• Focus on probabilities and use deeper diversification to address risk.
  • Choose international investment vehicles to manage U.S. estate tax and address foreign asset tax reporting.
  • A close relationship to your clients will make a difference in times of market volatility.

What are some of the unique characteristics of your practice?

Our clients are conservative, for the most part, and so our focus is on capital preservation.

I started in the financial industry in 1996; 1998 was pretty hard, with the Asian crisis. Then there was the tech bubble; then there were the accounting scandals. A little bit later, the commercial paper crisis occurred. In 2011, there was the European sovereign debt crisis, and so on.

I’ve learned to take a very humble approach: I don’t know any more than the next manager and I’m not any smarter than the market. Our focus is not on what we think will happen, but on what could happen.

I believe most advisors would do a good job for their clients if they adopted the same focus.

What are some of the key considerations to keep in mind when designing an internationally diversified portfolio?

In terms of returns, there can be a meaningful difference between having U.S. stocks in U.S. dollars or in Canadian dollars. Sometimes currency fluctuations favour you, sometimes they don’t.

"I’ve learned to take a very humble approach: I don’t know any more than the next manager and I’m not any smarter than the market."

In addition, depending on the kind of investment vehicle you use, tax issues may become very complex. The Foreign Income Verification Statement (Form T1135) that Canadians have to file if they own more than $100,000 in foreign property has recently become much more complicated, for example. If they own U.S. equities, wealthy individuals may also face a significant U.S. estate tax.

Some exchange-traded funds (ETFs) are also Canadian trusts, however, and are not considered U.S. assets even though they may invest in U.S. stocks. Investors can therefore bypass those complexities as well as the U.S. estate tax that would be due upon death if they have direct U.S. equity exposure.

With ETFs, it is very simple to create an internationally diversified portfolio in Canada with Canadian dollars, avoiding conversion fees and many tax issues. And you have the choice of hedged or unhedged funds.

Are there other reasons that you’ve adopted ETFs as part of your portfolio?

Research shows that the probability of outperforming the market as a whole is quite unlikely. There are always some managers who do so within a brief timeframe, but in the long run, the likelihood of finding a manager who does so on a sustainable basis is very low.

I used to outsource to different money managers. It’s a strategy I call risk execution management: you select a manager and give him a portion of your client’s money because, historically, he has a low downside capture – when the markets go bad, his fund doesn’t go as bad. Of course, it normally doesn’t go up as much, either. So you hire another manager for that upside capture. Soon it’s a bit like a coach managing a hockey team – and over time, you find your forward playing the goaltender’s role or that your defenceman is always on the offensive. The team doesn’t do what you hired it to do.

What is your best advice for less senior advisors?

Global opportunity is not necessarily elsewhere. It’s not necessarily in Canada. It is looking at all options. And it is avoiding what did well the previous year. Everybody wants that, but they really wanted it the year before, not the year after.

"With ETFs, it is very simple to create an internationally diversified portfolio in Canada with Canadian dollars, avoiding conversion fees and many tax issues."

Don’t think you’re better than other managers. Don’t think you’re better than the market. Think of what could happen as opposed to what you think will happen. By doing so, you’ll have deeper diversification, and the likelihood that your clients will have a bad experience is much reduced.

Finally, as the adage goes, remember that “clients don’t care how much you know; they want to know how much you care.” When we ask our clients what we could do better to serve them and what they like most about our work, they always mention how much they value the fact that we call them regularly, in the good times as well as the bad times. Be close to your clients – it will make a difference.

Jean-Philippe Ste-Marie

Jean-Philippe Ste-Marie

Wealth Manager and
Portfolio Manager
National Bank

Jean-Philippe Ste-Marie joined National Bank Financial in 1998. An investment advisor and portfolio manager, he and partner Luc Richard “concentrate their efforts on monitoring disciplined investment plans for their clients.”

One More Thing

We see home country bias often among people who manage their own investments. They tend to invest in companies they know, local companies or a few very mega-large-cap worldwide companies. So many opportunities pass them by. If you spread newspapers out over a table and only look at four per cent of the table, it’s likely you’ll miss some great reading. You can see where I’m going with this: the same is true of looking solely at Canadian markets. Sometimes it is good to be home when Canadian stocks are at valuations that are more attractive than elsewhere, but the likelihood of it continuing over a longer period of time can be questioned. Outperforming stocks or asset classes tend to underperform after a while and vice versa.