Meet the asset class specialists

We hosted our semi-annual Meet the Pros event last week in Toronto where clients had an opportunity to meet some of the independent asset class specialists we retain for specific components of the portfolios we manage. This year’s panel of pundits included Maureen Farrow of Economap (our independent economist), Tye Bousada of Edgepoint Investment Group and John Foresi of Venterra Realty –specialists in global equities and U.S. real estate respectively.

The key takeaways in my view were:

  • the recovery from the of 2007/08 financial crisis is on a good path and has slow but steady momentum;
  • after a strong run-up in both equity and real estate prices; be very careful not to overpay

While Maureen’s report was a positive one, she did remind us of her prediction made years earlier that it would take 10 years to repair the damage done from the financial crisis of 2007/08.  We are now in Year 6 of a process that is expected to last several more years. Global de-leveraging continues and every major country is using any and all strategies to re-ignite growth. Progress is being made.  Most economies are growing, albeit very modestly.  But, most importantly, there is momentum and it is sustainable. Every country would like more growth to accelerate job growth. Inflation is not an issue due to an overcapacity of both resources and labour.

Canada is an under-performer however, and our export activity is struggling.  The U.S. is becoming less dependent on our oil exports and slower growth in Asia has reduced demand.  Maureen argued that Canada must seek out new and diversified export markets aggressively.

Finally, she reminded us that there is still a difficult task ahead – weaning our economies off the “easy money” policies that have driven interest rates almost to zero and fueled the rise in many financial assets around the world.  This is new ground for central bankers and it will have to be carefully managed.

Tye’s presence at the lunch was timely.  U.S. and Global markets are up 20% or more in 2013.  The obvious question everyone wanted an answer to was what does the future hold? As a money manager can he still find attractive opportunities or are the valuations too high?  Tye and his colleagues have a very disciplined approach to stock-picking.  They hunt for companies where profits can grow more than the economy.  And they don’t want to pay for that growth today. He assured us that these opportunities are still out there, but are fewer in number compared to five years ago.

As he has done in the past, Tye offered an example of their investing style from their current portfolio. They bought Tenneco (NYSE:TEN) a year ago.  The company is one of the world’s leading designers, manufacturers and distributors of clean air and ride performance products and systems for the automotive and commercial vehicle original equipment markets and the aftermarket. Tye figured that TEN could double profits in the next five years. More importantly, he did not feel that these expectations were built into the stock price. The stock has gone up 73% in the last 12 months.  He closed appropriately by cautioning us that future returns will be lower – perhaps, 10% vs. their 16% of the last 5 years.  I think everyone was expecting him to say 6% and was very relieved to hear that he thinks 10% over the next 5 years would be a very good return!

We have added U.S. real estate to our clients’ portfolios in the last 18 months so it was appropriate to have John Foresi, of Venterra Realty at the luncheon.  Under Venterra’s guidance, we now have an interest in 12 multi-family properties in the Southeastern U.S. and we hope to add more in 2014.  Why the U.S.? According to John, the “fishing hole” is substantially bigger.  In his 10 markets in the U.S. , there were $17 billion of transactions last year versus $1 billion in Toronto.  This means that there is a much better chance of finding attractive opportunities. Venterra’s transactions are characterized by at least one unique value play leading to above average returns for investors. Above average returns are earned by purchasing an asset at a substantial discount to replacement cost, an opportunity to materially increase rents with Venterra’s pricing optimization technology or deploying Venterra’s unique customer service platform to substantially improve multiple operating metrics and financial results. The target is an annual cash return of 7-8% and an overall return when sold of 12% or more.  He and his partners have not been able to find similar economics locally.

John also fielded questions about the U.S. trend away from home ownership to rental housing.  Home ownership peaked at 69.4% in 2004 and has now fallen to 65.0%.  In 8 of his 10 markets, it is still substantially cheaper to rent than to own.  While new construction has accelerated in the last two years, they are now only building 300,000 new rental units per year in the U.S.  which is barely enough to meet new demand.  These factors all contribute to higher rents and ultimately better returns for investors.

Judging by the number of questions and conversations at the end it was a successful event and everyone took away new insights about the challenges and opportunities of the next investment cycle. We’ll return next spring with another Meet the Pros panel – hope to see you there!

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