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Understanding Your Annual Report

As our reports are unique and comprehensive, this article will endeavour to help you understand your report better.

Strategy Review

We start with a Strategy Review, which expresses in a few simple words what you are trying to achieve with this money. As most of our portfolios are managed under the asset allocation method, your planned asset mix and actual mix at the report date are disclosed. Sometimes, the actual mix bears in mind funds that you maintain elsewhere but are known to us. Where there is a significant discrepancy between actual and plan, some comments will be given explaining why.

Summary Observations

The Summary Observations show how much money was made and the overall return.

Benchmarks

The Benchmark returns are drawn from market sources to encompass the same reporting period as your report. Ideally, benchmarks would be extremely useful to assess your portfolio’s performance. Practically, it is not so simple. Most of our portfolios are balanced to some degree, whether it be balanced between more and less risky assets, or between different geographic zones in the world. Thus, no one benchmark can reflect the allocation of your portfolio. The alternative would be to weight a collection of appropriate benchmarks to the same weightings as your portfolio. Sometimes, this works. Often, your allocation may not have remained static throughout the year as we react to developments and deploy new funds. Thus, your weighted-benchmark may not be comparable for the whole year.

The benchmarks are reproduced on colour graphs showing you the direction of various markets over the entire reporting period. Each month-end represents the return for the twelve months then ended, thus giving a “rolling” annual return by region or type of investment.

Detailed Observations

The Detailed Observations review the performance of every asset you own. They refer to the accompanying "Detailed Report". Note that the individual returns on the detailed report are not valid when the asset was not held for the entire twelve months.

The chart appearing in the "Detailed Report" breaks down the income and return into the cash income and realized and unrealized gains/losses.

Cash income refers to dividends and interest paid into the account. This may include accruals; meaning, for instance, interest earned up to the report date but not payable until the investment’s next anniversary date (typically, semi-annual for bonds and annual for GICs).

Realized gains and losses result when something is sold during the year, and is calculated as the difference between the sale proceeds (net of any brokerage commissions) and the market value at the last report date. If the asset was bought and sold within the period, the gain would be calculated as the difference between the proceeds and the purchase cost.

Unrealized gains and losses are the differences between the closing and opening values of the assets (or purchase cost, if bought in the period). The report may break out the gains between fixed income assets (bonds) and equities (stocks). Bonds can fluctuate in market value, like stocks, due to movements in market interest rates. This is called the current yield. Typically, we hold bond assets to maturity, in which case the temporal fluctuations in value do not contribute to “sell” decisions. It may be interesting to review the proportions of cash and appreciation which help to build your portfolio.

The detailed report includes a graph which shows the cumulative growth in your portfolio arising from your contributions as well as cash income and gains from year to year.

A second graph shows the overall growth in your portfolio from year to year superimposed on the comparative historical annual returns.

For your fixed income (bond) portfolio, we calculate the “average rate of return”. This is the weighted average of the yields-to-maturity of all of your bond holdings. It tells you what return is being earned on the “bedrock” part of your portfolio.We also disclose the “average term-to-maturity”. This is the average length of time from your report date that your bonds will be available for cashing out or re-investing. This is an important statistic in managing a bond portfolio, as it measures your liquidity (quick access to cash) and exposure to interest rate movements. We have a target for your portfolio and this measures that attainment.

Where you have a portfolio of direct stocks, we do an analysis of the diversification across industrial sectors:

In many portfolios, we also report your international diversification. This is a time-consuming process that requires delving into the geographic allocation by the managers of your foreign mutual funds and is based upon analysis of their recently published reports. Again, we typically have international targets to spread your money around the globe and this measures that attainment.

One of our international investing strategies is to invest in direct stocks of global companies. As they are globally diversified, it is not practical to allocate them to specific countries in the above analysis.Thus, they are excluded from that summary.

Proposed Changes

In the Proposed Changes section, we comment on the propriety of your overall allocation plan. Sometimes, we will suggest that you change the allocation to become more risk-taking or risk-averse. Based upon the overall and detailed reviews of the entire report, we may make recommendations for specific changes. It may be time to divest a “loser” or harvest a “winner”. It also may be time to sell and redeploy to re-attain the planned allocation. This step is at the heart of the Strategic Asset Allocation Model that we practice to manage your money.

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