President Darcy Hulston on Fiera deal, ‘ferocious’ debates that drive firm and why it will never go passive
As he brings our meeting to a close, Darcy Hulston whips himself into an impassioned and captivating description of Canoe Financial’s culture.
He signs off by getting to the heart of the employee-owned independent investment management firm’s ambition and raison d'etre.
He said: “I get asked are we going to sell? No. Why? We’re doing well. We are going to build a great, iconic Canadian business and we are going to be proud of it.”
It's an impressive call to arms and the president and CEO was engaging company at the firm’s Toronto office, regularly slapping his hand on the boardroom table as he tackled a number of industry topics. Over the course of a lively hour with WP, he talked about his bewilderment at rivals’ failure to beat the benchmark, why he’s unafraid to change underperforming management teams and castigated the industry for doing a “brutal” job at explaining the difference between active and passive.
Hulston has good reason to be bullish. Having already closed a deal to purchase Kevin O’Leary’s mutual fund business, Canoe this month announced a move to acquire nine of Fiera Capital’s mutual funds. The deal, negotiated meaningfully from May after years of casual discussions, is expected to close during the first quarter of 2019 and swells Canoe’s AUM by about $785 million to almost $5.5 billion.
He is full of admiration for his new business partner’s success and sees similar “proud Canadian” values in the two operations. He called them a “global powerhouse” and admitted he gets “a little welled up” at the level of commercial success they have achieved out of Montreal.
Canoe, he said, are trying to do the same thing from its Calgary HQ and Hulston expects his business to double in size in the next three years. He believes the drive within Canoe comes from the way the team was put together during its inception in 2010 when, rather than offering portfolio managers a signing bonus, he asked them to write a check. Half balked at the request.
“They weren’t wired right for this experience,” Hulston shrugged, adding: “I get asked a lot about the culture at Canoe and my answer now is it’s very strong; incredibly strong. I deliberately don’t use words like awesome or happy or awful. It’s strong because when we sit around the table here and debate an issue, it’s ferocious. Everybody wrote a check, mortgaged their house; they are invested.
“People here eat each other, sometimes it’s crazy but it delivers unique outcomes. I don’t know many firms at all that are wired that way in our industry. It’s very common in oil, gas and consumer but in our industry in Canada, it’s unique.”
“Building an iconic, platinum brand”
Hulston had appeared a little flustered when he walked in to meet WP but it’s immediately apparent this is a misguided first impression. Asked about Canoe’s expansion plans after the Fiera acquisition, there is ambitious clarity in his answer about where the company is heading. He said the firm has never had fewer than two or three deal files open and conversations are ongoing.
“We will definitely opportunistically acquire or partner to grow,” he said. “I can see us doubling in the next three years. I don’t want to be cocky about that –we’re grateful to be in the business – but the way we’ve got our infrastructure built today, three offices, our asset management teams with their competencies … we can double our assets and not compromise on anything to the unit holder. That might get fees down a little more and we’ll still continue to create the alpha we can quite easily.”
Hulston admitted, however, that reaching a $10-to-20 billion size business is a different ball game. The critical mass and savings to the client are advantages but he said there are very few firms that can run a $30-40 billion fund effectively because it’s just too cumbersome.
He said: “Most of the big funds are lousy; they are just too big. They never beat their benchmark, they never beat their peer group, they are one star and they still sell.
“So our commitment is we don’t want to be those guys, so we will have the courage to cap. It doesn’t mean we won’t continue to grow but if you get a strategy that means all of a sudden the manager can’t use cash the same way or can’t sell as quickly, then what are you doing?”
The other factor that separates Canoe from many of its peers, according to Hulston, is a willingness to live by the sword when it comes to delivering alpha. The company has backed up its words with performance and a ruthlessness to change management teams that are underperforming.
“I can’t even believe I’m saying it because that should be obvious,” he said. “We’ve had underperforming strategies and we’ve changed the management team. We’ve done that a couple of times. Is it that crazy? It’s supposed to be what we do as fiduciaries. So I’ve no problem showing those pictures and if we can’t, shame on us, we’ve got a problem as a business.”
“We will never offer a passive strategy”
Hulston said that not only did Canoe embrace recent volatility but they were also silently hoping for it. It’s a confidence borne out of a belief in what they are doing and a view that passive market exposure is not a competitor.
He said full beta is not appropriate for most investors, who will not be protected when the market takes a nosedive, leaving good active managers to trade around volatility and cash, using natural hedges and other strategies inside the portfolio to weather the storm.
“You got to add alpha,” Hulston said. “That’s the point. What’s frustrating is there are so many of our competitors … they are massive and they never beat a benchmark, they never beat a peer group and they outsell us. I just find that perplexing.”
Hulston questions why an investor would pay 30 basis points in Canada for full market beta on the S&P when you can head south and use one of the two “behemoths” in America and pay only two.
He said: “There’s no point [competing against that] and that’s awesome – they can have that space. We are going to outperform them, for sure, but our fee structure is going to be different.”
He added: “We’ll cap strategies if that’s what it takes to support our performance or we’ll change management teams. We have to live on that sword. I don’t mind saying that. We will continue to deliver performance – we have to.”