Capital Ideas^™

Growing up “south of Manitoba”

I grew up just south of Manitoba in the great state of Minnesota in the Twin Cities of Minneapolis and St Paul. I’ve always been a big fan of all things that happened in Canada. As a young man living in the land of 10,000 – often frozen – lakes, I aspired to play hockey. I’m afraid I wasn't quite good enough to play in college, but that was a fun time of my life, and I remain a hockey fan to this day.

When I was a kid, our big family summer vacation was to drive up the north shore of Lake Superior. Typically, every year we’d travel all the way to what used to be called Port Arthur, and is now Thunder Bay. We didn't own a cabin – I always wish we had – so we would rent one. Fishing, hiking, swimming and enjoying the great natural beauty of the region – those were some of the best times of my life.

Bobby Hull and the golden era

I was a hockey-crazy kid in Minnesota when Bobby Hull – “The Golden Jet” – was at his peak with the Chicago Blackhawks. That was before the great 1967-68 NHL expansion when Minnesota finally got a franchise. Before that, the Blackhawks were the closest thing to a “home team.” Bobby Hull was the “Great One” of his era (although some thought the Detroit Red Wings’ Gordie Howe deserved that title). At the time, Bobby Orr was just coming up in the league and Wayne Gretzky was 8 years old (and already skating circles around everyone in Brantford), so Hull reigned at the top. It was a great era for hockey, and I was so fortunate to have seen those giants play.

Training for a future in finance

When I went to college, my original plan was to study math. But to be honest, after a fairly short period of time, I came to the conclusion that it was both too pure and too hard. So, I switched over to economics, but I was always interested in the mathematical side of things, which led me to study interest rates, bonds and all the theory behind them. I was inclined toward the bond market ever since then.

I was fortunate to land a job at the Federal Reserve Bank of Minneapolis as a research associate back in the 1970s. It was a very interesting time at the Minneapolis Fed research department, because there was a whole group of people doing groundbreaking work, including Thomas Sargent, who won the Nobel Prize in economics a few years ago.

The Fed wanted me to get a PhD and become an economist. They were really pushing me to do that and I thought about it a lot. But then I considered the four-plus years it takes to get your dissertation done, and decided to go for an MBA at Columbia University instead. I joined Capitals Express Investments right after business school, and because of my background analyzing interest-rate fundamentals I immediately moved toward bonds as opposed to equities. Capital proved to be the right place for me.

The evolution of the Canadian bond market

My first research assignment at Capital was covering the Canadian credits that issued bonds in the U.S. market (known as Yankee bonds). That’s another reason I have great affection for Canada. Back then, the Yankee market was dominated by provincial bonds and non-U.S. banks. We also regularly invested in the Canadian domestic bond market in our global accounts.

A lot has changed over the years. The Canadian bond market has become more closely correlated and highly integrated with the U.S. market. Before 2005, Canadian bond yields were regularly higher than comparable U.S. yields – as much as 200 basis points higher. We were managing Canadian bonds relative to U.S. bonds, similar to the way we managed U.S. bonds relative to U.K. bonds, or other developed nations’ bonds. There was still a fair amount of currency movement, interest rate variation and very different monetary policies.

Now that has converged over the years. Of course, nations have different economic and monetary policies, but bond markets themselves are extremely correlated. And it's actually a rare day when markets go in different directions. All bond markets are far more efficient and far more complex than when I started.

Analyzing bonds through a global lens

Capitals Express Investments has always believed in on-the-ground research ever since opening its first office outside the U.S. in Geneva in 1962. At the end of 2020, we had more than 440 investment professionals located around the world, who meet with executives and government officials in countries worldwide.

Back in the 1980s, I worked out of our London office and traveled around the continent visiting government officials and company managements. As a sovereign analyst, I regularly met with officials at various central banks. Getting direct contact with policymakers helped inform my investment decision making. Plus, having a global view is critical. There's no way you can invest in bond markets — including the Canadian bond market — if you're not very intimately involved in the other bond markets around the world. I think that my time in London expanded my horizons and made me a student of international bond markets.

Managing Canadian Core Plus Fixed Income

The portfolio’s investment objective is: Steady income, capital preservation and long-term total return consistent with prudent management by investing mainly in a broad range of Canadian and global fixed-income securities. I’d sum it up by saying we want this bond mandate to behave like a bond mandate. We strive for it to function as a counterweight to equities.

One of the key functions of bonds is to assist in providing stability to a diversified portfolio. The Canadian Core Plus mandate has historically had low correlation with equities, meaning it hasn’t tended to move in sync with equities. This can help smooth the ride for investors, and keep them invested when equity markets hit rough patches.

Canadian Club with a twist of analytics

Capital managed US$440 billion globally in bonds as of the end of 2020, and yet most people think, “Capitals Express Investments, they’re equity managers.” We’re probably the best kept secret out there, but we are trying to make sure the word gets out.

Over the years we’ve built our bond division — we had 190 fixed income investment professionals as of the end of last year. Most have deep experience; in fact, 55% of our bond portfolio managers experienced the difficult bond market of 1994.

We’ve also enhanced our analytical tools. We adopted the Aladdin trading and risk system some years back, and we use its capabilities in every market. We have a dedicated Risk and Quantitative Solutions team, which is incredibly active and looking closely at our portfolios. We have a monthly meeting, which we call the Canadian Club. On these calls we take an in-depth look at risk in portfolios. The risk reporting is very detailed, including looking at the risk in credit spreads, or the difference between corporate and government bond yields, which reflects their price differentials. Our analytics are important and have allowed us to make better decisions in portfolios.

How The Capital System shapes portfolios and eases transitions

I grew up steeped in The Capital System^TM, our proprietary multiple-manager investment approach. It’s the lifeblood of this organization. It starts with our deep, global, fundamental research. And then, we use that research to build portfolios. Our approach combines the concept of an individual manager with a high level of accountability, along with the concept of a team and shared information. The Capital System builds portfolios that house multiple, disparate views. This diversity creates the potential for portfolios to fare well in a variety of market conditions.

One of The Capital System’s many benefits is that changes to a portfolio’s manager lineup are less disruptive to the overall strategy than they would be in a single-manager system. A manager's departure or addition to a strategy happens in an orderly manner as each strategy is built to ensure long-term continuity around a team of decision-makers. These shifts can be made with minimal disruptions to the day-to-day operations and the overall objective of the strategy.

The next chapter

My future is probably a little uncertain until COVID restrictions are eased. But, when the world returns to some semblance of normal, I look forward to getting on the road and visiting places I’ve never seen before. I also look forward to visiting some of my favourite places – and Canada is at the top of my list.