2. Presenter: David McGruer CFP Financial Planner, Dundee Private Investors Inc. October 2006 Client Education Night Portfolio Building For Growth And Stability

3. Agenda: Portfolio building using the lessons of the past decade Math basics of portfolio construction The world market index as a benchmark Selecting money managers Typical portfolio construction Constructing a portfolio for growth and stability - some ways in which I differ from the standard approach

4. Before portfolio: start at the beginning Your goal: Time horizon, usually more than a few years is considered long term  Dave: consider life expectancy for long term goals Rate of return required or desired Ability to handle uncertain results

5. Why diversify? Reduce the systematic risk of being in an investment asset class such as stocks, bonds, etc. The variability inherent in a type of asset Increase portfolio reliability, consistency

6. How to diversify: portfolio efficiency Constructing a portfolio so as to obtain the maximum return for a given level of variability Efficient market hypothesis (with flaws) Modern portfolio theory - MPT (with flaws) Efficient frontier based on MPT Typically selects 7-10 narrower asset classes and combines them “efficiently”

7. Classic efficient frontier curve Looks to past and combines assets with less than perfect correlation to optimize portfolio mix Typically includes lower returning assets in order to reduce risk. Thus: stability with a price, sometimes steep. Source: Institute of chartered accountants of BC, Feb 2006

8. Measuring diversity Overlap analysis of investment holdings Correlation analysis - a correlation of 1 means they always move together. A low correlation between assets is desirable. Reliability of the correlation is important, most often ignored They say diversification is the “free lunch” of investing, but it depends on how you diversify

9. Portfolio uncertainty Variability of returns Frequency of negative returns Standard deviation of returns usually based on 36 monthly data points (3 years) 2/3 of results fall within 1 S.D. of mean, 95% within 2 S.D. Low number desirable Should be, is not usually goal-time sensitive Dave’s modification: annual returns instead of monthly

10. Advanced risk measures combine data Risk ratios such as Sharpe ratio how much extra return (over the “risk-free” return of treasury bills) is provided when you take on a higher variability? A higher number indicates better reward for a given level of variability

11. The efficient portfolio spectrum Typically five portfolios varying by equity/fixed income weights

12. Typical efficient portfolio Top one is for you Bottom one is for people 100km south of here, has essentially zero Canadian content LifePoints® Long-Term Growth Portfolio

13. Dave’s objective: build an efficient equity portfolio with minimal funds Market and fund data sources: Globefund.com and mutual fund companies To be used for long term goals First consider the global market index (MSCI World) as a benchmark Add first fund with all possible desirable criteria Add second and third, looking for meaningful added return and/or consistency Calculate portfolio effect of combining three

14. Review the MSCI World equity index Start in 1994, inception of youngest of 3 funds in the model Index has range of +31.2% to - 19.6% Average index return of 7.1% Standard deviation of annual returns is 14.2%, same as monthly S.D. over the same period Two thirds of returns fall between -7.1% and +21.3% 95% would fall between -21.3% and +35.5%

15. Do we choose active or passive management? There are funds which mimic the index returns even after accounting for fund management expenses: they do earn their keep but do not add value to the market results

16. Earning more than their keep: value added There are two ways an active manager can propose to add value to their fund Increase the performance, which may come with the price of higher volatility Increase stability, which may come with the price of lower returns Some managers have done both Added performance along with lower volatility They could say they increase performance by avoiding needless risks

17. Selecting an active money manager 1. Do you invest in businesses? (equities) 2. Do you have a very wide scope? (global) 3. Are you likely to stay put? (vested interest) 4. Do you work within a solid fund company? 5. Do you have a clear investment philosophy? 6. How have you used your philosophy to do well over the long term, especially in down markets? 7. Do you diversify the portfolio? 8. What are the expected tax implications? 9. Can you stand as a sole portfolio holding? 10. Are you on Dundee’s recommended list?

18. Start with one fund that adds value Better than index performance, 1.6% higher SD=5.9%, less than half index volatility=14.2% Very good downside management in 2000-2002!

19. Selecting the second and subsequent money manager In the classic model, low correlation to the first is the criterion Dave’s added criterion for long term portfolios: added fund is expected to have a return similar to the first, does not lower the expected return

20. Diversifying within equities Don’t sacrifice returns to obtain stability, seek low correlating but similar assets, each of which is already diverse and stable Correlations rise as you add more funds

21. Add a second and similar fund which has a low correlation to the first Return increased by 0.9%, But standard deviation increased by 2.7% Both managers added value by performance 0.53 correlation between managers Both handled down market better than index Only two negative years

22. Add a third fund which has low or medium correlation to the first two Is there really much left to do after that? You own about 100 companies from all over the world You have three excellent managers, three fund companies working for you Diversification without di-worsification

23. Review of three funds meeting selection criteria Still a wide range of +33.4 to -13.8% Good to much better overall performance than index Slightly lower to much lower standard deviations Correlations: Cund/AGF = 0.42 Trim/Cund = 0.53 Trim/AGF = 0.74

24. Consider the combination of the three funds Higher returns than index and two of three funds S.D. close to most stable fund, 91% of returns from +7.7% to +21.3% Sharpe ratio better than all three funds, much higher than index

25. Consistent performance wins out over index

26. Limitations of this approach Long cycles may suggest persistence of results when they may in fact change (same problem with traditional models Correlations are a moving target Manager-specific results means you need to monitor the managers, versus market mimicking allocation where manager is irrelevant

27. Conclusions Can build simple, more efficient portfolios using reason, statistics and portfolio theory Traditional models select 7-10 narrower asset classes and combine them efficiently A different approach: select value added managers with already broad mandates and combine them efficiently Can seek value-added managers instead of relying on market data Reduce portfolio volatility, increase consistency of results Fewer funds, simpler, each one stands alone Rebalancing may not be required to stay on track (added only 0.22% to the annual return of the three equity fund model), might equally take away from performance

28. Action steps Review your portfolio with your advisor Does the portfolio still match your goals? Assess the value-added of fund managers after lesson of the hard bear market 2000-2002 Level of diversification? Can it be more efficient? May elect to make a shift over time rather than a sudden change

29. Recent reading

30. Question and answer period

31. Door prize draw Mackenzie branded items Senators Tickets