Tom Bradley: An old hand

A: If you follow my writing, I’ve been pretty cautious, raising red flags around the lack of appreciation of risk in markets. And I’ve personally been pretty cautiously positioned and also trying to do that with clients. But, I’m the first to admit that I didn’t see it getting this bad. We’ve been counselling clients to hang in and if they’ve got the gumption for it to rebalance towards equities. We haven’t told them to go crazy and mortgage the home. I think it’s pretty late in the game here – though I said that a few weeks ago – but we are watching the markets so we’ll see.

Q: In your opinion, how did things get so bad?

A: I’m a bit of a student of cycles and one thing I’ve learned is you can never time them. In hindsight we’ll see the peak and trough. The second thing I’ve learned is when they go on a long time and get really extreme they take a while to unwind. Usually the other side of a cycle is pretty extreme too. What we’ve got right now is a number of different cycles that have come to an end – or maybe they’re all one – but housing is well rolled over, consumer spending or consumer borrowing is a cycle that has gone way beyond what people thought and it is rolling over so people are retrenching. Maybe the one that will make those look like nothing is the debt cycle of Wall Street and how leveraged we are with all the debt products. We’ve got the great unwinding here. It’s nothing you haven’t heard but it’s deleveraging the consumer, deleveraging Wall Street and the banks. They’ll unwind separately, but they’re all linked.

Q: What are you going to do to mitigate damage to your funds and clients’ portfolios?

A: We’re doing the same thing we always do, but it’s certainly amped up especially with our managers. We monitor them very carefully – we spent a year and a half putting a team of managers together. They reflect my philosophy about investing, so we keep in touch with them, we talk to them formally a couple times a quarter, as well as throughout the quarter just to get a review. What we’re watching for is whether they are sticking to their style or not. I would say things are a little more intense right now and we talk to them a bit more. They’re picking away at stocks. None of our equity managers has gone whole hog, but our global manager has been much more aggressive in recent days buying stocks and bringing cash down. All our managers had anywhere between 10% and 15% cash and have now brought them down to single digits.

Q: How do you stay connected with clients at a time like this?

A: We blog quite actively as our main form of communication to clients. We’re not like advisors, who are more intimately involved with clients so we school our clients. If they want to talk to us, we’ll pick up the phone and they can talk to myself or a colleague, but we want them to call us. Having said that, we’re calling out as much as we can in this market.

Q: Steadyhand has only been around for a year and a half. How will the market turmoil affect such a young company?

A: We’d like to say we’ve avoided this carnage – our clients will be in the middle of the pack or slightly better – but we haven’t avoided it. If we had weathered the storm better, that would maybe set us up for a really nice growth phase, but the reality is that a young company, with this kind of fear in the market, people are going to go away and hide for a while even though we might go through a profound rally. It’s slowing us down for sure. We had great momentum coming into the fall and had expected that to pick up after Labour Day. We’re still adding clients, but much slower than we would have thought.

Q: What is your managers’ investing philosophy?

A: Our managers are absolute return-oriented, so they’re not really worried about benchmark short-term. Ultimately we want to beat the benchmark, which is why we started the company. But they’re not sector rotators, they go to where they think there’s value. Our global manager is buying tech and nibbling at financials. Our equity fund managers have really been opportunistic, but it’s all over the map. Because of the style of the funds you won’t see someone making a sector swing or loading up on one particular sector.

Q: How did you choose your managers?

A: A I started Steadyhand for two reasons. After I left PH&N, I was a free agent in the market and I was able to invest more freely. I did some myself – I’m an old equity guy – but found it tough to find what I wanted out there. I wanted absolute return managers, I wanted concentrated managers, I don’t want my money to be in someone’s 125th best idea. In some areas, like global, that’s hard to find. There are managers out there who own 200 stocks. I’m lucky enough to have built wealth through my career so we were able to access some managers that weren’t accessible to the public.

Q: Why did you start a small, lowfee operation?

A: The driving force was that I thought the big players in the industry were putting out bulkier and bulkier products, they’re feature laden, they’re too high-fee, they’re complicated, they’re not transparent, and I just think there’s room in the market for a straightahead, very simple mutual fund. The industry has gotten so complicated that it’s opened the door for someone like us to come in and be simple and transparent.

Q: What type of person invests with Steadyhand?

A: There’s two types of investors, people who trust us with a significant amount of wealth, so they’re using three or four funds, and then the other type. Some clients come through the advisor channel or other dealers, where they want one of our funds. The most popular one has been the small-cap fund – it’s a $10 million fund.

Q: How much does it cost for clients to invest?

A: It’s $10,000 per fund. Our assets under management are in the low $50 million. We have over 400 clients. Two-thirds of clients we deal with directly.

Q: What does the future of fees look like?

A: The fee landscape is interesting. I would contend that the average cost of investing for Canadians has gone up, because of the proliferation of structured products and principal protected notes (very expensive products). If you go to a broker and buy some products, you’re probably paying more fees today than 10 years ago.

But, there are many more lowfee options. Discount brokers have bashed down commission rates, ETFs have proliferated and there’s a better general awareness. While the average client is probably paying more, other options and people who are more aware of low fees are bringing costs down, which is great.

Q: You’re saying fees will drop?

A: I’ve always thought fees would come down, but I’ve come to realize that there’s a lot of pressure to keep them where they are. Every manager of a wealth management division has been told he has to produce more earnings this year than last year and cutting fees isn’t a way to get there. It was nice for us to start with a fresh sheet of paper and $50 million in assets so we were able to design our fee scale, but if you have tens-of-billions of dollars, a fee cut can be a pretty expensive proposition. So the little guys are going to bring fees down. Look at who the lowfee players are – it was PH&N when they were a little guy, it’s us, it’s Mawer and firms like that.

Q: Is it harder for a small firm to deal with regulators than a larger company?

A: Yes. One thing that bothers me is that there’s such an unevenness in regulating wealth management. Structured banking products are the wild west. PPNs aren’t well regulated, there are all kinds of hedge funds you can sign up with that are lightly regulated, then being a mutual fund manufacturer and a dealer means we can’t sneeze without documenting it. It makes us run a very tight ship. There are lots of benefits to it, but sometimes regulators are too quick to layer on another rule or document without thinking about what can they take away. With every extra layer, it hurts the little guy who doesn’t have a lot of scale, but we don’t want to discourage new companies from getting into business.

Q: Steadyhand allows investors to buy your funds direct or through an advisor. Why use both channels?

A: Our biggest point of distinction is coming direct. Investors can deal with us that way and most of them do, but we’re on FundsSERV and we’ve gotten on most of the dealers’ platforms so people can buy that way.

Q: I assume it would be more expensive to go the advisor/dealer route?

A: It varies from dealer to dealer; some dealers do transactions for free because we don’t have trailer or a load, but most have a fee of some kind. It’s a little more expensive, but our sweet spot is for the do-it-yourselfer. They’re interested, they have the knowledge, but they can’t manage their own portfolio. It’s the same target client as the discount brokers. Many people have given feedback that they’d like to keep assets all in one place, such as on TD Waterhouse.

Q: How has your experience as CEO of PH&N helped you?

A: Bob Hager (one of PH&N’s founders) has been very influential for me. I tried to take the great things from the company – the whole ethics of the firm, the client service approach, the approach to fees – but having said that, we aren’t PH&N light. It’s really very different. You couldn’t implement this investment philosophy at PH&N. We’re also more edgy, we can be more transparent, we don’t have any outside ownership, we don’t have any blue-chip pension clients we might offend. We speak our mind on industry issues and market issues and we can personalize experiences. It’s a very different feel and culture than PH&N. They also have 300-plus people. I was a manager of people there, and I loved that but here we have a small team – it’s much more of an investment firm.

Q: What was your reaction when you found out that PH&N was sold to Royal Bank?

A: I was disappointed. I spent 14 years there. I always wanted to see it grow to be one of the world’s greatest asset managers. It was one Canadian firm that had a chance to do that. I’m not saying Royal Bank won’t do a very good job for PH&N clients, but we’re seeing that it’s going to be a division of the bank and changes are happening already. I wasn’t there, I wasn’t at the table, but I was disappointed for sure.

Q: Will you sell out one day?

A: I’ve worked in only two other places in the industry. The first was Richardson Greenshields and after I left they were bought by Royal Bank. I was at PH&N and after I left they were bought by Royal Bank. So you know where my exit strategy is.

Q: Does size really matter?

A: We do think size is an issue; we have lots of disadvantages of being a $50 million company, but we have some advantages. Managers can be more nimble, our funds are very unconstrained; our equity fund owns small as well as large cap.

Bill Holland (CEO of CI Financial) talks about how you have to be big, that there’s no other way to go. I don’t buy that. Have we got a tough row to hoe here at Steadyhand doing the direct-toclient approach? Absolutely, this will be a tough slog; it’s one client at a time right now and we have to build credibility, but this is a business where small is good. Somebody managing an $8 billion Canadian equity fund can’t do it the same way that we can.

Q: How big do you want to get then?

A: We want to get to where we’re paying our bills – we are going to go a few years without making any money. We need to get north of $100 million to start paying bills. We would like to be big enough and have the momentum to have real credibility and have an impact in the market. We’d like to change the landscape. The industry has gotten too fat and flabby. That doesn’t mean people shouldn’t get advice and pay for advisors and do all the things the industry does, but we’d like to try and shake it up a bit and get it back to what it should be all about – investing, not marketing.

Q: Are you worried that the bigger you get, the harder it will be to stick to your philosophy?

A: I would hope we don’t steer away from our basic approach, but that’s not to say we won’t add a fund or two. The decision we made, and we tell our clients this, is we manage their money the way we want our money managed. We’re not going to put some flavour of the month kind of fund on the shelf because we know it’ll sell unless we really think that’s a good way to invest. We’re not going to get it right every time, we might design a fund incorrectly, but we’ll add funds over time.

Q: Blogging has been a big part of your marketing strategy. Why?

A: We wouldn’t have started Steadyhand if we didn’t have some tools in our kit that would allow us to be different and make some noise. My propensity, enjoyment and ability to write gave us a tool most other firms don’t have. It’s part of our agenda to change the landscape. We can talk about the industry – not only what we are doing, but what others are doing, and it builds a profile for our company over time. The Internet is a great field leveller for us.