Sober investment

Sixty-five-year-old Thomas Caldwell has seen investment fashions come and go. A highly experienced Toronto fund manager, he’s not impressed by IROs who don’t talk straight; his own answers, when he is interviewed, are compressed and tight. This is a man, as he himself acknowledges, who demands simplicity. ‘The job of the IRO is to give me color, vision,’ he says. ‘I want the straight goods.’

Generally Caldwell prefers to talk to a CEO whom he can eyeball without distraction – group or public meetings produce too much pap. ‘I want two things: the vision and the CEO’s plan to achieve it,’ he says. ‘I don’t care about quarterly estimates. I want to know about whether his or her actions are consistent. My job is to buy into the big picture and establish that the person I’m talking to is semi-normal. One of the things we find from many CEOs is that they’re quite eccentric people.’ CEOs be warned, then: no bow ties. 

Caldwell’s Urbana fund is interesting on a number of fronts. It sits among several others of his firm’s mutual funds but is closed-ended. Caldwell says this gives him and investors more leeway so he’s not tied to the pressure of quarterly numbers, undermining strategic direction; he can take the long view. It’s a too-often shunned set-up that goes back to the middle of the last century, he says.

Right now, Caldwell rates Canadian bank stocks. Many look undervalued and are in generally good shape compared with the shocking state of banks drowning in subprime delinquency across the border, he points out.

‘Several have good dividend yields,’ he adds. ‘We like stocks where we understand the business model. We don’t like aggressive numbers. The closer I get to cash the better. But I want to know a stock’s ‘X’ factor. Why is it better than others? What gives one company the edge over another? It’s about financial clarity but it’s also about management teams making money with what they have, rather than what they might get.’

Caldwell is also on the lookout for telltale signals of slackness. Sobriety – trust him – will help your case. On more than one occasion he’s put up with the CEO of a Canadian oil company thoroughly soaked in alcohol. ‘We didn’t want to be part of that company,’ Caldwell stresses. ‘Or be around chief executives visiting strip joints. I mean, they’re not 16-year-olds – what is the problem there?’

Trading places
What Caldwell does like enormously is stock exchanges. Several, including NYSE Euronext, look absolute bargains, according to the former McGill University economics graduate. ‘The NYSE is currently trading at a bit more than $21 compared with an $82 12-month high,’ he points out. ‘Unlike stocks, stock exchanges don’t tend to collapse.’

He also says the sector, particularly in the Far East, has massive potential – a good way of buying into growing global trading volumes, especially from the powerhouse economies of the future. ‘It’s still one of the best ways to participate in a region,’ he adds.

Nevertheless, like growing numbers of investors, Caldwell is deeply concerned about board compensation. Board directors have given management absolutely massive incentives, but there’s rarely a downside, he says with frustration: ‘That has really helped to obliterate the US financial system.’

He’s also a fierce critic of many of the SOX regulations drafted in to tackle corporate recklessness. ‘SOX shifted the focus to governance from corporate and systemic risk,’ he explains.

‘Further, the repeal of the Glass-Steagall Act – a set of banking reforms dating back to the early 1930s designed to control speculation – allowed investment bankers to play with monster pools of deposit capital. We are living with the results of that. It’s a dangerous reaction from Washington saying, Let’s do something quick that could hit the regulatory environment. We need a total rewrite of securities regulation based upon principles, like the UK system.’

New dawn
So can newly elected President Obama make a difference? What changes to the investment climate can he make, given the limitations imposed by the global downturn and frightening economic numbers generally? Caldwell is realistic.

‘It’s still very early on,’ he points out. ‘The critical thing is confidence; we really need it, period. Things are positive to the extent that President Obama is a breath of fresh air. But the ingredient that’s badly needed is stability. If you can create financial stabilization, everything will follow from that. People will spend if they feel secure in their jobs, even if they don’t have the cash to pay for what they want to buy.

‘When I think of Obama I also think of former Canadian prime minister Pierre Trudeau, who was in reality an old Fabian socialist.’ He tails off briefly. ‘I think Obama will be a tried and tested Democrat, so more government spending will be likely,’ he adds.

Despite his apparent caution on Obama, Caldwell is pretty optimistic about the economic future. He reckons the doom-mongery – which was all over the World Economic Forum in Davos just before IR magazine went to press – is overcooked.

And what stocks might Caldwell be filling up with in the meantime, taking advantage of so many appealing valuations? Commodity prices have taken a hammering and he’s positive on the energy sector generally.

‘If inflation comes back, energy companies will look good to us,’ he reckons. ‘Gold, some metals and Canadian banks will do well for us all.’