ICM August 2017 Newsletter

By Jocko Toic / August 25, 2017

It’s not me, dear. It’s your expectations…

An eye-catching headline in the Investing section of August 8, 2017, Globe and Mail caught my attention and turned out to be a worthwhile read only because it further enhanced a pre-existing confirmation bias with respect to traditional portfolio construction. Titled “Why Investors Need to be Ruthlessly Pessimistic About Their Returns”, the article was a summary of the updated Projection Assumption Guidelines for financial planners published by the Financial Planning Standards Council (FPSC). Looking into it a little further, the stated objective of the guidelines is to “aid financial planners in making long-term (10 or more years) financial projections that are free from potential biases”. Plainly put, the guidelines are a suggestion of the return objectives that financial planners should be using to set client expectations going forward. Constructed entirely of publicly traded stocks and bonds, the return guidance for conservative, moderate risk and aggressive portfolios is 3.25% p.a., 3.92% p.a. and 4.75% p.a., respectively, net of fees. Not that further evidence was required, but this firmly debunks the age-old assumption that bonds will generate 6-8% p.a. and equities 8-10% p.a. Quickly doing the math on the back of an envelope using the FPSC numbers, I looked around the office and had a vision of everyone still at our desks at 80 because we were unable to retire. (Which, I suppose, is great news for those of you who want to keep us as long-term partners!)

However, just as the FPSC is suggesting that financial planners need to manage client expectations lower with respect to traditional asset classes, we believe that return expectations in private markets are also due to adjust. Perpetual expectations of consistent double-digit year-over-year returns without any incremental commensurate risk, particularly when issuers begin with less than whole dollars, is not sustainable. With global benchmark rates still near all-time lows and not moving up very quickly (if at all in many instances), the continued pursuit of assets by capital means that spreads across all asset classes will continue to be compressed, thereby lowering forward looking return expectations.
As an active asset manager, we at ICM are hard wired to believe that we can generate excess return by identifying opportunities and executing strategies to unlock value. Our track record suggests that we have thus far been successful in doing so, and we hope to continue to be able to do so for many years. Generating excess returns in any market environment, however, must always be viewed in the context of the current environment. Simply put, the measuring stick of success cannot be static. If you look back at the offerings that we’ve brought to market over the last several years, beginning with ICM VI and currently with ICM IX, modest adjustments to the current income and total return objectives have been made along the way in direct response to the pressures identified above. These adjustments are absolutely necessary such that your investments with us are sustainable and our objectives achievable. I’m reminded of another article I read recently suggesting that the primary cause of disappointment is the difference between expectation and observation. While that article was about personal relationships, the fundamental principles are a nice fit here as well. As I tell my wife, if her expectations are reasonable, I’m a pretty good catch!

John Courtliff , CFA
Managing Director