Scott oversees all of CWB Wealth Management’s investment solutions, investment process and philosophy, and research teams. Linnea, meanwhile, is responsible for managing CWB client investment portfolios and overall wealth strategies - including those for entrepreneurs and business owners across the country. Both have managed billions of dollars over the course of their careers.
CWB: There are a lot of funds and investment managers out there. What should you be looking for when choosing a manager and/or a fund?
Scott: A simple story about trust. I've been working here for three years. What I used to say to my wife before I joined is, “if anything happens to me, call Linnea,” because I've known her a long time and I trust her. You need to find someone who can have an honest, free-flowing discussion with you. Especially in the high-net-worth area, that's key. Also, if it's someone who can help with financial planning, business banking, personal banking and the other services we offer at CWB, that's a huge plus.
Linnea: Scott hit on No. 1 there. I wouldn’t focus on investment returns because different fund managers will outperform at certain times and underperform at others, but over the long-term their performance can be similar.
So, the key is finding somebody you feel very comfortable with. If you’re looking for an investment manager, I would recommend interviewing two to three people to figure out who you feel most comfortable with and whose philosophy aligns most with your own.
And another important thing to understand is what fees you are paying and how that person is being compensated. I think there has been a lot of movement in the industry over the past number of years to get rid of some of the crazy ways advisors were compensated. Most are now being compensated based on a fee-based approach based on assets under management, but you still want those fees to be competitive.
CWB: What if you're a smaller investor? Do you have any advice for someone who is looking to buy some mutual funds for their portfolio for example?
Scott: If you're a smaller investor, it's just as important. If you're a large investor, who tends to be a little bit older, you’ve accumulated all of your wealth and you want to preserve it, number one, and grow it, number two. But as a small investor, you have this huge runway where you can grow your wealth, if you do it right. So, what I would do if I was starting out — and what I tell my kids — is to learn as much as you can about investing and read as much as you can. When it comes to picking different funds or ETFs, I think people make a mistake by looking strictly at the performance track record. We know a lot of the time that last year’s best performing fund becomes this year’s worst performing fund. So, it’s really about what are you comfortable with? What type of investor do you want to be? What style of investing makes sense to you? What kind of asset mix do you want? The best way to do this is to work with an advisor you trust.
CWB: There is a lot of talk about moving money into so-called green industries and out of traditional industries, for example. Is this an important consideration for an investor or just the flavour of the month in investing?
Scott: It's important. Young people today are heavily invested in this from a societal standpoint. Increasingly, having a strategy around ESG (environment, social and corporate governance) issues is extremely important for an investment firm now, and it's not going to go away. But ESG means different things to different people. For some people it may mean they don’t want to own a fund that invests in fossil fuels. For other people, they want to make sure that the companies they invest in are onside in terms of all the environmental rules and regulations that are in place around the world. It really depends on the person.
Linnea: I think it has shifted a bit over the years. Scott and I have been in the business for 25-plus years each, and I would say that there has been a good consciousness about corporate and social governance, but I would say that the “E” part, the environmental part, is getting more attention now than it did in the past.
Scott: You have to be really careful. It’s easy to invest in a fund that doesn’t own fossil fuels when oil goes from $40 or $50 a barrel amount to negative like it did in 2020. You’re not really missing returns. On the other side, meanwhile, many of the green darlings have really risen in value like Tesla, for example. And now some of these companies are trading at prices that just make no sense. So, you could see this reverse at some point. And then you’ll have to ask yourself if you’re really willing to forgo investing in certain sectors, even if it hurts your portfolio’s returns. I think sometimes people forget that it’s not irresponsible to invest in companies that produce fossil fuels. After all we use their products every day. But if they don’t follow the rules, or are poor corporate citizens, that is irresponsible, and sooner or later it will be reflected in the stock price.
CWB: It's hard to figure out what a green company is sometimes. Batteries appear to be a green investment, but if you look at how they're made, they’re not always exactly green. It’s tough to sort out what companies are ESG-compliant and which companies are not, right?Scott: Tesla bought some bitcoin recently. The amount of energy that goes into mining for bitcoin is massive. So here they are, the green energy, electric vehicle company that bought bitcoin. How do you square that circle? So, the way we think about ESG issues is not to divest from certain sectors, not to say that we won’t invest in oil and gas, but to know what those companies are doing as far as their emissions, future goals, regulations, etc.
We look at companies holistically. Are they a good steward of their assets?It’s really hard for investors. There are no formal standards for ESG at this time. So, at this point, ESG can mean anything you want it to mean.
Linnea: There’s such a wide spectrum there. And I am sure it is going to evolve more over time.
CWB: So, Elon Musk goes to his Twitter feed and writes, “buy this, buy that” — and then the stock he mentions rockets. How do you deal with this? It must drive you crazy?
Scott: We ignore it. We don't take stock tips from Elon Musk. If we have a position in a stock, and Elon Musk comes out and says it's good, and the stock climbs 50%, there's a good chance we're selling that stock. We really look at the fundamentals of a company and how those fundamentals are going to develop over time. Elon Musk is a fantastic entrepreneur and all that, but it's just noise.
Linnea: I'll talk to clients who ask why we didn't have Tesla in their portfolio because it did so well this year. A lot of our clients are business owners and we remind them that we do fundamental analysis on companies, and we have a framework for determining with companies we buy.
Everything has a price. If we are speaking with a client, for example, and this client owns a forestry company, and they value their company at five times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization; a metric used to evaluate a company's operating performance), you might ask her if they would buy their competitor’s business for 100 times EBITDA just because someone sent out a tweet?
The answer, of course, is no. We have a framework and there has to be valuation that makes sense. We don’t just buy things because they’re going up based on momentum.
CWB: How do you measure success? How do you benchmark your performance on behalf of your clients?
Linnea: In this business — and Scott and I come from institutional backgrounds — we tend to get very focused on benchmark returns and beating the benchmark because generally that’s how institutional investors are paid. But what I’ve found over the years, is that most individuals aren’t focused on that benchmark and they’ve got their own internal benchmark that they need to hit. Whether it’s five percent or seven percent or whatever it is, it’s more about preserving their capital. I have clients that retired 15 years ago, and they’ve been taking out money every year and they’ve preserved their capital. They’re happy. This couple has been living just fine, and they have quite a bit of money to pass on to their kids. Everybody looks at success differently, and it’s funny because as obsessed as this industry is with the benchmark when you get down to individual investor level it’s not so focused on the benchmark, it’s more like, “Four percent or five percent makes me happy.” And as long as you’re achieving that, most clients are fine with the results.
Scott: And that's what pension funds do, too. They look at their obligations and they look at their assets and they ask themselves, “Well, what type of returns do we need to generate to meet our obligations?” And they set up their mix based on their assumptions for those asset classes.
It’s a goals-based type of outlook, rather than “we're going to earn as much as we can for your account.”
For every incremental return that you want to earn, there's additional risk that you have to take on and for a lot of individuals they don’t want to be 100% in equities, that’s just more risk than they want. So you have to think about their goals and tailor the portfolio to them.
CWB: So an entrepreneur walks into your office and asks for investment advice. What's the most important thing you can tell this person?
Scott: Diversify. What makes all the news — and this is something we haven't talked about — it's been a long time since we saw a long bear market. We saw one in March 2020, but it was really short and there wasn't a lot of long-term pain. If you don’t diversify, and you make bad decisions, you could lose everything.
So, an entrepreneur is doing their work and they’re taking on all sorts of risk in their business. If there are bad times in their industry then they have issues. A portfolio that is well diversified can weather the ups and downs of the market.
Linnea: When I meet with people who are entrepreneurs, I'm very careful about setting expectations. A lot of these people are very successful and they’ve built growing businesses, so they are used to returns that are a lot higher than we’ll be able to deliver in the market. I am very upfront about that. I tell them the reason we’re doing this is to diversify, work on succession, and not have to be tied to the business every day. So, yeah, you’re giving up some of that return, but for a different reason. It’s about moving on to the next phase of life.
Scott: It's hard to get rich quick in the market, but it's easy to get poor quick. Buying GameStop at $350 and riding it down to $50 or whatever it is today, that's a good way to get poor.
This interview took place on February 11, 2021. The interview was lightly edited for clarity and length.