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Mar 4, 2019

CMS Model Portfolio Update Weathering A Tough Year

by Ryan Modesto

Ryan ModestoIt has been some time since we did a thorough update of the CMS model portfolio so we decided to dedicate a few pages to this topic here. Before we dive into performance and changes to the portfolio, we wanted to discuss the strategy of the portfolio as a refresher.

Portfolio Strategy:

The strategy of the portfolio is meant to be largely a passive, low cost portfolio strategy diversified by asset class (equity, fixed income), geography (Canada, US, International), currency (Canadian Dollar vs. US Dollar) and style (growth, value). We then tilt the portfolio around the edges in an effort to generate some alpha. This is seen through exposures such as the covered call ETF (ZWU), Consumer Discretionary ETF (XLY) and Tech ETF (VGT).

The holdings are concentrated more on Canadian and US geographies and in general is tilted more to the growth spectrum but we would consider it still a fairly balanced strategy overall. We do believe that with longer lifespans and less reliable pensions (or none at all) for many, portfolios need a bit more growth in order to meet lifestyle needs than investors may be accustomed to compared to past decades. This is also largely a consequence of lower interest rates not being robust enough to support retirement incomes after costs and inflation.


There are two ways one can rebalance a portfolio: Calendar based or based on a threshold. For calendar-based rebalancing, one sets a time in their calendar (quarterly, semi-annual, etc.) and rebalances when the date comes up. For threshold rebalancing, one sets a range of weightings the investor is comfortable with and rebalances when a holding moves outside of the range. So, one might be comfortable with a particular ETF at a 10% weight +/- 5% (so as low as a 5% weight or as high as a 15% weight). When the fund exceeds 15%, you would rebalance back to 10% and if below 5%, you would add to the position to bring it back to 10%. While we do not have set ranges for the CMS portfolio specifically, we tend to rebalance as the weightings drift from initial weights but are happy to let things drift either way to benefit from momentum trends and ‘let winners run’.


In general, tax implications and decisions need to be done at the individual level. Since everyone’s situation is different, it is difficult to construct a general model portfolio that takes taxes into consideration. With that said, we strive to be low turnover in order to limit unnecessary taxable events. If an individual wanted to tax-loss sell some losers in the model, this would be something they could do with relative ease if they so wish.

Overall the intention of the portfolio is for it to be a starting point for an investor that they can tweak in a manner that makes sense for the situation.

2018 Review

As most readers likely know by now, 2018 was a wild ride and a tough year for all investors everywhere. Essentially every asset class and market ended the year in negative territory and things were looking pretty bleak heading into the holidays. Fast forward a whopping two weeks and all of those concerns have at least eased and markets have rallied roughly 8% over the year-to-date period as we write this. If an investor needs a case study as to why thinking long-term and not trying to time the markets is key, look no further to the ‘V-shaped’ market move around the year-end and New Year. In 2018, the TSX returned -8.9%, the S&P 500 returned

-4.4% and a balanced portfolio in the form of iShares ‘XBAL’ returned -3.15%. These returns include dividends and distributions.

Turning to the CMS Model Portfolio, returns were -3.9% for 2018. This is about what we should expect for a passive and broadly diversified portfolio of ETFs. Losses were less than equity markets and the portfolio was in-line with a balanced benchmark. The lower performance compared to XBAL would be attributed to a bit higher risk being taken on in the CMS portfolio through higher equity compared to XBAL. Since inception of October 18, 2013, the portfolio has returned 32.5% which is an annualized return of 6.9%. It is important to note that these are as of year-end and the recently posted portfolio shows more recent (and better) returns. Again, this is probably right where we would expect a broad, passive portfolio to be. A long-term return expectation of 7% is often cited as a reasonable expectation for investors and this appears to ring true.


With cash nearing 7% and the equity allocation growing over the years, we are going to do some more defensive rebalancing this year. Out of the cash balance, we are going to put most of the idle cash to work by adding 2.5% to each of XBB (an additional 114 units per the model portfolio) and CPD (an additional 278 units per the model portfolio) as of market close on February 7th, 2019.

Next, we are going to trim SPY and in turn the US allocation by 1.5% (8 units) and reinvest these funds into ZWU (an additional 167 units). This will increase the average portfolio yield while also positioning the portfolio a bit more defensively.

These changes are hardly ground breaking but no one ever said managing a portfolio should be ‘exciting’. Thinking long-term while rebalancing holdings appropriately and thinking in the context of a diversified portfolio is key. Oftentimes when an investor gets impatient and attempts to make large and unnecessary changes is when the most damage can be done.

We do not know what he next year will hold but can be certain there will be volatility and uncertainty. We continue to view the CMS Model Portfolio as a solid starting point for an investor looking for more of a passive, market-based portfolio while providing some potential for alpha over time with some of the sector and income tilts in the portfolio


Ryan Modesto, CFA,

CEO, 5i Research Inc