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A year-end guide to maintaining your portfolio

Before you decide to rebalance, you need to benchmark your investments against major stock and bond indexes, ROB CARRICK writes

It's time to make sure you received your fair share of the gains served up by the major stock indexes and a lot of mutual funds in the past year.

Don't just assume you did because you own a couple of Canadian equity funds and the S&P/TSX composite has a very solid year-to-date gain of 12.5 per cent, or because you own some income trusts and the trust market turned in yet another standout year.

The only way to truly gauge how you did in the past year is to benchmark your portfolio against major stock and bond indexes. If you did as well or better, mark 2004 down as a fine year. A slightly worse performance is rarely something to worry about, but a lot worse requires a post mortem. Surprisingly, a portfolio that far surpasses the benchmarks may also be a cause for concern.

To start this exercise, you'll need year-end returns for your investment or registered retirement account. If you don't have on-line account access -- you can easily set this up at most brokerage and advisory firms -- then you'll have to wait a couple of weeks for your printed statement to arrive in the mail.

Next, you'll need a source of data on returns from the major indexes. The Globeinvestor.com and Globefund.com websites will do the trick here for the most part.

Let's start with the Canadian equities in your portfolio. If you own a diversified group of individual stocks, call up a quote for each one on Globeinvestor.com and then use the "price report" function to obtain the one-year gain or loss (you can measure the price changes in percentage or dollar terms). Then, tally your overall gain and loss and compare it to the performance of the S&P/TSX composite. If you only own big blue chips, use the large-capitalization S&P/TSX 60 index as a basis of comparison.

To get data on the performance of these two S&P/TSX indexes, plus other Canadian, U.S. and global indexes, use the "indexes" area of Globeinvestor.

If you own Canadian equity funds instead of individual stocks, then head to Globefund. This site's fund profiles compare individual fund returns with the appropriate benchmark, usually the S&P/TSX composite for broadly based funds and the S&P/TSX 60 for dividend funds. For a quick and dirty analysis, don't bother making special allowances for Canadian equity funds that hold some of their assets in U.S. or foreign stocks.

If you want a more precise view, Globefund's individual fund profiles should provide a geographical breakdown of a fund's assets (if they don't, try Morningstar Canada's website at http://www.morningstar.ca). For a fund with 10-per-cent exposure to the U.S. market, you'd use a blended benchmark of 90-per-cent S&P/TSX composite and 10-per-cent S&P 500 index. Be sure to use Canadian-dollar figures for the S&P 500 -- without currency adjustments, returns from U.S. stocks are meaningless these days, thanks to the rise of our currency against the U.S. dollar.

You'll find Canadian-dollar S&P 500 returns on any Globefund profile of a U.S. equity fund. Globefund's global and international equity fund profiles contain Canadian-dollar returns for the MSCI world and EAFE indexes, which are the proper benchmarks for these two categories, respectively.

For fixed income, the benchmark of choice is the Scotia Capital Universe Bond index. You can find year-to-date returns for this index on the Scotia Capital website at http://www.scotiacapital.com/ResearchCapabilities/RE_DomesticSC.htm.

The Scotia bond index can be used to measure bond funds and holdings of individual bonds. Bonds require special attention, though. If you bought a bond at par or thereabouts, then the coupon (that's the return set when the bond was issued) is the right point of comparison. The coupon will appear in your account statement right in the name of the bond, as in Telus Corp. 7.5 per cent 1JN06. If you bought a bond at a discount or premium, then use the yield that applied when you bought the bond.

Again, this is a quick and dirty analysis. Bond prices bounce around a fair bit as rates fluctuate, but this is meaningless to investors who hold their bonds to maturity for the income. In this case, all that matters is the coupon or yield.

Here are the right benchmarks for other asset classes.

Income trusts. Use the S&P/TSX capped income trust index -- it doesn't include some of the new trusts, but the compensating advantage is that it's easy to find data on this index in the "indexes" area of Globeinvestor.

Balanced funds. These funds typically have 60 to 70 per cent of their assets in stocks and the remainder in bonds and possibly cash. For benchmarking, you can either use the appropriate blend of the S&P/TSX composite and the Scotia Capital bond index or just rely on Globefund's fund profiles, which use a default of 60-per-cent S&P/TSX composite and 40-per-cent Scotia index.

Cash. The three-month Treasury bill rate is a good point of comparison. You can find data on this in the "Rates and Statistics" area of the Bank of Canada's website at http://www.bankofcanada.ca.

You'll notice that the usual benchmark for your investments is an index of one sort or another. There's a practical reason for this in the fact that you can "buy the index" through any number of index and exchange-traded funds. If your portfolio components can't match or beat the index, then you'll need to investigate.

Where funds are concerned, it's a good idea to look at a Globefund profile to see how they compare to the category average. Keep an eye out for funds that lag their peers as well as their benchmarks.

What should you do with laggard funds and stocks? A year's worth of underperformance can be disappointing, especially if it prevented you from getting a piece of strong markets like we saw in 2004. But it's not in any way a justification for selling.

Before you go that route, do a three-, five- and, if possible, a 10-year analysis of your holdings to see how they match up with the indexes.

Only if there's a distinct pattern of underperformance should you think about selling. Remember, even solid first-rate stocks and funds have rotten years.

Believe it or not, returns that demolish the benchmarks are cause for scrutiny as well. High-risk stocks or funds often exhibit a pattern of soaring highs followed by nasty declines. If you're happy with that type of risk-reward ratio, then fine. If not, then think about taking profits and switching to something steadier.

Benchmarking goes hand-in-hand with another form of basic year-end portfolio maintenance called rebalancing. That's where you make adjustments in the size of your equity, bond and cash holdings to ensure you're in line with the asset mix that best suits your investing aims. Essentially, the idea is to sell some of your winners to buy more of your losers.

Don't rebalance without first benchmarking your stocks, funds and bond, though. If you're going to recommit to a particular fund or stock, you want to first make sure it measures up.

A report card for your portfolio

The past year was a good one for financial markets, but that doesn't necessarily mean your own investments prospered. Here's an example of how to assess your portfolio returns using a hypothetical portfolio of actual stocks, bonds and funds bought Jan. 1.

Year-to-date gain/loss*Year-to-date gain/loss in dollars*
CANADIAN EQUITIES
$25,000 RBC O'Shaughnessy Canadian Equity Fund20.8% $5,200
200 shares Royal Bank of Canada at purchase price of $12,356 6.5% (including dividends) $803
200 shares of TransCanada Corp. at purchase price of $5,56611.6% (including dividends) $645
200 shares of Dofasco Inc. at purchase price of $7,27828.3% (including dividends) $2,060
TOTAL17.3% $8,708
COMPARABLE ENCHMARK S&P/TSX Composite Index12.5%
GLOBAL EQUITIES
$25,000 Templeton Growth Fund8.7% $2,175
COMPARABLE BENCHMARK MSCI World Index (Cdn. Dollars)8.2% (for year to Nov. 30)
U.S. EQUITIES
$5,000 AIC American Focused-0.8% -$40
COMPARABLE BENCHMARK S&P 500 Index (Cdn. Dollars) 3.5% (for year to Nov. 30)
FIXED INCOME
$15,000 in a five-year Government of Canada Bond with a coupon of 4 per cent4.0% $600
$15,000 in the TD Canadian Bond Fund7.0% $1,050
TOTAL5.5% $1,650
COMPARABLE BENCHMARK Scotia Capital Universe Bond Index6.7%
CASH
$7,500 in the Altamira T-Bill Fund 1.8%$135
COMPARABLE BENCHMARK Three-month T-bill 2.2%
PORTFOLIO TOTAL10.7%$12,628
BLENDED BENCHMARK RETURN# 9.1%

-* From Jan. 1, 2004 through mid-week;

# Blends the benchmarks using the same assets weighing as in the hypothetical portfolio.

SOURCE: WWW.GLOBEINVESTOR.COM

© 2007 The Globe and Mail. All rights reserved.

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