Mieux bâtir et mieux investir

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Two fish are swimming along when they come across an older fish. The old guy asks, “how’s the water?” The younger fish are puzzled – like it’s a trick question. They swim along without answering; probably thinking the old guy’s crazy. Eventually one turns to the other and says, “What the hell is water?”

Familiar story, I know – but an important one. The point, of course, is that sometimes we can’t always see – or understand – what is immediately around us. Sometimes we are just too close up. To see better, we need to change perspective and step back a little.

True of life. True of investing. And certainly true given the uncertain and uneven state of the global economy.

Trying to figure that out is almost as difficult as figuring out what’s wrong with the Leafs: world beaters one night, tanking the next. Inconsistency the only constant. Fixing the Leafs? All I can say is, “go Habs!”

Today, I’d like to talk about the state of the global economy and how we at la Caisse are navigating it.

In the United States, they’ve come a long way back from 2008, thanks to courageous monetary policy, an unprecedented revolution in energy production, continuing technological innovation and, frankly, that “never say die” resilience of Americans.

All contributing to rates of growth that while perhaps a bit slow by booming post-war standards, nevertheless demonstrate that the recession is clearly behind it. Making that country one of the bright spots in the global economy.

Meanwhile China – once everyone’s Superman, with rates of growth faster than a speeding bullet, able to erect tall buildings in a single bound – well, it’s come back to earth. Still a great and growing country. An increasingly powerful presence on the world stage.

But frankly, with an economic strategy focused largely and rightly on bolstering domestic consumption and building a services economy, China is not going to drive global growth as it once did.

The next big engine? Perhaps India, where reforms in financial sector policy, energy and agriculture may be inching that country toward breakout economic growth.

And, of course, Europe and Japan. Older, richer countries slowly growing poorer. Why? Because of the failure – the abject failure – of their respective political classes to understand the urgency of structural reforms or to marshal the political will to implement them. Quantitative easing may buy some time for these economies. But it will not save them. Political courage will.

Put all of this together and you have a world of uneven growth, a fragile global economy. Not a world in crisis, but one that is hanging onto growth by its fingernails.

A volatile world, with geopolitical risks running high from Asia to the Middle East to Ukraine. With the risk of economic stagnation in Europe brought on by increasing political polarization and intransigence.

And ahead? Global markets that have become addicted to monetary stimulus and that are likely to suffer bouts of withdrawal at even modestly tighter monetary policy in the U.S.

Put all of this together and you have a world of uneven growth, a fragile global economy. Not a world in crisis, but one that is hanging onto growth by its fingernails.

Contributing to the volatility is something that’s been going on for years and getting worse. And that’s the short-termism of markets.

Markets dominated by those chasing returns quarter-by-quarter, month-by-month, even day-by-day. Investors whose preoccupation is quick wins and fast returns. Essentially traders who parse every Fed utterance and react to every new rumour.

That mindset matters. It matters because, in that frame of mind, stocks – companies – become interchangeable. Commodities.

But companies aren’t commodities. In our economic system, companies play critical roles in allocating resources. Determining levels of investment. Innovating. Creating jobs. And driving productivity.

When we treat companies like commodities we run the risk of creating a vicious circle that undermines the long-term growth of both companies and the overall economy.

Why? Because CEOs respond to the demand for short-term performance by focusing their strategies on quarterly performance instead of building great businesses. And that behaviour, multiplied across companies, across sectors, weakens long-term economic growth.

At la Caisse, we’re not going down that road. First, because we don’t believe that’s the best way to manage through these times. And second, because we have an interest in the long-term health of every economy we invest in. All long-term investors do.

So when we invest, we want to build. We’re builders, not traders.

And what does that mean? It means investing like a business owner.

Business owners have a deep understanding of the fundamentals of the company or asset they’re investing in. They know a business’s culture, its people, its operations, its strengths and weaknesses. They understand the industry, the competition – and the customers. And they have the patience that comes from a profound sense of the business’s intrinsic value that allows them to see through short-term market fluctuations.

But in return, they demand performance. And, if needed, they’re ready and able to step in and right the ship.

That’s why we insist on a comprehensive understanding of the financial and operational aspects of every investment we make. Achieving that means going far beyond knowing the numbers or doing the traditional kind of research.

So when we invest, we want to build. We’re builders, not traders. And what does that mean? It means investing like a business owner.

Well, you may say, sounds obvious: know what you’re investing in. But the kind of deep knowledge I’m talking about is actually a very big change, transforming everything from the way we do research and the people we hire, to the kinds of conversations we have about potential investments.

It’s meant hiring people who have actually worked in companies, with operating experience and a clear understanding of how companies create value. Professionals who aren’t afraid to get their hands dirty.

Yes, we need people who can read a balance sheet and a financial statement, but we also need engineers and geologists, metallurgists and telecom specialists.

At la Caisse, we’ve built a culture that pools knowledge from across our organization, across asset classes, so that we work in synch, not in silos. Generating the kind of knowledge that leads to deep convictions.

By assessing risk from a variety of perspectives and by focusing not just on due diligence, but deep diligence, we can develop the kind of convictions needed to take large positions for the long term. For us, deep knowledge is the new risk management.

And we use that business-owner mindset to invest in real things, rooted in the real economy, used by real people, every day – not in abstract financial products that only a math PhD can understand. And even then, not always getting it right.

That’s why, since 2012, we’ve converted $50 billion in public equities into portfolios of only the best, platinum-grade companies in the world. Businesses you know, offering products and services you probably use. Companies like Canadian National, Manulife, Couche-Tard, Microsoft, Colgate and Nestle.

Companies chosen, not because they are part of an index, but because of the quality of their operations, the strength of their market position, the capability of their leadership team, the health of their balance sheets and their prospects for the long term.

And we use that business-owner mindset to invest in real things, rooted in the real economy, used by real people, every day – not in abstract financial products that only a math PhD can understand.

Think about it. Does it really make sense to do what so many large investors do? They start by buying an index– say the TSX – and end up with six banks when they really only want three of them. Then they commit a bit more to the ones they like, a bit less to those they don’t, in an effort to fractionally beat the index.

Like three. Buy three.

At la Caisse we want to own the best companies, the best assets. With the best prospects of solid long-term returns. Period.

That’s what we do in real estate, where we don’t just own the properties, we operate them, though our subsidiary, Ivanhoe Cambridge.

With over $40 billion in assets, Ivanhoe Cambridge is one of the world’s leading real estate companies, with properties in Canada, the United States, Latin America and Europe.

In the United States, we’re acquiring and developing office towers in New York, Chicago, Seattle and Silicon Valley – some of the best, most resilient markets in the country.

In a world where fixed income pays 2-3% a year, we’re more and more comfortable with real estate that pays 6 to 7%, even if it is less liquid. That’s why we’re purchasing 3 Bryant Park in Manhattan, one of the city’s most consistently performing real estate assets.

In Canada, we’re invested in some of the country’s signature buildings – from Place Ville Marie in Montreal to Eighth Avenue Place in Calgary. And here in Toronto, we’re joining with Metrolinx to explore building a new architectural landmark at 45 Bay – an integrated office and transit development that’s going to set the standard for environmental construction.

We’re also investing in infrastructure – an asset class we like because it is, almost by definition, a long-term investment, ideally suited to the needs of a pension plan. One that throws off steady cash flow, often with substantial barriers to entry.

Infrastructure is an asset class with enormous global potential. By even conservative estimates, the world needs to invest an additional $4 to $5 trillion to meet the demands of rapidly growing cities including new transit, water and electricity systems. Ports and airports.

And that need is everywhere – in already advanced and in rapidly advancing economies. We see it here in Toronto, on congested highways. And we see it in my own city of Montreal where crews are desperately shoring up the Champlain Bridge until it can be replaced.

That’s why la Caisse is invested in infrastructure projects around the world, including the Port of Brisbane in Australia, Colonial Pipeline in the United States, London’s Heathrow Airport, as well as in major wind power projects in both Europe and the U.S.

The next frontier for us? Not just investing in existing infrastructure but developing new – greenfield – projects in the same way that we do with real estate. Drawing on the strong operating capacity we’re building.

So to create value in a world of uneven and fragile growth, we’ve fundamentally changed how we invest – by adopting the mindset of a business owner, a builder.
The current environment demands something else as well. Because no matter how good our people are or how hard they work, we can’t understand everything in sufficient detail to avoid big mistakes.

So another cornerstone of our strategy is to work with partners. Be they like-minded funds from Canada or abroad; be they local families or companies or even governments around the world.

That’s why, for the last number of years, we’ve reached out, across borders, engaging partners with their extensive network of contacts, their understanding of the political and economic landscape.

Partners who know their markets best and see the opportunities first.

In Brazil, we worked with the Carvallo family to take a stake in 22 shopping centres – capitalizing on that country’s growing middle class.

In Mexico, we joined with the Black Creek Group to develop mixed-use urban communities in Mexico City, Monterrey and Guadalajara.

And in France we teamed up with the national railroad – SNCF – to invest in Keolis, the fifth largest public transit company in the world that moves over two and a half billion people every year, in cities from Melbourne to Boston.

To do even more in the future – as la Caisse builds a larger global footprint – one of the lessons we take from our experience investing in Quebec and Canada is that presence matters.

That’s why we decided some time ago to add to our existing offices in Paris, New York and Beijing with new offices in key markets such as Singapore, Mexico City, Mumbai and Sydney. Why? To develop relationships with the best partners to ensure access to the best opportunities.

The bottom line? Even in the face of volatility and slower global growth there are opportunities if you know where to look, know what you’re doing and have the right partners.

As we work to globalize la Caisse we’re also investing in companies in Quebec that can become significant players in the U.S. and around the world.

Companies like CGI, an enterprise we’ve known for 30 years, helping it to acquire U.K.-based Logica. A deal that extends CGI’s global reach and a counter-cyclical business that will do well in difficult economic times.

Or WSP, a Quebec-based engineering firm formerly known as Genivar. We teamed up with the Canada Pension Plan Investment Board to help Genivar acquire WSP. Raising WSP’s profile on every continent and enabling it to become a more global engineering company.

Even in the face of volatility and slower global growth there are opportunities if you know where to look, know what you’re doing and have the right partners.

And, in that same spirit of openness, we worked with Manulife to help it acquire Standard Life in Montreal.

Our in-depth knowledge of companies enables us to help turn around those with short-term problems but long-term potential. Companies like Quebec-based RONA, where we worked to strengthen the board and to install new management – moves that are beginning to pay dividends as the business gets back on track and heads in the right direction.

We want to be able to engage with companies. So we’re building the capabilities we need to work more closely with boards and management where we think we can make a difference – a constructive difference – for the long-term health of the company.

Our goal? To be an active, but never an activist shareholder.

So how do you manage in today’s global economy? By thinking and investing like a business owner. Being a builder. Developing deep, asset-specific knowledge. Acting globally – and taking a long-term perspective.

What’s the fundamental value in this approach? Just this. It creates a virtuous circle that improves risk-adjusted returns over time. It treats companies as businesses to be built, not as commodities to be traded. Encouraging them to take the longer view, to invest in innovation and to focus on building long-term performance.

So how do you manage in today’s global economy? By thinking and investing like a business owner. Being a builder. Developing deep, asset-specific knowledge. Acting globally – and taking a long-term perspective.

At scale, this approach can help stabilize capital markets. And help reduce the noise and distractions that so often lead to irrational volatility – and bad investment decisions.

In a fast-paced world, taking a step back is often a step in the right direction. Allowing us to see the bigger picture. Build better. Invest smarter.

And navigate the water – the turbulent water – all around us.