The risk ratings on funds can be a joke. In fact they are an “absolute” joke according to James Gauthier, Partner and Chief Investment Officer at Justwealth. And there’s some math humour in there as the risk system is based on “absolute” measures, not relative. The risk rating on mutual funds and ETFs is based on historical volatility. In this post we check in on the risk and performance of the Justwealth portfolios in the March stock market correction.
James offered that …
Any system which attempts to rank subjects into categories needs to compare the subjects against each other, not some arbitrary fixed measures that change over time.James Gauthier, Justwealth
In the Globe and Mail, Dan Hallet offered that the risk ratings failed in the recent stock market correction. Dan feels that the risk rating should be based on an estimate of how much a fund will fall in a major stock market correction. I’d agree. That’s how I would frame it when I was an investment advisor at Tangerine Investments.
Adding those shock absorbers.
If you’re moving into an all-equity portfolio or fund you have to make sure that you’re prepared for a 50% drop in value. Can you handle watching 50% of your portfolio disappear? If not, we’ve got to manage the risk levels. We have to reduce the amount that the portfolio might drop in a major stock market correction. The traditional risk managers that can work like shock absorbers are bonds. Bonds are the adult in the room.
The risk rating currently used ignores the stock to bond ratios. In the stock market correction that ran into March the risk ratings failed way too often. In the Globe Dan offered …
The “low to medium risk” category contains an awful lot of funds holding nothing but stocks – which is nonsensical. More than 35 per cent of the 1,200 funds in this category lost more than 15 per cent, of which 38 per cent saw declines of more than 20 per cent. Ouch!Dan Hallet, Highview Financial Group
And many funds in the low risk category lost 10% or more in the correction. One ‘low risk’ fund lost 24.8% of its value. The returns were all over the place for each level of risk.
The 5 risk categories.
The risk categories are normally described as …
Low Risk / Low to Medium / Medium / Medium to High / High Risk
And here’s the fund averages in Canada vs the Justwealth Portfolios. These are the portfolio declines from the beginning of February to the end of March. We see that the Justwealth portfolios held up better than the average fund. For example, in the medium risk category the average fund was down by 18.3%, while the Justwealth portfolio was down 13.6%.
The Justwealth portfolios used for comparison:
- Low Risk – Capital Preservation
- Low to Medium – Global Conservative Growth
- Medium – Global Moderate Growth
- Medium to High – Global Balanced Growth
- High Risk – Global Maximum Growth
Also in the mix for consideration… Justwealth’s Low Volatility Equity Portfolio was down just 17.2%. That all-equity portfolio is at a medium to high risk level.
Justwealth performed much better than the average fund in Canada on risk/drawdown in every category. And there are no surprises. There are no outliers. That is the benefit of a more comprehensive portfolio with sensible asset allocation.
Gauging the investor’s ability to withstand certain levels of portfolio decline is key. It’s built right into the risk evaluation models for the Robo Advisors. And what gives them that Robo moniker is that you can choose to do everything online. The online questionnaires will determine your tolerance for risk, assess the goals, and offer you the appropriate portfolio.
Keep in mind that there is investment advice available at all of the Robo Advisors. A few of them also offer financial planning. Justwealth assigns a personal portfolio manager to each client. They are quite human.
On that subject, here’s my review …
Gauge the risk. Match the risk and goals to the investor.
The performance of the Justwealth portfolios.
Here’s the link to their performance page.
Below you’ll see the returns for the Justwealth portfolios used for the above evaluation. The most conservative portfolio is in the top row. The risk increases as we go down the list. The returns include the Justwealth fees and the fees for the ETFs. The returns are to July 31, 2020.
Those are some very solid returns. But at Justwealth there can be additional benefits thanks to financial planning option and the greater number of tools in the chest, compared to the other Robo Advisors. Tax efficiency is of great concern.
They are also recognized as the go-to shop for RESP portfolios in Canada.
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