As a portfolio manager, our mission is to help clients allocate their money to investment portfolios that provide efficient risk-adjusted returns over the long-term. To achieve this, we conduct an annual review of our portfolio construction process, consisting of four main steps:

  1. Creating long-term capital market assumptions for various asset classes.
  2. Developing model portfolios with varying asset allocations to provide a range of risk/return characteristics.
  3. Reviewing the universe of available investment products and determining which ones to approve for use in our model portfolios.
  4. Mapping approved investment products to model portfolios across account types to minimize costs and taxes.

This article focuses on the second step of the portfolio construction process: our updated model portfolios for 2024.

What is a Model Portfolio?

Before discussing our model portfolios in more detail, let’s first define what we mean when we use the term model portfolio. A model portfolio is a set of asset class allocations (or weightings) used to guide the investment of a client’s money at a high level, before any security-specific implementation decisions are made. Since the allocations are assigned at the broad asset class level, model portfolios are theoretical and it is not possible to invest in them directly. However, model portfolios are useful because they allow us to assess risk/return characteristics and construct portfolios using a limited number of inputs rather than having to consider the full universe of available investment products, which number in the thousands.

Portfolio Optimization

Using a list of approved asset classes as building blocks and assuming the allocation of each asset class can range from 0% to 100% (in 1% increments), there are more than 1 trillion possible model portfolios. It isn’t practical to evaluate the risk and return characteristics for all of these possibilities, but thankfully technology can help to streamline the task.

We input our long-term capital market assumptions and a set of minimum diversification constraints into portfolio optimization software. The software analyzes all asset allocation possibilities using the modern portfolio theory framework to eliminate inefficient model portfolios – a portfolio is inefficient if another portfolio exists that provides a higher return for the same level of risk or that provides the same return with a lower level of risk. When the optimization process has completed, the software outputs what is know as an efficient frontier: the set of model portfolios expected to provide the highest return at each possible level of risk.

We select a subset of the portfolios along the efficient frontier as our model portfolios, allowing us to provide a broad, but manageable, range of investment options for our clients across different risk levels.

Our 2024 Model Portfolios

After completing the portfolio optimization process outlined above, we’ve updated our model portfolios for 2024, split into two groups: those with an allocation to gold and those without. While it is not possible to predict the future with certainty, these model portfolios represent our best guess of the asset allocations that a Canadian investor can expect to provide attractive returns over the long-term at given levels of risk:

Changes to Model Portfolio Allocations

Given the relatively small year-over-year changes to our 2024 long-term capital market assumptions, no adjustments are being made to the asset allocations of any model portfolios this year.

Model Portfolio Return Assumptions

By combining our model portfolio asset allocations with our 2024 long-term capital market assumptions we can calculate the weighted-average expected return for each of our 2024 model portfolios. While it is not possible to predict the future with certainty, these assumptions represent our best guess of the average annual returns (before fees or taxes) that a Canadian investor can expect to achieve over the long term (i.e. 10+ years) when investing in a portfolio of securities with an asset allocation similar to that of each model portfolio:

Changes to Model Portfolio Expected Returns

Our latest model portfolio return assumptions are relatively stable on a year-over-year basis, with all portfolios within +/- 0.3% of their values from 2023. Generally speaking, the expected returns for our conservative model portfolios ticked up slightly this year while the expected returns for our balanced and aggressive model portfolios ticked down.

The two charts below compare the expected returns for our 2024 model portfolios against the prior year and display the year-over-year change for each model portfolio:

Conclusion

Our model portfolio return assumptions play a key role in financial planning. After completing an investment suitability assessment and allocating model portfolios to a client’s investment accounts, we update the assumptions in their financial plan to reflect the expected return of their actual investments. Working with a portfolio manager that provides both financial planning and investment management ensures consistency between these two disciplines.

This article’s purpose is to explain the general concept of a model portfolio, how we analyze the many potential asset class allocations that make up a model portfolio, and how we filter down the many possibilities into a manageable set of model portfolios that cover a range of risk levels for our clients. If you have any questions or would like to discuss these topics in more detail, please contact your advisor.

Footnotes

Model portfolio expected returns are an average of the long-term asset class return assumptions weighted by each model portfolio’s target allocation to the asset classes. Returns presented are hypothetical because it is not possible to invest in a benchmark or asset class index directly and the expected returns do not reflect the transaction costs, management fees, or taxes that an investor would incur when investing in a financial product, such as an exchange-traded fund, that attempts to track the performance of a benchmark or asset class index.

Clients’ actual returns will vary based on their management fees and the timing of cash flows into and out of their respective accounts. Model portfolio expected returns also assume that asset class weightings are held constant while in practice an account’s asset allocation may deviate from targets within a reasonable range.