Cashing in on Hope and Faith
December 20, 2012
I was reminded this week of a conversation I had at a member mixer at the Adelaide Club a number of years ago. A woman, and tremendous squash player, who was on sabbatical from her management consulting gig asked us an interesting question. The question was, “What is the best business in the World?”
Think about it for a moment.
I immediately decided that my vote for best business would be a casino. For one, I’ve been known to play a little poker and blackjack at times, and have come to the realization that even playing blackjack by the book, and pretty tight at poker, that I seldom walked away with the windfall of riches that I had expected. I was quickly told that while casinos were a very good business, they were not one of the best. A recent article in The Atlantic about Don Johnson (not that Don Johnson) taking casinos in Atlantic City for millions supports that. The portfolio management team at Aston Hill have invested in the bonds of different casinos groups in the past, but are always quick to say that these bonds are backed by real estate, suggesting that perhaps casinos are not as bulletproof as I had thought.
Also, in the 2008-2009 period many said that Las Vegas was a ghost town, and by all accounts continues to be quite weak. She had done some research on some of the new religions that had started across the Globe and had found that these organizations were quite good businesses. One must only go to the Vatican to be convinced that there is wealth in the World’s major religions. Religious organizations are often secretive of their finances with much of their wealth coming from real estate and donations from those who follow their respective faiths. US Census data was used to break down earnings by faith, however little substantive information is known about the financial affairs of the religions of the World.
A documentary from 2009 attempts, and does draw some conclusions on the wealth of the World’s religions, but frankly I’m unconvinced of his findings. I think his estimates of around $50 billion in annual income for both Catholicism and Islam sound low, but it shows that on a much smaller scale, some of these new religious movements could also be profitabile enterprises. The Wikipedia posting of ’New Religious Movements’ lists 267 religion movements, many of which were started in the 1900s, and many are notable for a number of reasons – although it’s quite possible that many more exist.
In the late 1990′s, while I was working at Nesbitt Burns, the head of the Managed Assets Group at the time, argued in his quarterly thought-piece that investors were diverting money that were previously being spent on lotteries and gambling into the mutual fund and investment industry. They were very good years in the markets, and the investment business grew substantially.
Televangelists are perhaps the most visible and commercial example of the business of religion. At the core, they may believe that they are helping their cause, but in essence they are perpetuating a potential belief that hope can be sold like a product and faith may be purchased.
One of the challenges of the financial world today, is that many investors have lost hope in equities. The asset class that delivered such strong returns during most of the 1990s, has done very little to enrich clients since. Since my entry into the business, equities – excluding dividends – are flat. While we, as an industry, continue to focus on ‘the long-term’ and ‘staying in the market,’ the TSX Composite sits only about 800 points (7%) above where it was in August 2000.
How do investors get enthused again? How can faith in equity investing be restored? Many investors believe that because the last 12 years have yielded no capital growth in the broader North American markets, that by this virtue, markets will be better in future. I’m not sure that, that simple viewpoint is correct. Leadership in markets is always changing, and leadership amongst markets is also changing. Despite, and despite significant liquidity injections by central banks, the World has to de-lever. Markets may not move higher. But many companies will. Redwood is a fund company focused on active management.
We do not believe that ETFs, alone, are the future. Low cost funds, focused solely on investing in the highest market capitalization will continue to be great proxies for broader markets, but if broader markets are under pressure from macro-economic stress – it may not yield the best results? Those who make money in the next decade will focus on companies that can grow, despite sluggishness in the broader economy.
Hope is not a great investment strategy, but for markets to move higher, investors need to believe that over time, equities will outperform other asset classes.