Deans scorns 'Bay Street blow-hards'

Most investment managers prefer to sugarcoat the industry’s hard issues, but not Wayne Deans.

Deans is not like most investment managers. The president of Vancouver firm Deans Knight Capital Management pulls no punches in discussing the “white shoes” of Bay Street, the “crooks” in corner offices and the “wave riders” who manage funds.

Deans even takes a swing at Peter Lynch, one of the legendary names on Wall Street.

His no-nonsense style as a stock picker has also earned Deans rave reviews from investors.

Bayne Stanley photo, Business Edge
Wayne Deans was shut out by stock brokerages after university and became one of Canada’s hottest fund managers.

Shunned by Bay Street investment firms as an MBA grad more than three decades ago, the 57-year-old son of a Montreal dock worker has become one of Canada’s hottest fund managers.

The small-cap Northwest Specialty Equity Fund he manages has trounced Bay Street with a three-year annualized average return of 33.5 per cent despite a bear market. The average annualized return for the small-cap group over that period was 1.1 per cent.

And, as a regular contributor to the Edge’s Pro’s 3 Stars feature over the past two and a half years, his stock picks boast a cumulative return of 76.3 per cent.

But the road to success was a rocky one at times for Deans, who learned some hard lessons along the way.

1. What initially drew you to the investment business?

“I always wanted to be in the stock business. It was because of people I’d met over the years. They all seemed to have a lot of money. And they all seemed to be having a lot of fun. They were all members of the best clubs, wore the best clothes and drove the best cars and lived in the best neighbourhoods. So why wouldn’t I want to be in that club?”

2. So how did you break into the business?

“When I graduated with an MBA (from McMaster University in Hamilton), I sent out probably 50 letters to stock-brokerage companies in Canada to try to get a job. I never even got one interview. I quickly learned that in those days, the Bay Street and St. James Street group was a closed club. It was truly a white-shoe business and it was people with family connections that worked in that business. So I wound up working for the Bank of Canada for 10 years. I didn’t have any connections. My father worked on the docks in Montreal. My parents knew nothing about investing.”

3. What did you learn from your experience as a central banker with the Bank of Canada?

“That was my first taste of being a so-called professional investor. One of the things that a few of us did in our spare time was invest money for the bank’s pension plan, and when I left I was assistant chief in the securities division which implemented monetary policy. A lot of people in the financial world spend a lot of time analysing the economy and the mode and the actions of the (U.S.) Federal Reserve, and to a lesser extent, the Bank of Canada. If you’ve had a chance to work there, you kind of laugh at all that stuff. What they’re inferring about what the central banks are doing are figments of their imagination. Central banks, by and large, are reactionary rather than proactive agents of the economy. The most important thing I did learn as a central banker was that you could not forecast human behaviour. In my day at the Bank of Canada, we had a real powerful group of economists and we would get their forecast every quarter. These forecasts were never correct. So what I learned as an investor is that even if you were right about (economic forecasts), it has nothing to do with buying the right company.”

4. What was the first stock you ever bought?

“The first stock that I bought for myself was in the late 1960s while I was in college. At that time, there was a real speculative bubble in stocks. They had what they called the go-go fund managers in that era. It was a mini-1999 type of scenario. The first stock I bought was a company controlled by E.P. Taylor and it was called New Providence Development Corporation. It was a high-flying stock and they were going to develop hotels and high-end condos and homes in the Bahamas. (Chuckling) I lost my shirt. I learned that there was more to it than just buying a stock that was going up.”

5. What do you think sets you apart from other portfolio managers?

“I think there’s a group of us who are in the minority that ignore a lot of the broad trends that people are talking about and focus specifically on buying a business at the right price. In 20 or 30 years in this business, that’s one thing that I’ve learned that I think is a fundamental law of our business. The most important decision we make is the price that we pay for a company. That is simply what it all boils down to at the end of the day. If we can find a business that we think is worth $150 million and can buy that business for $100 million, we think we’re making the right decision. But I wouldn’t say for a minute that we’re not affected by the noise (of the market) from time to time.”

6. What in your mind is the ideal temperament of the successful investor?

“The successful investor has to constantly be frightened and always worrying about everything. So you always have to be questioning everything you’re doing and second- guessing yourself. Most importantly, you have to be very skeptical of the information that is coming your way and really pick it apart. A lot of the stuff that comes our way is bullshit. You have to be skeptical of who is bringing you information and what their motives are. We do a lot of business with investment dealers and some of them do a fantastic job for us. But not very many of them do a good job because their motives are questionable.”

7. How stressful is the investment business?

“I think it’s a very, very stressful business. Although we invest our own money as well, the money that we’re investing (in the firm) isn’t ours and we’re accountable directly to individuals. I guess you just get used to it or you don’t stay in the business. I guess in some ways I thrive on that.”

8. How much stock do you put in recommendations by research analysts?

“I can’t remember the last time we bought or sold a security based on a written analyst report. I don’t think we’ve ever done that. They’re usually too late because they have to play it safe. But that’s not to say that we don’t get good ideas from the Street. It’s usually in verbal form. We’ll get a call from someone who knows us well and knows the kinds of risks we like to take. They’ll say: ‘Have you looked at this?’ We’ll ask: ‘Are you going to write it up?’ They’ll say: ‘Well, maybe later or maybe never, but you should have a look at this company.’ That’s usually the trigger for us.”

9. You started buying LionOre Mining (LIM-TSE) a few years ago at about 40 cents and featured it as one of your star picks in the Edge at $2. Now it’s in the $7 range. How did you identify that stock as a winner?

“When it first came to our attention, the stock was in the $4 range but then nickel prices started to collapse (in the late 1990s). Most investors were then focusing on technology and telecommunications stocks and drove the price of LionOre down to a low of about 35 to 40 cents.

“That is when we started to really load up. Two things attracted us to the company. First, they were a relatively low-cost producer so they could break even and not bleed to death with nickel prices so low. Secondly, and probably more important to us, was the fact that the team of managers at that company was the best mining management team of any mining company we’d ever met, big or small. And that includes Inco.”

10. When researching a company, what do you look for in a CEO?

“I guess for us the single most important question is whether we trust him. Is he going to do the right thing for the shareholders? I think that we have become better and have a sharper eye for judging whether or not someone is trustworthy. I got there by getting bagged big time by somebody in the 1990s, and it shouldn’t have happened because I was suspicious of the individual. I got seduced by the fact that there were other things about the business that I liked. I was very wary of the CEO and we’ve learned that if we are wary of the CEO, be careful.”

11. What was that company?

“The company was International Wallcoverings, which was the largest manufacturer of wallpaper in the world. There was a management change because the CEO who we trusted became ill. A group of us who were large shareholders went to meet the board. They were a bunch of white-shoe, Bay Street, blue-blood, blow-hard do-nothings. We challenged them and they all resigned. We became the board, brought in forensic accountants and found out the company was bankrupt. There was a board sitting there on a bankrupt company and didn’t even know it. We steered it into CCAA (bankruptcy protection), eventually assets were sold off and the company was liquidated.”

12. If you could snap your fingers and do one thing to improve investor confidence in the public markets, what would it be?

“You know, I wouldn’t do that. I think that people have gotten what they deserved in terms of the bad things that have gone on. There’s too much closet indexing going on in the world. So big, big pension plans are buying into companies without doing any due diligence. That’s why fraud is prevalent. Why did they buy WorldCom, why did they buy Enron, why did they buy Tyco, why did they buy Hollinger? It was all quite obvious what was going on, if you did your due diligence. So people got what they deserve and I have no sympathy for them whatsoever. There are guys managing money who are so-called professionals, but one of these guys was written up recently as a superstar. I know he’s a (expletive) thief. He doesn’t know due diligence. He’s not a professional investor. He’s just a wave rider. That’s where people get into trouble. I’m not saying we don’t make our share of mistakes. We do, right. But I think we learn from our mistakes and we’re at least trying to do our best. There are guys out there who squawk because they got bagged by WorldCom, but it’s their own fault.”

13. Where are you finding value in the market these days?

“Well, you’ve got to hunt for it. In our opinion, in this market you’ve got to go and look at things that are out of favour by most investors because the company is facing some kind of temporary setback, or what we would hope is a temporary setback. Then, we might have the opportunity to buy what would be the company’s normalized cash flow or earnings stream at a very reasonable price or a low price.”

14. Can you give an example of what kind of companies you’re looking at now?

“You can look at companies that have faced obstacles because of the rising Canadian dollar, which has rendered them less competitive and has hurt their profit margins, particularly those that manufacture in Canada and sell into the U.S. Those stocks, by and large, have been hammered by the market. But in our view, if the company is extremely well-managed, management will take action to alleviate the problem created by the rising currency. The impact of that action could take years to filter through but you could, for instance, shift production to China or to Mexico. If they can get back to where they were, then the current price of the business will turn out to be quite cheap.”

15. What’s your outlook for the oil and gas sector?

“We think that over the next five years the commodity environment for oil and gas companies will be favourable. On the average, we think most analysts are probably too low (in forecasts) looking out five years. But you also have to consider that gas and oil are harder to find and more expensive to find, so some guys are going to fail in that climate because they’re facing production declines. So you’ve got to find people with the ability and skillset to find it cheaply and sell it into this strong commodity price environment. Not everybody can do it. The skill we hope to be able to bring to the game is identifying the right people and investing in them at the right price.”

16. Do you think the party is over in the gold sector?

“We think the environment for the gold price looks pretty good, largely because the U.S. dollar faces giant twin deficits that are going to be very difficult to reverse. But because of the strong gold price, a lot of old gold companies have come back into vogue and everybody is playing the game. But let me reiterate that there are a lot of guys out there who are just a bunch of friggin’ crooks who are running gold companies. But because people don’t do any due diligence and they don’t remember (the managers’) track records, they’re high-flying stocks. They’re going to get bagged again by these people . . . There’s a speculative thing going on right now that probably isn’t over and that extends to base metals. We made a lot of money in base metals and we’re very, very nervous about it.”

17. What’s your view of the corporate pension plan fiasco in Canada over pension shortfalls?

“We won’t get into pension plans (business) because these people just don’t get it. I see where all these learned consultants are weighing in on the matter and they’re idiots. They just don’t get it. The reason why pension plans don’t have enough money to meet their liabilities is because they’ve been mismanaged by consultants and trustees over the last 25 years.”

18. As someone who is involved in a mentoring program at the University of British Columbia, what’s your best advice to a budding investment manager?

“We have kids come in here as a group who are managing a portfolio at the university. We’re trying to get them to forget a lot of things that are being taught at school, a lot of the things that they’re reading in the newspapers and a lot of the things that they see other investors doing. We tell them to get back to fundamental issues like the price you pay for a business being the only important decision you’re going to make.”

19. Who is the investor you most admire?

“I think most people would respond by saying that Warren Buffett (chairman of Berkshire Hathaway) would have to be at the top of the heap, not necessarily because he has been so successful but because he has a certain clarity of thought that I don’t think I’ve ever seen in anyone else. Look at guys like Peter Lynch (the legendary Wall Street fund manager). Why is Peter Lynch no longer managing money? Well, I think he was just basically riding the wave. He isn’t in the same league as Buffett. When I read his books, they didn’t make any sense to me (One Up On Wall Street and Beating The Street). They’re a joke. Buffett’s different. He absolutely understands what he’s doing, which is buying the best possible franchise at the lowest possible price. And there’s an art to that. There are also a number of very, very successful Canadian investors, but none of them are in (the money management) business. I can’t think of a professional money management firm in Canada that I would be comfortable in trusting one plugged nickel of my money. Except ours. But there are people who are extraordinarily successful individual investors that I wouldn’t hesitate to give my money to. But they would be appalled if I mentioned their names. They’re extremely rich people who got rich by thinking differently, being different and staying out of the public spotlight.”

20. How long do you plan to continue with this job?

“I’ve made it quite clear to my partners here that as long as they feel I’m making a contribution to the business, I’ll work until I drop off the perch. I can’t even take a legitimate holiday. I’m not comfortable doing that. Even if I’m away somewhere, I’m still in touch with the office and the head’s still working.”

IN PROFILE: Wayne Deans

* Title: President/co-founder/portfolio manager, Deans Knight Asset Management.

* Born/raised/age: Montreal, 57.

* Education: George Williams University, Montreal (now Concordia), bachelor of commerce; McMaster University, Hamilton, MBA.

* Career: His investment career began with the Bank of Canada where he spent 10 years as a central banker, including a posting as assistant chief of the securities division. Since then, he has been a vice-president with Wood Gundy investment firm and president of MK Wong & Associates. He co-founded Deans Knight Asset Management in 1992.

* Accolades: Deans was named Canadian mutual fund manager of the year in 1996 in the Analysts Choice Awards.

THE COMPANY: Deans Knight Asset Management

* Profile: Deans Knight is an investment firm that manages about $900 million in institutional, private wealth and mutual fund assets. The company specializes in high-yield corporate bonds for portfolios requiring income and small-cap equities through management of the Northwest Specialty Equity Fund.

* Fund Form: The Northwest Specialty Equity Fund boasts a three-year annualized average return of 33.5 per cent (the group average for that period is +1.1%).

* Website: www.deansknight.com/ info@deansknight.com.

* Address: 730-999 West Hastings St., Vancouver, V6C 2W2.

* Phone: 604-669-0212.