CRM2 part 1

Client Relationship Model

May 13, 2016

Welcome to Part 1 of our series of blog entries as we review the impact of the new Client Relationship Model (CRM2) being implemented throughout the year.

Time vs Money Weighted Returns The Impact on Performance Reporting

What is CRM2?

In short, CRM2 is an initiative by the Investment Industry Regulatory Organization of Canada (IIROC) and other industry regulators to:

  1. create a new standard in performance reporting, and
  2. help clients fully understand the costs associated with investing.

This has been an ongoing implementation process for several years and in 2016 you will see more detail in the areas of performance and cost reporting on your portfolio statements. The Wooding Group has disclosed costs and net performance measures to our clients for a long time; therefore for the purpose of this blog, we’ll examine how performance reporting will change.

What’s New? Money-Weighted Returns

Starting at the end of 2016, your performance report will include both Time & Money weighted return calculations. Time weighted returns is the traditional calculation method and has long been the industry standard when evaluating performance at the Institutional level. Money weighted returns now introduces a timing element to the performance calculation.

Time vs. Money Weighted Performance: A Sample

Time vs. Money is best highlighted with an example, let’s take a look at 3 different investors that each had $100,000 in the EdgePoint Global Equity Portfolio as of January 1, 2015. The EdgePoint Global Equity Portfolio is a great sample as it had strong returns for the first 6 months of the year, then was slightly negative for the latter 6 months. While all the clients experienced identical ‘time-weighted’ returns of 12.7% over the course of 2015, each had different ‘money-weighted’ returns based off the timing of their purchase or withdraw.

Let’s take a look at all 3:

inline-table

Smith: had no transactions throughout the year and therefore her time and money-weighted returns are identical.

Jones: made a mid-year investment of $50,000 into his portfolio. Given the timing of his purchase, it actually caused his money-weighted return to be lower than his time-weighted return

Todd: withdrew $50,000 from her portfolio the same day Jones invested. She had great timing and took capital to buy a new car at high point during the year. As a result, her money weighted returns are significantly higher than her time weighted return.

Observations

  • While all 3 investors held the same security, for the same amount of time, the money weighted returns are different based upon the timing of purchases or withdrawals. Time-weighted returns ignores all contributions and withdraws when calculating performance, while money-weighted takes them into account.
  • Over time, the difference between time and money weighted returns should be very close

Our thoughts

As your trusted investment advisors, our duty is to manage your assets for the best possible outcome while staying within your risk tolerance and investment objectives. We utilize our Team approach which has a disciplined process at its core this allows us to constantly evaluate investment choices while making the best decisions with your objectives in mind. We advocate investing for the long term and cannot always control the timing of our clients purchases.

Often, when people ask us when the best time is to invest, our response is ‘today’. We can honestly say that we don’t know what will happen to the ‘market’ tomorrow or next month, but if your time horizon is longer-term, we believe today is a great time to invest and let the magic of compound growth, diversification and disciplined investing take over!

We cannot control the timing of your purchases or withdraws as most of those are driven by your individual situation. Communication remains key. By keeping us in the know with regards to your current financial situation enables us to plan accordingly. We will continue to monitor our investment choices and your portfolios based upon quality, methodology and time weighted performance.

However, we do think the era of new CRM2 and the resulting reporting will create a better understanding of how you have performed and that is a great piece of knowledge for you as an investor!

Pete & The Wooding Group