You get your blood pressure checked regularly, but have you checked the pulse of your investment portfolio lately?
Individual investors can actually do a free -portfolio diagnosis that measures risk through a sophisticated system known as RiskGrades. It was developed at J.P. Morgan Chase bank in 1995 and is now the key product of a privately held company on Wall Street known as RiskMetrics.
According to RiskMetrics, 625 institutional and corporate clients use the system to assess investment risk, so it seemed to me like a good idea to give RiskGrades a shot.
With trepidation, I signed in to www.riskgrades.com and spilled out my guts, confessing my portfolio to this cyber-stranger. I fully expected flashing red lights and a blaring siren to commemorate this event.
Considering the heavy weighting in volatile microcaps, I was surprised when RiskGrades did not order me to get my blood pressure checked - or my head examined.
In fact, in terms of risk exposure, RiskGrades was in a kindly frame of mind, giving me a reasonable mark of 71 and labelling me in its mid-range as a "growth" investor. I received a pat on the back for diversification, which reduced my risk rating by 74 per cent, and an overweight cash position.
The system rates an investor conservative in the 25 range, balanced in the 50 range, growth in the 75 range, aggressive in the 100 range and speculative (a polite way of telling you to go to Las Vegas, where at least the drinks are free) in the 125 range or higher. Besides equities, it also measures a portfolio based on holdings in mutual funds, bonds and equity options.
At 71, I was in the same ballpark as the S&P/TSX Capped Composite Index (TSX:TCF), which scored 68 (results are based on ratings through Jan. 6). RiskGrades noted that my risk profile was 1.48 times higher than the S&P 500 Index. The U.S. benchmark S&P 500 scored 48, Dow Jones Industrial Average graded 43 and Nasdaq 59.
For conservative investors, a comfortable RiskGrade for individual stocks is in the 100 range, which was the ranking of 21 global equity indices during a five-year span from January 1995 to December 1999.
According to RiskGrades, which updates scores on a daily basis and covers stock exchanges in several countries, Warren Buffett and I are not exactly on the same page. I own things such as Group Bocenor Inc. (TSX:GBO), a door manufacturer that almost crashed the RiskGrades site with a score of 741 (it trades at 26 cents a share). Warren Buffett owns things such as Berkshire Hathaway (NYSE: BRKA), the poster child for RiskGrades with a score of 48 (Berkshire Hathaway, the company Buffett founded and is chairman of, trades at $89,500 a share).
Apparently, RiskGrades scores for individual stocks can range from 0 to 1,000-plus.
It has numerous features for portfolio analysis, including one that allows you to fool around with your portfolio.
So I revised my portfolio by moving all my cash into Group Bocenor and my computer started to smoke and make strange rumbling sounds. Finally, the verdict: My portfolio score had tripled - from 71 to 224 - which might suggest this is not a sleep-at-night stock.
Although RiskGrades may provide a valuable guideline of risk, investors should be cautious about making investment decisions based on the results. In fact, for active traders who benefit from volatility, a stock with a higher score may be more appealing.
The RiskGrades system provides an interesting overview of the state of the markets, particularly underscoring the increased risk in high-flying Canadian energy and gold stocks.
You may be shocked to learn that EnCana (TSX:ECA), Canada's largest oil and gas company based on market cap, rates higher in terms of risk with a 188 score than the historically volatile Nortel Networks (TSX:NT) with a score of 178. The system puts a premium on recent volatility, which explains EnCana's mark.
In fact, tech stocks are generally rated lower risk by RiskGrades than oil and gas stocks. For instance, Canadian Natural Resources (TSX: CNQ) at 178 scores higher on the risk scale than both Google (Nasdaq:GOOG) at 156 and Yahoo! (Nasdaq: YHOO) at 148.
Of the exchange traded funds in Canada, only the iUnits S&P/TSX Financial Index (XFN), with a RiskGrade mark of 50, compares favourably to the major U.S. indices in terms of risk. The iUnits S&P/TSX Gold Fund (XGD) carries the most risk, according to RiskGrades, with a score of 146. The iUnits S&P/TSX Capped Energy Fund (XEG) scores 138 while the Barclays Advantaged Income Trust Fund (TSX:BAI.UN) scores 130 and iUnits S&P/TSX Capped Information Technology Fund (XIT) scores 100.
RiskMetrics, which had revenue in the $100-million US range last year, was spun out from J.P. Morgan Chase in 1998 to private investors and is the brainchild of Ethan Berman, a CEO who has caused quite a stir on Wall Street recently by not acting like a CEO.
Berman wrote a letter to the chairman of his company's compensation committee last November requesting that he not get a raise in salary, no stock options, a reduced bonus and the same cut in profit sharing as all other company employees, even though the company ramped up its revenue in 2005. According to reports, he was dead sober at the time.
The chairman of the compensation committee, former U.S. Securities and Exchange Commission chairman Arthur Levitt, who has lobbied against excessive executive pay, sent the letter to the New York Times.
Berman stated in the letter: "The banker J.P. Morgan once said that he would never lend money to a company where the highest-paid employee was paid more than 20 times the lowest-paid (employee), as it was in his view unstable. While we are a long way from that threshold, last year I felt I was given an overly generous raise, putting my salary 20 to 40 per cent higher than my direct reports (managers). If the proposed salary increases are given to the other managers within the firm, my current salary will be at a level more appropriately above the other key employees in 2006. I do not feel that my own performance was as strong as in previous years. I would therefore ask that my discretionary bonus reflect this by an appropriate amount."
In an interview with the Times, Berman explained why he wrote the letter. He did not intend the letter to be made public. "I wrote the letter because it's something I believe in," Berman told the Times. "But if other people read the letter and say, 'Maybe I should rethink this,' that would be success, to me."
If you're a shareholder of an underachieving public company headed by an obscenely overpaid CEO, you can gain a fresh perspective on corporate governance by reading Berman's letter in its entirety at www.nytimes.com/ morgenson. Hey, you may even want to fire off copies to the CEO and chairman of the compensation committee. It may be the wakeup call they need.
* SAGE WORDS: "You're losing me with detail. Let's sign it and let the lawyers haggle over the (b.s.) later."
- Wheeler-dealer entrepreneur Peter Pocklington (as quoted in The Inquisitors, by Peter Newman).
* Clarification: Some stockbrokers are paid to pitch their brokerage's products and get paid when clients buy and sell. Some brokers are paid a percentage of the assets they oversee and do not get paid when their clients buy and sell. Incorrect information appeared in the Jan. 5, 2005 Financial Opinion column.
(Gyle Konotopetz can be reached at gyle@businessedge.ca)
