Investing $1 million can be table stakes for Canada’s wealthiest families. That sum might, after all, be just a small fraction of their portfolios.
Yet where to allocate it is a challenging proposition amid war in Iran, the disruption of artificial intelligence, the ongoing spectre of inflation and an administration in the United States with a volatile approach to trade and a host of other policies.
With that in mind, four investment executives offer different approaches to the hypothetical question of where to invest $1 million today.
Preserving purchasing power
Stephen Harvey, chief investment officer with Sagard Capital in Toronto, says many family offices use a goals-based approach to investing. At Sagard, the investment team uses three buckets for the portfolio representing three goals for capital: one for growth for future generations, another for income to meet current needs, and one for preserving purchasing power.
That third bucket resonates with many families today given concerns about higher inflation and interest rates. Harvey breaks the strategy into four kinds of assets to protect purchasing power: real estate, infrastructure, gold, and commodities. Depending on market and economic conditions, each works differently.
Gold, for instance, performed well amid concerns of U.S. debt and devaluation of its currency. Yet the precious metal’s price came off record highs after the outbreak of war in Iran.
Now, commodities are providing a cushion against inflation worries.
Higher oil prices aside, “there are supply constraints in almost every commodity market around the world,” he says, and copper stands out with one of the greatest imbalances. “It is structurally undersupplied because there are no new copper mines coming on board.” And demand is likely to keep rising.
AI-driven demand for electricity on top of wider electrification of the economy will likely only exacerbate supply issues, which could result in strong price growth, he adds.
Fundamentally sound
Desmond Kingsford, founder and portfolio manager at Highwood Value Partners in Whistler, B.C., runs a concentrated portfolio of publicly traded stocks, backed by fundamental analysis.
Highwood’s objective is investing in quality, profitable businesses with strong balance sheets and owner-operated management teams strategically positioning their business for long-term growth.
“A strong balance sheet and a profitable business allow management to adapt their business in the face of change, whether that’s AI or war in Iran,” he says. As well, stocks must be attractively priced, which is no small feat in today’s stock market inflated by speculation around AI.
One example is Fever-Tree Drinks PLC, trading on the London Stock Exchange. “It’s a highly profitable business, and run by the founder, who owns a significant portion of the shares,” Kingsford says about the global leader of premium mixers, whose market is growing with higher demand for non-alcoholic drinks.
There are supply constraints in almost every commodity market around the world.
Stephen Harvey, Sagard Capital
At first glance, Fever-Tree stock, with a price-to-earnings ratio of about 40, may appear overpriced. Yet Kingsford argues this is misleading because the ratio reflects past challenges with higher costs from the pandemic for shipping and energy, two of its biggest expenses.
Its recent partnership with Molson Coors Beverage Co., which will manufacture and distribute Fever-Tree products in the U.S., makes Fever-Tree more attractive than its current valuation suggests. “Those cost issues are largely fixed by the partnership,” he says.
As a result, Fever-Tree’s true PE “on a normalized basis” is closer to 14 times earnings, or potentially as low as 7 times. This revised valuation provides more room for its share price to grow, especially given that the partnership could “triple sales” in the U.S.
Even if inflation moves higher than expected, Kingsford notes, Fever-Tree also has the ability to raise prices, which it chose not to do during the post-pandemic inflationary period. “That allows management to more easily increase its prices to offset costs.”
Small businesses, big impact
Many wealthy families invest with legacy in mind, seeking investments that may have a positive impact on society today and in the long run, says Mike Thiessen, chief executive officer of ThreeCap Management in Vancouver.
A new investment firm focused on investing in small and medium-sized Canadian businesses engaged in producing goods and services with positive environmental and social impacts, ThreeCap takes a different tack from typical private equity.
It seeks to be a long-term investor, providing liquidity to aging owner-operators who run enterprises involved in energy efficiency and renewables.
If investing for future generations, you can take way more risk.
Ben Carlson, Ritholtz Wealth Management
“These small and medium-sized businesses are overlooked opportunities,” says Thiessen, a portfolio manager formerly with the renowned responsible investment firm Genus Capital Management Inc. These companies can offer attractive valuations between three to six times earnings before interest, taxes, depreciation and amortization.
Among them is a firm involved in solar power installations for commercial use, especially in agriculture. “Another we’re looking at now is involved in pipe insulation in commercial buildings, increasing energy efficiency.”
These businesses already generate growing cash flows, Thiessen adds, in contrast to other impact investments engaged in developing new clean technologies that have yet to generate sales. “But many of the owners now want to retire, so they need a new long-term home for their business.” Unlike typical private equity, ThreeCap does not seek to cut costs by reducing payrolls to boost profitability and flip the business soon after.
“We want to hold these for the long term, and that’s attractive for business owners because they want to see their company that they’ve poured blood, sweat and tears into to continue to grow and have a positive impact in their communities.”
Innovating for future generations
Many families’ legacy objectives include investing for generations not yet born, and public equity markets are often the best way to provide growth that outpaces inflation. “If investing for future generations, you can take way more risk,” says Ben Carlson, director of institutional asset management at Ritholtz Wealth Management in Grand Rapids, Mich. “Yet instead of trying to pick the winners, let the market do it for you over several years.”
He points to research showing over the past century that about 4 per cent of companies account for about 90 per cent of the gains in the market. Picking those winners, however, is a fool’s game even for professional managers, he says.
Consider that in the AI race, Microsoft Corp., with its partnership with OpenAI, was considered the market leader last summer. “But today, Anthropic is the big AI leader,” Carlson says about the privately held company that is expected to list publicly in the future.
In turn, he suggests investing in a passive, low-cost exchange-traded fund for the Nasdaq 100. “Nvidia wasn’t even in the top 10 of the Nasdaq 100 as recently as 2020, and now it is at the top of that index.”
He further notes the index casts a wide enough net that it will likely capture companies like Anthropic and Space Exploration Technologies Corp. (SpaceX) when they do list. “Especially in times of innovation, when greed and euphoria ramp up so much, there’s really no way to know who will end up long-term winners,” he adds. Given the uncertainty, he argues that owning the Nasdaq 100 “is an easier, likely more effective legacy investment strategy than trying to pick the winners and avoid the losers.”
Joel Schlesinger is a Winnipeg-based freelance writer who has written for Canadian Family Offices since 2021. Specializing in investment, wealth advice, real estate and personal finance, he is also a regular columnist for the Winnipeg Free Press, and his work regularly appears in The Globe and Mail, Calgary Herald and Edmonton Journal.
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