This document discusses the importance of diversification for client portfolios. It provides learning objectives around explaining diversification's benefits and describing various diversification methods. The document then outlines specific diversification strategies for equities, such as geography, market capitalization, active vs. passive management, and active management styles. It also discusses diversifying fixed income portfolios using mutual funds and individual securities. The overall goal is to educate financial advisors on building well-diversified portfolios to reduce risk and enhance returns for clients.

1. Financial Advisor Development Program
Diversification
© 2013 CIBC Retail & Business Banking Learning & Development Internal | 9/8/2014

2. Quote
“To invest successfully over a lifetime does not
require stratospheric IQ, unusual business insight
or inside information. What's needed is a sound
intellectual framework for decisions and the
ability to keep emotions from corroding that
framework.”
— Warren Buffet
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3. Consider This…
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4. Learning Objectives
By the end of this workshop, you will be able
to:
 Explain the importance of diversification
and how it benefits client portfolios
 Describe the various methods of
diversification and how they fit into a
portfolio
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5. Why Diversify?
Client portfolio
CIBC Money Market
5.75% Province of Ontario
5.25% CAD Eurobond
BCE incorporated
TD U.S. small cap equity
CIBC Latin America
Moderate investor profile
5% Cash
40% Canadian bond
10% International bond
15% Canadian equity
20% U.S. equity
10% International equity
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6. Why Diversify?
Asset Allocation is the first step in building an
investment portfolio.
The next step is to decide how to diversify within
each asset class.
Diversification within each asset class can help to:
• Reduce volatility
• Enhance returns
• Provide a disciplined approach to
investing
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7. Diversification Methods — Equity Asset Class
• Geography
• Capitalization
• Active vs. passive management (indexing)
• Active management styles
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8. Diversification Methods — Equity Asset Class
• Geography
• Capitalization
• Active vs. passive management (indexing)
• Active management styles
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9. Geography
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10. Geography
Why invest globally?
Investing in different geography regions can
reduce risk and enhance returns:
• Different equity markets behave
differently at different times
• Currency fluctuations add an additional
level of diversification
• Positive or negative events may affect
some regions but not others
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11. Diversification Methods — Equity Asset Class
• Geography
• Capitalization
• Active vs. passive management (indexing)
• Active management styles
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12. Capitalization
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50
40
30
20
10
0
-10
-20
Returns
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
Russell 1000 Large Cap Russell 2000 Small Cap

13. Capitalization
100% Large cap stocks • Large capitalization stocks = Russell 1,000 index (US$)
• Active vs. Passive Management (indexing)
• Active management styles
• Geographic
• Capitalization (Large Cap vs. Small Cap)
• Sector/Specialty
• Small capitalization stocks = Russell 2,000 index (US$)
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13.2%
13.0%
12.8%
12.6%
12.4%
12.2%
12.0%
11.8%
11.6%
11.4%
17.5% 17.7% 17.9% 18.1% 18.3% 18.5% 18.7% 18.9% 19.1% 19.3% 19.5%
Portfolio Risk (%)
Portfolio Return (%)
Source: www.barra.com
Large cap versus small cap?
100% Small cap stocks

14. Capitalization
Why have both large and small cap funds in a
portfolio?
• Provides additional diversification
• Helps minimize portfolio risk
• Potentially enhance returns
The amount of exposure of large and small cap
funds will depend on the client’s:
• Risk tolerance
• Objectives
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15. Diversification Methods — Equity Asset Class
• Geography
• Capitalization
• Active vs. passive management (indexing)
• Active management styles
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16. Active vs. Passive Management
Active or passive?
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17. Passive
• Mandate simply to
replicate index
• Exposure to full market
cycle
• Lower fees
• Tendency to be tax
efficient
Active vs. Passive Management
Active
• Has objective to outperform
the market
• Can hold cash
• Has higher fees
• Offers various mandates
• Tax efficiency depends on the
mandate of the fund
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18. Active vs. Passive Management
Which is a better approach, active or passive
management?
• Neither, both can have a place in a well-diversified
portfolio
The breakdown of active versus passive
management within a portfolio depends on:
• Client preference
• Efficiency of the market
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19. Active vs. Passive Management
Characteristics of an efficient market:
• Large, well established
• Free flow of information
• Highly regulated
• Large number of analysts covering the
companies in the market place
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20. Active vs. Passive Management
More efficient markets:
 U.S. large cap
 Canadian large cap
 European equity
 International bond
 Canadian bond
Less efficient markets:
 U.S. small cap
 Canadian small cap
 International small cap
 Specialty sectors
 Emerging economies
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21. Efficiency of the Market and Management Style
In more efficient markets, what
management style would be your first
consideration?
• Passive
Why?
• The probability of outperforming the
market over the long term is
significantly lower
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22. Efficiency of the Market and Management Style
In less efficient markets what
management style would be your first
consideration?
• Active
Why?
• The probability of outperforming the
market over the long term is
significantly higher
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23. Active vs. Passive Management
There’s a case for both styles:
 A sound strategy for virtually all
portfolios
 Use passive management in more
efficient markets as the anchor of
your portfolio, and complement with
active management to further reduce
risk
 Use active funds to explore in less
efficient markets
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24. Diversification Methods — Equity Asset Class
• Geography
• Capitalization
• Active vs. passive management (indexing)
• Active management style
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25. Active Management Styles
Four types of managemAecntti vsety mleasn: agement styles
 Value
 Growth
 Growth at a reasonable price
(GARP)/Blend
 Top Down versus Bottom Up
Activity:
In your groups discuss and fill in the blanks
using the words given in the workbook.
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26. Active Management Styles
Value:
 Main focus is on price
 Managers select high-quality, undervalued
companies (often at 40% — 60% discount)
 Willing to hold long-term and sell when stock
reaches intrinsic value
 Look for low P/E, low P/BV, high dividend
yield
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27. Active Management Styles
Growth:
 Main focus is on earnings
 Managers select companies with strong
growth prospects
 You should look for higher-than-average
growth in EPS, ROE and
revenue
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28. Active Management Styles
GARP or blend:
 This offers a blend of growth and
value styles
 Managers seek to buy reliable future
growth at a P/E lower than the
growth rate of earnings
 GARP managers may be biased
towards one of the blended styles
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29. Active Management Styles
Top down:
• Looking at the big picture
• Analyzing general economic conditions
• Then determining which industries,
sectors or countries should benefit from
an improved economy
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30. Active Management Styles
Bottom up:
•Identifying companies regardless of
economic or industry climate
•Analyzing companies financial
statement including ratios
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31. Active management styles and the market cycle
? ?
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PEAK
TROUGH
EXPANSION
CONTRACTION
RECESSION
PEAK
RECOVERY
Active Management Styles

32. Active Management Styles
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33. Active Management Styles
Where do they fit into a portfolio?
• It makes sense to include a mixture of
active styles in a portfolio, as different
styles will perform well under different
market conditions
•The exact mix of styles can be tailored to
the client’s risk tolerance and objectives
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34. Fixed Income Diversification
© 2013 CIBC Retail & Business Banking Learning & Development Internal | 9/8/2014

35. Fixed Income Diversification
When building the fixed income component of a
portfolio, how can we diversify?
• Fixed income mutual funds
• Individual securities
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36. Fixed Income Mutual Funds
What are some ways to diversify using fixed
income mutual funds?
 Active vs passive management style
 Geography: Canadian vs international
 Term: Short-term vs long-term
 Quality: Government bond vs high-yield
bond
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37. Fixed Income Securities
Diversify individual securities by using:
• Maturity dates (laddered portfolio)
• Issuer:
o Government versus corporate bonds
o Federal versus provincial bonds
o Sector (such as auto manufacturing &
financials)
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38. Summary
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