The last 3 weeks have included a lot of travel for me. While travel is tiring it is also very insightful and, in this note, I would like to share with you the two main insights I gained from this trip.
- Perception versus Reality
- Growth and Risk
Perception versus Reality
One of the stops on the trip was Turkey. I had never been to Turkey before and my perception of Turkey would have been formed by movies, news, and other media. However, from the magnificent airport at which we landed (which we were informed is one of the 5 busiest airports in Europe and partially owned by a major Canadian pension plan) to the highways that had me thinking I was in Canada to the very orderly organization of buildings, malls, etc., my perceptions were completely invalidated. I’m sure there are parts of Turkey that are poorer and more chaotic but that applies to every country. What is the relevance of this to investing? Don’t allow perceptions to drive decisions.
Growth and Risk
The majority of the trip was in India. While we had several meetings with companies and other Indian parties, the inescapable insight was the “context of growth” and what that means to the assessment of risk. We tend to think of emerging markets as higher growth and higher risk. However, when immersed in a market experiencing roughly 8% real GDP growth and nominal growth in the 10-15% range, there are good investment opportunities all over the place and the entrepreneurial spirit, which is the lifeblood of any economy, is in high gear. This caused me to ask the question: “Which is a more risky pool from which to select investments: one with 8% growth or one with 0% growth?” My conclusion was that a growth market offsets a lot of risks. So, notwithstanding that there are many risks associated with lesser developed markets (eg. corruption, unpredictable regulation, etc.), I believe that the risk reduction provided by a growth context can be greater. In the case of India, I believe that combination of high macro economic growth combined with the transparency and democracy that is inherent in the country makes for a relatively attractive risk profile.
Bank of Nova Scotia and Dundee Wealth
More recently, Bank of Nova Scotia announced an agreement to acquire 100% of Dundee Wealth. This was widely reported, so I won’t focus on the details. One of the most frequent questions I was asked in the aftermath was “Do you think CI is next?” Now, we are not prone to speculate on merger and acquisition activity. However, we think that there are inferences that can be derived, from the BNS/Dundee transaction, in respect of Canadian Wealth Managers. We have long articulated the strength of the Wealth Management business model (strong demographic drivers, minimal on-balance sheet risk, scalable, financial and operating leverage, etc.) and that our view was validated by the desire of the banks and insurance companies to increase their presence in this space. In this case, let’s look at what Bank of Nova Scotia’s behavior is saying. They could allocate their capital anywhere. And, it would be surprising if their minimum rate of expected return was anything less than 15%.
One of the stops on the trip was Turkey. I had never been to Turkey before and my perception of Turkey would have been formed by movies, news, and other media. However, from the magnificent airport at which we landed (which we were informed is one of the 5 busiest airports in Europe and partially owned by a major Canadian pension plan) to the highways that had me thinking I was in Canada to the very orderly organization of buildings, malls, etc., my perceptions were completely invalidated. I’m sure there are parts of Turkey that are poorer and more chaotic but that applies to every country. What is the relevance of this to investing? Don’t allow perceptions to drive decisions.
Growth and Risk
The majority of the trip was in India. While we had several meetings with companies and other Indian parties, the inescapable insight was the “context of growth” and what that means to the assessment of risk. We tend to think of emerging markets as higher growth and higher risk. However, when immersed in a market experiencing roughly 8% real GDP growth and nominal growth in the 10-15% range, there are good investment opportunities all over the place and the entrepreneurial spirit, which is the lifeblood of any economy, is in high gear. This caused me to ask the question: “Which is a more risky pool from which to select investments: one with 8% growth or one with 0% growth?” My conclusion was that a growth market offsets a lot of risks. So, notwithstanding that there are many risks associated with lesser developed markets (eg. corruption, unpredictable regulation, etc.), I believe that the risk reduction provided by a growth context can be greater. In the case of India, I believe that combination of high macro economic growth combined with the transparency and democracy that is inherent in the country makes for a relatively attractive risk profile.
Bank of Nova Scotia and Dundee Wealth
More recently, Bank of Nova Scotia announced an agreement to acquire 100% of Dundee Wealth. This was widely reported, so I won’t focus on the details. One of the most frequent questions I was asked in the aftermath was “Do you think CI is next?” Now, we are not prone to speculate on merger and acquisition activity. However, we think that there are inferences that can be derived, from the BNS/Dundee transaction, in respect of Canadian Wealth Managers. We have long articulated the strength of the Wealth Management business model (strong demographic drivers, minimal on-balance sheet risk, scalable, financial and operating leverage, etc.) and that our view was validated by the desire of the banks and insurance companies to increase their presence in this space. In this case, let’s look at what Bank of Nova Scotia’s behavior is saying. They could allocate their capital anywhere. And, it would be surprising if their minimum rate of expected return was anything less than 15%.
So, what they are saying is that they expect to earn a minimum 15% return on their investment starting from the price of the transaction. And, that pricing is higher than the pricing that applies to some of the other Wealth Managers. So, if we believe that Bank of Nova Scotia is a prudent investor, then that would imply that some of the other Wealth Managers could be well positioned to generate 15% plus returns – if that turned out to be true, it would make Wealth Managers a good investment today.
