Seven reasons to own individually managed portfolios

Diversification is a key principle of portfolio management. Owning just a few stocks is very risky, since one bad result can have a major impact on the entire portfolio. However, owning a lot of stocks can be expensive, time consuming and cumbersome. The need for a way for investors to diversify their holdings led to the idea of pooling the assets of a lot of investors into one pot. This led to the creation of the first mutual funds in the 1950s, and the idea has only gained popularity over the decades. Now the number of mutual funds for sale far exceeds the number of traded stocks. Exchange Traded Funds (ETFs) are a low-cost alternative to mutual funds but fill the same purpose and have become incredibly popular. Blackrock, the leader in the creation of ETFs through its iShares brand is now managing over $3 trillion.

Although mutual funds and ETFs are an easy and inexpensive investing solution, there are a number of good reasons to own individual securities in a managed portfolio. This is particularly true for those with larger accounts, say, over $500,000. That is why we continue to emphasize this part of our business, although we now run a pooled fund specifically designed for our smaller accounts. Here are seven good reasons to own shares in a segregated, individually managed portfolio.

  1. Index-based funds combine the good, the bad and the ugly.

A very popular investment idea is to simply buy a fund that moves up and down in lockstep with a major stock index such as the TSX, the Dow Jones Industrials or the S&P 500.  Rather than try and pick winners, instead just own all the stocks.  You are guaranteed to have every winner, but equally, you will also own every loser. You take the average risk and you get the average return. Index funds are very cheap, but you get what you pay for. When the market goes down sharply as it did last spring, your fund goes down with it.

  1. Funds may not be as diversified as you think, or as you want.

With many funds, including index-based ones, the investor will often get a very lopsided, undiversified portfolio, exactly what you are trying to avoid. In 2000, Nortel alone made up over 35% of the TSX index. A buyer of a TSX Index fund might have thought she was getting a diversified portfolio, but more than 1/3rd was invested in one company, one that went bankrupt quite soon thereafter. This becomes a problem whenever one sector or one stock becomes “hot”.

Many clients believe that by buying several mutual funds or ETFs created by different companies they will get a diversified portfolio. Often, however, they find that they own the same stock in multiple funds, creating duplication and less diversification than desired. Almost any Canadian large-cap fund will, for example, probably own at least four of our big banks. Buy a Canadian dividend focused fund and you might easily end up with exactly the same four banks. This is particularly true in the rather small Canadian stock market with relatively few high-quality choices available.

  1. What do you own and why do you own it?

In an index-based fund you know what you own, but in other funds, the holdings are completely opaque; you find out after the quarter-end what the fund owned ON THAT DAY, but not what it owned in the preceeding 90 or so days. If your fund trades frequently, (and many mutual funds have turnover rates that exceed 200%/year), this snapshot really tells you nothing. You have no idea why the fund manager bought something, sold it, and perhaps repurchased it. You are in the dark.

Do you care what you own? At Baskin Wealth Management we have always believed that buying a share of a company means taking ownership of that company, even if only in a small way. For that reason, we have never purchased tobacco companies, small arms manufacturers, internet pornography or gambling companies, and importantly, any other company that a client does not wish to own. Over the years many clients, for example, have asked us not to buy oil sands related firms. We can do that for them in their segregated portfolios. Buying a mutual fund or ETF sacrifices the ability to control what you own or even to know what you own.

  1. You have no control over your tax situation.

If your portfolio is made up only of registered accounts such as RRSPs and TFSAs, taxes are not an issue.  However, for other accounts taxes can have a major impact on your returns. In a segregated portfolio you can decide when to realize capital gains or losses, how much dividend income or interest income you want, and you can address and adjust these choices over time. In a mutual fund or ETF, you own a share of whatever gains or losses the manager chooses to take, as well as your share of the dividend and interest income earned by the fund. We know that some years some of our clients want little or no capital gains, and some years, they can afford to take more. We also know lots of people who have had an unpleasant February surprise when the tax slips arrive from the mutual fund managers.

  1. Depending on the product, liquidity can be problematic (or occasionally impossible).

Here is a true story. We recently brought a client’s large portfolio in from another manager. It contained a mutual fund which could only be sold on quarter-ends; this is not too unusual but certainly is inconvenient. It was late January when we put in the order to sell on March 31st. It then turned out that it took a further six weeks for the manager to compute the quarter-end value and pay out the proceeds, in mid-May, almost four months after the client had requested the money. Low liquidity or delayed liquidity is most common in funds that hold “alternative” assets. During the height of the COVID market crash two of Canada’s largest mortgage investment companies froze redemptions altogether. Most inconvenient for clients who wanted or needed their money for some other purpose. In contrast, everything we buy at Baskin Wealth Management is liquid at all times.

  1. Who is paying attention to your needs?

Investing in mutual funds and ETFs is easy. So easy, in fact, that clients of large banks and mutual fund companies may find that nobody is paying attention to their holdings once the initial asset allocation has taken place. It is often a case of “fire and forget”.

A fundamental principle of good portfolio management is to monitor investments carefully, reading quarterly reports and listening to company conference calls, all in the service of weeding out poor performers and concentrating on the better prospects. Index funds, by definition, abandon this discipline.  A good manager of a segregated portfolio will save you from disasters; holders of index products have no way of avoiding the inevitable stinkers that detract from portfolio return.

  1. Foreign holdings carry an additional level of risk: Fluctuating currencies.

A year ago, the Canadian dollar was trading around US$0.725. Last month it peaked at around US$0.835, a gain of about 15%.  That’s a lot of volatility, but nothing compared to currencies like the Turkish Lira which has lost half its value in the last three years or the Argentinian Peso, down 85% in the same period. Purchasers of “Global” mutual funds and ETFs or “Emerging Market” products often find to their horror that however good or bad the underlying companies might be, the ultimate investment return might depend more on currency movements than stock market prices. The average investor has very little understanding and no control over the extent of the currency risk in fund of this kind. In contrast, an individually managed account can measure currency risk and work to maximize returns by, for example, buying US stocks when the Canadian dollar is high, and selling them when it is low.

In summation, mutual funds and ETFs are a great solution for some investors, chiefly those whose invested funds are not large enough to allow adequate diversification and those who choose not to engage professional managers.  For all others, we think there are real advantages to the individually managed portfolio. Our results over the last twenty-three years demonstrate the truth of this statement.


David Baskin




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