Despite working in the finance industry for nearly 20 years, securities analyst and portfolio manager Randy Cass’ best strategic investment advice to investors is to sit back and let the market make most of the tough decisions. “Human psychology makes us very prone to selling things after they have gone down and buying things when they go up,” he says.
Randy Cass is CEO, portfolio manager and founder of Nest Wealth Asset Management Inc., a Toronto-based automated portfolio management company. He describes himself as a “full-on believer in passive investing”.
“Empirically, objectively . . . it’s the way to increase a person’s wealth,” he says of trusting the market over the long term. “Exceedingly high” fees in Canada compared to other markets further eat into profits in actively managed portfolios, he also points out.
Compared to passive investments tied to the massive trends that play out across an economy and the collective brainpower of millions of investors in the broad market, an active portfolio manager will have much more difficulty planning investment strategy and keeping up gains over time, Mr. Cass argues. He adds that the task becomes even more complicated when accounting for the fact that portfolio managers’ fees come from their clients, and “then almost impossible” by piling on human emotions as well.
Human advisers supported by automated wealth management
About three years ago, he founded his latest enterprise based on his faith in passive investing, an online portfolio management business called Nest Wealth (nestwealth.com), which now boasts thousands of clients.
(Mr. Cass previously handled quantitative investing strategies for the Ontario Teachers’ Pension Plan as well as internal funds and currency trading earlier in his career. He also founded First Coverage, a company that operated a financial information website and was sold in 2011, and hosted Market Sense on BNN from 2012 to 2014.)
Clients answer questions about their age, income, and risk tolerance. From there, Nest Wealth designs a custom portfolio of exchange traded funds for the client. “It’s just as easy for us to make a customized mix for each individual, so that’s what we do.”
While most investors might refer to a company like Nest Wealth as a ‘robo-advisor’, Mr. Cass says he describes it as a “digital wealth manager” because, he notes, “in Canada, there’s still a human involved in the process”. Clients talk to a human portfolio manager before committing assets to the market.
Even so, much of the day-to-day administration of portfolios is automated, allowing Nest Wealth to efficiently manage portfolios of varying size and allowing clients to pay a flat monthly fee regardless of how much money is in their portfolios.
“Really, the technology is being used to create more convenience for the consumer. Technology provides a better distribution methodology.”
Mr. Cass stresses that Nest Wealth takes a strictly “passive, plain-vanilla, boring . . . and by the book” approach to investing. However, the human touch incorporates best industry practices to determine the right asset mix for clients, for example re-balancing portfolios, managing portfolio drift, and adjusting holdings with age.
“Those things are important and we add value in those areas,” he admits, but stresses that Nest Wealth lays “no claim to knowing the market better than others”.
3 building blocks for a solid investment portfolio
Given Nest Wealth’s reliance on the overall progress of a diverse market, Mr. Cass says the foundation for a solid investing portfolio should reflect a mix of Canadian equity and Canadian fixed-income components.
In addition Nest Wealth looks for exchange traded funds that have low-cost fees to add to its clients’ holdings.
Mr. Cass also stresses the importance of selecting ETFs that accurately follow the underlying sector, commodity, or stock index that it is supposed to be based on.
“An ETF that doesn’t track what you want it to track is of no worth to you.”
Based on these principles, he singles out the iShares Core S&P/TSX Capped Composite Index (TSX—XIC) as his first ‘best buy’ selection, fulfilling the Canadian equity component. He praises XIC’s excellent trading liquidity and low tracking error relative to the underlying index. As a capped index, it also limits the weight of any single security.
For Canadian fixed income, his second ‘best buy’, the BMO Aggregate Bond Index (TSX—ZAG) fits the bill. The index is currently split among 36.84 per cent federal bonds, 34.63 per cent provincial and 28.53 per cent corporate debt.
Finally, for some exposure to the U.S. market and gains there, he recommends the iShares Core S&P 500 Index (CAD-Hedged) (TSX—XSP), which tracks its namesake benchmark but is hedged to the Canadian dollar, thereby tamping down on foreign exchange effects.
Once investors pick up this “three-headed beast”, Mr. Cass says, “you’re well on your way to creating a fantastic portfolio.”
This is an edited version of an article that was originally published for subscribers in the April 7, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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