Protecting on the Downside

Protecting on the Downside

In our last edition of the CH Minute our Chief Investment Officer, Brian Trafford, covered what a benchmark is and how they are used to gauge a mutual fund’s performance. That CH Minute can be read here. During this edition of our bi-weekly newsletter, we turned our focus to downside protection and what methods we can use to help protect clients’ capital while also looking to grow their wealth.

What is downside protection?

In its simplest form, downside protection is a measurement of how much a given portfolio drops compared to the market overall. How this is done will depend on the investment management team and the tools they employ, together with the investment style that they employ. Another way to think of this is that it provides a safety net when an investment decreases in value.

What techniques can be deployed for downside protection?

In another CH Minute, we covered derivates and how our fund partners at Dynamic Funds use them in their Dynamic Alternative Yield fund (click here to read that CH Minute). Derivates provide downside risk protection as the fund manager is essentially paying a premium for “insurance” to protect an asset decreasing in value past an agreed-upon threshold.

One of the simplest ways to offer long-term downside protection is to make sure that the investments being purchased are different from the market as a whole and are less subject to the sorts of risks that can cause a security to underperform. Basic things like profitability, free cash flow, a lower-than-average level of debt within a given company, powerful brand recognition, and high barriers to entry to key market sectors that give those companies significant pricing power as well as cost controls. These form the “moat” that Warren Buffet talks about when he says he looks for companies with “large moats” around their businesses.

Other tools include more complex strategies that are managed by our investment partners such as stop-loss orders, trailing stops, shorting, and capping exposure to specific asset classes, sectors and geographies.

Finally, we look to build properly diversified portfolios that are not all subject to the same types of risk. This helps to balance out returns over time and make the investment ride much smoother.

How does CH Financial protect from the downside?

When creating or managing a portfolio, we use diversification to deploy cash into numerous asset classes. The asset classes that CH currently invests in include:

  • Canadian Fixed Income
  • International Fixed Income
  • Real Estate
  • Alternative Strategy
  • Canadian Large Cap Equity
  • International Large Cap Equity
  • Small-Cap Equity

CH creates portfolios using two core mutual funds, then “layer” in other mutual funds as the portfolio grows and/or more money is invested. The mutual funds we “layer” in provide diversification through exposure to other asset classes.

So, why use more than one fund in each asset class? We do so to provide further diversification but also to pair mutual funds in the same asset class that are complementary to each other. We pair mutual funds that have a low correlation, meaning there is very little to no security overlap. Simply put, the comparable mutual funds won’t own the same basket of stocks.

Finally, within this diversified portfolio, we make sure that our managers remain focused on the quality of the businesses that they buy. Additionally, we ensure that each of those businesses has strong free cash flows that will help lessen the likelihood that their value will drop when the markets get choppy.

Conclusion

While other advisors may be looking for the next mutual fund idea with high returns, our focus at CH is to pick mutual funds while simultaneously looking for ways to reduce risk, without compromising the targeted return for our client’s portfolios. Whether it’s diversification, using low correlated investments, or deploying completely uncorrelated mutual funds in a client’s portfolio, we are constantly focused on downside protection for clients. Please feel free to contact your advisor with any questions or to further discuss how downside protection is protecting your capital while building your wealth.

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Like you, we’re selective about the long-term relationships in which we engage.

We’re looking for aspirational clients who require the whole spectrum of financial services because managing the whole is how we’re able to deliver unbeatable value – it’s our “secret sauce”.

If this describes you, let’s set up a meeting and
get to know each other.

Are we a good fit?

We’re looking for aspirational clients who require the whole spectrum of financial services because managing the whole is how we’re able to deliver unbeatable value – it’s our “secret sauce.”If this describes you, let’s set up a meeting andget to know each other.

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I just want to say we have been with your team since 1993, and we have never had any bad advice. The investments you set up for us during this time has paid for university education for our two granddaughters and provided a significant monthly income for us to augment our pensions.

We are with you for the long run and are not going anywhere. Jeremy has told us that at these times the numbers tend to scare you, but you haven’t really lost anything if you don’t panic and sell.

Ken M, Calgary

With CH Financial since 1993

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When I became a client of CHF it was a real game-changer as I was going through a very difficult time both professionally and personally.

I went through a divorce and the loss of a job and a parent, all within a 12-month period. While it was very tough to deal with at the time, I was reassured by the fact that the team at CHF had my back and really cared about me and what I was going through.

Looking back now, I’m not sure how I would have managed without the support of the CHF family.

Jeremy and his team were there every step of the way to help me navigate my way through the complexities of a divorce and inheritance. They got me back on track both financially, as well as emotionally.

I have now been a client of CHF for over 10 years and thanks to their expertise, I know that my family will be well taken care of for many years to come. I am now in a position where I don’t need to worry about money thanks to a solid financial plan.

I would highly recommend the CHF team to others going through life-changing and difficult situations as your financial partner.

Linda, Victoria

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As an investment industry professional, I am constantly on the go and maximizing my peak career earning years in my 40s. With travel and work commitments I am very limited for time to spend with family and do the things I love to do and chose CH Financial to allow me more freedom and lifestyle balance.

Being in the investment industry my whole career and an extremely busy professional, I know I could probably do a good job at managing my money as I work in the industry after all while I rely on and trust the CH Financial team that they will take care of the details, both growing my assets as well as taking care of every aspect of my financial situation, including my tax, investments and insurance, they simply take away the stress of having to worry about it all and help me to navigate the complexities for me so it all meshes together and importantly saves me valuable time and headaches.

At the end of the day, the reality is I truly value my time and the opportunity cost of my time and would rather hire the best in the industry so ultimately my wife and I can do the things that we love to do, have more leisure time, relax and enjoy spending time in the great outdoors, exploring new countries, hiking in the mountains and volunteer work.

Since engaging CHF more than 5 years ago we have enjoyed significant growth in our investments but more importantly, we have peace of mind and sleep much better at night knowing the team at CHF has our financial back and anything financial they will take care of for us.

I would have absolutely no hesitation in recommending the team at CHF to other career-focused busy professionals who really value their time and lifestyle balance.

Kevin & Sharron, Calgary

Financial industry professionals

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Prior to joining CH Financial as a client, I had been partially managing our investments and using a bank-owned broker for many years, with moderate success. When we became clients of CHF, I quickly realized how little I knew about the complexities of managing investments and the importance of seeking out the best specialists in the industry to assist with my family’s full financial picture.

Brian and the team at CHF encouraged us to take an introspective look at our assets and expenditures and even helped us implement a comprehensive budget. The team really stepped up to take care of all aspects of our financial picture, including portfolio design, CH Financial introduced us to a lawyer who took care of everything for us, estate planning and tax, while helping us simplify our financial affairs.

Being of the sandwich generation my wife and I spend considerable time caring for our surviving parents and our grandkids, so

freeing up valuable time is essential to allow us to do the things we love to do. The team at CHF takes care of the details and today my wife and I enjoy a comfortable, stress-free financial situation.

Over the years as a client of CHF, both our portfolio and wealth has grown exponentially, more than we could have ever imagined. Now that we are both happily retired, having the CHF team in our corner helps us to sleep better at night knowing that our somewhat complex financial puzzle is being looked after by a team of people that really care, as opposed to being treated like a number by a big bank.

I would have no hesitation in recommending the CHF team to others looking for a superior financial home in Calgary and a safe place to invest your hard-earned money.

Ian C, Calgary

Comfortably retired thanks to CH Financial