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© Copyright 2000 Rogers Media. The following article first appeared in the January 2000 edition of
BENEFITS CANADA magazine.
Investing in the future
Sure the Internet has changed the world.
But has it changed your pension fund's portfolio?
By Barbara Clapham
the results achieved by canadian money managers variedwidely last year, depending largely on one
factor--whether or not they invested in high technology companies. The common shares of Nortel Networks and
other companies of the so-called new economy soared to sky-high valuation levels during the year.
Harry Gibbs, vice-president, investments, at the Workplace Safety and Insurance Board in Toronto, expects a
wide dispersion in year-end results between managers who held Nortel and those who did not: up to 1,000
basis points.
This latter category includes value investors. Many chose to exclude or underweight tech stocks, investing
in manufacturing companies instead. They were punished with poor results, not only underperforming growth
managers, but also benchmarks such as the Toronto Stock Exchange 300 composite index.
Although value managers invested according to their mandate, explaining lacklustre results is never easy.
We have all heard about the new paradigm, how globalization and the Internet have introduced a new era of
sustainable profitability.
Whether or not that's true, times have certainly changed. Even index managers are impacted by technology.
At the end of October 1999, the sector made up 24% of the Standard & Poor's 500 index, compared to 7%
in 1992. If the growth in technology continues, value investors will continue to be left out in the cold,
unless a better way to assess these companies can be found.
On the valuation of such companies, the renowned value investor Warren Buffet once said: "If I taught a
class, on my final exam I would take an Internet company and ask: 'How much is this company worth?' Anyone
who would answer, I would flunk." But while Buffett does not invest in the technology sector at all,
avoidance is not a strategy advocated by many managers.
Michel Nadeau, senior vice-president, core portfolios at the Caisse de dépôt et placement du
Québec, acknowledges the difficulty in determining the value of Internet stocks, but adds: "The
Internet trend is here to stay. The challenge is to pick the winners."
Internet companies that are selling a service are extremely difficult to value, since their worth lies in
potential growth. Nadeau's view is that it is preferable to focus on companies that are easier to price,
such as manufacturers of equipment related to the Internet. Cisco Systems Inc. and Intel Corp. are two
examples.
Ontario Teachers' Pension Plan has a different philosophy. Internet stocks are assessed in the same manner
as any other security. "They either fit our normal process or they don't," says Bob Bertram, senior
vice-president, investments. Noting that few value managers hold any of these stocks, Bertram adds that the
managers who do hold them tend to be those with growth or momentum styles of investing. If an Internet
stock fits their criteria, they consider it for inclusion in their portfolio.
Meanwhile, the definition of an Internet stock is broadening. Business to business e-commerce is expanding
the category, as many companies of the old economy are discovering how the Internet can work for them. Ford
Motor Co. and General Motors Corp. are both setting up Web sites through which they plan to buy all their
goods and services. This should save billions of dollars for the companies as bureaucracy and
intermediation are reduced with suppliers openly bidding for contracts in a global arena.
Business to business e-commerce is a huge growth area. Money managers are looking at companies that use it
to their advantage in a different light. After all, who would have imagined a few years ago that the shares
of 'ol Ford Motor Co. would ever make up about 2.5% of Altamira's e-business mutual fund?
Barbara Clapham is contributing editor of BENEFITS CANADA.
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CONFERENCES
Cash and Risk Management
Strategies for Treasury Professionals
Feb. 2 to 4, 2000, Toronto
This conference will address techniques to help blend risk management and cash management responsibilities.
Call (416) 971-4177 or e-mail register@infonex.ca.
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