Palos Management president Charles Marleau. He tries to meet two or three CEOs per day—in person. (Portrait by Richmond Lam)
Once upon a time, investors had to crunch their own numbers to come up with company metrics, earnings estimates and other information that would help them make buying and selling decisions. Now all of that data is readily available, whether on free financial websites, through your online brokerage or, in minute detail, on a Bloomberg terminal. That makes investment professionals’ jobs more difficult. If everyone has access to the same information, then what’s the point of hiring them?
Answering that question has guided Charles Marleau’s career from his early days working at the Montreal Stock Exchange to managing his family’s money during the tech boom and bust. In 2001, after the bubble burst, his father, Charles Marleau Sr. (a former vice-president at BMO and National Bank, and founder of a now defunct asset management firm), suggested young Charles start a money-management business.
Marleau fils, though, didn’t want to compete with everyone else. He preferred to do something that would differentiate his practice from rival firms and, more recently, from the do-it-yourself investors who can access copious amounts of information on the web. “We had to find a niche [that had] less competition but also generated a better return than the market with less risk over time,” he says.
So what does Marleau, president and co-founder of Montreal’s Palos Management, do that gives him the edge? Two things, he says. One is that he can short stocks in his flagship Palos Income Fund. While he’s long on most of the equity in the fund, he’ll take a short position on sectors or securities that seem overvalued. For example, recently he went short on three real estate investment trusts—CT REIT (TSX: CRT.UN), Smart REIT (TSX: SRU.UN) and Choice Properties (TSX: CHP.UN)—thinking a rise in interest rates in the U.S. would drive these stocks down. He simultaneously bought a smaller basket of REITs that were trading at a discount to net asset value. He hoped the trust units he’d shorted would fall more than the basket of REITs would, which is what happened. But he made that pair trade to protect himself from a move in the other direction.
The pair trade is important—Marleau always goes long in one area and short in a similar asset group—because he can mitigate the risk of the market’s moving in an unexpected direction. If his short doesn’t work out, but the long end moves, then he still stands to make money or at least trim his losses. Marleau likes shorting because stocks usually revert to the mean. Overvalued stocks fall; undervalued equities rise. “Both sides don’t have to move,” he says. “I’m just hoping one will revert.”
But while shorting can add up to three percentage points to his annual return, he says, that’s not the main reason his fund is outperforming the S&P/TSX composite total return index. It’s because of what he calls “the art of investment.” Since everyone now has data at their fingertips, he’s big on face-to-face meetings with CEOs. He connects with two or three a day, he says.
When Marleau sits across from CEOs and asks them questions, he’s looking at their facial expressions. He wants to see if they really know what they’re talking about. And there’s a knack to that. “We believe there’s a big void in taking the time to really tell if the business plans at these companies make sense,” he says. “That’s where it becomes a bit of an art.”
For Marleau, the meetings are about seeing “the whites of their eyes.” He’s after two main things: He wants to know about their growth plans and whether they can articulate what they do. If an executive says he or she wants to increase capital expenditures, then he wants to know exactly how that’s going to be done, the expected return on that investment and the overall strategy. “That would be an ideal first conversation,” he says.
The number one question Marleau needs to answer for himself is whether he can trust a leader with his money. It doesn’t take long to find out, he says. He carefully watches how a CEO reacts to questions, both verbally and physically. He’s looking to see if the executive gets annoyed with queries, squirms at something he says or responds with an answer that doesn’t relate to the question. In one instance, a CEO told Marleau he should invest in his company because he, too, was Quebec based. Needless to say, that conversation didn’t last long. “Some people go into meetings and think we owe them something,” he says.
But when a conversation goes well, it can be exhilarating. For instance, in a recent meeting with Winpak Ltd. (TSX: WPK), an Etobicoke, Ont., packaging company, Marleau heard about how it’s working with the largest poultry company in North America; that it plans to go after even larger food operations; and that it wants to start packaging food for restaurant chains, something it hasn’t yet done. The CEO gave Marleau a clear idea of how Winpak plans to expand and what kind of capital expenditures it will need to make. “I didn’t realize how large an opportunity this could be,” he says. “This gets me excited because it allows me to say that at least I know the direction [the company] wants to go.”
It’s after these meetings that he digs into the numbers. Metrics help him see, based on what he’s heard, whether the company is overvauled or undervalued. The face-to-face meetings only inform his long positions, he points out—shorts are based purely on valuations. At the moment, telecoms, utilities and REITs look expensive to him and could be candidates for short positions, while energy and energy infrastructure plays look attractive.
Unfortunately, it is difficult for investors to meet with CEOs themselves (though they can read reports and articles in which executives are quoted and listen to how they respond to questions on quarterly calls). That difficulty is why Marleau thinks he has an advantage over number-crunching investors. “When I pick up the phone to call the CEO of Alaris Royalty (TSX: AD), he calls me back and we talk,” he says. “That adds value.”
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