Five tricks from the end-of-year playbook
Most fund managers, even though hardly any ever beat the market on a consistent basis, are generally pretty smart people. They work hard. It’s not their fault that high fees compounded over time puts their relative fund performance in jeopardy. For individual investors, though, watching what fund managers do can sometimes really help one’s portfolio. You can look through filings for top holdings to get new stock ideas, or watch sector weightings to perhaps get a heads-up on what the pros are thinking in terms of positioning their portfolios.
For your own portfolio, acting like a mutual fund manager can also be beneficial. At year end, for example, fund managers go through several exercises with their investments. Your own portfolio might benefit from following examples. First, suppose that, in January, you are going to have lots of people looking at your portfolio (not just your spouse). Will you be confident that these outside eyes will see that you have a well-structured portfolio plan? Fund managers of course have thousands of investors to be accountable to, and as we approach year end they take several steps to avoid complications and questions when the fund’s year-end statements are released. For example:
TAKE YOUR LOSSES
Most investors are aware of the benefits of tax loss selling. Still, selling your losers is still something most investors have discomfort with. No one likes to admit they were wrong. But fund managers make mistakes all the time. Because taxes are passed through to investors, most managers have less incentive to sell for tax reasons than other investors, but it still occurs. Do not wait until the third week of December to sell. Many investors are looking at their potential tax loss candidates already, and we see most of this activity in the second or third week of November. In addition to selling your losers, don’t forget to watch for new opportunities as well. There is a well-documented January “small cap effect” as the stocks of small companies bounce in the New Year because all of the taxloss selling is finally over. Thus, be nimble: Some of your losers this year could still be quick winners in January.
GET RID OF STOCKS THAT YOU’RE ASHAMED ABOUT
When investors pore over a fund’s year-end statement, they question anything that looks “different.” Suppose you bought that “hot” IPO that went lukewarm. Suppose you foolishly (or not!) bought into all the hot sectors, such as marijuana, lithium, cobalt or bitcoins. Hive Blockchain (HIVE on Venture) for example, is up 2,900 per cent in the past few months. Sure, maybe it is the next great winner. But as a fund manager do you want to show investors you loaded up on an $800-million company with no revenue yet? Take a look at your own portfolio. If you couldn’t explain — from a fundamental perspective — why you own something, maybe consider cleaning it out from your portfolio and doing some more research on it.
DIVERSIFY AND RE-ALIGN YOUR SECTOR ALLOCATION
We are not sure why, but we see, all the time, “general” Canadian equity funds with 55 per cent sector positions in energy, or 65 per cent in financials. We imagine these managers are simply taking “bets” on sectors. Prior to year end, though, many fund managers will realign their sectors allocations, so their fund actually looks more diversified than it was during the year. For your own portfolio, year end is a good time to make sure you are properly diversified. There are 11 TSX sectors. How many do you own?
SPEND YOUR EXCESS CASH
If you are running a mutual fund that has an expense ratio of 2.3 per cent, the last thing you want to do is show to your investors that you are holding a 35 per cent cash position. No one likes paying high fees on cash balances, so many fund managers will reduce their cash positions going into year end. This is especially true when the market is having a good year, like this year. Sitting on cash (and paying fees on it) in a bull market is not something that investors want to see from their well-paid fund manager.
TAKE A LOOK AT BUYING SOME MOMENTUM STOCKS
Suppose you are a fund manager and you are not having a great year. Maybe you missed out on some big winners. Well, now might be the time to take a look at some of these ideas again. Your fund is underperforming, and if you do not own some of the big movers then you are, from a competitive standpoint at least, making a bet against them. Fund managers are often paid bonuses on how well they do against other funds, not just the market. If your competitors own Nvidia or Shopify or some other star performers, you might want to ask yourself why you do not. This does not mean piling into any old stock just because it is up, but you should re-examine your negative thesis on these hot stocks, because, so far, you’ve been wrong.
So, take some portfolio tips from the pros. Since, if you are a do-it-yourself investor, you pay no management fees, you can learn from the pros AND beat them as well.