Advisor Invest With Confidence
Advisor Invest With Confidence
Best ways to show a little local bias in your portfolio
Say you spot the ‘next big thing’ in your own backyard. Can you invest local? Retail investors might try the field of angel investing, but it requires due diligence
By: KATHY KERR
Date: October 6, 2017
Why not buy local apples from the farmers’ market instead of imported bananas from a multinational grocery chain? If the shoes you desire are manufactured in your hometown, so much the better. It’s all about supporting the local economy and employer.
But what about the realm of financial strategy for the average investor? Does the “buy local” trend extend to “invest local”?
It depends in some measure on what type of investment is involved – publicly traded stocks and mutual funds, or private and startup investing. The majority of retail investors put their dollars into the publicly traded sector. There, the concept of “local bias” sends shivers up the spines of financial advisors.
While investors might think they understand the business that employs themselves or their neighbours, that’s not the best strategy for spreading risk and building a nest egg, advisors say.
Chris Turchansky, president of ATB Investor Services in Edmonton, says his clients come in thinking oil and gas stocks are where they want to be. “We really try to educate our clients not to overweight, or put more of their investments in one specific country, or one specific province,” he says.
“A lot of things in Alberta are tied to the price of oil. … When oil and gas companies do well, it tends to put upward pressure on salaries and wages across industries, so when oil doesn’t do well, it tends to dampen those.
“What we don’t want to see is when something happens to the province not only does the value of a portfolio go down, potentially the value of their house takes a hit, potentially their salary also takes a hit. It doesn’t mean there aren’t great companies to invest in here in Alberta … just not disproportionately,” says Mr. Turchansky.
But what about supporting local employment? Ric Palombi, director of research for McLean & Partners Wealth Management Ltd. in Calgary, has a contrary perspective on that.
“I think there’s an inherent feeling that if you’re not investing in Canada, you’re not supporting Canadian jobs. But Canada is a price-taker. There’s very little, as equity investors, that we can do to make that any better. We could be buying Encana or Cenovus [oil company stocks] all day long, but if the price of oil or the price of natural gas keeps falling, buying those stocks doesn’t really support people at Encana or Cenovus keeping their jobs because these prices are determined globally.”
Mr. Palombi counsels investors to look outside Canada, not locally, for growth potential. It’s better to expose your portfolio to other business cycles. “Just because oil and gas is not doing well it doesn’t mean that technology stocks in Asia or Europe or names in the luxury space are not growing, and adding those names in the portfolio helps to buffer the downside if you hold some oil names.”
In Montreal, the interest in investing locally has declined in recent years, says Cimon Plante, portfolio manager and vice-president at National Bank Financial. “Sometimes when you go to an annual meeting, there are local people – the older generation. You don’t see many millennials in the room.”
Local investing is still a factor in some regions of Quebec, he says. For instance, investors in the city of Rougemont are interested in the juice company Lassonde Industries Inc., which has had roots in the community since 1918 and is a major employer. “They may know the owner. They see it is growing. They have a better sense of the economic pulse of the company,” Mr. Plante says.
More people are talking about private investment as a way to support local companies, he says. “There’s a trend for startup investing, but practically speaking it’s hard for the average investor to know how to get in,” he says. He recommends that clients who want to try venture investing talk to people with experience in investing privately to see whether it’s right for them.
Advisors acknowledge that while the world of startup funding and private investing is beyond the capacities of most average investors, it does provide a local connection. Private and angel investing, however, requires due diligence and a high tolerance for risk.
But for those with the time and inclination, there is also potential for high rewards. Those in the field say they feel a sense of excitement and emotional connection to spotting the “next big thing” in your own backyard.
The National Angel Capital Organization (NACO), which represents 3,300 investors in 45 networks across the country, reports that angel investment is largely local. In its 2016 report, of the networks that returned the organization’s survey, 29 per cent of that year’s investments were made in the same city as the angel group and a further 55 per cent were in the same province.
R. Stewart Thompson, the Calgary-based founder and chief executive officer of VA Angels, cites growing interest among investors who haven’t ventured into the angel asset class before. (Canadian securities regulation requires that angel investors be accredited investors. The Ontario Securities Commission says there are up to 500,000 accredited investors in Canada, but only a small fraction actively invest in early-stage companies, NACO says.)
Until four years ago, it was difficult to get into the arena. Those who became angels were mostly investors with a background of running their own businesses. But now several provinces offer tax credits for investing in startups, and retail investors are seeking out angel groups.
Joining a group, rather than going it alone, is the way to go, says Mr. Thompson. “This is not an easy asset class. Most retail investors should be scared of doing this. How do you know when your 23-year-old cousin comes to you and says, ‘I have this really amazing idea,’ that they’re going to be okay? How do you know the $100,000 or $50,000 or $20,000 you give them is going to be the last amount they need?”
Mr. Thompson, 52, got into angel investing in 2003 after running a couple of his own companies. He started out with Supernet, one of the first Internet service providers in Alberta, and later ran a company called Khyber Pass Entertainment.
During a visit to Silicon Valley on behalf of the Alberta government, he came across a model for angel groups and he felt it was something needed in Alberta, where there wasn’t much investment money for technology companies. His group became the third such group in Western Canada. “I changed from a [business] operator to becoming an investor in 2003, but I would say I still had all my bad operator habits. I would say I didn’t have my investor habits until 2006 or 2007.”
Mr. Thompson says his first four investments were train wrecks, but VA Angels is well established now. “I’ve got chapters in Kelowna, Edmonton, Calgary and Winnipeg and satellite chapters in Prince George and Medicine Hat. Across that network we have 140 members,” he says.
“Anybody can become a member of our group. It’s like a whopping $1,500 a year. And we tell people for the first year ‘try not to write an investment.’ But it’s so exciting. You see so many cool things. … We’ve never had a member sit on their chequebook for a whole year.”
That said, it’s about making money, not supporting the corner store. “There’s a difference between being a philanthropist and being an investor,” says Mr. Thompson.
“If you invest locally and the company stays local, you don’t make any money. We’re trying to make 10 to 20 times our money back. You’re not going to make that in a ‘local’ company.”
Investors who are not necessarily looking for equity in a firm have other possibilities. For instance, ATB Financial, a provincially owned Crown corporation also known as Alberta Treasury Branches, has a lending program with a low buy-in for investors interested in lending to small business.
Teresa Clouston, executive vice-president of business and agriculture for ATB in Edmonton, says the LendR program appeals to people who believe in the entrepreneurial spirit in Alberta. “They see a business idea or model and say, ‘I think that’s got legs and I can see how it would benefit our community, society, employment and/or I think that company is going to grow and have an attractive return.’” The $1,000 buy-in minimum for lenders makes it accessible.
ATB believes this program may be the first crowd-lending program of its type in Canada. ATB reviews the firms seeking loans to ensure they have a viable business plan and coaches them on their online campaign pitch. The startup raises 10 per cent through friends and family. An additional 40 per cent of the 12- to 24-month term loan, capped at $100,000, comes from LendR community investors. The borrowing firm raises that portion with the online campaign, which the lenders bid on. Once the campaign is filled, ATB provides the final 50 per cent.
“You’d have an aggregate of investors. … It’s in the low thousands that any one investor would put forward,” says Ms. Clouston.
If the company is successful, the return on the loan is 15 per cent. “There’s no collateral against those investor loans. It’s an attractive rate of return, but your funds are at risk. The rate of return is designed to reflect that level of risk.”
Ms. Clouston says the program, which is new this year and has had a good handful of businesses go through the process, has already attracted more lenders than campaigns.
Yuri Navarro, chief executive officer of NACO in Toronto, echoes the thoughts of many advisors and participants in local investing that the best strategy is to have a range of investments. “We would never recommend that anyone put all their money into this,” he says.
But investing locally is not about making the highest return. Rate of return ranks approximately third in reasons to be involved in angel investing in surveys of NACO members.
Angels want to “stay in the game” and continue to be involved in the sector they have made a living at and live vicariously through the success of the entrepreneur they are backing, says Mr. Navarro. They also want to give back to the community and help out the next generation of entrepreneurs, he adds.
He cites two golden rules of angel investing: “You don’t invest in something you don’t understand, and you don’t invest in a company that’s more than an hour’s drive away from you.” That said, angel networks allow investors to tap into the expertise of peers in the group, and the national organization can put networks in touch with other experts and businesses outside the area.
“Like anything else, angel investment is subject to portfolio issues,” says Mr. Navarro. “If you’re highly concentrated in one sector or in only uber-local companies, you’re exponentially increasing your risk profile.”
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