April 6, 2011
“Vanilla ice cream is so much better than any of those fancy flavours!” exclaimed Michael Sabia. The President and CEO of the Caisse de dépôt et placement du Québec, one of Canada’s leading financial institutions, has simple tastes, in both iced desserts and financial products. He reminded final-year Bachelor's in Business Administration students that they should avoid trendy instruments, the “flavour of the day,” when it comes to portfolio management. Mr. Sabia was speaking on April 5, as part of the Professor for a Day program, to students in the class taught by Pierre Saint-Laurent, Full-time Faculty Lecturer in Finance. A second group of students, those taught by Full-time Lecturer Jean-Philippe Tarte, watched the rebroadcast lecture.
Mr. Sabia was President and CEO of BCE from 2002 to July 2008, after holding other senior positions at Canada’s largest telecommunications company. Before that he was CFO of CN at the time the railway was privatized and converted into a publicly owned company. He began his career in the federal public service, spending ten years as Director General of the Department of Finance and later as Deputy Secretary in the Privy Council Office. But it was primarily as head of the Caisse de dépôt et placement that he spoke to the students.
The Caisse now manages net assets of close to $152 billion, has 25 depositors and is one of the largest fund managers in North America. Yet it was not in very good financial health when Mr. Sabia took the helm, in March 2009. The Caisse had just experienced huge losses, so the challenge was not only to motivate all its employees but also to refocus its operations on Quebec and clean up its finances. Above all, though, he had to look at managing risk differently and better matching its portfolio to the market. The first step in this direction was to move more into equity markets and rely less on fixed income. Another change: no more loans to make purchases without solid guarantees. “Financial leverage,” joked Mr. Sabia, “is a bit like investments on steroids. That kind of loan bulks up everything, both profits and losses.”
Mr. Sabia and his team set about carefully cleaning up their portfolios, getting rid of certain securities and reorganizing their assets. “In the end,” he says, “we had to completely change the way we looked at portfolio management. If I can give you just one message, it would be this: invest only in the things you understand.” Indeed, that is a fundamental principle that investors Stephen Jarislowsky and Warren Buffett have been applying for years. It is nothing new, but according to Mr. Sabia the industry gradually neglected it, by encouraging investments in little-known businesses with potential for short-term profit. It is better to stick with sure values, companies whose operations are clearly understood.
The experienced executive, with a string of successes at CN, which he transformed into one of North America’s leading railways, and BCE, which he made more competitive and better prepared for the challenges ahead, had plenty of advice to offer. He concluded with an anecdote. Well-known American authors Joseph Heller and Kurt Vonnegut had been invited to a billionaire’s private island and were talking about wealth. When Vonnegut pointed out to his colleague that even after writing a blockbuster like Catch 22, he would never be as rich as their host, Heller immediately replied, “But I have something he’ll never have: enough!” If the Caisse has managed to learn from what it has gone through and refocused its operations, let’s hope that tomorrow’s investors will be happy with their profits. The greatest skills in investing, after all, are knowing when to get out, selling at the right time, and being satisfied with your profits.
With BBA graduating students, Michael Sabia is flanked by Full-time Faculty Lecturer Pierre Saint-Laurent (left) and Pierre Laurin, Executive-in-Residence, HEC Montréal (right).