mutual funds. Sterling Mutuals Inc. © 2008