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The term “alpha” is often bandied about in the wealth management industry when firms boast their ability to exceed run-of-the-mill investment returns. But consistently providing results and finding ways to go beyond are easier said than done.
Finding alpha isn’t just a matter of creating the perfect portfolio, it’s about providing value. For Nicola Wealth, that means letting all the parts of a client’s financial picture, including investing and planning, work together. Too often, and to the detriment of performance, the two are kept separate.
Taking a planning-first focus, where investments serve and elevate the plan, is fundamental, says Ben Jang, portfolio manager with Nicola Wealth.
The firm’s advisory and portfolio management team serve some of Canada’s most affluent families and has a historical track record of providing long-term alpha for clients. Mr. Jang says most managers in the industry strive to outperform their respective benchmarks. But at Nicola Wealth, alpha is about more than just providing investment returns.
“Our philosophy is unique,” says Mr. Jang. “The Nicola Wealth approach to generating alpha is about managing risk first and foremost in the context of each client’s circumstance. That goes beyond the portfolio and extends to their overall tax picture, their retirement income needs, and objectives for a legacy.”
Through that lens, financial planning is paramount to success.
“While we rely on our portfolio management team to drive investment decisions day to day, our role as financial planners is to work with clients for a holistic understanding of their situation,” says Russell Feenstra, wealth advisor and client relationship manager at Nicola Wealth. “That means that before we do any analysis, recommendations or even a review, the first step is to fundamentally understand their lives and what’s important to them.”
That requires a deep dive into clients’ complex finances, consisting not only of registered assets, but often sizable non-registered accounts, and several businesses, holding companies, foundations, and trusts. “We look at each category and ask, ‘how can we add value?’” says Mr. Feenstra.
Only then does work begin on designing a bespoke wealth plan, supported by an investment strategy focused on balancing preservation of wealth and long-term growth with diversified public and private market assets.
The key to success is being unafraid to stray from the norm, Mr. Jang says. “It’s difficult to achieve alpha when your portfolio looks like everyone else’s. At Nicola Wealth, we believe our approach gives us an edge, which has resulted in historically consistent returns over the long-term.”
Going into 2022, for example, the firm saw a lot of risk in the traditional 60/40 asset mix, which typical wealth managers use. Many managers elsewhere felt the same way, and were reducing duration exposure due to expectations of higher interest rates. But most have constraints, notes Mr. Jang. They reduced duration by two to three years from the FTSE Canada Universe Bond Index average of about eight years. In contrast, Nicola Wealth’s Bond Fund had an average duration of about one year at the time, which substantially dampened the negative impact of rising interest rates.
The Nicola Bond Fund strategy also involves limiting exposure to the most indebted borrowers. Mr. Jang says these borrowers often make up the largest share of bond benchmarks, as they have issued more debt and make up a larger percentage of the universe. The Nicola Bond Fund focuses on the most financially fit borrowers, which typically have less debt or have sufficient means to pay it back.
“The result is comparable if not better, with reduced risk of permanent loss of capital,” says Mr. Jang.
Avoiding such a loss of capital is also central to his firm’s risk management process. Some wealth managers view deviations from the benchmark as risk. Nicola Wealth focuses on the underlying credit quality of its investments and whether the yield of these investments is sufficient to offset the risk of default.
Investors may not always appreciate the day-to-day mechanics of how their money is managed. But Nicola Wealth’s overall approach to preserving wealth while providing prudent long-term growth does resonate, Mr. Feenstra says. “Often clients come to us after being frustrated by lackluster results.”
That’s not just due to investment performance. He says their disappointment often results from their previous advisors and other financial professionals working in silos. That led to fragmented wealth plans and overall underperformance.
“We foster an environment of cross-pollination of ideas – a team approach that clients can clearly see is benefiting them,” says Mr. Feenstra.
The integrated approach includes Nicola Wealth’s investment and advisory teams and involves working closely with clients’ other trusted advisors such as lawyers, accountants and family offices. That way, no potential opportunity to achieve and even exceed client goals is overlooked.
“In fact, we tend to operate similar to a family office in that we often quarterback clients’ financial strategies,” Mr. Feenstra says. “We want to identify and utilize all opportunities within the integrated plan whether those involve tax, investment, income, estate, philanthropic or succession planning. After all, that’s what providing alpha is truly about.”
Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances.
