In the latest episode of the Polestar Podcast, financial experts Kevin Parton and Keith Allan delve into the current market conditions and provide valuable insights for investors. The discussion revolves around the impact of interest rate movements and strategies for navigating market volatility.

 

 

Podcast Highlights:

• Explore how market sentiment reacts to speculation about interest rate movements and its influence on investor decision-making.
• Learn the importance of staying resilient during market pullbacks, maintaining a long-term perspective, and seizing opportunities to acquire discounted assets.
• Discover the significance of disciplined investing habits like dollar-cost averaging and diversification in mitigating risk and maximizing returns.
• Understand the necessity of removing emotion from investment decisions, and how it contributes to long-term investment success.
• Gain insights into the mindset needed to navigate market fluctuations, focusing on long-term goals rather than short-term market movements, for sustained investment growth.

 

By understanding the dynamics of interest rates and adopting disciplined investment strategies, investors can weather market volatility and position themselves for long-term success. Tune in to gain further insights into navigating today’s ever-changing financial landscape.

 

About the Guest – Keith Allan

Keith Allan is a Portfolio Manager with Harness Investment Management. Harness has engaged in a strategic partnership with VELA Wealth and provides discretionary portfolio management for many of VELA’s clients. With more than 15 years of buy-side investment management experience, Keith brings a wealth of knowledge and experience to provide insight and guidance to clients regarding their investment portfolios. At Harness, Keith is responsible for developing and maintaining investment portfolios for VELA clients. Keith is dedicated to fostering long-term relationships with high-net-worth individuals and families by providing a clear and transparent vision to help them achieve their investment goals. To learn more, please visit Harness Investment Management team page.

 

About the Host – Kevin Parton

Kevin Parton, CFP professional, specializes in personal and business financial planning, tax reduction, and estate planning. Kevin is diligently concentrating on client education as a powerful strategy for building financial certainty. As no financial situation is the same, Kevin and his team monitor clients’ plans and implement personalized strategies to reduce their personal and corporate taxes, and protect their income, assets, and loved ones against the financial consequences of a serious illness, injury or death, ensuring clients maintain financial certainty and peace of mind. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

In this episode of the Polestar Podcast, host Jason Boudreau speaks with Morgan Housel, author of “The Psychology of Money” and “Same as Ever.” Morgan shares insights from his unique journey from a ski-racing youth to a leading financial writer, emphasizing hard work, curiosity, and the realization that personal inadequacy led to greater efforts in his education and career.

Morgan explores the balance between optimism and pessimism in wealth management, drawing from his professional experiences and his writings. He highlights the critical role of understanding human behavior in financial decisions and discusses the complexities of entrepreneurship, the pursuit of happiness, and parenting in the age of social media.

This episode is a deep dive into Morgan’s philosophy on financial psychology, the importance of self-awareness, and the challenges of navigating success and satisfaction in today’s digital and materialistic world.

 

 

Key highlights of this episode:

• Morgan Housel’s unique journey to acclaimed financial writer, highlighting the value of hard work and the impact of early life experiences on career choices.
• The importance of balancing optimism and pessimism in wealth management.
• Insights into behavioral finance, emphasizing the psychological aspects of money management and the power of understanding human behavior in financial success.
• The role of entrepreneurship and the realities of managing a business, addressing the challenges and rewards of navigating the business world.
• The impact of social media on happiness and self-comparison, with a focus on the challenges of parenting in the digital age and fostering a healthy relationship with technology.
• Morgan’s perspectives on the pursuit of happiness, success, and fulfillment, offering listeners a guide to navigating life’s financial and emotional complexities.

 

About the Guest- Morgan Housel

Morgan Housel is a partner at The Collaborative Fund.

He’s the New York Times Bestselling author of The Psychology of Money and Same As Ever. His books have sold over five million copies and have been translated into more than 50 languages.

Morgan is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, and winner of the New York Times Sidney Award. In 2022, MarketWatch named him one of the 50 most influential people in markets. He serves on the board of directors at Markel.

 

 

About the Host – Jason Boudreau

Jason has built VELA Wealth into an established life and estate planning firm, guiding families as they make meaningful choices at the intersection of life and wealth. Jason’s areas of expertise include intergenerational wealth transfer and estate planning with a focus on advanced insurance-based solutions that incorporate philanthropy and legacy planning. Leveraging these specialties, Jason brings a fresh perspective and outside-the-box thinking to the strategic planning process. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

In the new episode of the VELA Wealth Polestar Podcast, Kevin Parton, Partner and Senior Advisor, and Keith Allan, Portfolio Manager at Harness Investment Management, explore the world of alternative investments, offering a behind-the-scenes look at how VELA Wealth, Harness Investment Management, and Purpose Investments collaborate to unlock unique opportunities. They challenge listeners to rethink traditional portfolio strategies, emphasizing the importance of diversification with private assets like equity, debt, and real estate.

 

 

In this episode of the Polestar Podcast, you’ll learn:

• how VELA Wealth, Harness Investment Management, and Purpose Investments collaborate to unlock unique opportunities,
• why traditional portfolio strategies are being challenged,
• how alternative investments can revolutionize your portfolio,
• the power of diversification with private assets like equity, debt, and real estate.

 

About the Guest – Keith Allan
Keith Allan is a Portfolio Manager with Harness Investment Management. Harness has engaged in a strategic partnership with VELA Wealth and provides discretionary portfolio management for many of VELA’s clients. With more than 15 years of buy-side investment management experience, Keith brings a wealth of knowledge and experience to provide insight and guidance to clients regarding their investment portfolios. At Harness, Keith is responsible for developing and maintaining investment portfolios for VELA clients. Keith is dedicated to fostering long-term relationships with high-net-worth individuals and families by providing a clear and transparent vision to help them achieve their investment goals. To learn more, please visit Harness Investment Management team page.

 

About the Host – Kevin Parton
Kevin Parton, CFP professional, specializes in personal and business financial planning, tax reduction, and estate planning. Kevin is diligently concentrating on client education as a powerful strategy for building financial certainty. As no financial situation is the same, Kevin and his team monitor clients’ plans and implement personalized strategies to reduce their personal and corporate taxes, and protect their income, assets, and loved ones against the financial consequences of a serious illness, injury or death, ensuring clients maintain financial certainty and peace of mind. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

 

The Podcast Transcript

 

Kevin Parton:

Hello. This is Kevin Parton from VELA Wealth, and this is the Polestar podcast. I am lucky enough to be back here in the interview seat with portfolio manager Keith Allan. How are you doing today?

 

Keith Allan:

Doing well, Kevin, thank you for having me.

 

Kevin Parton:

All right. I’m excited about what we’re talking about today – alternative investments for a variety of reasons. In the last couple of years, it’s become quite a hot topic and I think there’s much to be explored both in the scheme of where alternative investments fit and how it relates to the average person. But, firstly, I want to talk about three different entities: VELA Wealth, Harness Investment Management, and Purpose Investments. Can you please provide some helpful context and explain the relationship between the three companies?

 

Keith Allan:

I can understand from a client’s perspective how it can get a bit confusing and convoluted at times when we’ve got several entities all commingling. I’d be happy to shed some light on each entity and explain what they provide and how they fit into the client’s overall financial landscape.

VELA Wealth is the wealth manager in the sense that they are the relationship manager for the client. They focus on planning the client’s entire financial landscape, including insurance and all other types of needs. Purpose Investments or Purpose Unlimited, as it’s called now, is the portfolio management entity and Harness Investment Management is the registrant under that umbrella. So, Harness acts as the fiduciary. As the portfolio manager, while I work exclusively with VELA clients, my licensing is through Harness Investment Management as the registrant. So that way I’m licensed with the Securities Commissions across Canada through Harness, which falls under the Purpose Unlimited umbrella. So, you can think of Purpose almost like a Black Rock or a Vanguard. Their whole MO is to bring products to market, ETFs, funds, and portfolios. They’re separately managed account portfolios, which are the same accounts we use for our clients. So, Harness was branched off from Purpose to provide these products to high-net-worth or ultra-high-net-worth clients and the retail landscape, which is where VELA comes into play. VELA has entered into a relationship or a strategic partnership with Harness to allow its clients the opportunity to invest in Purpose’s product through Harness. I’m hoping clients aren’t more confused after I explain that than they were before I explained it. I did my best to hopefully demystify the whole relationship between the three entities.

 

Kevin Parton:

From where I’m sitting, I think you did a pretty good job. It’s unique right now in the Canadian landscape, but this sort of platform makes what VELA is doing more and more accessible to the Canadian market. Historically, there have been large entities where everything was under one umbrella, but to operate in that space, you had to kind of preexist as a massive entity. And we’re in the age now of more boutique-style firms that can tailor and cater more specifically to their clients. This is the mechanism by which it’s done at a level people are familiar with.

 

Keith Allan:

Yes, exactly. I think the whole thing about the relationship and how this is structured is to give the clients the best of all worlds because it allows each person to focus on what they do best and to give that to the clients in context so that clients are ultimately enhancing not just their portfolio but their overall financial situation, whether it’s planning insurance investments, which are the three main entities of the family balance sheet. We want to be able to give our clients the best in class and this is the relationship that allows us to facilitate that.

 

Kevin Parton:

“Aces in their places” comes to mind as you are saying that this allows us to ensure that we have the best people for the job. This brings me to the next point and the purpose of this conversation – alternative investments.

So, as I was saying, alternative investments have become a common word or term these days to sort of fad level after 2022 when stocks and bonds went down in the same year and one of only a few historical years in which that’s been the case.  It began a big conversation around the different assets you can invest in what are the alternatives? What do you do? I think a problem with it becoming such a common term is that it loses its meaning and where it originally came from, what it describes starts to sort of take on a mind of its own. And sometimes far worse as it gets used so commonly that that people think that they’re supposed to know what it means and then they don’t do the research into exactly what it is, or they try and delve into things themselves.  This is where I want to start. What exactly is an alternative investment so that our listeners can be clear on the definition before we dive a little bit deeper into this subject?

 

Keith Allan:

So, alternative investments can be described or defined as an investment asset class outside of your traditional bonds and equities in cash. So, anything that doesn’t fall in that traditional stock blue chip equity, small cap, large cap stock, or your traditional bond, your fixed income, corporate bonds, government bonds, GICs, cash, or other money market instruments, would be considered an alternative investment. It can be anything from commodities to real estate to derivatives, private equity, private debt or private real estate, hard real estate infrastructure, or synthetic instruments that mimic real estate and provide a yield. Many different types of products can be defined as alternative investments, but the reality it should be something to be looked at outside of your traditional asset classes. And for us, that’s what’s important and what we feel will help drive returns for our clients moving forward.

 

Kevin Parton:

It sounds like there’s quite a large array of things that fall under the alternative asset classes, which kind of make and I think sort of lends itself to where the conversation 2022 is going is stocks, bonds, and cash are traditional, but a much smaller shelf relative to everything that falls under alternate assets. Then the next evolution is well, how are alternative assets being included in the design of a portfolio to sort of work in conjunction with the traditional non-alternative assets and who makes those decisions?

 

Keith Allan:

Traditionally, if you go twenty-thirty years back, alternative investments weren’t a part of the portfolio. Everyone talks about your classic 70/30 portfolio, 70% equities, 30% bonds, or your classic 60/40 portfolio, 60% equities, 40% bonds. Set it, forget it, move in. In our opinion, that type of portfolio structure is a very antiquated approach to investment management because the reality is we want to achieve alpha for our clients, and alpha is defined as the excess return above and beyond your benchmark. To do that in today’s environment, you need to be able to have other asset classes, uncorrelated asset classes to your traditional equities and fixed income. That’s how we look at alternative investments. And now it’s peeling back the layers of what type of alternative investments we want to use to achieve that alpha that we’re looking for. Like I said before, there are many different layers there, but for us, we want to drive return for our clients.

There’s an efficient market hypothesis where all available information is priced into the market at any given time. So, to truly achieve alpha, it’s almost impossible because all the information is showing in the market at that specific point in time. So, portfolio managers are somewhat obsolete if you believe this because there’s no chance to add alpha if you’re looking at public markets and traditional markets. If all the information is there. So, whether we believe that efficient market hypothesis or not, that’s a whole other discussion. But what we do believe is that we are not obsolete as portfolio managers, and we indeed can achieve that excess return. But we need to do it in non-traditional asset classes like alternatives. So, I just wanted to throw that little tidbit in there because I think it’s important that people listening to this understand -if you are a believer in efficient market hypothesis and all information is truly reflected in public markets, there is still a chance for us to return that alpha to clients and earn our keep, so to speak. We believe we can and we believe we’ve done that. So that’s a little bit of a sidebar, but I want to throw that in there.

 

Kevin Parton:

I appreciate you throwing that in there because of that. That is a common conversation around index investing and what people want to do with their money, and I think this is where alternatives play a role as it opens up the portfolio to sort of a litany of other as you said noncorrelated assets that are important and something that again keeps coming up now with sort of the big seven tech companies.  Nvidia (NVDA.O) just almost reaching or passing 2 trillion as these indexes are made up by fewer and fewer companies or the moves that occur in there are as a result of what’s happening in fewer and fewer companies. So, I think to your point, the opportunity to add value is starting to grow because of the fewer and fewer companies in these indexes… but that is a conversation for another podcast.

 

Something that I know to be true at least, and maybe this is more of a question than anything, but alternative investments used to be only accessible to pension funds or institutional investors maybe because of technology or just sort of necessity has changed. I think that’s also why it’s become a more common discussion as alternative investments are becoming more and more accessible to retail investors. Can you talk a little bit about why that evolution has happened?

 

Keith Allan:

So that’s a great point, Kevin. And what we’ve done with Purpose and Harness is we’ve been able to bring product to market that normally to your point would only be offered in the biggest pension funds or the biggest money managers in the world managing billions and billions of dollars in a pension fund or a hedge fund. So, why should it just be the largest funds in the world getting access to these types of investments? We feel that our clients should be able to get access to those, maybe not in the same direct manner, but certainly very close in terms of how they hold it, and how it represents the overall asset allocation for their portfolio. So, what we’ve done is we’ve taken private assets, private equity, private debt, private real estate and unitized it to our clients so they can gain access to these types of investments. We feel very grateful that we’re able to do that through our partnership with Purpose and Harness and VELA because not a lot of investment managers out there can offer this to their clients in the unitized form. So, that again separates what we’re able to do for our clients outside of a lot of other investment managers.

Kevin Parton:

Which brings up two interesting points. The first one is – is this sort of a unique offering through Purpose, some different alternative assets that are available in this unitized mechanism? Is that unique for Purpose or unique with VELA or are these accessible at a litany of different firms in the market?

 

Keith Allan:

The answer to your second question is no. They are not readily available to other outside firms in the market. There are other private investments. If your portfolio is being managed by another firm, you may have access to other types of private investments.

Because of the strategic partnership we have, we’re able to gain access to these particular funds, but also at a price point that is very accessible for clients and they’re not paying unreasonable management fees to get access to this. I think that what separates us from other firms is that we’re able to get access to them, but at a price point that is very enticing for clients and they’re not paying a gigantic management fee like they would be elsewhere.

 

Kevin Parton:

Fair enough. I guess that the barrier to entry into these products as far as a dollar amount isn’t so high that it limits who can access them.

 

Keith Allan:

Yes, exactly.

 

Kevin Parton:

I know that Purpose has a relationship now with three different alternative investments. Are you able to speak a little bit to those three at this point?

 

Keith Allan:

Yes, absolutely. So, Purpose has partnered with three firms based in the United States that specialize in private assets. In that partnership, they’ve launched three separate funds, private equity, private debt, and private real estate. Purpose has now been able to bring this to the Canadian marketplace for clients that are partnered with Purpose, Harness, or VELA, and provide these funds for them.

The private equity fund is partnered with a firm called Pantheon in the United States, the private debt is with Apollo and the private real estate is with a firm called Blue Rock. So, together with each of those three firms, Purposes has created a fund that is sub-managed by those aforementioned firms, but available to Canadian retail investors. The track record for all these firms is remarkable which is why Purpose decided to partner with each of them respectively, for that particular asset class. Due diligence has been done and the companies have been vetted after a lot of research, it was decided these were the best partner firms to go with to provide these private assets for the clients.

 

Kevin Parton:

If I’m hearing you’re right, when we started talking about alternative investments, there was a very large array of available things that fit under that category and what Purpose is done is to acknowledge all the options that exist and kind of distill it down through a rigorous process and now said, “So, these sort of three options are the best that we want to offer on our platform or to our clients within the alternative asset space?”

 

Keith Allan:

Yes, exactly. So, I think there is a huge appetite from investors for private assets. I know in the beginning I talked about how commodities, derivatives, and other types of assets could be deemed alternatives. However, the largest appetite amongst retail investors is for private equity, private real estate, and private debt. It is difficult to be able to access that in the Canadian landscape. So, Purpose knowing that there is a huge demand for this from investors across Canada, focused on the initiative to be able to establish 3 funds in those private assets and be able to bring them to market for retail investors.

So, we feel that the private equity, the private credit or private debt, and the private real estate sort of tick all the boxes in terms of increasing diversification for clients from traditional asset classes, as well as providing a reliable income stream because all of these funds pay a distribution quarterly and enhanced returns or achieve the alpha that I spoke about earlier. Those three funds do all three of those things, which is why these are the ones that we feel are best suited for our clients moving forward.

 

Kevin Parton:

Right, okay. Now that we talked about that, how do you decide what fits into a portfolio? You talked about the traditional 60/40 or 70/30 portfolio structures earlier. What the mix is supposed to be if you incorporate alternative assets in there?

 

Keith Allan:

I think ultimately it comes down to each client, their appetite for risk, and their ability to take on risk because undoubtedly these private assets do carry more risk than perhaps your traditional equities and bonds, which is why they’re able to ultimately achieve higher returns. It’s a direct correlation between the risk you’re willing to take and the return you are getting. Now there is some volatility and there are certain restrictions within these funds in terms of being able to get your money back, being able to put money in, and withdrawing it. They’re not overly restrictive. It’s not like you put your money in and you’re never going to get it back, but there are some restrictions in place and clients need to be aware of that when they do invest in these types of funds as they aren’t as liquid as traditional public equity or public debt. So, we are being able to weigh that for clients. What is their appetite for risk? What is their asset allocation? What are they looking for? And for some clients, it might not be appropriate. We feel that for most clients it is because again, we want to be able to drive return for clients, and to do that, we need to be able to diversify the portfolio. Certainly, for clients that rely on taking income out of their portfolio every month or have a huge upcoming purchase, we may not look to go private as much as we would for a client that has a long time horizon and does not require true liquidity needs at this point. So, every client has looked at it on a case-by-case basis to truly understand if these types of investments are appropriate for them.

You asked me what is the traditional or the new asset mix that we should be looking at. Well, I can’t answer that because as I said, every client is different. We feel that it’s entirely appropriate, or else being equal, for clients to have roughly between 8% and 12% in private assets just given the current climate, and for some clients, it will be less. I don’t necessarily know if we would ever go more than that, but 8% to 12% is what we look at in terms of private assets and alternative assets. Right now, those alternative assets are made up primarily of private equity, private debt, and private real estate.

Kevin Parton:

Great. I guess with the change in interest rates, cash is a little bit more of something you’d consider in a portfolio. So, the traditional mix was equity fixed income and now it looks like alternatives and cash can be in positions three and four within the building of a portfolio. I only mentioned that to say that when you talked earlier about alpha and adding the values of portfolio manager, well, when you double the assets, you tend to consider putting in a portfolio that adds a little more complexity. Can you tell us what sort of the changing environment both in bringing alternatives into portfolio management more readily and fluctuating interest rates does when you’re looking at portfolio construction?

Keith Allan:

Well, we’ve said for some time now that cash is an asset class, whereas before it was kind of just a sidebar, right? We always hold a little bit of cash in client’s portfolios, but we did not truly look at it as an asset class because there was virtually no yield on it. But now when you’re seeing banks offering very high interest rates and we have our cash product that we offer for clients that yields well north of 5% you can say that this is an asset class for clients. When we build out a portfolio, we’re looking at equities and fixed income, but cash falls right next in line to that, and again, alternatives, private equity, private debt, and commodities. Are we going to go ahead and hold 20% cash for clients? Well no. That will not be a good job as portfolio managers If we’re just going to say, “We’re going to hold 20% cash across the board”. We might hold a little bit higher than normal in client’s portfolios in cash to provide us the opportunity to act when there’s an asset or a particular name we like and we want to be able to deploy that money easily and readily. You’ll be getting a 5% yield on that, while a lot of bonds weren’t offering that. So, we can put that money there, get the tidy yield on it, and have it readily available for us to deploy, right? But again, it’s not stagnant and it’s always dynamic. We’re always thinking about what are we going to do in two to three months from now, do we want to have cash available, and what other types of assets are we looking at to enhance the return and drive return for our clients. So, yes, cash is an asset class. It’s not always going to be an asset class.

I think to your point about interest rates, we’ve seen interest rates drop to historical lows during COVID-19 and now they’ve jumped back up to highs that a lot of the population haven’t seen in their lifetime. What’s going to happen next? Well, inevitably, interest rates will come down. I know they haven’t yet. The Bank of Canada has gone on record saying that probably at some point this spring, the US Fed same deal. So, as the interest rates come down, fixed income is going to rise, and the value of fixed-income assets moves inversely to what the interest rates do. So, there may be an opportunity to hold more fixed income or other types of assets that are going to increase in value. But right now, we’re still active in holding cash for clients and we think it’s prudent to do so.

Kevin Parton:

Great. I’m going to try and summarize some of the points we went over today. So, we started with talking about alternative assets, which are effectively anything outside of cash, stocks, or bonds. The list was quite large, but we sort of narrowed that down to where the appetite is, which is private debt, private equity, and private real estate. Purpose has done its due diligence and found three big players in each of those spaces such as  Apollo, Pantheon, and Blue Rock, which have been unitized to give our clients access to really good quality private assets as a part of their portfolio, especially through 2022. It’s become apparent that the traditional mix of stocks and bonds isn’t necessarily what’s going to be advantageous going forward. So, it’s becoming more and more prudent to include alternative investments or private assets in the portfolio. That is a decision that’s made on a case-by-case basis based on clients, but being somewhere where you can gain access to that type of advice is what’s going to become a differentiator or a difference maker.

So, I think that’s kind of where we can summarize everything we’ve talked about so far. I’m going to turn it back over to you, Keith. Can you please give one or two bits of advice or talking points to your perspective on alternatives before we wrap this up?

Keith Allan:

Thanks, Kevin. Everything you said there is a perfect summary of what we spoke about. The one piece of advice I would give is to be open-minded and be able to think outside the box and outside of the antiquated 70/30 or 60/40 portfolio. If you’re looking to drive value moving forward and enhance return in your portfolio the 70/30 portfolio will do its thing but ultimately you need to be able to look outside traditional assets to truly drive return. We as a team have done a lot of work on this and really done our due diligence in terms of understanding what private assets mean in portfolios, and how they can diversify portfolios and provide uncorrelated returns to traditional asset classes. So, I think for people that don’t know a lot about private assets or have a negative connotation as they have heard a friend who got into some private fund and lost all… Well, no, that’s not the private assets we’re looking to add, it doesn’t work like that as these have been vetted, due diligence has been done and we truly believe that they are going to drive value for our clients.

Kevin Parton:

Awesome. I appreciate it. I think this is great information for our listeners so that they can get a little bit of an inside scoop and understand more about alternatives and private investments. We’re always available if there are additional questions. Thank you for your time and I look forward to talking to you again soon.

 

Keith Allan:

Absolutely. Thank you for having me, Kevin.

 

 

Disclaimer

The information provided in the podcast transcript is designed for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

Kevin England, President of the England Group, shares his journey from a dairy farm upbringing to a successful career in real estate and philanthropy on the recent Polestar Podcast by VELA Wealth. Raised with strong family values and a work ethic, Kevin’s early experiences taught him the importance of integrity and community involvement. His transition to the real estate sector led to innovative approaches to property management, emphasizing long-term thinking and transparency. Kevin’s passion for making a difference is evident in his philanthropic endeavors, including organizing car shows to raise funds for cancer research and hospice care, showcasing his commitment to giving back.

 

 

Key highlights of this podcast:

• Childhood Lessons: Discover how Kevin’s upbringing on a dairy farm instilled in him strong values of work ethic and community involvement, shaping his approach to business and life.
• Career Evolution: Learn about Kevin’s transition from working in construction and the tar sands to a successful career at IBM, where he honed his skills in communication and long-term thinking.
• Real Estate Innovation: Explore Kevin’s innovative strategies for property management, including his focus on transparency, long-term planning, and adding value to properties through amenities and services.
• Philanthropic Passion: Hear about Kevin’s deep commitment to philanthropy, from organizing car shows to raise funds for cancer research and hospice care to supporting recovery centers for young men in need.
• Building Trust: Gain insight into Kevin’s approach to building trust and rapport with clients, emphasizing integrity, transparency, and a long-term perspective in all his dealings.
• Legacy of Impact: Discover how Kevin’s dedication to giving back has created a lasting legacy, inspiring others to follow their passions and make a difference in their communities.

 

About the Guest – Kevin England

Kevin England: A conservative, innovative, and bold entrepreneur with over 30 years of success. From his roots on a Pembroke farm, he embodies hard work and determination. After graduating from Carleton University, he honed his skills at IBM Canada Ltd. and Qualico Developments before founding the England Group in 1986. Based in Vancouver, Kevin England leads with integrity, ensuring everyone wins in the deal. To learn more, please visit the England Group website.

 

 

About the Host – Jason Boudreau

Jason has built VELA Wealth into an established life and estate planning firm, guiding families as they make meaningful choices at the intersection of life and wealth. Jason’s areas of expertise include intergenerational wealth transfer and estate planning with a focus on advanced insurance-based solutions that incorporate philanthropy and legacy planning. Leveraging these specialties, Jason brings a fresh perspective and outside-the-box thinking to the strategic planning process. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

 

 

The Podcast Transcript:

 

Jason Boudreau:

Welcome, everybody to the Polestar Podcast by VELA Wealth. Today we have the pleasure of having Kevin England. Kevin is the President of the England Group, the company focuses on a diverse portfolio of real estate assets and has been around for many years. Welcome, Kevin. Thank you so much for being here today.

 

Kevin England:

Hey, Jason.

 

Jason Boudreau:

Great to have you here and looking forward to the conversation.

I know you have lots of neat things on the go today with exciting projects you’re involved with and your non-profits and your passion around that. I’ll lead into that a little bit later in the conversation. What I’m hoping we could do today is start way back as far back as you can remember. I want to hear about the journey of Kevin England and how you got to where you are today if that works for you.

 

Kevin England:

Sure, Jason. Let’s do it.

Well, I was the fifth child of 10 and I was raised on a dairy farm just outside Pembroke, ON. In the early years, everyone had a job, everyone pitched in. So you learned work ethic and family values very early on. My grandparents were farmers as well. Interestingly enough, my grandfather and his brother, my uncle, had bought a steam engine in 1922, and we’ll be talking later about my passion for vintage cars… so they bought a massive 22-horsepower Sawyer-Massey steam engine machine and they went around to the various farms to help them do the threshing.

As a child, I remember that it was a big part of our family culture – my grandfather was doing that. As I said I had nine brothers and sisters. I was boy number 5 and then there were two sisters, a boy who took over the farm, my brother, and then two younger sisters. What’s a bit unique was being raised on a farm in Renfrew County, I went to a one-room schoolhouse. So, I had grade one all the way to grade eight in one room. We just had a school reunion for one of the teachers who taught there. She had 35 kids in this class at one time and she was 18 years old. She was a very capable person. Having had many siblings, I had brothers and sisters all across the classroom, so it was a unique way to start. We would walk to school in the farming community and then eventually by grade eight, we started to be bused to the larger schools. But that was the beginning of how we were getting educated.

When you grow up on a farm you learn a lot of things. You witness a lot of things – my dad and my mom were very involved in the community, very involved in the church, and very involved in helping neighbors. I got to see my dad do many things for neighbors that he would not want anyone to know about, he wanted to keep it private. We knew all our neighbors, their parents, and the grand their kids, so you grew up with a strong sense of self-identity in that community. Of course, they did not realize it at the time.

I was fortunate enough to hang out with a group of guys who went on to university. So, I took a gap year and went to Europe, which at that time was a big deal. I went to Europe for six months with a buddy and came back and decided to not just do a trade, but then I would go to university. I went to Carleton University, Ottawa, Canada.

I was fortunate to get hired by IBM on a career day at the university. It wasn’t my intent. I had just decided to have this interview for the experience, and they decided that I was probably a good rainmaker. They decided to hire me and that kind of surprised me as well because I was just enjoying the interview. I remember it was the third day of interviewing and I was the very last interview. And I said to the interviewer “Let’s go get you a coffee.” So, I took him to the university coffee shop. My friends were there, they saw me there with the interviewer from IBM, who was the Senior Manager, and they knew I had the job. They said you had him laughing and eating out of your hand and they said, “Who takes the interviewer to the coffee shop to do the interview?” So, that was very fortunate for me. They sent us to Toronto for training and that is where a lot of my business success came from learning communication skills, the approach to thinking long-term, and thinking bigger.

 

Jason Boudreau:

How old were you when you started at IBM?

 

Kevin England:

I was 25 when I started at IBM. At that time, I had already started the business on the side. I have worked in construction. I remember in my high school days I had hitchhiked out to Fort McMurray and got a job in the tar sands. I was making like two and three times more money than you could make in my hometown. The next year there were 17 of us. So, I was alone there for the first year and then I told all my friends from high school. The next year there were seventeen of us in Fort McMurray. That was pretty cool, we kind of owned that town, and it was a pretty special and spectacular time. So that’s how I got my university money. I was there for two summers and got my university money. Also, I got experience driving a gravel truck, and I had farm experience already, right? So, I got the job.

While I was in university, I got a loan from two of my brothers and bought a diesel gravel truck which I was operating in the summer. I hired a family man to drive it while I was back at university finishing my credits. So, when I went into the IBM interview, what made me different was that I already had an operating business. So, that made me kind of unique, because they interviewed hundreds of young people at the time who, I thought, had much better degrees. And of course, I ended up with the job because of my personal and practical experience. That probably changed the course of my life.

I won the Gold Pen for the Top Sales Award at the end of the six-week training in Toronto. All the students were competing for the top sales award. I won what’s called the Gold Pen – an award that recognizes building relationships, rapport, trust, and connection with someone in just five minutes. Turns out I had a natural aptitude for that.

So, then I had friends leaving IBM and going into the real estate sector and making a lot more money with a lot more upside there in their future. Those were the guys I worked with every day. And I thought “They’re doing it, I can do it.” So, I went into the real estate field, first with a company called Imperial Group as a Branch Manager and then they transferred me from Vancouver to Edmonton. After  I came back to Vancouver and worked with a company called Qualcomm for two years. There I learned a lot. I try to always make a lot of extra contributions to the company that weren’t in my job description, but where I could learn as much as possible from the other divisions and the other people. That paid off when I decided to start my own real estate syndication investment company. That paid off in spades.

At that time the opportunity was to buy real estate in Texas, US. You can’t be an expert in every market, so I decided that Texas would be a market I would get to know inside out.

 

Jason Boudreau:

Anywhere in particular in Texas?

 

Kevin England:

In the North and the Northwest, in Plano.  I decided to go into a more expensive white-collar area because I felt it would be safer. If something did go wrong, you had an asset and you could get out and break even, right? It was in the early 90s when those markets went through a huge crash, a huge recession, and a huge overbuilt situation. We’re buying properties that were eight, ten, or twelve years old for half price. Of course, going in the North and the Northwest of both Dallas and Houston – those areas came back first. That’s where all housing prices came back.

I preferred to buy conservatively. So, I prefer not to build but to buy existing ones, so, we could know what our mortgage was going to be in advance of buying it. We had a good idea of the rent and we knew that we could make improvements and make a big visual impact. We’re buying the nicer properties that were gated communities and had tennis courts and if they didn’t have a gym, we would add a gym. We would add lots of amenities because I know people will pay for quality and they will pay for

the extra bells and whistles. We would buy a property only 85-90% occupied and we would increase the service. The rent would be more than our neighbors but we would be full. We added simple things such as having a young family of police officers move in for half-price rent, just so people would feel that it was a safe and secure community and all those little.

I remember we had a property of 502 units on the waterfront in Toronto. We were in a situation where there was a vacancy problem, and we were always at 10% vacant. As we would fill them up, we would end up with another 50 notices, so we would always be behind the game. So, I came up with the idea that we would give away a car. We figured out that the rent for a one-bedroom for a year was going to bring in about $17,000 or $18,000, and while I was having coffee in Toronto, there’s a brand new 4-door Saturn for sale, for $17,000. So, I reckon that if we took the revenue from a one-bedroom unit, we could have a contest. So, we said that for the next 50 one-year leases, one person will win a car. It created so much excitement among our onsite staff and amongst the public that we got 50 leases almost in the first weekend because we’re doing something entirely different.

We got a local politician to come and do the draw. That got us ahead of that cycle where we’re always chasing the vacancy. We always tried to be creative and bring more services. Always add full gyms, tennis courts, volleyball courts, adding padding greens. So, we were making ourselves nicer as opposed to trying to cut costs. Right. We were bringing more value and making ourselves unique. We had signature services: people could drop their dry cleaning off at our front leasing office and pick it up the next day. We just make life easy for our tenants and all those things paid off.

The other thing, I said to my investors, “I manage your properties as if you were family. So, instead of paying you out dividends to make myself look good, we spend more money on those properties to make sure there’s no deferred maintenance to keep them in pristine condition.” That paid off when we went and sold the portfolio because we had no deferred maintenance. You run a property and you can get more cash out but then eventually you have to pay the piper, right? You’ll have deferred maintenance and that can sneak up on you and be a big problem.

That was part of the philosophy, the conservative approach. There were some years when the properties were going into a recession, especially in 2008. So, I would defer my management fees and no one else was doing that in the industry, but I would just not take management fees so that the properties would have more cash flow. Then I could be paid back in the future when the property is sold.

Another thing I did that was kind of unique is I had what was called a cash flow loan. We set money aside when we did each deal and we mastered about $1,000,000. We kept an account at the Royal Bank. So anytime a property needed improvements, it could be borrowed interest-free from that pool, so I didn’t have to go and do any cash calls to my clients. And then when the property would be refinanced, that money could be paid back.  Even through tough times and some of the properties being in trouble, we’re able to get ourselves out of trouble and turn it all around and eventually sell the portfolio and make my clients a lot of money. When they went in, they were leveraged into loans at the bank but the tax write-off and the cash flow would cover their interest payments for their loan at the bank. Of course, the ultimate security was an asset that looked good and in a good location. So, always keep the risk to the minimum, and at the same time, we ended up with a tremendous upside.

I had a formula that if the clients had to get all their money back at a 10% return, then as a general partner I could start to share in the profits. So, we are all in the same boat. I have just as much focus and attention on my first properties as on my last properties because I’m in all of them, whereas I had seen other syndicators – they would just keep moving on to the next property. They don’t care about the original ones, because they’ve already gotten their profit out and moved on. This was a much better formula that became a win-win for everyone. So, we ended up with something like a cash-on-cash return of just over 19% annually over the 25 years. It was very gratifying for me to be in a room with several 1,000 investors who are older than myself, but who were telling me that that was probably the best investment experience of their life. Because when things were tough, I would tell them that things were tough and that we would work to solve the problem right and turn it around.

 

Jason Boudreau:

Just being transparent about it.

 

Kevin England:

Yes. Another thing we did differently was that we audited financial statements every year and the audits were in our books and on site. So, always the transparency the keep everybody real and honest in the deal. It ended up being very gratifying for me.

One of the best ideas I ever had was when we were selling the portfolio. I got involved in a recovery center that helps young men who find themselves on the streets and find themselves with an alcohol or drug problem. I wanted to raise money for that so we could do more good, especially in the province of British Columbia. I came up with the idea that we would ask the investors that 1% of the gross of the deal could go into a foundation that would help these young men who wanted to turn their lives around. We made a benchmark that we would get $20 million more than the last appraisal for the properties before the 1% would kick in. Well, in the end, we ended up getting $68 million more than the last appraisal. So, in the end, we raised $4 million with this 1% formula.

We’ve gone to this recovery farm that has had 1300 young men go through it. It is non-profit. We work with government agencies, we have private donations, and it is free and holistic. There are farm animals and people can stay there for a year. We helped these young men who have gone to many other treatment centers that didn’t work, but because of our formula, it worked for them. Now they’re out, having regained their lives and being productive citizens personally as well as helping other young men who struggle with the same kind of demons.

That’s been very gratifying and that’s where I got the bug that it’s fun to do properties to make money, but it’s a lot more fun to go out and bring people together and do good in the community. That has become my passion. I get a bigger charge out of that.

That led me to my work with Canuck Place. As I mentioned earlier, my grandfathers and their steam engines sparked my interest. Well, I got the bug to start collecting vintage cars.

 

Jason Boudreau:

When did that start for you?

 

Kevin England:

Well, that was about 12 years ago. The first car was a 1931 Model A. I’m buying these cars that are primarily Fords and Lincolns, that are called bread and butter cars. Nothing too fancy, but those are the cars that can be mechanically restored. The second car I bought was called the Sears Horseless Carriage one of the original cars that were essentially horse buggies with a motor under the seat. This car has an air-cooled 12-horsepower motor which I rebuilt, with wooden buggy wheels. It’s a buggy, but in the early 1900s, almost every car on the road looked like a horse buggy with a motor. That was how the car industry started. And then, of course, Henry Ford came along and started to make cars. He went into mass production with his Model T in 1908. So, I have 3 Model T’s and I like the older cars. I have a 1908 Model S. That’s given me great pleasure and along the way, I got invited to go out to Canuck Place to take a young family for a ride in my Model T. My 4-seater convertible Model T, it’s 1911, bright red. It was a profound experience for me because this young family has three boys and the youngest boy was a patient at Canuck Place. I took the dad and the older two boys, 8 and 10 years old, for a ride in the Model T.  They got a break from the stress and burden this family was going through. They got to go into this other space including the dad. When we came back the boys were climbing underneath the car looking at the drivetrain and involved in it. It was amazing.  I have a conversation with the dad as father to father. My youngest grandchild, Leo, was the same as the young 3-year-old Sawyer at that time. The young Sawyer was a patient and had a very rare form of cancer and basically, there was not a lot that could be done for him. So, he was having his last weeks at Canuck Place. The dad was telling me the boys keep asking why this happening and what is going on. And while talking with him I realized the huge support that Canuck Place brings to these families that have a child that’s struggling with cancer. Canuck Place not only helps that child, but they help the whole family because it’s life-changing for the siblings to go through this.

I was driving away from having had this amazing experience as I got invited into the family journey thinking “Thank God, there’s Canuck Place to be here for families that have this challenge in their in their lives.”

That inspired me. I saw the pleasure that this car brought to this family and decided that we should do a car show. My good friend Luigi worked with Canuck Place at the time. He had invited me out and he was encouraging me to do it. I said “Ok. I know other people with vintage cars. Let’s do a car show and put them to work to help children, and raise money for Cancer Research, raise money for the Hospice.” So, that was the idea and we put together the first car show in five weeks.

 

Jason Boudreau:

Great. When was the first show?

 

Kevin England:

It was in September 2021. We were just coming out of COVID. We were one of the very first events. We had a full crowd on a Saturday afternoon in Ambleside Park, North Vancouver, and we were unique, no one was doing this kind of car show. We were under the tent with the red carpet. It was an invitation-only event, and we people would not have to pay an entry fee or purchase food, as it was donated. There was no silent nor live auction. It was all done on the basis: come in, see the cars, hear the story about the good work Canuck Place is doing, and then we just asked you to pledge towards the cause. Our goal was to raise $100,000 and we raised $600,000.

Since then we’ve done two more car shows and now we do them every June on the Saturday before Father’s Day. This year, it will be Saturday, June 15th. So, the second year we raised $900,000, and last year we raised $900,000.

What’s notable is we give away a Cup. We have a People’s Choice where people who go to the car show decide which card is the most impressive car for them and they get to vote and put their vote in a ballot.  The car will be chosen by the most votes and it will win the Cup and the Cup will be on display at Canuck Place for the year.

What’s interesting here is that young Sawyer passed away the morning of the first car show. That was uncanny. We did not have a name for the Cup that we giving away and I got the idea to name it after Sawyer. So now we have the Sawyer Cup. In essence, this young boy inspired this car show that we can do every year now and hopefully, we can make it better each year. I’m in close touch with the family. They spoke at the last two car shows they attended and it’s been huge for them and their healing journey that their son was able to bring something really, really positive.

 

Jason Boudreau:

…and create a legacy in his name.

 

Kevin England:

…and create a legacy at his early age and you know. I said to them “he’s almost the same age as my youngest grandchild, so I could relate and put myself in that position. What would I do? Where would I turn if my family was in that same situation, right?”

This car show is quite a fun event. I went to my friend, Dave Lede, who also has a passion for vintage cars, and asked him if he would put a car in. So, he said, “Why wouldn’t I Co-Chair? ”. He is one of my best friends and we get to do something and work together and bring a lot of good. So, it is about having real meaning – it creates meaning in our lives, children’s, and families’ lives. It does a lot of good. We also have a lot of fun because of our passion for these cars.

We’re working on having Jay Leno. He’s a car guy and my goal is at some time have him attend and give the Sawyer Cup to the winning car. So, that’s where we are at.

 

Jason Boudreau:

Thank you, Kevin. Thanks for sharing that story and such a neat journey. Early on conversation, you mentioned when you worked for IBM you learned about building trust and rapport. Can you share a little bit about that? What are all those attributes and how do you deliver on that?

 

Kevin England:

Well, building credibility and trust with people it’s something that was ingrained in my childhood because I was raised in a small farming community and you were as good as your work. Your reputation was everything. So, no one had to teach it to me. I didn’t even know I had it.  I would always bring that to the table. I remember being with the purchasing agent at UBC and having a frank conversation with him, and he said “You are different. Your whole approach is different.” We became quite good friends and he had a very important role there, but I brought that to the table – “I’m not here to make a sale. I’m here to create a relationship. And if making the sale isn’t right for you, then we’re not going to do it.” With my clients, I would say “We’ll just buy one unit.” They would get excited and want to buy two, but I would say “Just buy one now, there’ll be more properties.”

It is a long-term relationship and if you think long-term you’ll never go wrong. Never worry about the financial reward or the financial payback. If you do a good job and you bring your integrity to it, and quite frankly, if you’re having fun doing that, everything else will happen organically. It will happen automatically and that is the story of my life, I guess.

 

Jason Boudreau:

I was going to say that earlier, Kevin. While I was listening to your story especially about how you built the portfolio and even the little things such as deferred maintenance and advising clients that this is the best way for it to go. It sounds like you’re playing the long game and clearly, that’s paid off.

 

Kevin England:

Absolutely. Especially with the real estate. When we brought the investors in, the idea was that we would flip the properties in five years and make some money, right? We realized we could refinance, improve the properties, improve the cash flow, increase the mortgage, give back money to our investors tax-free, and think long-term as opposed to making a profit and paying taxes on it.

Pretty much all these properties when we sold them, the client had received all of their money back, got it, and we hadn’t figured any taxes per se, right? And, of course, when you hold real estate long-term and you keep it well maintained, you’re going to do quite well financially. Also, of course, we were doing U.S. dollar play. We got lucky along the way when we sold the portfolio, oil was $104.00 per barrel. I was telling people we were the prettiest girl at the dent. So, it became a bidding warrant, which is what you always want. Then we went and locked the deal down with an $8 million deposit. And three weeks later, oil started dropping $10 a barrel. It wasn’t long before it was down to $47 a barrel, but we had a committed deal with a very strong purchaser. As Canadians, we’re getting U.S. dollars. The Canadian dollar got weaker, but we were paid U.S. dollars. So, my clients made another 20% return on their investment. Besides that, they were part of this legacy of raising $4 million for a recovery firm. We are going to expand our efforts globally, not limited to just one recovery firm, but also to engage in various other initiatives to assist our governments in addressing the homelessness and addiction problem.

 

Jason Boudreau:

Got it.

 

Kevin England:

So that’s it’s something everyone involved should be proud of because we get to take a good situation and make it even better.

 

Jason Boudreau:

Thank you for sharing, Kevin. Just to close our conversation today, if you were speaking to the younger generation and maybe it’s your kids or your grandkids or just people you meet, specifically around philanthropy, and obviously, this is something that’s been woven into your DNA for many years about the sense of community and giving. What sort of advice or words of wisdom would you give people today who are maybe building towards something in the future and may want to get back but don’t know how or where to start? What would you share with them about that consideration?

 

Kevin England:

Go with your passion. Pick something that you’re passionate about, that moves you and you will be able to galvanize others to come together with you to make a difference. If you go with your passion, it will manifest and all will come around.

 

Jason Boudreau:

Love it. Well, thanks again, Kevin. I appreciate your time today. It was great to connect and hopefully, we can do this again someday.

 

Kevin England:

Thank you for the opportunity, Jason.

 

In this Polestar Podcast episode, Kevin Parton engages in a dynamic conversation with Jason Boudreau, unraveling the unconventional journey that laid the foundation for VELA Wealth’s creation and evolution. From Jason’s diverse professional background to VELA Wealth’s distinctive approach to wealth management, the discussion navigates through the pivotal role of mentors, the firm’s dedication to Canadian private business owners, and the importance of independence in financial services.

 

 

Key highlights of this episode:

• The VELA Wealth story.
• The transformative power of mentorship and coaching.
• VELA Wealth’s trailblazing approach.
• The importance of independence in financial services and curation of platforms and partnerships.
• Commitment to client fulfillment.
• Declaration approach instead of a traditional mission statement.
• What future unfolds for VELA Wealth.

  

About the Guest – Jason Boudreau

Jason has built VELA Wealth into an established life and estate planning firm, guiding families as they make meaningful choices at the intersection of life and wealth. Jason’s areas of expertise include intergenerational wealth transfer and estate planning with a focus on advanced insurance-based solutions that incorporate philanthropy and legacy planning. Leveraging these specialties, Jason brings a fresh perspective and outside-the-box thinking to the strategic planning process. To read more, please visit the VELA team page.

 

About the Host – Kevin Parton

Kevin Parton, CFP professional, specializes in personal and business financial planning, tax reduction, and estate planning. Kevin is diligently concentrating on client education as a powerful strategy for building financial certainty. As no financial situation is the same, Kevin and his team monitor clients’ plans and implement personalized strategies to reduce their personal and corporate taxes, and protect their income, assets, and loved ones against the financial consequences of a serious illness, injury or death, ensuring clients maintain financial certainty and peace of mind. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

We are excited to present this insightful episode of the Polestar Podcast by VELA Wealth, featuring Faramarz Bogzaran, the Managing Partner at F&M Management Ltd. and CE3C Management Ltd., just ahead of the highly anticipated CE3C Conference scheduled for January 24th and 25th, 2024. Faramarz’s expertise sheds light on critical aspects of mergers and acquisitions (M&A), setting the stage for enriching discussions at the upcoming conference.

Throughout the conversation, Faramarz provides key insights into the crucial role of M&A advisors in streamlining company sales, navigating the intricacies of valuing professional services firms, and understanding the significance of strategic planning for post-sale expectations in the environmental consulting and engineering sectors. These insights offer valuable guidance for business owners and executives navigating the complexities of M&A dynamics.

 

 

Key highlights of this episode:

• Delve into the mechanics of seamless company sales with a focus on the pivotal role of an M&A advisors.
• Explore the valuation methods for professional service firms, focusing on financial stability and managing working capital.
• Learn essential post-sale strategies: from strategic planning to adjusting to new ownership dynamics for a smooth transition.
• Gain insights into the factors influencing M&A in the Canadian landscape, shedding light on industry trends and future implications.
• Importance of strategically plan your exit beyond the sale to ensure a successful transition.

 

About the Guest- Faramarz Bogzaran

Faramarz Bogzaran, the founder and Managing Partner at F&M Management Ltd., brings over four decades of expertise to the forefront of Canada’s management consulting scene. Specializing in M&A and Corporate Advisory services, he has successfully navigated environmental consulting, waste management, and remedial contracting sectors. A seasoned M&A advisor, Faramarz is celebrated for his adept leadership in ownership transitions. He played a key role in founding CE3C Management Ltd., the driving force behind executive conferences uniting leaders in Canada’s environmental and engineering consulting sector. At F&M, he provides strategic advice on growth, financial management, buyouts, exit strategies (M&A), corporate governance, and project management. To read more, please visit the F&M Management Ltd. Website

 

About the Host – Jason Boudreau

Jason has built VELA Wealth into an established life and estate planning firm, guiding families as they make meaningful choices at the intersection of life and wealth. Jason’s areas of expertise include intergenerational wealth transfer and estate planning with a focus on advanced insurance-based solutions that incorporate philanthropy and legacy planning. Leveraging these specialties, Jason brings a fresh perspective and outside-the-box thinking to the strategic planning process. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

 

The Podcast Transcript:

 

Jason Boudreau:

Welcome, everyone, to the Polestar Podcast by VELA Wealth. It’s my pleasure to have Faramarz Bogzaran today. Faramarz is the Managing Partner at F&M Management Ltd. and the CE3C Management Ltd. companies. Hello Faramarz and welcome to the conversation today.

 

Faramarz Bogzaran:

Hi, Jason. Nice to be on your podcast. It’s the first time I’m doing it.

 

Jason Boudreau:

Could you please give us a bit of background about F&M and CE3C?

 

Faramarz Bogzaran:

Sure. So, I founded F&M in 2010 as a corporate advisory services company, specifically working in the environmental consulting and engineering sector. Over the past thirteen years, we’ve provided a range of services encompassing governance, mergers and acquisitions, effective project management, business optimization, and integration services. Our focus has remained on the environmental consulting and engineering side. In 2017, we decided to organize a conference that would bring the leaders of these companies together under one roof. So, we formed a company called CE3C Management Ltd. and started doing a pilot test in 2017, which led to their first conference in 2018. We had around 40 CEOs, Presidents, and Vice Presidents of innovative consulting and engineering firms attending the Conference for a two-day collaborative conference by organizing panel sessions and discussing some of the challenges and opportunities for these leaders in this sector or this industry.

So, we’ve been organizing these conferences since 2018. The upcoming 2024 conference is on January 24th and 25th. We are very excited about holding the 5th Conference. One of the reasons we decided to do this was that a lot of the work that we do as corporate advisors under F&M Management comes from these leaders attending the conference. It seemed to be a mutual benefit to F&M Management and at the same time, we are trying to create a platform where all the CEOs or Executives of these companies get together. We are the only organization that creates that kind of platform for these leaders to get together and talk to each other rather than compete. It is kind of a genesis of how F&M came about in 2010 and how the CE3C Management bring us closer together.

 

Jason Boudreau:

So, what does the CE3C stand for?

 

Faramarz Bogzaran:

CE3C stands for Canadian Environmental Engineering Executive Conference.

We wanted to have a name for it that sticks. So, we thought about it a lot, and I believe it was my idea – I said, “We’re going to have a lot of the executives coming here. So that’s an E. We will be dealing with a lot of engineers and the environment. So that’s another two “E”s. It’s Canadian, we have three “E”s and the last “C” stands for the “Conference”. So that’s how the name was created.

 

Jason Boudreau:

Very well. Thanks for sharing this, Faramarz. It sounds like it’ll be an exciting conference this year. I know that Rob, my business partner, and I were there last year and we like what you’re doing in the space. It’s great and very niche and unique.

One of the things that I thought we’d start with is what is the key role that an M&A advisor plays for executives, and business owners, whether it’s in the environmental and engineering space or outside. You’ve had decades of experience in the sector. What do you believe the key role of an M&A advisor is?

 

Faramarz Bogzaran:

That’s a very good question.  In my opinion, the number one reason why people or companies hire an Advisor is when they decide to entertain the possibility of selling their company. You want to call them an advisor or corporate advisor. I say it is the main reason because a good M&A advisor helps you streamline the process. There is a process to have your company organized or prepared to go into the market and go through the process of obtaining interested parties in what you offer as a business owner or as a shareholder, and bring it home at the end and signing a sales purchase agreement that is acceptable to the shareholders or to the owners of the company that the M&A advisor represents. One of the things that good M&A advisors do is, as far as they’ve done their homework, they create a lot less disruption in the process where people still have to do their jobs. You need to have somebody to come and help you, to guide you through this process because it can be anywhere between three to six months before you complete the transaction. During this process of three to six months, you don’t want to be distracted from your ongoing business because you don’t want to harm the business by wanting to sell the business. If you end up doing that you’re going to be at a disadvantage to sell the company because the people that are trying to buy you, they’ll monitor you while you’re going through this process. So, one advantage of having an M&A advisor is to lessen the disruption. I’m not suggesting that there will be no disruption, but lessening it and also going through the process of educating the shareholders, managing expectations, and obtaining letters of intent that are conducive to the process and are acceptable by the owners who are trying to sell their company and finally help with other advisors such as legal and accounting work together as a team to bring it home. It’s a team effort. It’s not wise for one advisor to do the whole thing.

 

Jason Boudreau:

It sounds like the M&A advisor plays that quarterback role to help tie it all together.

 

Faramarz Bogzaran:

Absolutely yes. We found ourselves in most cases as the catalyst in the process. At the beginning, we start representing our client who’s trying to sell their company. As we move forward, we end up working with the lawyers, and accountants, and we end up dealing with a lot with the potential buyers and the final buyer. We found ourselves that we become almost the gel or a catalyst to make sure that things went smoothly. At the end of the day, there has to be a willing seller and a willing buyer. And I’ve seen one too many transactions, that have gone through the process, but unfortunately, that catalyst did not really gel things together and things fell apart.

 

Jason Boudreau:

I see. How would one assess the need to retain maybe an external M&A advisor versus trying to manage that process internally? What are the pros and cons or maybe just some considerations around that?

 

Faramarz Bogzaran:

I have a perfect answer for this. I was the President and CEO of a company called Secore Environmental for about 8-9 years. I joined the company and then orchestrated a management buyout of that company shortly after. Once we owned the company, we decided to put the journey of five years ahead of us to grow the business and sell the company in five years. It just happened that we bought the company in 2002 and we sold the company in 2007. So, I have done a lot of M&A work and have been involved in a lot of mergers and acquisitions before that. Also, I acquired the company while we were growing Secore, before selling it. However, when we decided to sell the company and I was President and CEO of the company, my board asked me “You’ve got the experience, why don’t we do this internally. Why do we go externally?”. My recommendation to them was “No, that’s not what we want to do”. I would still do a lot of the heavy lifting, but we need to have an advisor. At the minimum have an advisor that creates competition there. At least the picture of competition. So, the people who are interested in the company don’t think “Ok, these guys are just selling the company, so we can just do everything ourselves” or “They don’t know what the process is”. So, even though I had the experience, I ended up hiring an advisor. In that process, I did most of the heavy lifting, but I had that advisor working with me throughout the process to the successful sale of the company in 2007.

 

Jason Boudreau:

So, you’ve been through it in the CEO seat as well and seen the value of having that external advisor working with you and the internal team supporting the process.

 

Faramarz Bogzaran:

Correct. You have a very good point. If you’re a CEO, I can assure you that you can’t pull the whole thing out of yourself. You are going to work in a team setting internally, you may have to seek help from your CFO, and get some help from your human resources or IT departments, as long as these people are inside the “nest”. What I mean by that is, as long as they’re shareholders, they know what’s going on because there is confidentiality involved, and keeping everything confidential is an utmost importance.

 

Jason Boudreau:

In terms of preparing for the sale, as you mentioned earlier in our conversation about the timeline being sort of a three-to-six-month window before you transact, how much time is usually spent leading up to that three-to-six-month window on average where a company is preparing for some sort of M&A activity?

 

Faramarz Bogzaran:

That’s another very good question. Well, I can tell you this. Over the past 13 years, I do not have the exact number but we probably had at least five or six companies that reached out to us to become their M&A advisor. The first thing we do is look at the company’s performance, we look at the whole picture of what this company is all about. And in all those instances we came to conclude that they’re not ready. What we meant by “not ready” is that when you’re trying to position your company for potential sale, whether it’s a professional service or anything else, one of the things that potential buyers look at, in particular, if they’re buying the shares of the company, at what sort of consistency you have had over the years based on financial performance. If you have had a lot of ups and downs in financial performance over the years that is not a very good sign. You’d want to have a nice trajectory of really healthy growth followed by a very nice earning, the bottom-line performance. So if your growth and earnings are not stable, what we normally do before we take the company to market, we look at it and see what we can do to optimize the business to get it to a level where it is working consistently, generating reasonable growth top line and also reasonable bottom line performance.

The rule of thumb as far as we are concerned from the M&A side, is that you need to have anywhere between two to three years of good consistent top-line and bottom-line growth. And if you don’t, we would like to work with you to get you to that level to make sure you are prepared to do that. Otherwise, a lot of the buyers in the market see inconsistency, and since it is not consistent, you’re going to subject them to some onerous earnout provisions. So those are the things that we try to avoid. We prepare some of these companies before we take them to the market.

 

Jason Boudreau:

So, that’s obviously about trying to maximize the value. Could we talk a little bit about the valuation particularly in your area of expertise as professional services companies? How complicated is the process of valuing professional services companies?

 

Faramarz Bogzaran:

It is not really that complicated. A lot of companies out there are professional companies that are certified valuators to value your company. Now you’re talking about professional services, let’s say engineering company or environmental consulting company as an example or even let’s assume they are accounting or legal professional services. For the most part, the value of these companies hinges on the earning capacity of these companies. What I mean by earning capacity is that you look at it and see what your performance bottom line is, not the net income. In our industry earning capacity is captured under EBITDA which stands for earnings before, interest, taxes, depreciation, and amortization. When you factor those out, you’re talking about the true earning capacity of the company. Then you look at that and apply multiple. So, EBITDA multiple 4,5,6,7 or 8. Now, EBITDA is based on the performance of the company that we try to make consistent so the EBITDA number is showing a nice upward trajectory. However, one that kind of complicates it – is that multiple because that multiple is not fixed and it varies from the size of the company, If the size of the company is X, multiple might be different; the services that the company provides; their management; even the age of the shareholders, the people that hold the key to the vault in terms of the clientele base; reputation and so on. So, there’s a variety of different geography and factors that may influence that multiple.

So, if you have a company X with let’s say EBITDA of $5,000,000 and an advisor like us goes to market, we may end up getting letters of intent with the multiple of what $5,000,000 is, as long as it is a true reflection of what that earning is, fully normalized and all things equal. So, what is going to happen, is that we may end up getting letters of intent that may vary from one to another based on that multiple. Some may apply 4 multiple, some may apply more. However, these multiples also can be influenced by the buyers’ interest in the company. If they’re looking for a boutique, niche-oriented company that they don’t believe they can find anywhere else, they’re prepared to throw in another multiple on it, so you end up getting it. For the most part, based on at least historical numbers that we see in the professional services in the engineering consulting side, the multiples range anywhere from as low as 3. I’ve seen as high as 10 and slightly high, but as for the medium – the majority of them happen between multiples of 4 to 7.

That’s one aspect of putting a value on the company – giving somebody a value for your income statement, which is using the EBITDA number. You take the EBITDA number, multiply it by a factor, then you have to bring the balance sheet into the equation to come up with the market value of your company. Another element that becomes extremely important in any M&A transaction is working capital adjustments driven from your balance sheet, not from your income statement. For a company to go into the market, it has to have a healthy EBITDA as well as a healthy working capital. Otherwise, buyers are not going to come and buy the company and write a big fat check for you on your income statement performance when you have very little working capital because if you do not have adequate working capital, you have to put more money into it.

Therefore, we bring the EBITDA together with the working capital adjustment as long as the advisor manages to negotiate a good working capital adjustment. When you look at the letter of intent the buyers always indicate that it is a debt-free, cash-free transaction which means that they’re not taking on any of the debt because it got subtracted from the value and they don’t want to buy your cash. Why they are paying you dollar for dollar, right? They want to have adequate working capital in there at closing when they buy the company. That’s how it works.

 

Jason Boudreau:

Got it. So, it will impact the valuation then, right? One of the things that I see with a lot of business owners that we work with is considerations around post-sale expectations from the buyers. I’d love to hear about your experience what do you see out there? Are the trends whether it’s been in the past year or two or even over your entire career which you see going forward in terms of expectations of keeping key people management in place for a certain amount of time? What dictates that and maybe a couple of examples that you’ve seen where the buyer said they don’t need you to stay on versus they need you to stay on and both transactions happen but there’s a different impact to the leadership group post-sale. Just curious if you could share a little bit about that with us.

 

Faramarz Bogzaran:

It’s an integral part of the process. I’ve seen many letters of intent that clearly say they have the provision or a clause in the letter of intent where they have identified who exactly needs to be signing and non-compete, non-solicitation or whether they have to stay with the company, post-closure or post transaction for a period time. At the end of the day what professional services are they buying? They’re not buying desks and computers. They’re buying people. The people are the ones that are turning the wheels in all these companies. So, if they’re buying the people who are generating the capital and they’re willing to pay high multiples for that value, they don’t want to lose these people. Because if they go, if they leave especially, it gets worse if they are tightly attached to clients or accounts. So, usually, it is customary to see that there’s a provision for retention for those individuals, in particular, senior shareholders.

I don’t know if you remember last year, I held the M&A panel session at the CE3C as a preamble to the panelists, I asked everybody the question, “How many of you do planning or budget or strategic planning for your company?”. Just about everybody raised their hand, right? And I asked, “Within that strategic planning, how many of you have exit strategy planning?”. Not a lot of people have raised their hands, because “why would I put an exit strategy in there? I’m not prepared to sell my company.” Nobody’s asking you to sell the company. But at some point, you’re going to retire. So, you should be putting exit strategies that show how you are going to sell your shares to your colleague who works for the company. If that doesn’t exist, it doesn’t present itself. Then you have a problem.

The second thing that I always tell people is if you’re trying to sell your company, don’t wait until you are in your 60s and 70s. Especially if you’re a single shareholder. It gets worse if you get older and the majority of the clients are with you – you get a problem. It will have a diminishing factor impact on your value because the buyers are going to say, “Well, wait a minute, he’s 70 years old, doesn’t have much fuel left in the tank, so he’s gonna retire the next day. And all these coins are going to go away. So what did I buy?” So, people must think about when should they enter the market. I always recommend that if you want to think about the possibility of selling your company and retiring, tell me when you want to retire first.

 

Jason Boudreau:

Right, and work backward.

 

Faramarz Bogzaran:

Somebody says they want to retire at the age of 60 and they are at 59 at this time, my answer would be “I think you’re going to retire at the age of 63 maybe because whoever is going to come up to buy you is going to put handcuffs on you for a minimum two to three years.” It is an integral part of the process that people have to understand. There is an expectation that you’re going to stay with the company for some time. That time sometimes is a year, from two to three or sometimes five years, but usually around three years.

I’ve seen transactions or letters of intent saying “no retention at all”. However, if you want to leave, you can leave. You don’t want people who don’t want to be part of the company – they can just leave tomorrow. So that’s to me a little bit riskier from a buyer’s point of view.

Another thing that I should say is once you sell your company set the expectation wise. I always use this analogy, especially if you’re the single owner or you’re the President of the company and you have majority control of the company. As soon as you sell the company, you’re not the King anymore. So don’t behave like you’re still the King or the Queen. You’re going to have to adapt to the new regime, new criteria, new process, new administration of the buyer. And while you’re in that period of retention of two to three years, I always tell my close friends that come to me asking what they should do after the sale – I say, “Never swim against the water”. All you’re going to do is frustrate yourself. It’s not your company anymore – it is somebody else’s company now. They have protocols, systems, procedures, objectives, and goals that may or may not meet what you want. So, you saying “Oh no, I disagree” – that’s not going to work that way. All you’re going to do is you’re going to be very frustrated for the next three years.

 

Jason Boudreau:

That’s an interesting perspective. It would probably be a very emotional journey as well for these people, right?

 

Faramarz Bogzaran:

That is one of the parts where we go beyond what most M&As usually do. You become close to people,  you get to know them. All of these companies that people have built over 30-40 years, become their babies. You just can’t let go. You know what I mean? It’s tough to let go. I’ve been in that position twice. It was excruciating to let go. But you have to let go. Because that’s the process. If you don’t let go, all you do is frustrate yourself.

 

Jason Boudreau:

That’s such an interesting perspective. Faramarz, thanks so much for sharing that.

We’re in this really interesting time, where interest rates have shot up, I know there’s still quite a lot of M&A activity going on out there, but obviously multiples and expectations have shifted. Curious to hear what are some recent activities in the sector and then maybe a trend or two that you’re seeing for the year ahead.

 

Faramarz Bogzaran:

Speaking from our own experience, as F&M advisors we recently completed 2 transactions in the environmental consulting and engineering and contracting industry. Right now we are in the process of completing three more. We see a lot of letters of intent coming in with very varying degrees of multiples and valuation in there.

You’re right, there are kind of interesting economic dynamics if you want to call it, the high-interest rates… Even though there are some indications that it is softening and it’s possibly stabilizing. US interest rates seem to be going down and all the indications are. So the Canadian market and the economy have a very strong influence on the way people get into the M&A market, especially it has an impact on that multiple that I told you about. If there is not enough capital for buyers or cheap capital for the buyers to acquire companies it may have an impact. However, there are some big publicly traded companies out there that are willing to pay the high multiples. For instance, I’m sure you’ve heard of a company called WSP [WSP Global Inc.]. They acquired a company called Golder Associates and they paid a high multiple, I think they paid roughly around 10.5 times the multiple of earnings which is the highest I’ve seen in years. There are several reasons they paid for that. I believe one of the reasons is that they didn’t have a very strong footprint in the environmental sector where they wanted to strengthen their presence. That brought somewhere around 5,700 professionals into that mix. Right after that, you are on the map with a very strong company. It was a strategic acquisition. Another thing is the market cap of the company. As soon as the announcement went out, the market value went crazy. So, there are a lot of factors that come into play depending on who the buyers are.

What we see, based on the transaction that you’re involved in and based on the transactions that have happened over the past 12 to 18 months -usually the multiples range anywhere between four to seven times more, but people tend to gravitate towards thinking that their company is worth 8 or 9 or 10 just because another company was sold at 8 or 9 multiple. That’s another responsibility of the advisor to control expectations, try to provide adequate information, and try to put some rationale as to why the norm is hovering between 4 to 6 to 7 to 8. Anything above that is really out of the norm. In the end, the market does what the market does -, people want to buy, they will go sometimes and provide some outlandish multiples for a variety of different reasons. But the reality is that we cannot compare company X with company Y and expect the same results in terms of value, multiples, and expectations. The economy and politics have a lot to do with that.

In the upcoming conference on January 24th and 25th, amongst all the excellent speakers, we teamed up a renowned economist, Michael Campbell, with Nick Nanos, who’s a nationally recognized pollster. I would like to know what the economists are saying and what the pollsters saying about politics that we’re going to go through elections in about two years in Canada. I would like to know how these two intertwine to impact or influence the M&A activity because they do influence it.

 

Jason Boudreau:

Right. Totally. That would be a fascinating conversation to hear.

Well, thanks so much, Faramarz. I appreciate you being here today. It’s been an incredibly interesting conversation. I’ve certainly learned a lot. Appreciate your time.

 

Faramarz Bogzaran:

Well, thank you, Jason. I appreciate it. And I thank you and your partners and VELA Wealth for this opportunity.

 

Jason Boudreau:

All right. Take care. Thanks so much.

In this episode of the Polestar Podcast, Kevin Parton, who recently joined VELA Wealth as a Partner and Senior Advisor, interviews Keith Allan, Portfolio Manager at Harness Investment Management, discussing their partnership with VELA Wealth and their unique approach to financial management. They address the challenges posed by rising interest rates and geopolitical events, highlighting the need to stay invested and avoid market timing. The conversation highlights the value of a balanced and diversified portfolio, offering valuable insights for podcast listeners.

 

 

About the Guest – Keith Allan

Keith Allan is a Portfolio Manager with Harness Investment Management. Harness has engaged in a strategic partnership with VELA Wealth and provides discretionary portfolio management for many of VELA’s clients. With more than 15 years of buy-side investment management experience, Keith brings a wealth of knowledge and experience to provide insight and guidance to clients regarding their investment portfolios. At Harness, Keith is responsible for developing and maintaining investment portfolios for VELA clients. Keith is dedicated to fostering long-term relationships with high-net-worth individuals and families by providing a clear and transparent vision to help them achieve their investment goals. To learn more, please visit Harness Investment Management team page.

 

About the Host – Kevin Parton

Kevin Parton, CFP professional, specializes in personal and business financial planning, tax reduction, and estate planning. Kevin is diligently concentrating on client education as a powerful strategy for building financial certainty. As no financial situation is the same, Kevin and his team monitor clients’ plans and implement personalized strategies to reduce their personal and corporate taxes, and protect their income, assets, and loved ones against the financial consequences of a serious illness, injury or death, ensuring clients maintain financial certainty and peace of mind. To read more, please visit the VELA team page.

 

The episode is also available on:

  

  

 

 

The Podcast Transcript

 

Kevin Parton:

Hello there. I am Kevin Parton, and welcome to the Polestar Podcast by VELA Wealth. My guest today is  Keith Allan, Portfolio Manager from Harness Investment Management. Harness has an ongoing partnership with VELA Wealth. How are you doing today, Keith?

 

Keith Allan:

I’m well, Kevin, thank you for having me. How are you doing?

 

Kevin Parton:

I’m doing alright, thank you. I’m excited to use this as an opportunity to find out a little bit more about Harness as well as your perspectives on things that are going on in the global economy and markets. I am going to start off with a real quick question as I am new to VELA: how is Harness Investment Management and VELA different from others in your experience?

 

Keith Allan:

Well, I come from working almost close to a decade at one of the largest institutional money managers in Canada. So, coming over to Harness four and a half years ago allowed me to take a broader lens in terms of how investment management should be done, and especially for our client base. For us we’re very focused on the client experience. So, in terms of the overall, the values that lies in the family balance sheet and taking that sort of overarching approach to find out what’s important to families, and not just from an investment perspective but from planning, insurance and the path to where their family wants to be and where they want to get to. So, we are taking a top-down approach and looking at the overarching relationship and the portfolio, and the portfolio itself is just one part of the overall process and I think that’s what separates us – is being able to look at everything holistically and doing what’s best for the clients.

 

Kevin Parton:

In your experience, that is what attracted you to being a part of this relationship?

 

Keith Allan:

Yes. From a corporate standpoint, not having to pull the strings from the higher-ups that is what attracted me. We have an approach that we stand by on how we view financial management and we want to be able to not only articulate that to our clients but be in a position to execute it. Jason and Rob [Jason Boudreau, Founder, and Rob Wallis, Partner, at VELA Wealth] and obviously yourself not only approach investment management, but overall financial management and overall financial planning, and that is what attracted me. I’ve known Jason and Rob for a long time as individuals and professionals, and I am really aligned with their beliefs.

 

Kevin Parton:

I can’t agree more. I mean, having been in the business for 14 years myself and having consistently taken a holistic approach, I’m really excited to be able to have this partnership with you and bring a little bit of a higher level of sophistication to that pillar of financial planning or investment management. I’ll sort of use that as a segue into the next question about investment philosophy.

Can you distill your investment philosophy or Harness Investment Management philosophy into some core components or explain how it drives your investment decision-making?

 

Keith Allan:

For sure. When we talk about investments nowadays, we sort of see it coming out of COVID, right? We talk about the meme stocks, and we see people investing on tilt whether it’s cryptocurrency or any sort of the latest greatest fad in the investment world. That is not what we’re about. We’re very fundamentally driven, so we believe in long-term investing. Maybe that’s not going to win style points or have a credible amount of attractiveness, but it’s empirically proven that this going to hold true for the long term. We believe that proper diversification, whether it’s sector or country-specific, is important to your portfolio. We’re very, very strong believers in asset allocation. Not your typical antiquated or archaic structure such as a 70/30 portfolio, 70% equities, and 30% fixed income – no, we believe that there are other components to a portfolio.

Alternative assets are a big component of our portfolios. Right now cash is a yielding asset – all our clients hold a certain amount of cash. When we talk about alternatives, we talk about real estate, commodities, or using derivatives when appropriate in some circumstances. So, for us, it’s all about diversification. It’s all about asset allocation. It’s about incorporating those investment assets with your overall family balance sheet. Is your family heavily involved in or heavily invested in real estate? Well, we’re not going to hold 15% of your portfolio in private real estate or REITs, we’re going to take that into account. If you have a lot of insurance policies unwritten to your family or other types of fixed income or pseudo-fixed income assets – we’re not going to hold 50% bonds in your portfolio, right? We’re going to look at your overall balance sheet, where you’re at and what makes the most sense for you and your family.

 

Kevin Parton:

So, it seems that you’re really able to customize what’s held within the portfolio specific to the client and to everything else that they own.

 

Keith Allan:

Yes, 100%. So that’s, again, what separates us. We can offer those bespoke or customized portfolios to our clients, which allows them to feel that we are really taking the time to understand what’s important to them and what allows them to really benefit in the long run from achieving that excess return. So, we definitely take a customized approach to that. We do have model portfolios we use, but we’re able to tailor them and tweak them to meet the client’s needs. What separates us is our product shelf and what we do all for it is quite vast, so we have a lot of different options. I sort of compare it to an ice cream parlor. You go to a Baskin Robbins that offers not just chocolate, vanilla, and strawberry. You have 30 flavors to choose from. We like to think of ourselves as the investment management firm, that’s got a lot of different options at our disposal and meets the client’s needs.

 

Kevin Parton:

Fantastic. I want to circle back to something you said a little bit earlier about coming out of COVID and the meme stocks. It feels like there’s a lot more of a conversation around trying to invest in the next hot topic. And you talked about not wanting to do that and it’s not necessarily the coolest. How do you manage client expectations when it comes to having these discussions with them? I have to imagine that these things come up in conversations more often than maybe they did pre-COVID.

 

Keith Allan:

It is tricky, right? Everyone knows someone, got a brother-in-law, cousins, friends, or neighbor who made 40% plus off this stock or that stock. Now, in my experience, and I’ve been in the industry now for 20 years, I would say 90% of the time it’s not true. People love to exaggerate when it comes to that sort of stuff and in reality, there are just not that many people getting that wealthy off one or two hot stock tips.

Setting expectations is the key. Managing expectations is the key. Rob Wallis, who’s a Partner at VELA and someone you and I know both very well, uses a quote that I love, is that Warren Buffett made more money in the last 10 years than the previous… I can’t remember what it is… the previous 30 or previous 40 years. And I think that shows the effect of compounding interest and compounding return.

For us it’s really preaching that longevity and really advocating to stay the course, put money in, allow it to compound, allow it to grow, and look, if after five years you’re generating 10-11% annualized per year, well, that’s pretty good. Doing that over a long-term, two or three decades for a lot of our clients who are in their 30s or 40s, they are going to have a meaningful portfolio when it’s time to retire. I think having clients trust that and showing them what that actually means, understanding the effects of compounding return, it’s very challenging, right? For someone that investments may not be their first language, they’re trying to understand how the effect of compounding works, and showing them that can certainly be impactful.

 

Kevin Parton:

Well, along those same lines, I heard recently that PIMCO prides itself in any given year having the best portfolio, but over 5 or 10 years, it always being sort of in the top five or ten percent because they’re consistent because they practice good fundamentals and their goal isn’t to try and be the hot topic or sort of swing for the fences and I think to a degree that can feel maybe boring or anticlimactic in the short-term, but in the long-term, obviously that’s what you’re going for.

 

Keith Allan:

Absolutely.

 

Kevin Parton:

So, in a year like this one, we’ve seen some up and down swings in the markets and there’s been this perpetual conversation around interest rates and what that might have to do with the market trajectory. What’s your future outlook going through the last two months of this year and into 2024 based on everything that’s happened so far this year?

 

Keith Allan:

There’s no doubt that this has been an incredibly challenging year and incredibly challenging 18 months, right? We’ve had unprecedented interest rate increases. I should say, when you see interest rates rise that dramatically, that quickly, that is really a heavy load on risky assets, most notably fixed income assets, whose price and value move inversely to interest rates, so as interest rates continue to rise, we see fixed income really sell-off. It’s just the nature of the asset class. But also equities, right? Because if people can get that guaranteed five, six, seven, sometimes more percent at their bank, well, why are they taking the risk of putting their money in risky assets such as stocks? They can get that guaranteed yield from their banks sitting in cash where there’s virtually no risk. So, naturally, we see risky assets sell off and that’s what we’ve seen over the last 18 months. So yes, it has been a very, very, very challenging market. What do I see moving forward?

Well, I think last week [October 30 – November 3rd, 2023] was really telling because effectively the US Fed came out and said that they are standing pat. I know they said that a few times with mixed results, but they do sound like this time it’s certain. And we saw the market react accordingly – we saw a nice rally last week, and sort of from what I hear and read and see, there’s a really good chance that’s going to be sustainable here as we go into the new year. We might see a little Santa Claus rally earnings are better than expected, right? There are some really strong earnings that come out where a lot of analysts and a lot of folks on Wall Street have said “OK, this is better than we thought”, which is sort of been the impetus for the market to react favorably.

As we get into this holiday season, the spending season, that’s going to be very telling. I believe people are willing to go out and spend at Black Friday and Cyber Monday leading into Christmas. And if so, are these companies that rely on consumer discretionary spending going to really see an uptick in their profitability as we go into Q1 2024? Are people willing to spend $1,500 on the newest iPhone?

Are they willing to go buy whatever the latest and greatest PlayStation or Xbox is out there? Are they willing to really splurge this year on family trips and maybe buy a new car? And do other things that they’ve otherwise been putting off? Again, that could be the impetus or sort of the push for a strong Q1. Especially if interest rates stay status quo, people might say “Look, the worst is behind us now”, but a lot of people are saying no, we’re not even close, there’s going to be further interest rate hikes.

The problem is that as mortgages come due, if interest rates continue to go up, people are not going to be able to renew and we’re going to see some really challenging times from a real estate perspective. At the end of the day, the Federal Bank and the US Fed don’t want to see people default on their mortgages, they don’t want to see people not be able to renew their mortgages. So they will have to weigh that with any future interest rate hikes.

I remain optimistic. I like to consider myself an optimist despite what some folks may say. I’m optimistic that we will see a catalyst here leading into the end of the year in the beginning of Q1 where we’ll see a little bit of bounce back in the market. I still think there’s a lot of volatility left, I don’t think it’s going to be clear sailing and the next bull market is right around the corner. But I do believe there will be a bull market at some point here in the next 18 to 24 months and that’s something that we’re really preaching to clients – “Look, you going to sort of ride the waves here. You kind of got to keep your head above water. Don’t panic. Can’t take the money out of the market. Let it do its thing. So, you can capture that bull market when it does happen because that’s when you can really start seeing some meaningful returns.”

 

Kevin Parton:

Well, I was going to ask about that because with interest rates being as high as they are, cash is returning more than it has in a long time. But relative to what? What we saw last week in two days, there was a big uptick in the market. And if you’re in cash and on the sidelines you miss those moments. How do you position in conversation or within your portfolios taking advantage of a high interest rate environment from a cash perspective, but also being cognizant of the fact that you can miss some big equity days and lose out on growth there?

 

Keith Allan:

It can be a challenging conversation with clients because our job is to enlighten them. At the end of the day, it’s the client’s money. I can’t say to a client, you have to do this and you have to do that, right? All we can do is offer guidance and perspective, and show empirically what returns mean what asset classes do, and what it means that if you are sitting in cash and you missed the first two days of a three or four-week rally, what that means to your portfolio. At the end of the day, the client has to make the choice and if we haven’t enlightened them and we haven’t shown them, then that’s on us. We haven’t done our job. But if we have and they still decide to go against our advice that’s their prerogative. I think for us it’s really important that we show them that cash is important to have and now it’s probably a higher weight than we otherwise would, whether that’s 5% or 7% or 10%. But at the end of the day, you want to be diversified and you want to have exposure. To your point when those risky assets do rally you’re really capturing it. So, sitting down and understanding what their cash needs are, making recommendations in terms of what we feel is an appropriate cash balance. Right now, that’s anywhere between 5 and 10% for clients depending on their situation.

Now, of course, if clients need cash imminently, if they’re buying a house or doing a renovation they’re going to hold more cash and that’s entirely appropriate because they need that cash. So, we’re not going to invest it and put risk on the table when they need that cash. But all other things being equal, we need to show them that they want to have cash available and some dry powder available to take advantage of positions that we feel are undervalued. At the end of the day, we want them to still remain fully invested, and that might mean diversifying in other asset classes. That might mean underweighting or overweighting certain positions, but we’re never advocates of trying to time the markets such as selling everything you got. If a client has a $1,000,000 portfolio, put it all in cash and try and time it on the way up, and try and get it out on the way down like that’s a fool’s game. Nobody going to win at that game. Not even the most sophisticated investors can win at that game.

 

Kevin Parton:

Absolutely. Well, in the interest of time, I have two more quick questions here. One in relation to what happened when rates went up? When rates went up, fixed income went down, but we also saw equities go down at the same time and there’s only been a number of years in history we’ve seen fixed income and equities go down at the same time. Is it likely, if not possible, that as interest rates come back down, we’re going to see the opposite happen? We’re going to see businesses that have lower interest rates to pay on their debt and so business growth will happen and retail investors can get into the markets more, but we’ll also see the opposite in fixed income when interest rates go down, fixed income yields get better.

 

Keith Allan:

Yes, in theory, your logic is correct. The one thing that I would caution about is that there are a lot of… and again I remain bullish and I do think there’s opportunity ahead. I do think that people will be compensated and rewarded for staying the course and staying in the market. But what I do caution is that there are all other variables that play geopolitically right now. We have two very large wars unfolding, unfortunately. One that continues to rear its head in Eastern Europe and Ukraine and the other one in Israel and that sort of leads to all bets being off. When you have these significant geopolitical events that are unfolding, and yes they are half a world away from what we’re here in North America, but it’s kind of the knee bones connected to the ankle bones connected to the elbow, where all does cascade itself down. I would caution against interest rates going down, we’re going to see a massive bull market rally and everything’s going to go up, fixed income is going to go up, currency is going to go up, and equities are going to go up. I would say let’s just maybe pump the brakes a little bit because we do have two wars that are going on that from supply chain standpoints, from energy, oil is still largely driven from the Middle East and Eastern Europe, especially Russia. Oil has such a cascading effect on the rest of the global economy.  When that’s impacted as much as it has been, we have to caution there. But yes, in theory, if interest rates start getting cut like you would think, risky assets would perform well. But we’re living in a world where there are so many other variables that it’s hard to make that type of forecast.

 

Kevin Parton:

Well, it’s like you were reading my questions because that’s what I was going to ask you – how do the geopolitical events impact what’s going in the market? And as you said a little bit earlier, I think there’s always something to consider in the short-term, but in the bigger picture, trying to time the market based on what’s happening locally or geopolitically isn’t necessarily the strategic move.

 

Keith Allan:

Just to reiterate what I said – we never advocate timing the markets like it’s time in the market, not timing the market. My good friend Jason Boudreau, Founder of VELA, likes to use that phrase. I actually quite like it. It’s time in the markets, right? We want to be in the market. You want to be deployed. You want to allow your assets to work for you. I think that’s the biggest thing that we advocate. Again, we’re going to diversify, we’re going to balance the portfolios accordingly, and we may shift weights around, we may be overweight or underweight just depending on what’s going on.  But we’re never going to say “Ok, we are going all cash” to our clients and then “Nope, now we’re going back in”, because that doesn’t make us look sophisticated and makes us look like we’re reactionary in our investment management and not proactive. Again, statistically, it’s showing that is not the correct way to manage money and certainly to make meaningful returns for our clients. It is not going to allow us to do that.

It’s unfortunate what’s unfolding in the rest of the world, and my heart goes out to these families and to what’s happening it’s tragic. It is something we have to be cognizant of, what effect does that have on North American markets and global markets, as we do deploy capital for our clients?

 

Kevin Parton:

Yes, absolutely. I think a really important point to consider is when we’re having those conversations with clients, being able to talk directly to someone like you who can explain how that impacts the construction of their portfolio or the investment philosophy or decisions, understanding why things are the way that they are in your portfolio. I think it is going to make a big impact on how you react. We talked earlier about people wanting to move to cash, but we need to sort of enlighten them on how to structure their portfolios. So, if you’re sort of able to guide them through that process, it becomes a much easier decision for them to make good long-term choices.

 

Keith Allan:

Absolutely.

 

Kevin Parton:

Well, really appreciate your time today, Keith. Thank you so much for sharing all this valuable information.

 

Keith Allan:

Yes. Thank you, Kevin. Thank you for having me, Kevin, and I hope our clients enjoy it and if they’re not clients, hopefully they enjoy it as well.

 

Kevin Parton:

Absolutely. Take care.

 

Disclaimer

The information provided in the podcast transcript is designed for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.