Dick Wertheim has been preaching the gospel for nigh on 15 years now, riding his hobbyhorse out on the Canadian range, but with nary a result to show. It might seem an odd stomping ground for this upper east side Manhattan boy who came to Canada 25 years ago. But after a rise to the top of Northern Telecom’s IR team and later the creation of IR consultancy Wertheim & Co, it’s a rare Canadian IRO that has Wertheim’s hold on the investment scene.
‘US corporations have such a mindset to get on a plane to London or Tokyo when they could be in Toronto in one hour,’ he says. ‘They point to Canadian restrictions on investing in foreign stocks – 20 percent for tax exempt assets – but that’s still a lot of money. With the difficulty of diversifying portfolios and a limited number of large cap Canadian stocks to invest in, there is a lot of interest in looking at international stocks here.’
‘Canadian markets don’t get the attention they rightly deserve,’ chimes in David Mills of the Barnes Organization. ‘Companies from Europe come to the US with massive roadshows, but they don’t come up here. They should do. There is a very strong community and a pant-load of money in Canada – Toronto, Montreal and even London, Ontario.’
Navigating the maze
The thought of visiting Canada might cause shivers among executives. But it is not winter all year round, and summer in Toronto even rivals New York for humidity and temperature. All the same, for a few chilly months when the wind is sweeping off Lake Ontario, the cold and snow cannot be ignored. Luckily, with practically the whole financial community concentrated around downtown Bay Street, many office buildings and shopping malls are linked by an underground tunnel system, and investors can attend a raft of meetings without even seeing the light of day.
The snow is certainly a factor in travelling outside of Toronto. Only the na ve would plan a same-day jaunt to, say, Montreal in winter: odds are the flight would be cancelled if not delayed. All the same, Montreal, with a large community of institutions including the Caisse de D p t, Standard Life and Talvest, is worth visiting as part of a Canada trip. While, nearby London, Ontario has several large insurance company headquarters, and if a trip to Vancouver is planned, then Winnipeg’s Investors Group is a logical stop along the way.
Discovering Canada
According to Ron Blunn of Blunn & Co, another Canadian IR veteran, the country’s defining trait is a small number of very large institutional investors: ‘The top institutions make most of the investments, with pension fund assets still growing substantially,’ he remarks. ‘Meanwhile, the pool of equity investments has been growing tremendously, with a great number of IPOs and rising valuations, but it isn’t keeping up with the amount of money available to be invested.’
The inescapable conclusion is that a North American roadshow will be incomplete if it fails to include at least a quick pitstop in Toronto. And despite an IPO boom that has kept apace with the US, Canada is awash in savings looking for a home.
So non-Canadian companies visiting Toronto – the country’s undisputed financial capital – find a welcoming investment audience looking at foreign stocks more intensely than ever. And Canada’s 20 percent ceiling on foreign investment may soon be phased out, unleashing a hungry investing animal into the arena of world equities.
Fund explosion
John Lute, a former Burson-Marsteller executive who founded IR consultancy Lute & Co, believes the 20 percent ceiling on foreign investment will disappear within three years. He adds that the most marked trend in Canadian investment is the stellar growth of ‘instividual’ mutual fund groups: whereas once the top Canadian players were the Caisse de D p t, Omers, and Ontario Teachers, today the likes of Investors Group, Trimark and Altamira dominate.
‘Mutual funds are Canada’s big mecca,’ notes Deborah Thompson, a Lute & Co executive who was formerly in charge of institutional marketing for Royal Bank Investment Management, one of Canada’s largest mutual fund families. ‘A decade ago, no-one on the street knew what a mutual fund was. Now they have exploded on the investment scene.’
Despite a wider breadth of investment styles, Canadians are still conservative investors, Thompson notes. ‘We tend to be very much like we’re always portrayed: longer-term, conservative, after nothing terribly exotic,’ she says. ‘But we’re not neophytes. An IRO coming into Canada would make a grave mistake in presuming we’re a bunch of colonialists and don’t know what a piggy bank is. There are very sophisticated people out there.’
Taking time
Canadian fund managers will spend more time with a company’s management team than US investors often do, asserts the Barnes Organization’s David Mills. ‘You go down to the US and you have to get your story down to ten to 15 minutes. You’re in and out like an assembly line. But here they’ll allocate one hour or more to sit down with the management team because they are really trying to get a sense of how to evaluate them.’
Less than glowing estimates of Canada’s sell-side research strength may not be entirely unfounded. ‘For certain types of companies, particularly high-tech ones, there is a feeling that the Canadian investment community doesn’t understand their sector in sufficient detail or depth, or isn’t willing to give the same valuation multiples that US investors are. Nortel’s stock price, for example, was Made in the US even 20 years ago,’ explains Wertheim, who worries about Canadian companies that spurn the hometown audience: ‘There is a strong, stable base of support here that they have to take advantage of.’
‘Particularly with new-tech and healthcare stocks, analysts here are relatively unsophisticated,’ notes Thompson. ‘There is an absolute craving for more decent research. You hear it over and over from Canadian issuers that they just can’t get coverage here because people don’t know their industry. Many go with a US listing for that reason.’
‘The big brokerage houses focus on bread-and-butter Canadian issuers because they can sell them,’ adds Lute. ‘Someone thinking Canada still thinks mining, oil and gas, and to some extent, financial services. They can sell Inco to a US or European client, but they may not want to spend money initiating coverage of a junior mining company.’
Indeed, Toronto may be lagging when it comes to researching new sectors, but in one area it enjoys undisputed respect: ‘It is the market to be in if you’re in the natural resource sector,’ avers Mills. ‘The buy-side pool of capital is here, as well as a group of analysts that have worldwide recognition in evaluating oil and gas and mining companies.’
Mills cites three recent Toronto Stock Exchange IPOs from unlikely issuers: Boliden, a Swedish mining company with no assets in North America; Black Sea Energy, with oil and gas assets in Russia; and Pendaries Petroleum, a Texas-based company with oil and gas interests in China.
But Toronto’s sell-side is starting to get much stronger and specialize in other, more diverse, sectors. ‘There are more niche-focused, very bright, knowledgeable analysts in specific sectors,’ says Mills. ‘They’re moving away from catch-all ‘special situations’ and ‘small cap’ basins to more highly focused research departments.’
Gleaning knowledge
The buy-side is also developing a very sophisticated approach, Mills reports. In setting up some recent investor meetings for Stelco, he found a specific person at some large pensions and mutual funds who follows the steel industry. The result was a more beneficial discussion on both sides: company management took home industry knowledge gleaned from the buy-side experts.
The gap between the US and Canadian investment communities is closing, agrees Wertheim. ‘Canada’s investment community has the same capabilities just not as much depth,’ he says. ‘But Canadian investment dealers have made great strides in terms of creativity, corporate finance and M&As, becoming more aggressive than they used to be. Clearly the larger firms have more clout.’
The impending merger of two of Canada’s largest banks, Royal Bank of Canada and Bank of Montreal, will see the combining of their Bay Street-leading investment dealers, Dominion Securities and Nesbitt-Burns. Some worry that this will reduce the options for issuers. But Wertheim says there may be more diversity with more room in banking syndicates for other players.
While the core group of investment dealers has long remained static – including also Midland Walwyn and CIBC Wood Gundy – there are dynamic new players on the scene: Yorkton Securities, Newcrest Capital and the ‘very hot shop’ of Griffiths McBurney.
Wertheim notes that while the importance of buy-side analysts and managers has risen dramatically in the US, in part because of worries about the sell-side’s corporate finance conflict of interest, the trend is only just beginning here. ‘The changing style of institutions is that they’re relying more and more on their own work. As an issuer, you still need to value the sell-side analyst. But you really want to get to the end-user: the fund manager making the real buying decisions.’
Not a backwater
Part of Canada’s conservatism, Blunn says, is a grave politeness: ‘On conference calls, Americans will be very direct, but Canadians won’t tell you what they’re thinking.’ Moreover, Canadians aren’t likely to spend extra time schmoozing, a trait Blunn thinks is inherited from the Scottish industrial barons who quarried Canada’s financial bedrock: ‘Let’s get down to business, tell me what you’re going to tell me.’
It’s clear that despite the dour demeanor of Canadian investors, this is a sophisticated pool of capital worth courting. ‘Don’t send your second string to Toronto because it’s not New York,’ concludes John Lute. ‘This is not just some backwater.’
Tourist information
WHERE TO PRESENT
The King Edward
37 King St E
Tel: +1 416 863 9700
Fax: +1 416 367 5515
IPO favorite
Royal York
100 Front St W
Tel: +1 416 863 6333
Fax: +1 416 860 5008
Recently renovated
Sheraton Centre
123 Queen St W
Tel: +1 416 361 1000
Fax: +1 416 947 4801
Board of Trade
1 First Canadian Place
Tel: +1 416 366 6811
Downmarket but a great location
Toronto Society of Financial Analysts
390 Bay St, #1702
Tel: +1 416 366 5755
Fax: +1 416 366 6716
WHERE TO STAY
Four Seasons
21 Avenue Rd
Tel: +1 416 964 0411
Fax: +1 416 964 2301
Hilton
145 Richmond St W
Tel: +1 416 869 3456
Fax: +1 416 869 1478
Inter-Continental
220 Bloor St W
Tel: +1 416 960 5200
Fax: +1 416 960 8269
WHERE TO EAT
Cafe Victoria at the King Edward
Tel: +1 416 863 4125
Elegant, quiet, discreet
La Maquette
111 King St E
Tel: +1 416 366 8191
Canoe
66 Wellington St W
Tel: +1 416 364 0054
Zoom
18 King St E
Tel: +1 416 861-9872
Jump
Commerce Court East
Tel: +1 416 363 3400
Good location but noisy
THINGS TO DO
Art Gallery of Ontario
317 Dundas St W
Tel: +1 416 979 6648
One of North America’s largest public art museums
CN Tower
301 Front St W
World’s tallest free-standing building
Hockey Hall Of Fame
BCE Place
30 Yonge St
Tel: +1 416 360 7765
Royal Ontario Museum
100 Queen’s Park
Tel: +1 416 586 8000
