HOW TO MAKE MONEy NOW
how to make money now
invest like a
with a bit
AND this guy
Undercover in the
British Virgin Islands
Inside the secret world of
Forget stocks, buy a
How would you invest
The biggest bargains
in the world
11-01-12 2:32 PM
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cover shot (and right) exclusively for report on business magazine by sean sprague
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decades of bull
and bear markets:
“I’m one of the
Procter & Gamble or Paladin Energy? Commodities or classic cars? We
tap a wealth of financial expertise
to help you decide where to stash
your cash this year. Start with our
roundup of investing legends, whose
sound advice includes Stephen Jarislowsky’s lessons on risk management
for young investors (26) and the scenarios that keep Eric Sprott awake at
night (36). Meanwhile, Boyd Erman
follows two of Canada’s top bankers
to less august surroundings, where
they find out why starting a hedge
fund in this country can be a tricky
thing, and where all can be lost for
want of a staple (38). Some investments lie even further off the beaten
track, from Malaysian condos (28) to
vintage stamps (35). You and your
money might be tempted to skip
town entirely, since, as our undercover sleuth Trevor Cole discovers,
setting up an offshore tax haven is as
easy as getting on a plane to the British Virgin Islands (44). Plus, take our
investing quiz to find out whether
you’re even qualified to be managing your money in the first place.
how to make money now
invest like a
with a bit
and this guy
Undercover in the
British Virgin Islands
Inside the secret world of
Forget stocks, buy a
How would you invest
The biggest bargains
in the world
11-01-12 2:32 PM
february 2011 REPORT ON BUSINESS 3
Kim Shannon of Sionna
Investment Managers helps
you with your homework
9 Business Intelligence
10 Five Questions
photographs (top) sean sprague; (bottom) jonathan loek
Canadians are moving slowly
toward watching TV and movies
online. Can Netflix lure eyeballs
away from cable?
The Leafs suck. MLSE CEO
Richard Peddie explains how the
company keeps making fistfuls
of money anyway
13 the Cricket economy
The cricket World Cup kicks off
this month—a good time to crunch
the numbers, from players’ salaries
(pretty good) to Canada’s odds
of winning (not great)
With NASA saying goodbye to the
space shuttle, firms like SpaceX
are taking up the challenge of the
Corporate surVIVaL GuIDe
53 aviator headphones for high fliers |
54 Hat tip | 55 For V-Day, let a hundred
cocktails bloom | 56 Johannesburg’s
business climate: hot and flashy
The fighting Irish haven’t come
out swinging against austerity
18 wall street
Hedge fund managers’ fees seem
disconnected from reality...and
then there’s Lady Gaga’s takehome pay. An economist explains
why superstars are worth it
64 exit Interview
In 2009, AbitibiBowater wasn’t
worth the paper its share
certificates were printed on.
Departing CEO David Paterson
explains how he turned the page
february 2011 REPORT ON BUSINESS 5
February 2011, Volume 27, No. 6
Phillip Crawley, Publisher & CEO of The Globe and Mail, extends best wishes to the
following individuals who were recently featured in the Report on Business Section of
The Globe and Mail newspaper. Congratulations on your new appointments.
to Group VP, Finance
to VP, Digital Media
to VP, Product
Editor gary salEwicz
Senior Editors dawn calleja, john daly, Ted mumford
Managing Editor judiTh Pereira
Associate Editor dave morris Copy Editor jeaneTTe king
Research caTherine dowling, dawn Promislow, charles rowland
Art Director domENic macri
Contributing Designer Paul van dongen
Photo Editor clare jordan
siri agrell, andrew Bell, sTeve BrearTon, Trevor cole, derek decloeT, diane jermyn, sTeve laduranTaye, hamin lee, rachel ann lindsay,
john lorinc, gordon PiTTs, eric reguly, mark schaTzker, liam sharP, doug sTeiner, sinclair sTewarT, faBrice Taylor, TimoThy Taylor Laura Mably
to VP, Human
AstraZeneca Canada Inc.
to VP, Launch,
AstraZeneca Canada Inc.
to Partner and
John D. MacNeil
to Dubai office
Bennett Jones –
James J. McDermott
to Partner, Dubai
Bennett Jones Dubai
Wayne L. Barwise
The Cadillac Fairview
to Senior VP,
The Cadillac Fairview
to VP, Engineering &
to VP, Human
to VP, Sales Business
to Executive VP, Global
Human Resources and
member of the Office
of the President
SNC-Lavalin Group Inc.
Vice-president, Advertising Sales aNdrEw saUNdErs
Product Manager, Magazines rolfe jones
Marketing Solutions Group liz massicoTTe Production
Director, Ad Production Services
and Magazine Production sally Pirri
Production Co-ordinator isaBelle oandasan
Publisher PhilliP crawlEy
Editor-in-Chief, The Globe and Mail johN stackhoUsE
to Sr. VP of Dessau
President and CEO
to VP and Treasurer
David G. Norris
Chair of the Board
to Senior VP,
to Chairman of the
Board of Directors
HSBC Bank Canada
to Senior VP, Financial
Planning and Analysis
George C.B. Smith
to Fellow in the
to the Board of
The Centre for
to Associate in the
firm’s Toronto office
to the Board of
The Centre for
to the Board of
To make arrangements for an Appointment Notice,
please call 1-800-387-9012 or email [email protected]
View all appointment notices online at www.globeandmail.com/appointments
St. Mary’s University
College in Calgary
John-Michel T. Huss
to President and
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photograph clay stang
to Executive VP,
Report on Business magazine, which includes its sister
publication Your Business, is published 15 times
a year by The Globe and Mail Inc., 444 Front St. W., Toronto M5V 2S9.
Devices streaminG netFLiX in north america
PlayStation 3 31%
TV is dead. Long live TV
Do not adjust your set—not yet, anyway. Despite sky-high expectations, Netflix’s foray into the Canadian market was
underwhelming. New subscribers to the U.S.-based online streaming service quickly noticed that the slate of available TV and
movie content was meagre at best, even after licensing deals with CBC and Global added new titles. It’s a whole different
story in the United States, where Wall Street has acknowledged Netflix’s influence on how Americans watch television by driving
up the share price a whopping 800% over the past two years. And it’s not hard to see why—according to network
monitoring firm Sandvine, Netflix now accounts for 20% of Americans’ Internet usage between 8 and 10 p.m. —Steve Brearton
ASK YOUR ADVISOR HOW YOU MIGHT PROFIT FROM THE OPINIONATED THINKERS AT DYNAMIC FUNDS.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the
prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Dynamic Funds is a division of Goodman & Company, Investment Counsel Ltd.
model, we just would not
be here. Most of [the traffic
on YouTube] is people
watching videos of cats.
You cannot build a
CeO, astral media
starting with zero
base in Canada.
We have 70 million
through our doors
little bit like,
is the Albanian
army going to
take over the
world? I don’t
P2P file sharing
Jeffrey L. Bewkes
CeO, time Warner
what we’re DoinG DurinG prime time
Sony digital tv
As the number of Americans
tuning in to cable television
nosedived, millions of
them watched movies and
shows on their smartphones
and other devices
Sony bluray Player
Other apple devices
microsoft Xbox 360
Sony PlayStation 3
Percentage of weekly
audience watching one
to two full-episode tv
shows (not including news,
preschool and sports)
top 3 movie purchases on
itunes in December, 2010
1. the Blind side
2. sherlock Holmes
We know that most people aren’t always thinking about investments.
But at Dynamic Funds it’s all we do. We actively seek to reward investors
with better-than-market returns by attracting the industry’s best portfolio
managers and giving them an environment where their opinions can thrive.
It’s what has helped make us one of the fastest-growing, most awarded
mutual fund companies in Canada.
there’s not a place
for Netflix, but I
don’t think it will
INVESTMENT OPINIONS AREN’T THE FIRST THING
ON YOUR MIND. BUT THEY ARE ON OURS.
PhOtOgraPhS (ClOCkWiSe frOm tOP right) tim fraSer/the glObe and mail; j.P. mOCzulSki/reuterS; luCaS jaCkSOn/reuterS; afP; jeff mCintOSh/CP
SOurCeS Sandvine, the battle fOr the Canadian COuCh POtatO, the COnvergenCe COnSulting grOuP ltd.
viDeo makes huGe Gains onLine
biggest issue we
have is cord-cutting—
the fear that studios will
bypass the traditional
and deploy through
the likes of Google,
FEBRuaRy 2011 REPORT ON BUSINESS 9
Maple Leafs captain
toronto Fc midfielder
Julian de guzman
highest-paid athletes on Mlse teaMs
Why so much fascination
among sports fans and media
on the business side of MLSE?
The underpinning of the
business is sports, and you’ve
got fans. Half the people in
Ontario are fans of the Leafs,
and when we get into the
playoffs, it’s three-quarters.
Then you lay on top of that
avid football and basketball
fans, and it’s just the whole
focus. We’re the most public
private company in Canada.
There’s a lot of coverage, and
they bring the business side
to the sports pages.
If you had your druthers,
would you make MLSE more
transparent? It’s not a public
company, but it is a public trust.
The good sport
Richard Peddie runs quite possibly the most successful—and most
criticized— sports and entertainment company in North America, if not
the world. Now that he has announced his retirement from Maple Leaf
Sports and Entertainment (valued recently at more than $2 billion,
with revenue of $500 million), he has one year left to prove his critics
wrong. Having one of his teams—any one—make the playoffs would help.
Though, as Peddie tells Michael Grange, MLSE wins either way.
You have 12 months left at
MLSE. What three things do you
want to get done before you go?
One is that all of our teams
make progress: The Leafs
make the playoffs, the Raptors
continue to make the playoffs
and Toronto FC secures a
top-flight general manager
and coach. The second is to
make progress on our new
the Real Sports Bar to our
soccer academy and other
things I can’t talk about. The
third thing is that our fiscal
year-end is June 30, and our
10 FEBRuaRy 2011 REPORT ON BUSINESS
goal is to make or exceed plan.
Every one of our employees is
on an incentive plan, just like
I am, and it’s nice to hand out
bonus cheques in August.
There are those who say that by
not winning, you’ve cost MLSE
money. What have you brought
to the business?
Would we have made more
money by winning? Would
our enterprise value be
greater? Absolutely, but not by
hundreds of millions. It would
take a lot of Stanley Cup finals
to get into the hundreds of
millions. But this is a team
effort. What you have to do
is to look at what we’ve done,
business-wise, and compare
it to any professional sports
team—all 130 of them—in
North America. Who has
brought in a whole new sport
in Major League Soccer and
FC? Who has done Maple
Leaf Square [a retail/condo
development near the Air
Canada Centre]? How many
have their own specialty
television channel? We have
three. You add up all those
things and we’re second to
none on the business side.
On a Smarter Planet, answers are hidden in the data.
stock, weather patterns, passenger demand) to assemble
and schedule more than 5,000 passenger trains per day,
improving operating efficiency by 6% and saving an
estimated 20 million euros annually.
The new science of analytics must be core to every leader’s
thinking. Because while data is growing exponentially today
in volume and complexity, time is not.
Lastly, through smarter data, we can also see how one
piece of information relates to the things around it. Nearly
useless by itself, a data point can now be put in context,
and that context can be analyzed in real time. Spanish oil
and gas company Repsol uses predictive analytics to
parse huge volumes of seismic data, boosting the success
rate of its exploratory efforts.
Smarter data, delivered in real time via new computational
models like stream computing, lets us make fact-based
projections in a world where risk and opportunity are
constantly in flux. So doctors in a Canadian hospital treating
high-risk newborns can identify patterns within an array of
physiological data to help detect life-threatening infections
up to 24 hours sooner.
Was there some temptation to
stay on the job until the teams
were competitive again?
The ultimate success is being
in a parade and getting rings
at the end of it. Do I want to
stay on? I’ll always be a fan,
and if I leave and people I
brought into the company
have great success, I’ll be
happy for them. But I’ve been
aiming for this time frame for
a long time—14 years is a long
time for a CEO. This is the
right time to bring in a new
person. I’m ready.
Here’s a bold prediction: The biggest leaps forward in the
next several decades – in business, science and society at
large – will come from insights gleaned through perpetual,
real-time analysis of data.
There are three keys to moving from “big data” to smarter
data: organize your information, in all its diversity; understand
its context; and manage its continual evolution, in real time.
photograph Markian Lozowchuk
❘ 5 questions ❘
If it were my company, I
wouldn’t do it. We do so many
high-level, multimilliondollar negotiations and idea
generation, and if people
figured it out ahead of time, it
yields competitive advantage.
So we can’t be transparent.
And I don’t think the fans
care if we make money or
not. We’ve invested $1 billion
in Toronto in the past 10
years. We’re building practice
facilities and grass pitches.
They wouldn’t care if we were
broke, and I don’t think it
really matters if we’re making
money, as long as we invest in
the teams. And frankly, I don’t
think it’s their business.
Through smarter data, we can make sense of information
in all its forms – structured and unstructured, text and
multimedia. That’s how Netherlands Railways is able to
weigh 56,000 variables (including the railroad’s rolling
As thousands of forward-thinking leaders today are
discovering, their data’s hidden meanings don’t just make
their companies smarter. They also increase the growth,
transparency, sustainability and knowledge of entire
industries, and of our whole planet. Which is turning a
bold prediction into a promising reality.
Let’s build a Smarter Planet. Join us and see what others
are doing at ibm.com/smarterplanet/ca
IBM, the IBM logo, ibm.com, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be trademarks of IBM or other
companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. © International Business Machines Corporation 2010.
We see the possibilities.
As an Operations Manager at Suncor Energy, Stephen Young is one of more than 12,000 employees who have seen how
innovation can turn possibilities into reality. Like turning tailings ponds into solid ground. Suncor marked a significant
milestone with the return of our first tailings pond to a solid surface in 2010. We’ve also developed a game-changing
technology that reclaims former oil sands mines into natural habitat decades faster than before. Developing these kinds of
solutions begins with seeing the possibilities. And we’re just getting started.
planned investments in
new tailings technology
of land reclaimed
trees planted on
Suncor’s site since 1967
sales SaleS of once-beloved Social networking SiteS
Attack of the killer
tech stocks! Part 2
This time, it’s social
THe crickeT econoMY
Beginning Feb. 19, 14 teams, including Canada’s, will compete at the International Cricket
Council’s World Cup in India, Sri Lanka and Bangladesh. It’s the world’s third-largest sporting event,
with an expected viewership of more than two billion people in 220 nations. —Steve Brearton
five beSt-paid playerS
in the indian premier league,
the world’S richeSt league
Facebook’s mega-deal with
Goldman Sachs is putting
pressure on social media firms
to go public. Will these four
players become blue chips,
or presage another apocalyptic
kevin pietersen • • • • • • • • $1.55 million
andrew flintoff • • • • • • • • $1.55 million
mahendra Singh dhoni
Sachin tendulkar • • • • • • • $1.12 million
(all currency in U.S. dollars)
PoSSiblE iPo dATE April, 2012
ThE ScUTTlEbUTT After a
round of funding in January
raised $450 million from
Russian firm digital Sky and
Goldman Sachs (the latter of
whom offered stakes to its
partners and private wealth
clients), the whispers pushed
the putative iPo date to
mid-2012—unless SEc rules
limiting investor numbers
force it to do it sooner.
$6.4 to $7.8 billion
Find out more about Suncor’s track record
and how we are planning to responsibly
develop North America’s energy supply.
PoSSiblE iPo dATE End of 2011
ThE ScUTTlEbUTT Pundits
are still reeling after Groupon
turned down Google’s alleged
$6-billion offer. now, with
Fidelity, morgan Stanley
and others sniffing around,
the firm could be in for an iPo
worth even more.
andrew Symonds • • • • • • • $1.35 million
Broadcast rights earned by the
International cricket council for
an eight-year stretch, including
the 2011 World cup
total value of teamS
English Premier league soccer
Indian Premier league cricket
national hockey league
canada • • • • • • • • • • • • 100,000
india • • • • • • • • • • • 100 million+
canada’s best-known cricketer earned 100
runs on 67 balls at World cup ’93
canadian men’S world cup cricket team,
by place of birth
amount estimated to have been
wagered during the Englandaustralia test matches in 2010
icc world cup betting oddS
5 to 1
5 to 1
6 to 1
1,000 to 1
“Cricket is all about agility, speed and reflexes. You can’t have an elephant as a symbol for it.”
—reaction to the Icc’s announcement of stumpy as mascot to the 2011 World cup
PoSSiblE iPo dATE
next few months
ThE ScUTTlEbUTT The question
isn’t if linkedin will go public,
but when. Sources say it has
already selected underwriters,
and is just waiting for the ink
on the paperwork to dry.
PoSSiblE iPo dATE Fall, 2011
ThE ScUTTlEbUTT Some
say Twitter hopes to push up
its valuation by riding the
momentum of the other tech
stocks, while it concentrates on
building revenue. but could
the microblogging juggernaut
have missed its window?
Trademark of Suncor Energy Inc.
what we pay
people, it is
a senior new York
bumping up base
pay, brokers and
traders continue to
grouse about not
getting a bonus
China’s spring festival travel season, known as Chunyun, is the world’s
largest annual human migration. The rush begins two weeks before
the Chinese New Year (which falls this year on Feb. 3), with travellers
sometimes waiting days to cram onto a train home.
trips taken during the
40 days of chunyun
in the u.s.
make the hajj
during a fourday period
a month or
FEBRUARY 2011 REPORT ON BUSINESS 13
cost oF Nasa space programs (IN 2010 u.s. DoLLars)
NumBer oF caNaDIaNs Who’Ve BeeN to space
❘ space ❘
They call it the “Space Coast.”
For 50 years, Florida’s eastern
edge has been the launch pad
for America’s space program.
So entrenched is the industry
in the towns across from Cape
Canaveral that even the area
code is a countdown: 321.
But NASA’s workhorse
fleet of space shuttles is being
retired in 2011. For the first
time, the space agency is
turning to private companies
like SpaceX—headed by Elon
Musk, who does double-duty
as CEO of electric carmaker
Tesla Motors—to handle
many of its routine launches.
SpaceX has a $1.6-billion (U.S.),
12-mission contract with
NASA to transport cargo to the
International Space Station.
For residents of Brevard
County, an hour’s drive from
Orlando, the demise of the
shuttle program leaves a
gap the private sector won’t
fill. SpaceX builds its Falcon
9 rockets in California;
Orbital Sciences, which has a
$1.9-billion (U.S.) contract with
NASA, builds its rockets in
Virginia. Besides, unmanned,
single-use launch vehicles
aren’t nearly as hungry for
manpower as the shuttle,
which had to be partially
disassembled and refurbished
before each mission.
Once the shuttle Endeavour
returns from her final mission
this spring, an estimated
7,000 NASA employees and
contractors will be out of work.
Factor in subcontractors and
related industries, and as many
as 20,000 jobs will disappear.
For now, NASA has no big14 february 2011 REPORT ON BUSINESS
ticket program to replace
the shuttle, either. Hopes
of a partial reprieve were
dashed last year when Barack
Obama axed the Constellation
program, which was supposed
to return Americans to the
moon on a new generation
of mega-rockets. To some, it
seems like history repeating
itself: When the Apollo
program shut down in 1975,
the regional population
dropped by 10,000.
But the end of the shuttle
has been a long time coming,
and a raft of commissions,
panels and reports have sought
to find a new focus for the
Space Coast’s economy. The
consensus, a little jarringly, is:
not space. Brevard County is
hoping its skilled workforce
will lure high-tech companies
in (relatively) down-to-Earth
fields like aviation (Brazilbased Embraer is opening its
first U.S. plant here), defence
and biotech. Then there’s the
Disney effect: An upgrade at
the Cape’s cruise-ship port is
expected to bring in additional
If officials are bubbly with
optimism, residents of a
county already hammered by
recession are more subdued.
“We haven’t had anyone
announce a golden bullet
coming directly to Titusville,”
says Al Taylor, the recently
departed president of the
Space Coast Association of
Realtors. Then again, it’s not
all bad. “Prices in our area are
still declining,” he says. “It’s
making for some wonderful
spacex will transport
cargo for Nasa,
which is going boldly
into private space travel
photograph courtesy spacex.com
Star trek, the
february 2011 REPORT ON BUSINESS 15
europe Eric Reguly
The temper of our times
Ireland should be burning. High unemployment, plummeting
real estate values, the recession and the sense that the government is part of the problem would seem to be enough to trigger
social unrest. Now add in the mullet-brained insistence on foisting the cost of Ireland’s epic banking collapse onto the taxpayers,
mortgaging their future for years, maybe decades.
Financial crises have triggered social unrest in many countries
in the past, ranging from strikes and demonstrations to riots.
Almost 30 people died in riots in Argentina in December, 2001,
when the government restricted bank accounts in an attempt to
stop a run by depositors. The country then defaulted on its debt
and ended its peso’s 1-to-1 parity link with the U.S. dollar.
In May of last year, rallies against Greece’s deep-cut austerity
plan turned ugly when a firebomb killed three workers in an Athens bank. The city has been paralyzed by several protests since
then. More recently, in London and Rome, dozens of students
and police were injured in protests against education cutbacks.
Dublin saw some demonstrations late last year, but they were
rather civilized compared to the strife elsewhere in Europe. That
will almost certainly change, however. If anyone is justified in feeling wronged, it is the Irish, because the poor bastards are being
forced to pick up the tab for their bankers’ gambling losses.
Ireland is having not so much an economic crisis as a financial
one. The country’s banks were among the most loosely regulated
financial institutions on the planet in the early 2000s, and they
went on a massive real estate lending spree. The annual value
of house building soared from a historic norm of about 5% of
national income to close to 15% in 2006 and 2007. Morgan Kelly,
the University College Dublin economist who predicted the
Irish real estate crunch, said last year that “the Irish decided that
competitiveness no longer mattered, and that the road to riches
lay in selling houses to each other.”
The banks threw gasoline onto the fire. The value of all bank
loans outstanding expanded to 200% of national income by 2008.
Near the peak of the market, Irish banks were lending 40% more
in real terms to property developers than they were lending to all
clients in 2000. In 2007, Ireland was building half as many homes
as all of Britain, which has 14 times the population. Typically,
loans made to developers were made without collateral.
The bubble burst in 2007. Property prices in many areas are
down by more than a third since the peak. That deterioration
will continue, because an estimated one in eight households has
negative home equity—the value of the house is lower than the
value of the mortgage against it.
16 FEBRuaRy 2011 REPORT ON BUSINESS
The insanity of unrestrained lending to the housing market
was matched by unrestrained guarantees to the lenders—the
equivalent of rewarding a heroin addict with more heroin. The
Irish government guaranteed most of the bonds issued by banks
and, in 2008, it committed ¤40 billion to buying dud loans. The
government is also investing about ¤45 billion to recapitalize the
banks. A big chunk of the ¤67.5 billion in bailout money Ireland is
receiving from the European Union and the International Monetary Fund in December will be used to prop up the so-called
zombie banks—ones that are essentially worthless but still carry
on business with government support.
The cost of the bank rescues more than doubled Ireland’s 2010
budget deficit to 32% of GDP, according to European Commission estimates, compared to 9.6% for Greece. The ratio of Ireland’s total public debt to GDP soared to almost 100% from 65%
a year earlier. Thanks to the battered banks, the ratio is expected
to reach about 115% by the end of 2012.
Ireland doesn’t have its own currency (it uses the euro), so it
can’t devalue its way out of the mess. Instead, it must resort to
a grim mix of wage deflation, higher taxes and public spending
cuts. As the Irish get poorer, their relative debt burden grows—
all for the sake of the banks.
There is, of course, a solution: Send the senior debt holders
to the barbershop. Haircuts on their holdings could save Irish
taxpayers an estimated ¤15 billion, giving the country a chance to
emerge from the debt swamp years earlier. It’s cruel to impose the
banks’ losses on taxpayers in order to repay the senior debt holders in full. Capitalism isn’t supposed to work that way. Greece
looks like it may go through a national default to slice its public
debt, as Argentina did a decade ago.
Will the Irish government do the right thing for its citizens and
whack the bondholders? Probably not. The bank and investor
lobbyists are powerful, and Dublin won’t want to risk legal challenges it might not win. Other EU governments will put pressure
on Ireland to leave the bonds intact, for fear that haircuts would
anger investors and raise borrowing costs for their countries.
Yet if Ireland’s debt is economically unsustainable, it’s also
politically unsustainable. A populist uprising seems inevitable
and it could easily spread to other debt-choked countries whose
bond investors are getting an easy ride. If 2010 was the year of the
debt crisis, 2011 could be the year of the social crisis.
Eric Reguly is an award-winning columnist with The Globe and Mail.
He is based in rome, and can be reached at [email protected]
illustration yarek waszul
The Irish aren’t yet rioting in the streets over austerity measures
to solve the country’s debt crisis. They oughtta be, boyo
A S P E C I A L I N F O R M AT I O N F E AT U R E
wall street Tony Keller
Brazil and Canada
Worth every billion
illustration nazario graziano/colagene.com
Lady Gaga, hedge fund managers and the Economic Theory of Superstars
Not long after the U.S. Treasury Department’s pay czar ended his
oversight of Citigroup’s compensation practices, the bank hired
a new head of global energy investment banking. Citi, which
nearly went under in 2008 and was partly owned by the U.S. government until last December, lured Stephen Trauber away from
rival UBS. It dug deep into the kitty to get him. Trauber reportedly will be paid $9 million a year (all currency in U.S. dollars).
You are no doubt appalled. Yeah, me too, I guess. But moral
outrage, unlike i-banking, is easy. Let’s consider a less demotic
proposition: that Trauber’s compensation, and that of some of
his peers, is perfectly rational. It just might be, if you believe in
the Economic Theory of Superstars.
Three decades ago, University of Chicago economist Sherwin Rosen set out to solve the riddle of why some people are
paid so much more than the rest of us. He looked at the industry
with the most extreme inequalities: the entertainment business.
There are millions of starving artists in the world, like the singer
at your local pub who can barely make rent. Yet Lady Gaga made
an estimated $62 million last year. How come?
In Rosen’s groundbreaking 1981 paper, “The economics of
superstars,” he explained why Lady Gaga doesn’t have to be 5,000
times better than the local musician in order to earn 5,000 times
more. He pointed to two factors: “imperfect substitution,” which
is our willingness to pay a lot more for that which is only a bit better, and “joint consumption technologies,” which allow a popular musician’s work to be purchased simultaneously by millions.
Either one can lead to high pay. Together, they spell superpay.
Imperfect substitution is easy to understand. “Lesser talent,”
said Rosen, “is often a poor substitute for greater talent.” Three
mediocre singers won’t satisfy an audience as much as one excellent singer. A major corporation facing a major lawsuit will likely
hire the best lawyer; a lawyer who is 10% less competent can’t
compensate by working 10% more, or charging 10% less. As a
result, said Rosen, “the demand for the better sellers increases
more than proportionately.”
Trauber is one of those better sellers. A classic i-banker, he
helps energy companies do deals, especially mergers and acquisitions. He and his team at UBS have done 115 oil and gas deals over
the past five years, worth $167 billion (according to Bloomberg).
Other bankers brought in little or no business, and washed out
of the profession. One of Trauber’s last big transactions was the
$11-billion sale of Smith International Inc. to Schlumberger Ltd.
18 FEBRuaRy 2011 REPORT ON BUSINESS
His UBS team advised Smith and collected a fee of $29.3 million.
Did Smith get its money’s worth? The deal closed, and the
company sold for a premium of 37.5% over its pre-deal share
price, compared to an average premium of 26% in other recent
oil and gas deals, according to Dealogic. The excess premium
was worth about $1 billion to Smith shareholders. If Trauber was
responsible for even a fraction of that—something that’s hard to
prove, or disprove—he earned his fee.
Yet i-bankers like Trauber aren’t really full-fledged Rosen
superstars. Unlike Lady Gaga and other star entertainers, Trauber does piecework. Each M&A is a one-off. Lady Gaga, in contrast, is software. She can earn a theoretically infinite amount of
money from just one recording session: The resulting song can be
purchased by millions of consumers worldwide. Or, as Rosen put
it, in something close to English, “when the joint consumption
technology and imperfect substitution features of preferences
are combined, the possibility for talented persons to command
both very large markets and very large incomes is apparent.”
Which financiers are superstars? Hedge fund managers.
They’re pulling down Lady Gaga coin, and then some. They pool
the money of many investors, because it’s not much more timeconsuming to manage billions than millions: That’s joint consumption technology. And in a demonstration of imperfect substitution, they also charge much higher annual fees than mutual
funds. The standard for hedge funds is “two and 20”—2% of
assets under management, plus 20% of returns. Result: In 2009,
the 25 highest-paid fund managers earned a total of $25.3 billion.
One mogul, James Simons of Renaissance Technologies, has
made more than $1 billion a year for the last half-decade by managing a huge pool and pushing imperfect substitution to the max:
Renaissance’s standard fee isn’t two and 20, but five and 44.
Do hedge fund managers deserve their paycheques? Do i-bankers? In a moral sense, surely not. They planted no crops, educated
no children, built no homes and saved no lives. Then again, neither did Lady Gaga. And the free market assigns compensation
not on moral merit, but on supply and demand. As long as there
are chart-topping songs, there will be chart-topping bankers. Ye
have the poor always with you, said Jesus. And the superstar rich,
Tony Keller, a former editorial page editor of The Globe and Mail, is a visiting
fellow at the mowat centre for Policy innovation.
share similar social values, multicultural societies, systems of commerce,
and industrial strengths spanning forestry, mining and energy to
automotive, aerospace and other high-tech fields. While our nations’ trade
ties go back more than a century, some say Canada could pay closer
attention to signs signalling Brazil’s interest in doing even more business.
he University of Western
Ontario’s campus in London
might be some 5,000 miles
away from São Paulo, but for Ted
Hewitt, Western’s vice president
research and international relations,
the emerging economic powerhouse
is a very good neighbour, one he
wants to keep close.
Even though Canada and Brazil’s
trade relationship predates Brazil’s
formation as a republic, Hewitt, who
has spent the past decade studying
urban development in Brazil, believes
Canada has barely begun to explore
the full potential.
While Canadian majors such as
Brookfield Asset Management,
From climate change to the economy,
the University of Toronto is asking the
most pressing questions of the day. And
thanks to the international exchange of
ideas, we’re answering them. It’s what makes
U of T #17 on the U.K.’s prestigious
Times Higher Education World University
Rankings and the #1 research university in
Canada. At U of T, we believe that talent
and ideas are borderless.
w w w. u t o r o n t o . c a
Canada’s answers to the world’s questions.
A S P E C I A L I N F O R M AT I O N F E AT U R E
Kinross Gold and monorail maker
Bombardier Transportation continue
to lead Canadian deal-making in
Brazil, and Brazilian heavyweights
like billionaire Eike Batista, who in
November 2010 made a $1.2-billion
cash offer for Vancouver-based Ventana Gold, are seeking growth in
Canada, Hewitt says, “Why aren’t
we investing in Brazil and engaging
them even more? If we don’t move
fast, we’ll miss the tide.”
Brazil is on a roll. Its highly diversified economy, now ranked number
seven worldwide, is expected to
grow between 6% and 7% next
year. Beyond the massive infrastructure developments and other impacts
linked to Brazil’s hosting of the
2014 FIFA World Cup and 2016
Summer Olympic Games, the country is actively developing everything
from natural resources to public
services. Hewitt says Brazil’s 192million-strong population and growing middle class are among its driving forces.
“In recent years, Brazil moved
more than 20 million citizens from
lower classes to middle class. These
people are buying now, and this trend
is only going to continue,” says
“It’s time for Canadians to truly
discover Brazil as a partner in trade,
investment and in co-operation,” says
Wanja Campos da Nóbrega, Brazil’s
Trade Commissioner to Canada. She
encourages Canadian businesses to
“be patient and do your homework.
Never think about Brazil in short
terms, but as a lifelong partner.”
Proponents like Hewitt and Judith
Wolfson, the University of Toronto’s
vice president university relations, see
particular opportunity in an evolving
Brazil-Canada relationship based on
“Canada and Brazil have innovation strategies that focus on science
and technology. Through research
and industry collaborations, we will
advance our knowledge economies
and see an expansion of external
trade,” says Wolfson.
A co-operative approach to this
common goal is taking shape. Since
2008, a bilateral science and technology agreement has encouraged collaboration in agriculture, biotech,
pharmaceuticals, ICT, nanotechnologies and renewable energy. Other
agreements are fostering the
exchange of grad students and PhDs.
Western and the U of T have
stepped to the forefront among Canadian schools using academic connections to bring top researchers together and spur innovation.
“The role of universities is clear.
When we work with government and
other partners to help facilitate
research, we know it will spawn
enormous activity from the bench to
By the numbers
$10 billion US
Canadian investments in Brazil in 2009
Canada’s rank among international
investors in Brazil
Estimated population of Brazil in 2010
6% to 7%
Brazil’s estimated economic growth in 2010.
industry,” says Wolfson.
Hewitt says Western’s joint health
research efforts with Brazilian
schools emphasize cardiac care, oral
health and molecular and neuroscience research into Alzheimer’s and
other neurological disorders.
Western is also working with the
State University of Campinas (Unicamp) and the Brazilian Enterprise
for Agricultural Research to advance
ways to convert biomass waste from
ethanol production into bio-oil. “We
have been working on this for several
years,” says Hewitt, noting the effort
has serious commercial potential.
Meanwhile, U of T and Brazilian
researchers are exploring energy production and chemical recovery associated with waste product disposal in
the pulp and paper industry and
transforming waste from sugar cane
into biodegradable plastics. As well,
faculty in molecular medicine are
exploring new therapeutics in cancer
treatment and pain.
For Hewitt, Wolfson and others in
Brazil and Canada’s innovation communities last summer’s announcement
of $3.7 million in joint funding for
science and technology projects
involving more than 60 companies
and universities in both countries was
The projects, which focus on fibre
optics, biodegradable plastics and
satellite technology, will explore the
Vale. There is no future
And there can be no
mining without caring
about the future.
Brazil’s rank among international
investors in Canada
$15 billion US
Brazilian investments in
Canada in 2009
Th i s re p o r t wa s produce d by R anda l lAnthony Co mmunic ations I nc. (w w w. randal lanth ony. co m) for The G lo be and Mai l. R i c hard D e acon , Nati on al B u s i n e s s D e ve lo pm ent M anage r, rde aco [email protected] bean d ma i l. co m .
A S P E C I A L I N F O R M AT I O N F E AT U R E
future of geomatics, wireless telecommunications and nanotechnology.
While the Government of Canada
is contributing a modest $975,000,
other Canadian partners are contributing $1.15 million, and the State
of São Paulo Research Foundation
and other Brazilian partners are contributing $1.56 million.
“There is no question, access to
new funding will spark interest to
explore opportunities,” says Wolfson.
Hewitt and Wolfson are convinced
the time to act is now.
“Brazil is actively seeking partnerships worldwide. Canadian universities, companies and institutions had
better think carefully if they want to
Brazilian mining giant a growing force in Canada’s economy
hen Brazilian mining
giant Vale [pronounced VALLEE]
bought Canadian nickel producer
Inco in 2006, it wasn’t just a
giant leap forward for Vale. That
investment triggered a boon in
Canadian mining, most recently
in the form of Vale’s announced
plans to invest $10 billion in its
Canadian operations over the
next several years.
The world’s second largest
mining and metals company and
Canada’s largest miner, Vale is
actively advancing major projects
in several provinces.
While the company’s foray into
Canada was complicated by a
year-long labour dispute at its
Sudbury, Ont., nickel operations,
company vice president, corporate affairs, Cory McPhee says a
new collect ive agreement and
efficiency improvements mean
Vale can proceed with confidence.
“Vale is building a long-term
sustainable future in Canada,”
says McPhee “We are investing at
Vale’s plans now include opening Sudbury’s first new nickel
mine in 40 years and bringing its
existing Sudbury facility up to
new environmental standards.
“Our Sudbury operation’s sulphur emissions are already down
90% from 1970 levels. New
upgrades will achieve a further
80% reduction and will represent
a 90% emissions reduction for
Vale operations across Canada.”
A new state-of-the-art
hydromet processing facility
being built in Long Harbour,
Nfld., is another anticipated win.
“This plant’s hydromet technology is the result of research funded, developed and proven in
Canada,” says McPhee. “The
plant will produce no emissions,
deliver a final product and have a
smaller environmental footprint
than previous operations.”
When completed, the Long
Harbour facility will process feed
from the company’s operations at
Voisey’s Bay – currently routed to
Manitoba and Ontario.
“Manitoba processing will
cease by 2015, but we are shifting our focus in Manitoba to
mining and milling,” he says,
noting Vale is exploring new ore
bodies, including its Thompson
1-D mine, which he says “could
be a billion-dollar-plus investment.”
In Saskatchewan, Vale has its
sights on a new potash project.
“When Vale looks to Canada,
we’re exploring for all sorts of
minerals,” says McPhee. “We are
committed to working with local
communities for the best possible
Now that’s digging in.
be at the beginning or if they are
going to try and elbow in two or
three years from now,” says Hewitt.
Wolfson adds, “The public has
accepted that India and China are key
targets, but it’s equally important for
us to recognize the Americas. If we
don’t think ‘north-south,’ it would be
a serious opportunity lost,” she says.
Investment a two-way street
anja Campos da Nóbrega,
Brazil’s Trade Commissioner
to Canada, says Brazil is
focused on attracting investments in
three key areas: logistical infrastructure,
(highways, railways, ports, airports and
waterways); energy infrastructure
(electricity generation and transmission,
and petroleum, natural gas and renewable fuels production, exploration and
shipping); and social and urban infrastructure, covering sanitation, housing,
subways and urban trains.
“There is a role for increased privatesector participation in some areas traditionally controlled by the state, such as
the management of ports, roads and
airports, as Brazil prepares to stage the
2014 World Cup and the 2016
Olympics,” says Nóbrega.
Raul Papaleo, president of the Brazil
Canada Chamber of Commerce in São
Paulo, says, “These are major opportunities and there is money to support
In the e nergy realm, he says developing Brazil’s deep offshore oil and gas
reserves is expected to require $48 billion in initial investment. “Sixty per cent
of the investment in related infrastructure will come from outside Brazil.”
Onshore, he says retail and distribution is another growth area. “We have
pharmacies, cosmetic shops, but a store
that offers everything like Shoppers
Drug Mart does not yet exist in Brazil.”
Sounds like opportunities that Canadians would do well to shop.
To learn more, visit www.brazcan.org.
Global problems need research
teams with just the right chemistry.
At The University of Western Ontario we have the right mix, partnering with Brazilian
scholars on more research projects than any other university in Canada.
Take Western neuroscientists Vania and Marco Prado - they’re working with researchers
in their native Brazil at the Federal University of Rio de Janeiro and the A.C. Camargo
Hospital to answer fundamental questions about how neurons communicate.
Their research will help develop novel treatments for Alzheimer’s and other
The Prados say international colaboração (collaboration) is critical in moving closer to
discoveries that will help people around the world live healthier lives.
Can your investments make
stellar returns in challenging
Sprott Funds can.
Sprott Hedge Fund L.P.
S&P 500 (CAD)
in the Fund in the year 2000,
would be worth $831,066 today.
We talked to 11 legendary
money-makers for advice
on how to thrive in the face
of widespread uncertainty; followed the
ups and downs of a brand-new Canadian hedge fund; went undercover in a
notorious tax haven; and investigated
everything from condos in Budapest to
vintage comic books to give you the best
ways to cover your assets this year—
and maybe even come out ahead
BY DAVID BERMAN, DAWN CALLEJA,
JOHN DALY, DEREK DECLOET, JOHN HEINZL,
DAVE MORRIS, JUDITH PEREIRA,
DOUG STEINER AND SHIRLEY WON
photographs by Sean Sprague
To learn more about our funds please call your investment advisor,
contact us at 1-866-299-9906 or visit our website www.sprott.com.
Inception date: November 7, 2000. All returns are based on Class A units, net of fees, annualized
if period is greater than one year, and as at November 30, 2010. Please note that Sprott Hedge
Fund L.P. is closed to new investments. Sprott Hedge Fund L.P. II which has the same investment
philosophy and management team is open to investments. Accredited investors only. Sprott
Hedge Funds are offered on a private placement basis pursuant to an offering memorandum
and are only available to investors who meet certain eligibility or minimum purchase amount
requirements under applicable securities legislation. The offering memorandum contains
important information about the Funds, including their investment objective and strategies,
purchase options, applicable management fees, performance fees, other charges and expenses,
and should be read carefully before investing.
febrUArY 2011 REPORT ON BUSINESS 25
You have a hunch the
jellybean market is
about to tank. You
borrow 10 jellybeans
from your broker
(at an interest rate
of two beans) and
sell them for $100
Sure enough, there’s
a jellybean glut, and
the price drops by
50%. You buy
You use your newly
acquired jellybeans to
repay your broker the
10 you owe him, plus
two beans in interest.
Your net gain: $40
The real problem for baby boomers is that they
haven’t put enough money into equities, and
equities are growing at a pretty fast rate, particularly
in emerging markets. We see great opportunities in two
areas: commodities and consumer-oriented companies,
including consumer banks. Consumer prices are moving
up in Asia generally. They’re able to afford a lot more. In
addition to that: mining companies and oil companies. The
demand for automobiles, transport and power means that
companies that are producing, storing and refining
oil and coal will do very well.”
executive chairman of the templeton emerging Market group and lead manager
of funds with more than $40 billion (U.S.) in assets under management
Chairman and CEO, Jarislowsky Fraser
sharply, and then for a long time did nothing. Abbott Laboratories went up year after year, and increased
the dividend. United Airlines went up and down like a roller coaster, and I finally sold it when a merger
was announced. ¶ WORST INVESTMENT Buying International Asbestos in 1953, which went broke after no one
wanted asbestos any more. It was really a promotion on the Montreal Stock Exchange. It was as bad as anything. ¶ BIGGEST OPPORTUNITY NOW I would buy something with a good yield, that raises the dividend every year, has excellent
management and is a leader in a stable industry, which operates all over the world. A stock like a tobacco stock or a liquor
stock or McDonald’s or Procter & Gamble—something like that. ¶ WHAT KEEPS ME AWAKE AT NIGHT The fact that I’m getting
older. I’m 85. Only about 7% or 8% of those in World War II are still alive. I’m one of the lucky ones. ¶ ADVICE FOR INVESTORS For
old investors, don’t take any risks. If they lose the money, they can never earn it again. I don’t believe in taking undue risks.
You can do that when you’re young and have a long career of earning money ahead of you, but not once you get into your
late 50s. And for young investors, don’t buy commodity stocks. I think commodity stocks are in a bubble. ¶ BIGGEST BUBBLE
Gold, obviously. I don’t know if you can call gold a commodity, because it isn’t. It’s nothing. It doesn’t have any particular
application. And when I see that everybody is investing in gold through exchange-traded funds and derivatives and God
knows what, it scares the hell out of me. It really is not a proxy for money. I dare anyone to go into a grocery store with an
ounce of gold in his hot little fist. ¶ HOW I WOULD INVEST A $100,000 WINDFALL I would buy a nice piece of art. If you really know
something about art, you make more money with it than with many other things. I would go for Canadian art, since I live in
Canada. I would look for a young artist with a really great gift, and make sure I have a trained eye. When I was younger, in the
1950s and 1960s, I bought paintings for $300 which are probably worth $150,000 now. I still own them.
26 febrUArY 2011 REPORT ON BUSINESS
the Black-Scholes formula was first articulated
by Fischer Black and Myron Scholes in 1973
(and is credited with aggravating the crash of
1987). What is the formula used to calculate?
Prices of options on securities
Excess return, or risk premium,
on an investment or trading strategy
Value of non-compete payments
to a CEO who has recently sold his
or her company
of a stock relative to a company’s
expected growth rate
FIRST INVESTMENT It was in stocks, when I was in business school after the war. Reynolds Metals went up very
prognoStiCAte like A pro
While most economists try to predict where the economy’s headed
based on housing starts and oeCD reports, others put their faith in everything
from baked-bean sales to the length of women’s skirts.
Many economists believe trends only become apparent right before
they end. Arguably the most famous example is the BusinessWeek
cover from Aug. 13, 1979—“the death of equities: how inflation is
destroying the stock market”—right before a record-breaking bull
market that lasted until the late 1980s.
BIG MAC SALES
The Economist’s Big Mac index compares the price of McDonald’s
signature burger in numerous countries. the index purports to show
how a strong currency like the British pound, for example, has more
purchasing power than the Canadian dollar.
no less an authority than former Fed chairman Alan greenspan
tracked the sales of men’s briefs, theorizing that the first thing men
avoid replacing in tough times is their underwear. greenspan also
helped enable the worst financial crisis since the great Depression,
so take this one with a grain of salt.
febrUArY 2011 REPORT ON BUSINESS 27
MOnEY in reAl
the secret: Buy rental properties. the website global property guide calculates residential rental yields—
the gross amount of rental income you can expect to make each year as a percentage of purchase price—in cities
worldwide, and determines the best places to buy by taking into account other metrics like affordability,
taxes, landlord-tenant laws and political stability. here are eight top picks.
panama is hot, thanks to low taxes, a mild climate
and zero hurricanes. A $5.25-billion expansion of the
panama Canal will double capacity. Even the Donald
is building a 70-storey trump Ocean Club here
the market could
del Mar or San
the capital of this former Yugoslav republic has been
inhabited since 4000 BC and is dotted with ancient
aqueducts, mosques and fortresses. Macedonia’s no.
1 priority is getting a spot in the European Union—
greece has been blocking its entry since 2005
can only buy
Bogotá isn’t the same place it was in the 1980s and
’90s, when drug cartels and paramilitaries terrorized
the capital. the murder rate is now lower than in
Washington, D.C., and the city has become a popular
earned by nonresidents is taxed
at a rate of 33%
like la Chico,
Santa Barbara or
the Country Club
Budapest attracts 2.3 million tourists every year.
it’s been hard hit by the recession, and house prices
are sinking—especially on larger apartments, which
actually offer higher yields than small ones
approval to buy
districts 5 or
6, close to the
District 8, a.k.a.
Montevideo has a bit of everything: art-deco
architecture, beach communities à la Miami, and
a historic centre (it was founded in 1726) that’s
being restored with chic cafés, hostels and galleries.
thanks to its strict banking secrecy laws, Uruguay is
known as “the Switzerland of South America”
costs are fairly
of the price of the
kl is becoming a major business hub—and a
destination in its own right—thanks to strong
manufacturing and natural resource sectors. the
kl airport will soon be able to handle an additional
30 million passengers a year, and the economy is
steadily coming back to life after the ’08 crash
approval can take
Jordan may not be flush with cash like its oil-rich
neighbours, but it has something foreign investors
crave: peace and stability. Western-educated king
Abdullah ii has liberalized the state-controlled
economy, and the export sector is growing fast
by israel, Syria,
iraq and Egypt
the elitist Jabal
Jabal Weibdeh or
fringe, home to
lima is an idyllic spot to spend the winter months;
each year, millions of tourists come here to take in
the magnificent incan city of Machu picchu, the eerie
desert drawings of nazca, and the world’s highest
navigable lake, lake titicaca
the upper hand;
take a long time
Miraflores or San
isidro, or partycentral Barranco
Victoria and the
port of Callao
You’re an investor
looking for a steady
income. You buy
a bag of what
you think is bluechip debt—loans
to people who’ll
actually pay them
28 febrUArY 2011 REPORT ON BUSINESS
bank knows that a
percentage of its
lendees will default.
it mixes those bad
debts (the orange
ones) into a bag
with blue-chip debt
and sells it for a
Founder of i.A. Michael investment Counsel ltd.
CrEDit CArD SECUritizAtiOn
As expected, some
of the lendees are
don’t pay their bills.
But because the bank
has sold off the debt,
the investors lose
out, not the bank.
HOW I WOULD INVEST A $100,000 WINDFALL We think both the Canadian
stock market and the economy will saw-tooth their way upwards. Given
that, we want to buy deep-value stocks—they should pay a dividend
and trade below or slightly above book value. I would buy five Canadian
common stocks, and put 20% each in Canam Group, Daylight Energy,
Equitable Group, Genworth MI Canada and WestJet. I want common stock with yields
that are at or better than what I can get in money markets like T-bills, but with good
capital-gain potential. ¶ BEST INVESTMENT Fortress Paper—it’s a supplier of Euro banknotes, passports and non-woven wallpaper. I bought it in June, 2007, at $8 a share...and
it recently hit a peak of over $48. ¶ WHAT KEEPS ME AWAKE AT NIGHT When managing
mutual funds, people have the right to take their money back at virtually a moment’s
notice. But you are trying to make long-term decisions . ...That is the greatest fear of
most portfolio managers—particularly for us, because we are deep-value investors. We
are very contrarian and we buy stocks that people do not like. ¶ ADVICE FOR INVESTORS
Patience, patience, patience. If you are going to find and analyze stocks that are fundamentally attractive, don’t give up after only one month. We were wrong for over a year
on Fortress Paper, our biggest win of all time. If you don’t have the patience and can’t
sleep at night, put money in T-bills or go to the bank. Investing is not for everyone.
Connect the pundit to his prediction
have learned nothing
recovery in the
U.S.” in 2011
“What will 2011
“The U.S. real estate
market, for sure,
is double dipping”
Answer: 1-b, 2-d, 3-a, 4-c
•Average purchase price per square metre ($U.S.)
febrUArY 2011 REPORT ON BUSINESS 29
The Intelligent Investor
(1949) Benjamin graham
Warren Buffett (Graham’s
student) calls this “by far the
best book on investing ever
Who climbed the highest and fell the farthest in 2010
One Up on Wall Street
(1989) peter lynch
The legendary manager tells
you how to spot “10-baggers”
Stocks for the Long Run
(1994) Jeremy Siegel
Siegel’s book builds a
compelling case that stocks
have had the best returns over
long—like, really long—periods
Delusions and the Madness
(1841) Charles Mackay
The South Sea Bubble, tulip
mania, witch hunts—the guide
to irrational mass behaviour,
investing and otherwise
president and chief investment officer of Sionna investment Managers,
which manages more than $2.8 billion
HOW I WOULD INVEST A $100,000 WINDFALL I love giving 500-year-old investment advice from a German banker
called Jacob Fugger the Rich: Keep one-quarter each in stocks, bonds, real estate and gold coins. Gold coins
were the currency of his day. In modern-day terms, he’s talking about T-bills. What he’s telling you is to
dynamically rebalance—sell asset-mix winners and buy asset-mix losers. All sorts of studies show the more
you dynamically rebalance, the better your long-term returns. It sounds easy, but it’s incredibly difficult to do.
¶ BIGGEST OPPORTUNITY NOW I’m a bottom-up Canadian stock picker. I find it fascinating that a large number of the cheapest
stocks in my model are oil and gas stocks—even what I would call the grand dame of Canadian oil and gas integrateds: Imperial Oil. ¶ BEST INVESTMENT Seth Klarman’s 1991 book on asset allocation, Margin of Safety. I bought it when it was published in
Canada for $26.95. It’s been selling on eBay for more than $1,300. He owns the copyright and won’t allow it to be republished.
It’s been stolen out of every library it’s ever been in. ¶ WORST INVESTMENT It’s a toss-up—there are so many. Believing the CFO
at Royal Trust that everybody misunderstood the stock. I bought it at $5 and sold it at $3. I consider that a big win, actually.
Laidlaw—I bought it at $4 and sold it at $1. I’m a value investor. You buy them when they’re cheap and sell them when they’re
cheaper, sometimes. ¶ WHAT KEEPS ME AWAKE AT NIGHT I sleep well, actually. What I am concerned about, however, is the new
mania for what is essentially tactical asset allocation and passive management. I call it dumb money. More than half of trading now is due to index futures and index ETFs. There are fewer people differentiating between quality and junk, so stock
prices are becoming less and less anchored by reality. ¶ ADVICE FOR INVESTORS If you’ve bought cheaply, and you’re patient,
you will create wealth in the long run, especially if the stock has an income component.
30 febrUArY 2011 REPORT ON BUSINESS
VW is aiming to be the world’s
biggest, and most profitable, car
company by 2018. it’s getting there
smokes with english
brand names like
and lucky Strike
The Single Best Investment
(2006) lowell Miller
Miller’s book is a guide to
ignoring daily market gyrations
to focus on building a dividend
A Random Walk
Down Wall Street
(1973) Burton Malkiel
A pioneer of index investing,
Malkiel explains why you
should be the market and stop
trying to beat the market
Selling pumps to oil and mining companies
may not be sexy, but it sure is profitable
All sorts of booming industries
outside the U.S. need engines, filtering
systems and electrical generators
(oil and gas)
how can shares of an iphone and ipad
assembler decline? Sweatshop allegations
and 13 worker suicides don’t help
Asian demand for coal and a U.S.
takeover bid are a recipe for gains.
Alternative energy in Quebec is not
Weir Group PLC
A casualty of the 1990s, resona hopes
to repay government loans by 2015.
recovery is just around the corner
* (Source: Bloomberg, total returns from Jan. 1, 2010, to Dec. 15, 2010)
the graph shows a stock whose 50-day moving
average breaks below its 100-day moving average.
What is this phenomenon called?
When I was 25, I invested a year in
interviewing portfolio managers and
reading every investment book I could get my
hands on. That year led me to the investment
approach I have been following ever since,
and also resulted in me meeting my business
partner, Geoff MacDonald. We have worked
together ever since. My advice for regular
investors: Get a good adviser. And try to live in
a very narrow emotional band when it comes
to investing. I’ve noticed that investors with
this skill have a better ability to stay focused
on the facts, which in turn has allowed them
to make better investment decisions.
Co-Ceo of edgepoint investment group
READ THESE BOOKS
BEFORE YOU INVEST A CENT
febrUArY 2011 REPORT ON BUSINESS 31
pUt A priCe on A one-oF-AkinD tUrnkeY BUSineSS
An ad that appeared last fall in a U.S.
vintage-car magazine offered the evel knievel
Museum in niagara Falls, ontario,
for sale at a “sacrifice” price of $1.4 million.
Bay Street maven (and car enthusiast)
Doug Steiner hit the honeymoon Capital
to inspect the assets
1. Revenue/Earnings multiples
Cash flow is a red flag: owner Mark
DeMarco says he only gets about 40
visitors a day at between $5 and $7 each—
and that’s during the summer season.
Assuming a revenue multiple of two times
annual admission proceeds, the museum is
generously worth $200,000.
2. Celebrity cachet/Unique
DeMarco has the rocket-powered Skycycle
X-2 that knievel used in his failed attempt to
jump the Snake river Canyon in 1974, plus
lots of other major knievel memorabilia.
After knievel died in 2007, DeMarco tried to
flog the dented X-2 for $5 million on eBay.
no takers. guesstimate of the bike’s value
to a motivated collector: $500,000.
Co-founder of the Saxon family of mutual funds and recently
retired chief investment officer of Mackenzie investments
HOW I WOULD INVEST A $100,000 WINDFALL It’s
32 febrUArY 2011 REPORT ON BUSINESS
tough to think of a
developed country that’s better than Canada, so I’d keep 75%
of it here. I think interest rates are going to trend up, so I don’t
want to own any plain-vanilla bonds. I’m going to own mainly
Canadian equities, and I’m a one-trick pony: For 25 years I’ve
said small cap, small cap. ...There are 400-odd companies in the BMO Small
Cap Index, and about a quarter of them still trade at or below book value. The
other 25% of the money, I would probably put in global big-cap stocks that have
reasonably good dividend yields: Colgate-Palmolive, PepsiCo and Johnson &
Johnson. Then I’d forget about things for five years—that’s the hard part for
most people. ¶ WHAT KEEPS ME AWAKE AT NIGHT A replay for us of 10 years of
Japanese no-progress—a bit of growth, a bit of inflation, and then it falls back.
Stocks will seem cheap at the beginning, and then you look back after 10 years
and they’re still cheap. ¶ WORST INVESTMENT We’ve had a fair number go to zero,
because that happens in the small-cap sector. But I’ll give you a couple of examples of cash-rich technology companies, because they’re very, very tempting.
One was Concord Camera, which made disposable cameras. This was six or
seven years ago. But soon every damn cellphone had a camera in it that took
four or five megapixels. Another company was Handleman, which essentially
ran the CD department in Walmart. Again, think back five or six years—people
were beginning to download, but we thought it would take a long time to catch
on. That’s the thing about technology: Usually somebody doesn’t come up with
a better mousetrap; they come up with a completely different way of achieving
the same thing.
3. Market timing
knievel’s popularity slumped after the
jump, and plummeted after he was jailed
for attacking his biographer with a baseball
bat in 1977. Most under-25s have never
heard of him. plus, last year, DeMarco lost
the right to use the name “evel knievel
Museum” to a las Vegas company.
the museum is in the old downtown of
niagara Falls—a big fat rocket-powered
motorcycle jump north of the Falls
themselves and the city’s new hotels,
casinos and attractions. As a buyer, factor in
a move to a location closer to the Falls.
5. The whole and the parts
the front half of the building is a
pawnshop, which would have to be valued
separately. As for the “museum,” only about
half the exhibits relate to knievel. the
rest are a bizarre—though fascinating—
collection of odds and ends, including nazi
memorabilia, one of elvis’s guitars, Japanese
erotic sculptures, Titanic keepsakes,
shrunken heads, a shoe from the world’s
tallest woman and more.
THE BOTTOM LINE: Do the bust-up
takeover—you could be sitting on a
gold mine. But you’d have to catalogue
thousands of items, and offer them
separately on eBay and collectors’
websites. And it would take experts
in each of more than a dozen types of
collectibles to price the goods.
Co-chief investment officer at Front Street Capital
WORST INVESTMENT I was 15 years old when I purchased silver bullion in
1979. My Grade 12 economics teacher told my cousin and I that silver was
going to go to $100 (U.S.) an ounce. I believed him. I bought 10 ounces
at $32 an ounce, watched it go to $50, and then sold in the early part of
1980 at $12 an ounce. ¶ HOW I WOULD INVEST A $100,000 WINDFALL I would
put 50% in energy, and invest in oil [with companies like Bankers Petroleum and Crew
Energy] and some energy service stocks. Economic forces originating out of Asia and
Latin America are creating lots of pressure in the basic materials world, so the other
50% would be in copper, nickel, zinc and metallurgical coal. I like base-metals producer
Lundin Mining and Capstone Mining, a pure copper play. ¶ ADVICE FOR INVESTORS Expect
more volatility over the next 10 years. Stick to your game plan driven by your age, needs
or wealth. In bullish times, you have to tone down your euphoria. In times like today,
you have to tone down the fear. You need to be patient and to have a long-term horizon
to be a successful investor.
febrUArY 2011 REPORT ON BUSINESS 33
What financial services industry jobs did the protagonists of these films hold?
Bonfire of the Vanities
louis winthorpe iii
investment bank VP
Answer: 1-c, 2-e, 3-b, 4-a, 5-d
MoneY BUYing COOl
We talked to four experts about how to invest without buying stocks or bonds
Estimated price of a mint-condition
1851 12-pence Canadian stamp
if you put $1,000 into
an investment that
pays out 9% interest
how much would
your investment be
worth in 15 years?
What is the formula
used to calculate
Answer: b) Bonus: p(1 + r)15
34 febrUArY 2011 REPORT ON BUSINESS
Vice-president of goodman & Co. investment Counsel
and chief strategist for Dynamic Funds
We are probably in a very
sweet spot for equities. So I would certainly have 60% in equities, and
40% in fixed income-type investments like preferred shares or shortterm bonds. I would put 20% in U.S. growth stocks like UPS, Schlumberger, Procter & Gamble, Joy Manufacturing or Apple. Another
20% would go into stocks in emerging markets like India, China and Brazil. And the
rest would be in Canada, where I would focus on commodities. In energy, we like
Athabasca Oil Sands, Canadian Natural Resources, Niko Resources, and Petrobank
Energy and Resources. In agriculture names, we like Agrium and Potash Corp. In
metals, we like Teck Resources, while Sino-Forest gives you direct participation in
China in the forestry area. We also like uranium names like Paladin Energy and Cameco. In gold, we like Osisko Mining and Barrick Gold. ¶ BEST INVESTMENT In the last
three years, it has to be Pacific Rubiales Energy. It’s an emerging energy company in
Colombia with an $8-billion (U.S.) market cap. It was a 20-bagger for us. ¶ WORST
INVESTMENT Katanga Mining has a big copper-cobalt deposit in the Congo, but the
stock got torpedoed by poor management. We made some money, but we should
have sold all the stock. It basically became a penny stock, going from $26 a share to
less than $1. It was a huge disappointment. ¶ WHAT KEEPS ME AWAKE AT NIGHT Losing
opportunities is what bothers me. More recently, the consumer discretionary sector
in the United States has done very, very well. But I missed out on that. ¶ ADVICE FOR
INVESTORS The one area that I would avoid now is long-term bonds ...If you look at
the performance of the markets in the last six months, we are beginning to see the
rewards that the equity markets are showing. So be less risk-averse, and certainly
start thinking about high-quality growth companies, because I think the environment for them has improved dramatically.
HOW I WOULD INVEST A $100,000 WINDFALL
“Stamps can be tricky, but if you know
what you’re doing and buy right, you can
make money. The strongest momentum is
in exceptional-quality to superb stamps.
Classics are better than modern, usually. The
1897 Jubilee issue has always been popular
with collectors. A mint Jubilee can reach
$10,000. The 12-pence is the one everyone
wants—there are fewer than 100 known
mint stamps. We haven’t had one for many
years—can’t wait to get another one.”
Tony Maresch, co-owner of toronto-based
Maresch and Son Auctions, which has been
dealing in stamps since 1924
Estimated price of a 1969 Z28 Camaro
“Muscle cars hit a peak in late 2007. Some of
them are down 50% or 75%. In 2007, a 1969
Z28 Camaro was $160,000; now it’s $70,000.
Some of the family-styled Maseratis from the
’60s, like the 3500, are good investments. At the
top end, I recently sold a Ferrari 220 GTO for
$20 million. It’s probably a great investment
because there are only 19 of them. I just
acquired a Delahaye for $4 million, and a few
years down the road it’ll be worth $10 million.
There are great returns on all segments, but
you have to know what you’re doing.”
Rob Myers, founder of classic-car auctioneer
rM Auctions, near Chatham, Ontario
Current price of a bottle of Latour 1996
“The best investments are the classedgrowth wines of Bordeaux, particularly
first-growths (Lafite Rothschild, Latour,
Margaux, Mouton Rothschild and Haut
Brion) from great vintages. The 1996 Latour
saw an upward move from around its 10th
birthday to 2008, then fell back. Our model
suggests it is at a low price relative to its
peers. Also, the Haut Brion 1990 ($9,600)
has underperformed the recovery of the last
two years but is recognized to be an excellent
wine, and the Palmer 2004 ($1,570), whose
quality exceeds its third-growth status.”
William Grey, investment manager of the
london-based Wine investment Fund
Estimated price of mint-condition
DC Comics Showcase #22, 1959—the
first appearance of the Silver Age
Green Lantern, hal Jordan
“Generally, the [Golden Age] Spider-Mans,
Batmans and Supermans—those have
always been good value, and in the last
five years we’ve seen the key books for
those titles double or sometimes triple in
value. There’ve been a lot of collectors who
have been handsomely rewarded, but it’s
usually been based on love of the medium
and building a certain amount of expertise.
Speculation is a dangerous thing.”
Ed Jaster, senior Vp of heritage Auction
galleries in texas
You have $20,
enough to buy 20
jellybeans at $1
each. You think the
price is going to
go up, and want
to borrow money
from your broker to
buy more. But there
is a 50% margin
the broker can lend
you is $10.
can carry is
of the new
value of all
30 of your
You now face a margin
call for $2.50—you have
to repay that much of
your original loan. But
you don’t have enough
cash, so you have to sell
five beans. You decide
to sell 15 beans to pay
off the rest of your loan,
leaving you with 10,
which are worth just $5.
if a lot of margin clients
keep selling, the jellybean
market will keep tanking.
febrUArY 2011 REPORT ON BUSINESS 35
Match the legendary investor
to his signature accessory.
1) Peter munk
2) mark Zuckerberg
3) warren Buffett
4) george soros
5) Bill miller
e) tortoiseshell glasses
Answer: 1-d, 2-c, 3-a, 4-e, 5-b
Chief investment officer of Sprott Asset Management
36 febrUArY 2011 REPORT ON BUSINESS
HOW I WOULD INVEST A $100,000 WINDFALL I
would probably put 80% in precious metals, 10% in energy, and another 10% in agriculture, as well as special situations stocks. In the precious metals area, I would put at least 60%
into something oriented toward silver. I think silver will appreciate on a
percentage basis way more than gold over the next decade and trade back
down to a gold-to-silver ratio of 16:1, where it has historically been. It’s something like 48:1
now. In the energy sector, I’d own some oil and gas and uranium stocks, while in agriculture, it would be potash and phosphate. ¶ BEST INVESTMENT Our best investment was realizing in 2000 that precious metals would become the investment of the decade. ¶ WHAT KEEPS
ME AWAKE AT NIGHT My biggest fear would be that all of a sudden you wake up and the whole
financial system just collapses. Go back to September, 2008, when we were within hours
of collapsing, or go back to eight months ago when Europe was about to collapse. ¶ ADVICE
FOR INVESTORS They should be in fear of the whole financial system collapsing, and figure
out how they are going to survive in a worst-case scenario. Invest accordingly. That is why
we have always thought that gold and silver were the pre-eminent places to be. They will
always hold their value on a relative basis because they are accepted by people as money…I
don’t think we could call a stock or bond a store of value.
Pick some first-rate
with whom you feel comfortable because you have
done your homework on
them. Then stick with them.
The mantra is patience,
patience and more
patience. Think long-term
and remember that the big
rewards accrue with compound annual rates
Mackenzie Cundill investment
Chief investment officer of Signature global Advisors
and Morningstar’s fund manager of the decade
BEST INVESTMENT When the global equity markets stank back
in 2000, we made some absolute home runs in gas and some
of the coal stocks on the market at the time, like Massey
Energy and Arch Coal. ¶ WORST INVESTMENT We owned some
shares in Laidlaw in the late 1990s, and they went to zero.
It was a value trap. ¶ BIGGEST OPPORTUNITY NOW U.S. manufacturing is a big
opportunity if you think about the U.S. dollar coming down, labour costs
being crunched, and the low-price natural gas environment. We like W.W.
Grainger, an industrial supply company, Dow Chemical and Parker Hannifin. ¶ WHAT KEEPS ME AWAKE AT NIGHT Investors are excited about commodities because of the level of economic growth in developing economies. But
they are on a collision course because their own success will fuel higher
commodity prices, and higher prices will damage their potential to grow.
What this means is that commodity prices, not interest rates, will serve as
the global growth brake in the next two years or so. ¶ ADVICE FOR INVESTORS
Own cash and equities. The very credit-worthiness of countries is fully in
question, and that is a backdrop that modern market investors have never
had to consider . …That means safe havens pose risk as well. What do you
do? It may be that the safe havens are in the places where you don’t expect
them to be—stocks as opposed to government bonds. ¶ HOW I WOULD INVEST
A $100,000 WINDFALL I would put it into our energy fund.
febrUArY 2011 REPORT ON BUSINESS 37
Keeping Up With
Starting a hedge fund, according
to the great Alfred Winslow Jones,
was once just a matter of long and
short. Today, two Bay Streeters
discover, it’s more about many
(competitors) and few (investors).
May the best spiel win
by Boyd Erman
we’re not at the
banks any more:
mike macbain (left)
and John schumacher
contend with an
at their new hedge
fund, east coast
38 FEBRUARY 2011 REPORT ON BUSINESS
wardrobe courtesy harry rosen
hair: anita cane using tresemmé haircare
With only a couple days to go in East
Coast Fund Management Inc.’s push
to raise cash for its first hedge fund,
Mike MacBain was set to run out the
door of his Toronto office to meet potential investors. It was big game he was after:
MacBain and East Coast co-founder John
Schumacher want to play in the top levels of
the Canadian hedge-fund industry, with an
end goal of $500 million for their first offering. The minimum investment is $250,000.
But MacBain realized he had a small problem on that day last June. Or, rather, a series
of problems, and they weren’t that small.
No pitch books had been printed out so
that investors could see how the fund works.
Likewise with the documents that would need
signing if anyone wanted to write a cheque.
The firm didn’t even have letterhead.
“I took a deep breath, printed out the copy,
everything is fine, I still have time, went
to staple it—and there were no staples in
the stapler,” says MacBain. “Not only that,
photographs by Andy Ferreira
FEBRUARY 2011 REPORT ON BUSINESS 39
nobody else was in the office, and I couldn’t find any
staples. I had a bit of a moment there, where I had
to come down and think about, holy Christ, how the
mighty fall. I can’t even find a freaking staple to staple
a pitch book together.”
Critical Lesson No. 1 of starting your own fund: You
are your own support staff.
The question of staple supply lines never crossed
MacBain’s mind when he was president of TD Securities. Nor did a printer jam threaten to ruin a deal for
his partner, John Schumacher, the former co-head of
When they launched their first fund last April, the
two boasted a combined 50 years in Canada’s banking industry, where both had reached the uppermost
echelons of the Bay Street elite. They left behind all
the infrastructure support of a big bank—and a milieu
where guys of their stature could take in millions a
year in bonuses.
But the allure was obvious: Everyone knows that
the hedge fund life is a level of luxe straight out of Hollywood, complete with Cristal and fine art and Lamborghinis. It’s the scene that made billionaires out of
fund managers like George Soros and John Paulson.
Critical Lesson No. 2 of starting your own fund:
This is Toronto, not Wall Street. There’s not much
investor money, there are not many big funds, and
there are not many big stars.
MacBain and Schumacher are out to change that.
At least, as soon as MacBain can find a staple.
here are an estimated 100,000 people around
the world already doing what MacBain and
Schumacher have embarked on. The industry, whose centre is New York and environs, boasts
total assets of about $1.9 trillion.
The ideal hedge fund finds steady, solid returns
that aren’t correlated to the markets: The fund makes
money no matter whether stocks and bonds are going
up or down. The idea is to make better returns than
the rest of the Street when financial markets are rising, and, at the very least, to lose less when they are
The man behind the first hedge fund, Alfred Winslow Jones, called his 1949 creation a hedged fund,
reflecting his belief in buying some stocks and selling others short. “Hedging, that is, the taking of both
long and short positions, makes our fund more stable
and conservative than the ordinary forms of common stock investment,” he wrote in 1961. Jones also
believed in using borrowed money, or leverage, but
held to the idea that hedging ensured that using a little leverage wasn’t risky.
The industry was slow to take off. By the late 1960s,
only about 200 funds were in business; there was
plenty of money to be made just buying and holding
financial assets, so there wasn’t much need to hedge.
By the 1980s, the number of hedge funds had dwindled to fewer than 70.
Then came the 1990s. Plunges in the market, including the tech wreck, made buying and holding a lot less
attractive. Investors wanted alternative strategies,
and maybe a little sexiness. Star managers like Soros
40 FEBRUARY 2011 REPORT ON BUSINESS
and Julian Robertson made headlines for big performance.
By the end of 2009, there were more than 9,000 funds, even
after a cull of about 1,000 during the financial crisis. As the sector
boomed, a thousand strategies bloomed, diluting Jones’s definition of hedge fund.
Today, one of the few characteristics that hedge funds still
share is that they are relatively lightly regulated, and are generally only sold to investors under exemptions from securities
rules that govern stock and bond offerings. The thinking is that
high-net-worth investors and institutions such as pension funds
are sophisticated enough to do their own due diligence—or, at
least, they’re rich enough to handle the losses if things go south.
Another remaining common trait of hedge funds is a fee structure that would make investors in most mutual funds blanch.
There’s an annual management fee, traditionally 2% of assets,
just like in a mutual fund. But the manager also takes a big cut of
any gains, usually 20%.
Beyond that, “hedge fund” can mean almost anything. Some
funds invest in stocks, buying some and betting against others in
a Jones-style strategy known as long-short equity. Others focus
on bonds, as East Coast is doing in its first fund, capitalizing on
the partners’ backgrounds in the fixed-income business.
Some funds try to profit from the spread between the acquisition price of a takeover target and its market price, a business
known as arbitrage. Others sniff around the distressed asset jungle, looking for underpriced stocks and bonds that will rebound
if the company that issued them can be turned around.
Still other funds play in the commodity world, betting on
movements in natural gas or gold or cocoa or exotic minerals,
or try to make the right calls on global economic and financial
trends, a strategy dubbed “global macro.”
When a hedge fund fails spectacularly enough to make the
news, it usually stems from the toxic combination of lots of leverage and little or no hedging.
That’s what happened to Amaranth Advisors, a huge U.S. fund
with a Canadian connection. The fund, with an energy trading
side run by Calgary-based Brian Hunter, made a giant bet that
gas prices would rise in winter months and fall in non-winter
months. It used more than five times leverage. When the bet
on winter prices suddenly went wrong in 2006, Amaranth was
forced to liquidate.
In part because of their propensity for such large positions
(Amaranth at times was said to control more than half of the
American natural gas market), hedge funds are also viewed by
some as a destabilizing force in markets. Regulators around the
globe are tightening rules on the sector in the wake of the financial meltdown.
But the vast majority never crash because they play it safe.
Only about 5% of all funds are of the high-risk, big-bet, big-leverage variety.
acBain and Schumacher plan to be among that happy
majority. They are hedging their bets, and they are
not shooting for the stars. East Coast aims for a return
of 8% to 12%, with a goal of building the portfolio to keep potential losses to only about half that even in the most severe market
event. They plan to invest in investment-grade bonds, the highest-quality corporate debt, and to trade other assets like equity
options and gold to hedge out the risks that bonds face, such as
inflation and interest-rate movements.
Even for a fund marketed as low risk, early 2010—when debt
shock waves rolled across Europe—was not an ideal moment
to debut. “Our timing really sucked,” Schumacher says. “We
launched in April with just Mike’s and my money, and then May
happened, with sovereign debt and the world going to hell in a
As countries like Greece, Spain and Portugal took on an insolvent hue, investors began to bail out of government bonds. Bonds
on the whole had been a hot asset class. Now they suddenly went
That wasn’t the only problem. MacBain and Schumacher
hadn’t foreseen that even after the financial crisis abated, the
bankers and traders who should have been key customers of
East Coast wouldn’t have much cash. Sure, they still got
big bonuses. But around the time that East Coast was
launching, banks were starting to pay employees mostly
in stock. By the time bankers paid for cars, school fees,
club memberships and the like, there wasn’t always much
left from the new, smaller cash payouts for investing.
This quandary illustrated Critical Lesson No. 3 of
starting your own fund: You are now in Sales. But
MacBain and Schumacher are soft-spoken and cerebral,
even shy; there’s no Glengarry Glen Ross in them. “John
doesn’t want to talk to a single client,” says Barry Allan,
a hedge fund manager who is advising East Coast. “He
wants to sit in his kitchen and trade.”
“It’s very important to trade well and perform, but as
we get to understand the business more, it is very clear
that the business is raising money, and it never stops,”
Raising money means changing out of the jeans or
cargo pants that pass for office wear at East Coast, and
getting out and glad-handing. It means telling a good
story about how you’re going to bring in steady returns,
with less volatility than the rest of the market.
To prove you can do it and that your system works,
you need a track record. That means running your own
money for months to get some numbers you can stick in
your pitch book. There has to be a compelling spiel about
how the fund has a strategy and a system that works in all
markets. You need references. You need a story.
“You can’t actually just say, ‘I’m a good instinctive
trader, and I’m going to hire some really trustworthy
people, and you can count on the fact that we won’t lose
your money,’ ” Schumacher laments. “That isn’t sufficient. But you know what? That’s all you need to know.”
MacBain knows he’s not a born salesman. “I don’t
want to be a pain in the ass,” he says. “If they don’t want
to invest, they don’t want to invest. That’s fine. It’s their
money. We need to hire some people who don’t have that
reflex mechanism to actually care whether they’re bugging people.”
otwithstanding their awful timing and reluctant salesmanship, MacBain and Schumacher
got off to a pretty good start last spring.
It didn’t hurt that the reference page of their pitch book lists
three current and former bank CEOs, along with Onex Corp.
founder Gerry Schwartz.
The partners set a short-term goal of $100 million for their initial fund. They hit it by midsummer. That made them, just three
months into the life of East Coast, one of the bigger hedge funds
in the country. And this while they were still waiting for the contractors to finish work on their new offices.
Yet by global standards, it’s still tiny. How tiny? Put it this
way: Steven A. Cohen, founder of SAC Capital Advisers, has an
art collection whose value has been placed as high as
$1 billion (U.S.). (If you ever wondered who bought
Damien Hirst’s shark-in-a-tank-of-formaldehyde,
now you know.)
Globally, the industry is thriving again after the
crash of 2008. The amount of money in hedge funds is
approaching its pre-meltdown zenith of $1.9 trillion.
Much of that money is concentrated in the U.S.,
where the top five fund companies (including those
of Soros and Paulson) together managed more than
$165 billion (U.S.) as of the beginning of 2010.
Huge funds of that sort are money machines for
their operators. A $10-billion fund with a 2% management fee generates $200 million in management fees
alone, before any performance bonuses.
In Canada, there are about 150 managers running a
total of about $30 billion to $35 billion. Most of those
funds have between $25 million and $100 million in
assets under management. Not a single Canadian
fund manager made the Top 100 list put together by
Institutional Investor in 2010. Funds as large as Barry
FEBRUARY 2011 REPORT ON BUSINESS 41
Allan’s Marret Asset Management, with $1.2 billion of
hedge-fund assets, are exceedingly rare.
The problem in Canada isn’t just that there aren’t
as many rich people with oodles to invest. As well,
some of the biggest potential investors—the huge
pension funds like Ontario Teachers’ Pension Plan—
try to save money by creating their own hedge fund
strategies internally. There’s also a chicken-and-egg
conundrum. Many big pension funds or university
endowments need to invest a lot of money at one
time, given their own sheer size. It’s hard to do that
in a small hedge fund. So the funds need to get bigger before they can get bigger. “There is a Catch-22,
as many investors will not invest in Canadian hedge
funds because it’s such a small market, and it will stay
a small market until more investors buy in,” says Leon
Chin, a partner at Ernst & Young who specializes in
The economics of a $50-million fund aren’t of the
get-rich-quick kind. Take the so-called two-and-20
fee structure. A 2% annual management fee brings
in $1 million to cover office rent, staff salaries, computer systems and other costs of doing business. The
20% performance fee part of that “two-and-20” only
gets paid if the fund managers make money for their
investors. A small fund leads to small takings. Say
the $50-million fund’s manager is a superstar, and
the fund gains 25% in a year, meaning $12.5 million in
investment income. The manager would take 20% of
that, or $2.5 million. That’s nothing to sneeze at, but
it’s not the kind of money that will buy a castle somewhere and Impressionist paintings to decorate it. A
top trader at a securities firm can do better.
And that’s in a great year. Finish a year flat, or
down, as many hedge funds were doing in the crisis,
and there are no performance fees at all.
There’s also the issue of the so-called high-water
mark. Most funds offer investors a scheme where they
only pay performance fees to the manager if the fund
is setting new highs: The idea is to ensure investors
don’t pay for the same performance twice. The crash
of 2008 was so deep—taking the Scotia Capital Hedge
Fund Index of Canadian funds down 23%—that some
fund managers took months to claw back near their
But MacBain and Schumacher are making the
numbers even more daunting for themselves, by trying to undercut the two-and-20 model.
When they were bank executives, and managers
were pitching them, they thought that two-and-20
was overpriced. So they are charging less. They are
keeping the 20. But East Coast’s first fund charged no
management fee for initial investors, and now charges
1.25%. They also have a hurdle rate of 4%—meaning
their fund needs to return at least that rate before they
start collecting the performance fee. Given that many
corporate bonds lately trade with yields below 6%,
and the pair are advertising a target return for investors of 8% to 12%, that’s a tough bar to surpass.
So perhaps it’s no surprise that MacBain and Schumacher aren’t making Lamborghini money. In fact,
they aren’t making any money. What’s worse, they’re
owed by the company. Apart from all the overheads
any fund would have, they’ve had to cough up for a
42 FEBRUARY 2011 REPORT ON BUSINESS
The House That
From u.s. homeowners to hedge fund managers, the
financial crisis spelled ruin for many. but, for a select few
who saw the maelstrom coming, the crash meant cash—a
and no fortune was bigger than that made by John Paulson, who
went from a bit player in the hedge fund world to a legend. the new
york-based fund manager’s dead-on call that the u.s. housing sector
would crash led to otherworldly returns for his investors—one of his
funds was reportedly up 590% in 2007—and for Paulson personally.
Alpha magazine estimated his pay at about $3.7 billion (u.s.) that year.
even by the standards of manhattan, that’s unheard of.
Paulson wasn’t alone in the billion-dollar club, as george soros,
renaissance technologies head James simons, harbinger capital manager Philip Falcone and citadel’s Ken griffin all took home more than $1
billion in what Alpha said “may well prove to be the greatest display of
individual wealth creation in any year in the modern history of finance.”
that performance earned the men the distinction of a trip to washington in 2008, where they defended how they did business before a
congressional committee. still, 2008 wasn’t all bad for Paulson: he
pulled in another estimated $2 billion (u.s.).
nowadays, after making a killing betting against housing, Paulson is
a bull on u.s. homes. in a recent speech, he urged people to get into the
market. “if you don’t own a home, buy one,” he said. “if you own one
home, buy another one, and if you own two homes, buy a third and lend
your relatives the money to buy a home.”
hmmm...isn’t that exactly the kind of behaviour that brought the
it was a really big day. Then something happens and you have an
“That amplitude is a result of the fact that it is risky. It’s like
the Flying Wallendas. You’re out there on the wire, and there’s
Failure certainly is a possible outcome. According to an industry report, 21 Canadian funds shut their doors in 2008 as markets
On the other hand, if you can get to billions in assets, as Allan
has at Marret, the fees do start to add up. But if it was just about
the money, Schumacher, for one, would still be at a bank. For
the longest time, he always wanted to be the highest-paid trader
wherever he worked. By his reckoning, in the later years of his
career, he always got paid more than not just all the other traders,
but more even than the bank’s CEO.
The cash stashed from those years means Schumacher doesn’t
have to worry about money. What motivates him now is the
desire to build something—something big. “That’s what replaces
the money,” he says. “I like this better. I got tired of fighting for
Having his own shop also gets him back to the focus that characterizes the early phase of a trader’s career, before promotion
into management spells less time in the market. “I used to just sit
there and shake my head,” Schumacher remembers. “Someone’s
paying me to do this? You’re fucking kidding me. I have never had
more fun in my life. There are lots of difficult things about this
whole process [of creating East Coast] but a lot of the real upside
is getting back to actually being a trader.”
The next goal for East Coast is to open another fund. Schumacher has already been trading stocks to get a track record. He’s
had a great year, clocking in gangbuster returns. Unfortunately,
dramatic numbers suggest volatility, and that’s going
to be tough to sell.
Schumacher’s had to rethink his trading style to try
to minimize the swings. It comes as a bit of a shocker
to a pure trader that the sales side of the industry
doesn’t want huge numbers. Slow and steady wins the
race. That’s a rich irony in the post-Madoff era, where
it’s received wisdom that Bernie Madoff’s clockwork
returns of 1% or 2% a month should have tipped investors off to his fraud.
There was another big shift to face in the fall. One
way to get a big pile of assets in Canada is to try to
appeal to retail investors. While Canada has a limited
number of high-net-worth people who invest in hedge
funds, once the door is open to more people, the assets
—and, with it, the pay—can really start rolling in.
But dealing with retail investors and their brokers
is more work—more work of the human-interaction
kind. It means more glad-handing. More golf trips
with brokers. More time on the phone holding the
hands of nervous investors.
Schumacher wasn’t sure if the retail idea was a
good one, but MacBain wanted to give it a shot. The
plan is going ahead. “It’s really Mike’s pet project,”
says Schumacher. “Like any marriage, you have to
compromise, and I don’t have a veto on anything.
“I don’t feel I know enough to be saying yes and
no, unilaterally. I think that partly this is a journey of
discovery. I would like to know where we’ll end up,
but I don’t know today where that’s going to be. I’m
very nicely renovated office space—complete with concrete
floors and wraparound windows overlooking sylvan midtown
Toronto, not to mention a gym and plenty of room for expansion
(the current staff complement is just a half-dozen).
arry Allan remembers that phase well. “I had to write
cheques to the company for the first two years to pay the
staff,” he says, describing his entire set of funds, hedged
and not. “We started out with $10 million and now we have $5 billion. That’s 10 years of working 24 hours a day, seven days a week,
and doing everything you can to build the company.”
Of course, one could always stay at the banks. There, as former
traders like Schumacher and MacBain can attest, there’s really
only one investor. It’s the bank’s money, and beyond that the faceless mass of shareholders. Sure, you might get fired if you really
screw up, but the bank will probably live.
Jérôme Kerviel is a case in point. He managed to lose almost
¤5 billion at French bank Société Générale. He’s long gone, and
facing jail time, but the bank is still standing. Contrast that to the
fate of Amaranth.
When it’s not bank money but investor money in your fund—
and that money is often a chunk of the life savings of friends or
family or former colleagues—the pressure is much different.
And, to Schumacher and MacBain, it’s invigorating.
“Working for banks, there’s not a lot of volatility in how you
feel from day to day,” says Schumacher. “It’s an up day, it’s a down
day, it’s 5 o’clock—let’s go have a beer. With a small business, you
really feel everything. The first time we got a $5-million cheque,
FEBRUARY 2011 REPORT ON BUSINESS 43
How I learned
to hide money
from the taxman
in the shell-company
capital of the world,
with help from a cabbie named Shorty,
a jet-setting fraud investigator
and a curious cast of
by Trevor Cole
The cabbie who drove me over the vertiginous hills of Tortola toward Road
Town, the two-stoplight capital of the British Virgin Islands, told me that his
name was Wayne. But he explained that ever since he was a small boy, people
had called him “Shorty,” so I could call him that too. I’d landed late after a threeleg flight from Toronto, with stops in Miami and Puerto Rico and a last, jarring
hop by turboprop ATR. For long stretches of the narrow, winding road from the Beef Island airport, there were no lights to reveal our surroundings. But as he weaved left and right, and gunned
the engine of his aging Toyota van to make it up the next steep, Shorty gave me the lay of the place.
There were dozens of islands in the BVI—no one can seem to agree on the number—and a whole
lot of money. At the far eastern end was Necker Island, owned by Sir Richard Branson. South
of us, Shorty indicated with a wave to the left, was Peter Island, where the billionaires liked to
hold exclusive weddings. “Sometime we can’t go over there for a whole month,” he complained.
Photo credit tk
Our man in Tortola:
The author goes undercover
44 FEBRUARY 2011 REPORT ON BUSINESS
FEBRUARY 2011 REPORT ON BUSINESS 45
46 FEBRUARY 2011 REPORT ON BUSINESS
Whatever money Bob was paid on contract—say,
$100,000—could be received by Bob Canada Inc. But
Bob could then pay $90,000 to Bob Island Inc. for
“consulting services.” Bob would have $100,000 in
income, but $90,000 in expenses, and so pay tax on
If Bob dealt in hard goods like shoes, he could use
Bob Island Inc. to buy shoes from China for $10,000,
then sell those shoes to Bob Canada Inc. for $90,000.
And Bob Canada Inc. could sell them in Canada for
$100,000. So that’s $10,000 profit Bob has to pay Canadian taxes on, and $80,000 sitting in a bank offshore.
(Bringing any of that offshore money into Canada
gets tricky. It might be possible to set up a credit card
that would let Bob get cash advances, paid back by
Bob Island Inc. But now, by not declaring that money,
Bob has slipped over into tax evasion. He’s better off
There’s an estimated $11.5 trillion
(U.S.) being stashed in offshore
accounts worldwide. But the list
of sunny places for shady people
is getting shorter. International
pressures have forced many tax
havens to open up, and data-theft
scandals have ruined the reputations
of a few more. But some offshore
financial centres remain strongholds,
while off-the-beaten-track enclaves
are becoming more popular. At least
one fraudster favourite isn’t really
offshore at all. Here are some top
destinations. —Anna-Kaisa Walker
using his offshore stash to buy a yacht.)
The CRA is trying to cut off the tax-avoidance avenues for people like Bob by establishing Tax Information Exchange Agreements with various countries, so
that it can find out who’s keeping how much where.
Up to now, it has signed 11 such agreements, several
of them with Caribbean jurisdictions. So far, however,
the BVI isn’t one of them. So when Bob wants to keep
his money and his identity safe, he comes here.
In Road Town, you’ll find about 80 firms, commonly known as “trust companies,” that act as agents
in forming and administering offshore companies and
trusts. For about $1,500, they’ll do the paperwork. (A
company named after your grand-niece, with 50,000
no-value shares? Done.) Since there are no taxes to
pay in the BVI, there are no books to keep, and no
audits of your records. If you wish, many of these
firms will provide a person or even another company
to act as the “nominee director” of your company, so
that your name need not appear on any transactions.
And most of them can offer “shelf companies”—
that is, companies already incorporated and sitting
on the shelf, ready to go. For more money, you can
buy a shelf company that has been “aged”—created,
say, five or 10 years ago and just waiting, dormant,
for someone who suddenly needs to say he’s been in
business that long.
You can do this online, if you prefer. Many of these
firms have websites, and you can download the application forms. (One such firm, Fidelity Corporate
Services, provides helpful answers to some common
questions about offshore companies. For the most
germane of these—“Aren’t all offshore companies
used by crooks and money launderers?”—Fidelity
complains that opinion is part of a government smear
campaign, and its answer begins, “Well, aren’t domestic companies used by them, too?”)
rank of the tiny
among the world’s
fund centres, after
the United States.
reported to be North
korean dictator kim
Jong-il’s hiding place
for $4 billion (U.S.)
in ill-gotten gains,
not tax-free, is known
for its strict bank
could I, a humble Canadian novelist, be getting up to? After a
few more calls for advice, I came up with this: I’d tell them I was
about to sign a major U.S. book deal and had a TV development
deal in the works, and let the dollars pile up in their minds. As
for why might I need an offshore company, I’d mention the fact
that my wife was divorcing me, and so...I hoped I could leave the
rest to their imagination. Some of this was true—I did have a U.S.
book deal and a TV development deal, but for dollar amounts
that hardly warranted a sock in a drawer, let alone an offshore
company. I was also, as it happened, separated, though between
my wife and I everything had long been settled. Exaggeration and
implication seemed more within my wheelhouse than out-andout falsehood.
I ran this scenario past Kenney, to see if it would pass shady
muster. He’d chased down billionaire husbands, one who’d
forged his wife’s signature on a divorce settlement that left her
just $33 million. In his Tortola office, he nodded. “That’s right in
that’s the GdP per capita of this two-square-kilometre sovereign principality,
surrounded on three sides by France. With no income tax, a glitzy casino
and 300 days of sunshine per year, Monaco is the wealthiest place in the world.
the average price of a 400-square-foot apartment: ¤1.7 million.
Number of companies
that used a single Grand
five-storey office building
called Ugland house—in
2009. the cayman
islands is the current king
of offshore banking, with
an estimated $1.8 trillion
(U.S.) in assets booked
through its 262 banks.
And all around were calm, protected waters, perfect for sailboats.
“Mos’ people on that plane you came in on,” said Shorty, “they
coming for the sailing.”
Not me. I was there because the British Virgin Islands offers
another kind of protection.
Even more than sailing, the business of the BVI is sheltering
companies from taxes. Operating as a tax haven isn’t unique to
this archipelago, of course; plenty of Caribbean islands, along
with a few European jurisdictions such as Switzerland and
Liechtenstein, have for decades offered the wealthy a place to
escape the heavy burden of post-World War taxation. But the
BVI has found its métier: offshore incorporation. All of about
25,000 people live scattered throughout these islands, but there
are more than 800,000 registered companies here, of which
about 460,000 are active. And it’s big business: By one estimate, 51.8% of the BVI’s national revenue comes from licence
and company fees. According to the most recent survey done by
KPMG, some 41% of all the offshore companies in the world can
be found here.
“Found” is a matter of debate, of course. Because while there
are some legitimate legal reasons to establish an offshore company in the British Virgin Islands—hedge funds, for example,
appreciate having fewer restrictions on their investments—many
people use BVI companies to hide something. Maybe it’s identity;
establishing an offshore company makes it easier to keep one’s
name out of certain transactions. Or maybe it’s money.
Fraud lawyer Martin Kenney, older brother to Jason Kenney,
Canada’s Immigration Minister, runs a booming practice in Tortola, charging $650 an hour or a hefty “success fee” to chase down
the assets of fraudsters who use offshore companies like those in
the BVI to hide millions of dollars from the eyes of wives, business partners and governments. Kenney, his grey hair styled back,
his crisp shirt open at the neck, sits in his air-conditioned Road
Town office and chuckles as he talks about the years following
1984, when BVI’s International Business Companies Act established the country as an offshore financial centre. Those were the
days when men would bring in duffel bags full of cash, he says,
when you could establish a company or a trust with little or no
proof of identity: “In the late ’80s and ’90s, it was a free-for-all.”
Increasingly stiff anti-money-laundering laws, imposed upon
offshore jurisdictions largely by U.S. authorities determined to
choke off the proceeds of drug trafficking and terrorism financing, have lately made it much harder to secret assets in the BVI.
But as Kenney likes to say, “Bad business is still getting booked.”
And my assignment was to fly here, undercover, and find out how
By coincidence, the very day I began my investigations in the
BVI, representatives from the Canada Revenue Agency and the
Department of Finance were appearing before the parliamentary
finance committee to report on the vexing matter of Canadians keeping money offshore. In the eyes of the CRA, it’s a twopronged problem—tax “avoidance,” which subverts the spirit
if not the letter of the law, and tax “evasion,” which is flat-out
illegal. The U.S. government estimates it loses $100 billion a year
in tax revenue stashed in offshore accounts. And while the CRA
hasn’t made an estimate of Canadian offshore money, it has, since
2006, increased the number of full-time employees working on
international audits by 44%. In that time, from more than 6,700
cases, it claims to have found $3.5 billion in unpaid taxes.
It takes an accountant to explain how someone might use an
offshore company to “avoid” rather than “evade” taxes, so I asked
mine. Here’s how he put it to me:
A person, call him “Bob,” could form a company in Canada
(Bob Canada Inc.) and another one offshore (Bob Island Inc.).
(pop. 300 million)
time it takes to get incorporation approval in
Nevada. in delaware, where 63% of Fortune
500 companies are incorporated, public records
aren’t required to disclose details of trusts,
company accounts or the identity of Ultimate
Statute of limitations for
fraudulent transfer claims
in the South Pacific atoll.
creditors must prove “beyond
a reasonable doubt” that a
debtor intentionally made a
fraudulent transfer to avoid
paying up. Since 1989, 13
other countries have adopted
some form of the bulletproof
asset protection trust laws
pioneered in the cooks.
$470 billion (u.s.)
total aggregated assets held by Bermuda’s insurance companies, or $7.3 million for each of
the country’s inhabitants. of the British territory’s 1,400 registered insurers, 885 are captive—
owned entirely by the policyholder. hank Greenberg, former ceo of AiG, was alleged to have
used Bermuda-based insurance companies as part of an elaborate fraud scheme.
efore I set up meetings with any of these
firms, it seemed a good idea to come up with
a fake identity. I could go in playing the highroller, I thought, and even set up a Gmail account
under a false name in order to communicate with
the firms. That idea dissolved the moment I talked to
Jack Blum, a semi-retired former U.S. congressional investigator and authority on shadowy dealings in
the BVI. “They’re going to want information about
you,” he said. “They’re going to ask for a passport and
some other ID.”
So, no fake identity; I’d have to go in as myself. That
was probably just as well; I’d never been a very good
liar. What about handing over my passport—was that
a good idea? I asked the advice of Lincoln Caylor, a
fraud lawyer with Bennett Jones in Toronto. “I don’t
know,” he said. “I wouldn’t do it.” Right.
It also seemed useful, during whatever meetings I
could arrange, to at least hint at some underhanded
purpose for needing an offshore entity. But what
the middle of the road,” he said. “You could get some people saying, ‘Oooh, that’s a little dodgy.’” That seemed just about right.
owntown Road Town is marked by a busy roundabout
and the usual Caribbean atmospherics of car horns,
exhaust fumes and a whiff of open sewers. In midDecember, Christmas featured prominently: Inflatable Santas
and reindeer wobbled along Main Street in the humid air, and
calypso versions of Christmas classics blasted from carpet-store
speakers. There are street signs in Road Town, but no one uses
addresses. Businesses locate their offices in named buildings,
and it is up to you to know where those buildings are. My first
appointment, for instance, was with a company I’ll call Tortola
Trust, in Palm Grove House, a stuccoed building in the banking
district (where, as it happens, you’ll also find branches of banks
such as Scotiabank and the CIBC-owned FirstCaribbean International Bank; thanks to its historic ties to Britain, Canada has long
had a dominant banking presence in the Caribbean.)
It took a while, and several entreaties for help from passersby,
FEBRUARY 2011 REPORT ON BUSINESS 47
before I found Palm Grove House. Emerging from the elevator at
Tortola Trust, I was greeted by two men in their mid-30s, a South
African named Mike and a Brit named James, both of whom
were dressed in shirt sleeves, open at the neck. They showed me
through an impressive suite of offices into a large boardroom,
and brought me a bottle of cold water.
After a few moments of chit-chat, I laid out my “situation.” I
mentioned a “significant amount of money” coming in and the
fact that my wife and I had separated, and that I therefore had
“concerns around that money.”
James and Mike seemed to view this as reasonable. Thoughtful
and relaxed, they probed for details, about my marriage, my family (did I have children?) and my assets. Whatever structure I set
up wouldn’t be to “defraud a creditor as such,” James explained;
it would be to help me “safeguard” future earnings. They both
seemed quite interested in helping me do that.
I wondered out loud whether there was some way to avoid
listing my assets under my name. Wasn’t that something a BVI
company could help me with?
assurances that my identity would be protected. “I
wouldn’t recommend, you know...we’re not going to
lie,” said James, somewhat hesitantly. “But, ‘Have you
got any assets in your name?’ No.”
Wasn’t that a bit risky, I wondered—to make someone else the legal owner of my assets? Yes, actually.
It would be possible, James admitted, for the firm to
remove me as director of my company, cash in my
assets and hide them “somewhere else in the Caribbean.” All of us in the boardroom had a good chuckle
about that. And James said the firm had insurance to
As for what I could do with the assets held by my
company, well, I could do anything. Although, “if you
wanted to buy a nuclear power station,” he said, grinning, “we may have some issues with that.”
James and Mike both recommended that I get tax
advice from my accountant before going further. (My
accountant had already told me that if I wanted to
If I was willing to provide more
information about the nature
of my assets and the purpose of
my company, one banker
told me, there was always the
option of paying his firm to act
as a director of my company.
“It removes you
further from the
scene of the crime,
if you like”
James laid out my options. Most clients set up a BVI company,
he explained, with shares listed in their own name, which would
be public. “But then what people do to avoid that,” he said, “is
they put the shares in a trust. So you have the BVI company and
the trust. And the trustee of that would be Tortola Trust BVI Ltd.
So we would be the shareholder. So you could say it’s definitely
not in your name, it’s in our name.”
This is one of the ways to accomplish what’s known as
“layering”—putting degrees of separation between the public face
of the company and the person that a creditor or a government is
really interested in: the Ultimate Beneficial Owner. All of the due
diligence requirements in the BVI rest on being able to provide
that name when a court demands it. That’s one of the reasons that,
as of last year, you could no longer use “bearer” shares in the BVI.
Bearer shares put ownership of a company in the hands of whoever physically held the shares; if the shares for Bob Island Inc.
were kept in Bob’s lawyer’s safe, the lawyer became the owner.
With the elimination of bearer shares, the owner’s name can’t
be completely hidden. But even so, layers can make the digging more difficult. James tried to explain the intricacies of the
company-trust-trustee arrangement, and I tried to push him for
48 FEBRUARY 2011 REPORT ON BUSINESS
form one of these companies, he’d recommend I start
working with another accountant.) And they would
need my passport and other details, such as a utility
bill to prove my residency, to meet the government’s
“Know Your Client” requirements. A few minutes
later, when James had left, Mike took me through the
application and fee schedule. “Once we are the legal
owners of the trust and the trust’s assets, that’s where
the confidentiality is working at its best,” he assured
me. “If somebody comes knocking on the door saying, ‘Are you looking after Mr. Trevor Cole? We want
to find out this, that and the other,’ we’ll just go”—he
A lot of people, he added, like to list their tax
adviser as the point of contact on certain documents.
“It’s just more murkiness for people to get through.”
And if I was willing to provide more information on
the nature of my assets and the purpose of my company, there was always the option of paying their firm
to act as the director of my company. “It removes you
further from the scene of the crime, if you like.”
ver the next two days, I met with three other
firms. In the blue-stuccoed Akara Building,
above a small photography studio and an
office for the BVI Tourist Board and Film Commission, I found the Panamanian trust company Mossack
Fonseca. There was no elevator to take me to the third
floor, just a narrow, dimly lit staircase with steps covered in chipped tiles, and the office at the top of the
stairs was more humble than Tortola Trust’s. There
I met with two women—Daphne, from the island of
Dominica, and an older woman named Rosemary,
who was the managing director.
Throughout our meeting, Rosemary eyed me with
some suspicion, but tried to accommodate my concerns about keeping my identity secret. “I understand
what you’re asking,” she said. “You want confidentiality. You want to be anonymous. You don’t want anybody to know that you are behind the company. And
that can be done. Lots of big corporations and lots of
individuals do it.” But when I brought up the topic of
layering, she became adamant. “You should not even
be talking to us about layering.”
Why was that?
“Because it is a no-no,” said Rosemary. “It’s illegal.
Layering is illegal.” What I could do was tell them I
wanted to set up a few companies. I could tell them
the structure I wanted. I could even ask for their help
setting up a structure for, say, inheritance purposes.
“But not layering purposes,” she insisted.
fter lunch—and a chat with a nice New Zealander named Steve, who was in Tortola
shopping for a yacht—I entered the offices
of the AMS Group, with branches in Hong Kong, London and Nevis. Here in the BVI, they’re located in Sea
Meadow House, a two-tone building a short distance
from the centre of Road Town. My contact was Nicholas, an affable Brit, reminiscent of a young John Hurt,
who showed me into a spacious and well-furnished
This time I refused to divulge the source of the
money I was getting, or what I wanted to do with it.
Nicholas took it in stride, wanting only assurances, for
now, that the money was from something “legitimate.”
He explained that half the firm’s business comes from
Asia, and they never see the end client. They work
mostly with “introducers”—legal or accountancy
firms that do all the due diligence work in their own
locality and that might order up 10 companies by
e-mail and get them that day because there was no
onus on AMS to gather any information on the client.
But that information had to reside somewhere.
“It’s not like the good old days,” said Nicholas, a
little wistfully. Once, a BVI company was like a packet
of biscuits. “It would be sold on and sold on and sold
on. And no one knew who on Earth ended up holding
the packet of biscuits.”
When I brought up the notion of a nominee director,
Nicholas admitted that some firms in the BVI offered
that service—a few hundred dollars a year might get
me a resident of Nevis who would act as a director
with a rubber stamp to sign documents. But then he
told me something surprising: If there was ever any
trouble, my director would run away and my name would show
up in court after all. “If you are a nominee director and you’re
getting paid $300 a year, you are not going to risk your neck for
the person you are protecting,” he said. “You send in your resignation letter, and then all gets revealed.”
I liked Nicholas. I figured if I ever actually wanted to set up
an offshore company, he’d be my guy. Before I left, he offered me
another insight: “If you really want to confuse people, you can
have Chinese characters in your company name as well. We sell
tons of them.”
to catch a thief
Westerners who have traditionally turned to countries like
Switzerland and Liechtenstein to safeguard their holdings
are running scared—thanks to these three whistle-blowers.
they’ve handed tax collectors piles of intelligence on the
schemes used to hide riches. —Greg McArthur
HeInrICH kIeber, 45
Former position: document scanner with the LGt Group,
a bank owned by Liechtenstein’s royal family
in 2008, it was revealed that the balding techie had stolen thousands of
pages of documents on 1,400 suspected tax cheats using LGt’s services
and sold them to the German spy agency. After Germany distributed the
documents to its allies (including canada), Liechtenstein issued a warrant
for kieber’s arrest, and Germany stashed him in witness protection. his
testimony before a U.S. Senate committee (in a pretaped interview, filmed
in silhouette) revealed the tricks used to hide money in Liechtenstein banks,
including code names and shell companies. “he’s feeling a little more secure,
but the contact is always through phone calls, and always on a secure line,”
says Jack Blum, his U.S. lawyer.
bradLey bIrkenfeLd, 45
Former position: Banker in wealth management with Swiss giant UBS
Whereabouts: Schuylkill county Federal correctional institution in Pennsylvania
this gruff Bostonian helped the U.S. department of Justice uncover more than
4,000 secret UBS accounts and ultimately landed the bank a $780-million
(U.S.) fine. his reward? A prison sentence of three years, four months (for
failing to reveal his relationship with california billionaire igor olenicoff, who
was under investigation by the internal revenue Service). Birkenfeld handed
over documents that outlined how a clandestine team of Swiss bankers had
been travelling to the U.S., recruiting clients at yacht races and art shows,
and encouraging them to funnel their money to Zurich and Geneva.
Hervé faLCIanI, 38
Former position: computer security expert with hSBc
Whereabouts: Nice, France
in January, 2009, the Swiss sent an urgent message to French authorities
asking them to track down Falciani, who had stolen information from hSBc’s
private bank in Geneva and was hiding at his parents’ home in Nice. When
they searched the home, authorities uncovered documents on nearly 80,000
tax clients. the French granted Falciani immunity from extradition and shared
the information—which includes 1,800 accounts linked to canada—with its
ne last meeting remained, and this time I wanted to go
a step further—to formally begin the process of buying
At Overseas Management Co., housed in a three-storey pink
building off Waterfront Drive, I climbed up a dingy and dirty
stairwell to the second floor and entered a cramped reception.
The ceiling was festooned with Christmas ornaments, and I was
led not to a boardroom but to a cluttered office with a small table
and two chairs. There I met with Anelena, a petite Panamanian
FEBRUARY 2011 REPORT ON BUSINESS 49
woman with a bright smile.
I almost felt bad for Anelena, because I’d decided to present
myself as a busy, uncommunicative guy who needed a company
and needed it fast, and sweet Anelena seemed a little bewildered.
But she did her best to accommodate me.
“Yes, we can take care of this,” she began. It turned out that
OMC was another company whose head office was in Panama.
Anelena said she would be happy to have the Panama office
e-mail me the information requirements, which included a passport, and a list of shelf companies to choose from. I asked if it
would be possible to just print out the list right now and let me
choose a company while I was there.
“Ehhhh, let me see.”
She came back more than 10 minutes later, without a list, and
began asking me questions. “You live in Canada, right? And you
want to buy a company. What is the purpose of the company?”
Protection of money, I said. And confidentiality.
“Okay,” she said, making a note. “I can give you the list right
now. But, you know, in order that you can get the company definitely we will need a copy of the passport.”
I asked if they could provide a nominee director.
“Ehhh, we have nominee directors. They are located in Panama.” Anelena paused for a long moment. “Do you have a business card?”
I said I didn’t.
“Uh huh,” she said, and gave a nervous giggle. Twice more she
mentioned that to start the process she would need a copy of
my passport. All I wanted from her, I said, was that list of shelf
“Mmm hmm,” she said, and giggled. We chatted for a while about
the lack of seafood restaurants in Road Town until I suggested she
go out and get that list of companies I wanted. She left
and, finally, 16 minutes later, she returned.
“These are the list,” she said, laying two sheets
of paper in front of me, one showing 15 names prechecked and available for incorporation, and another
with a list of 32 shelf companies ready to go in five
I looked down the list of BVI companies and circled
a name: Ventor Holdings Ltd. That’s the one I want,
Anelena said she would send me all the requirements, repeating again the need for a passport. She
asked, “What is your occupation?”
“Do you need to know that?”
“I’m an author.”
Anelena paused for a second, a little taken aback. “An
author?” But she made a note and recovered quickly.
Once they’d received all my details and approved me,
she said, I could have my company within two days.
The next morning I headed back to the Beef Island
airport. My cabbie explained that his name was James,
but everyone called him Handbroke. “Because when
I was small I broke my hand.” On the tarmac, on the
way to the airplane headed to Puerto Rico, a BVI resident nodded toward a sleek white Falcon 900EX jet,
its tail splashed with the image of an enormous blue
eye. That’s Sir Richard Branson’s plane, she told me
with an admiring smile; everyone knew that eye.
Richard Branson, at least, isn’t trying to hide. But
then, he lives here. He doesn’t need to.
Bull markets fuel mass hysteria. Bear markets crush all hope.
At Cumberland Private, we simply aim to be right. We’ve
protected our clients’ capital through some of the worst
downturns in history. And in a decade of flat markets, we’ve
outpaced the index by more than eight percent compounded
annually *. So let the talking heads talk, while you enjoy
the quiet confidence of working with one of the most stable
and successful private asset managers in Canada.
John Wilson, Chief Investment Officer
Don’t be a bull
or a bear.
Just be right.
What’s right for you in today’s market?
Watch the video at www.cumberlandprivate.com/BeRight
or call us at 416.929.1090 or 1.800.929.8296.
* Cumberland Private Long Term Capital Appreciation Composite vs. 50% S&P/TSX Composite Index/50% S&P 500 Index in CDN$ for
10-year periods ended 12/31/2009 and 6/30/2010. Past performance does not guarantee future results.
Calgary’s East Village, a superb 49-acre brownfield site within walking distance to downtown
Calgary, will soon be home to a $300 million mixed-use project — the first of many private
developments that will reshape the area’s residential and retail future. $80 million in infrastructure, a 4-km RiverWalk promenade and smart new vehicular connections are making
East Village a unique opportunity in brownfield regeneration. East Village is being developed
by CMLC, passionate, experienced placemakers who inspire communities to build, grow and
believe. If you’re a seasoned, visionary team that wants a hand in building a dynamic city,
you need to look into East Village.
Join us in the bold renewal of Calgary’s newest, oldest,
coolest, warmest neighbourhood.
For development opportunity inFormation,
call (403)-718-0300 or visit www.calgarymlc.ca
corporate survival guide
photograph adam rankin
In today’s open-concept offices,
listening to the radio at your desk is just
plain rude—you might as well be walking around
with a thundering boom box on your shoulder. Enter
stylish audio accessory maker Skullcandy and hip-hop mogul
Jay-Z’s entertainment firm, Roc Nation. A collaboration between the
two companies, the Aviator headphones show just how far personal listening
devices have come. The clever spring-loaded hinge design was inspired by the iconic
aviator sunglasses; the brown leather ear pads (also available in white or black),
as well as the carrying case, are almost too cool for flight school; and with a 40mm
driver bringing out the depth and warmth in everything from Louis Armstrong
to Lady Gaga, your music will sound as classy as you look. —Dave Morris
$150 (U.S.), skullcandy.com
february 2011 REPORT ON BUSINESS 53
If you overpromise during the recruitment process and then under-deliver, that’s a critical misstep
with millennials. I think employers are being stretched to promise things that they aren’t always
in a position to deliver on. But what they have to understand is that when they hire a person, invest
in them and train them for two years, and then they leave, you’re out of pocket a huge sum of money.
—Tim Ryan, founder and CEO of Vestiigo.com, an online careers site for young Canadian professionals
a brief review
1943 Scarth St.
Calling Michi the
top sushi spot in the
Prairies may seem
like faint praise, but
regulars swear that the
fish here rivals the best
you’ll find in British
Columbia. That’s likely
because the seafood is
imported from Japan,
as is the nimblefingered quintet of chefs
preparing dishes in the
kitchen. Specialty rolls
namesake maki, with
snapper and prawn, is
a local favourite—but
it’s the yellowtailcheek-and-daikon
soup ($10) that’ll really
impress the office
food snob. (He’s from
Vancouver, isn’t he?)
54 FEBRuaRy 2011 REPORT ON BUSINESS
So you’ve decided to take the sales team to
a conference in some sunny locale? Good
for you...they’re going to love you for that.
Or will they laugh at you? Question your
maturity? Wonder if you’re a weirdo? It
depends on what trunks you’re wearing when
you join them poolside. —Dave McGinn
The crowning touch
There are men who can deftly sling a raincoat over one shoulder, and tinkle the ice in their Scotch
glass with the other hand. Even if they raise their pinky in the process, these are stand-up guys, the
roosters of any henhouse. The hall-of-famers of this club have another thing in common: hat connoisseurship. Humphrey Bogart was one such fella, his namesake worn as only he could—angled
to frame his daggering gaze. Then there was Sinatra, who had his own rules on how to handle a fedora: Use both hands to put it on, curl the back brim up, and pull the front down a couple of inches
above the brow. Learn from these guys that no man in his 30s should wear a skull-and-crossbones
toque, or baseball caps from schools he didn’t attend or cities in which he never lived.
It’s good news, then, that modern-day milliners like Frenel Morris at Still Life in New York and
Stephen Temkin of the custom Leon Drexler label in Toronto handcraft and block old-school trilbies, fedoras and the like from quality fur felts—for men and women—lining them in butter-soft
silk. Have a look at Still Life’s bestselling Langston with its strong pinch and teardrop crease, and
its band made from a swatch of banker’s suit fabric. It has a shallower crown than its hat predecessors of the mid-20th century, which makes it fresh for 2011, the kind of hat a hip-hop mogul and a
Bay Streeter could bond over. Let us raise our pinkies in a ring-a-ding salute.
App of the month
Here in the future, there’s no need to
drive in circles when you’re chasing after
For Sale signs. The Canadian Real Estate
Association is rolling out a GPS-enabled
app that points out available properties
anywhere on the map, including the ones near your
current location. Just like the realtor.ca website, you
can filter search results by metrics such as price and
property type. It will even find open houses—perfect
for turning rambling Sunday afternoon drives into
Available for iPhone and Windows Phone 7, free;
BlackBerry and Android versions coming soon
Don your goggles: On Feb. 20, the CBC will broadcast
the Heritage Classic Flames-Habs outdoor game from
Calgary in 3-D, part of a series of live spots showcasing
the technology. The filming requires twice the number
of cameras as a standard broadcast, to provide a lefteye/right-eye perspective view on the proceedings.
Meanwhile, the battery-powered 3-D glasses (like the
Panasonic 3D Active Shutter eyewear, above) sort out the
picture as you watch. Want to impress clients? Sit them
down in front of a $2,000 3-D TV, and you can watch the
Flames lose like you’ve never seen them lose before. —I.T.
PHOTOgrAPHS (TOP lEFT) JONATHAN
jONATHAN lOEk; (TOP RIGHT)
PArk, WHITE lIONESS MEDIA; (BOTTOM RIGHT)
2228 Albert St.
Come dinnertime at
this century-old house,
jittery first-daters and
chatty business folk
alike devour an army of
tapas plates. Lunch is
a more subdued affair,
ideal for a tête-à-tête
over the tender steak
sandwich ($16) or burly
clients should be
marched outside to the
stunning ice bar, where
vodka cascades down
a martini slide. Before
long, the conversation
will be flowing, too.
TOO-LONG BOARD SHORTS
Hey, Spicoli. Unless you’re the manager of
a skate park, you need to hike up that hemline
and hang 10 on your own time.
Billabong Time Warp 22" Recycler
Hydrostretch, $68; billabong.com/us/
In full bloom
There’s no such thing as a sure thing. This tip, however, is as close as it gets: The recently
arrived St-Germain elderflower liqueur will be flying off the shelves and gracing the
country’s best bar rails in record time. We watched this delicately balanced, springy
liqueur take over the cocktail world when it was introduced a few years ago in Europe
and the United States. Truth is, our Canadian importers dragged their heels slightly too
long on this one. In fact, south of the border, St-Germain’s ubiquitous presence on cocktail menus has led to a distinctly plebeian nickname: bartender’s ketchup. This beloved
tipple became the Heinz of the bar world honestly, though: The brand is readily identifiable, it comes in a handsome deco bottle, and it’s really tasty. St-Germain also works
fantastically with that other goes-with-everything-booze, champagne. Mixing the two
makes La Rosette, one of the all-time simplest, can’t-miss cocktails; it’s a sparkling seductress and a perfect way to seal the deal.
• 1 oz St-Germain
• 4 oz champagne or cava
• Garnish with lemon twist
Simple, comfortable and, most importantly,
entirely mockery-proof. No one can snicker at
you in these. Ralph Lauren Kailua 9" solid trunk,
$60 (U.S.); ralphlauren.com
Unless he’s European, a man’s bathing suit
should never be tighter than his wife’s. Diesel
Boxer Aloha, $60 (U.S.); store.diesel.com
THE SINGAPORE SLING
Hey, you, Singapore men’s water polo team,
is that your flag’s crescent-shaped moon,
or are you just happy to be wearing really,
really inappropriate trunks? TYR Male Solid
Racer with custom silk-screening,
$19 per uniform plus silk-screening fee
(minimum order, 12); marchants.com
FEBruary 2011 REPORT ON BUSINESS 55
layover Johannesburg (GMT + 2 hours)
“In most developed
countries, people go into
politics after successfully
doing business, but in
South Africa, it’s the other
way around. If you are
chances are that you will
get access to some
very good business deals…
just don’t talk politics
at the table.”
—Darryl Levitt is a lawyer
with Macleod Dixon LLP,
where 80% of his work
is focused on business
in Africa. He travels
to Johannesburg at least
three times a year.
The Butcher Shop
Johannesburg has always been a place where people have gone to make their
fortune. In the 1880s, a gold rush lured the industrious to this South African
site, turning it into a boom town. Huge economic growth in the past 10 years,
combined with post-apartheid social change, has given birth to a racially
mixed business elite, which is expressing its new-found wealth in the way
new money so often does: conspicuous consumption. So if you want to make
an impression, leave your modesty at home and pack that Armani suit in your
monogrammed LV luggage. Flashing your American Express black card may
just give you a (Gucci-clad) foot in the door.
LAY OF THE LAND In the late ’90s, Johannesburg’s economic
power shifted from the downtown city centre to the sunny
northern suburbs of Sandton, Morningside and Rosebank,
which together have become the new business core. Home to
the Johannesburg Stock Exchange, as well as the big investment banks and asset managers, these residential areas are
also where the high-end hotels are located. Check into the
Saxon, a posh boutique hotel that has hosted the likes of Bill
Clinton and Nelson Mandela, who edited his autobiography
here after his release from prison. 36 Saxon Rd., saxon.co.za
MAKE YOUR PITCH When it comes to power lunches,
Sandton’s Nelson Mandela Square is consistently packed
with business types. The Butcher Shop & Grill lures execs
with its premium cuts of just about everything, from classic T-bone steak to lamb shank to venison. They even serve
ostrich fillet, a local delicacy. For a more refined experience,
you can’t go wrong with the luxurious Sides Restaurant at
the Ten Bompas Hotel. It boasts
a creative, international menu,
not to mention a legendary cellar
of local wines. The Butcher Shop
& Grill, Shop 30, Nelson Mandela
Sides Restaurant, 10 Bompas Rd.,
SEAL THE DEAL South african
business tycoon Vusi Sithole’s
f i ve - sta r Fre n c h resta u ra n t,
Auberge Michel, has become a
virtual clubhouse for the swish
new-money set since it opened its doors in 2004—a reservation here is sure to score big points with potential
Jozi clients. If, however, you’re craving authentic local cuisine, Moyo in Melrose arch is an eclectic afro-luxe restaurant that draws corporate bigwigs with its modern african
menu, well-stocked cigar bar and premium Scotch (the
local beverage of choice). Auberge Michel, 122 Pretoria
Ave., aubergemichel.co.za; Moyo, Shop 5, the High Street,
BEFORE YOU LEAVE once business is taken care of,
most visitors to Johannesburg book the first flight out of
town. But if you have an afternoon to yourself, drive out
to the Cradle of Humankind, where some of africa’s oldest and most significant hominin fossils were discovered.
You’ll get a mind-boggling look three million years into
the past, and you can’t get much more historic than that.
If the cables for your
electronic devices are
starting to outrank pants
and shoes in your pecking
order of packing, you can
either convert to Luddism
or get the Mobile Power
Pack by Tumi. It recharges
cellphones (up to five
times), PDAs and the like,
and comes with a USB
cable and cellphone tip
set, making it compatible
with pretty much any
phone on Earth.
$135 (U.S.), tumi.com
For more stories, research and insights on international business, visit bwob.ca
56 FEBRuaRy 2011 REPORT ON BUSINESS
pHoToGRapHS (JoHaNNESBURG) THaBISo SEKGaLa
t’s another lovely day in Northern
Palm Beach County, and veteran
Florida real estate agent Patricia
Fitzgerald is bustling from one
client meeting to the next. Florida’s real estate prices are stabilizing, but with values remaining far
below their record highs, it’s a
According to the recently released 2010
National Association of REALTORS Profile of
International Home Buying in Florida, foreign-
half the battle
If you’re up to speed on
these three tomes, you won’t
be caught unawares
by the curveballs the world
might throw at you
and your team this year.
Bosses shouldn’t curse
people out in an effort to
fit in; bad words should
not be directed at specific
individuals; and swearing in
front of clients is a big no-no.
As long as your new hire
respects those rules, I say
she’s a f***ing genius.
DEAR CORPORATE GOVERNESS
I’ve just hired a talented new manager. Everyone
thinks she’s great and she’s brought an exciting
new vibe to the office. The thing is, she has quite
the potty mouth. No one else seems to mind,
but I’m worried that if I don’t nip it in the bud,
everyone in the office will start dropping f-bombs.
Is swearing something a boss should weigh in on?
If Cee Lo can score five Grammy nominations
for a song called “Fuck You,” surely you can cut
this woman some slack for her salty language. In
fact, your new hire may have read the 2007 study
by Yehuda Baruch and Stuart Jenkins, professors
in the United Kingdom, who determined that
swearing at work actually encourages teamwork
and helps employees cope with stress. The
casual utterance of four-letter words among
colleagues (a.k.a. “social swearing”) allows
co-workers to bond, while “annoyance swearing”
(dropping an expletive in the context of doing
business) can cut the tension in the office. Of
course, there are boundaries to be respected.
I recently lost my father.
He was elderly, but it was
sudden, and it’s still sinking
in. Part of me thinks it would
be better to get back to
work right away and not sit
around the house, wallowing.
But my wife is saying I shouldn’t rush back. Is it
possible to grieve and work at the same time?
I’m very sorry for your loss. Consider this,
however—when you go back to the office, not
everyone will say that to you. Some people
won’t know how to acknowledge your situation,
and others might not even care. Either way,
you’ll need to interact with them. Dr. Katherine
Shear, a bereavement therapist in Columbia
University’s department of psychiatry, says it
can also be difficult for people to concentrate
or problem-solve during a period of acute grief.
But Dr. Shear agrees that returning to work can
be a helpful part of restoring normalcy. “People
need to oscillate between confronting the pain
and setting it aside,” she says. So if you feel
you’re ready, by all means, get back to work.
Be aware, though, that you might not handle
stress as well as you did before, and that even
the most distracting environment won’t block
out your grief. Losing a parent is a big deal,
and getting over it is hard work, too.
I read positive letters to the staff in my town halls, because my agenda is to
motivate them to do something spectacular. Board members, however, often come in
believing that there’s nothing that needs to be fixed or improved. The way to get
board members engaged is to read them a letter that doesn’t sound very good at all—
they lean forward on their chairs because now they feel accountable.
—Dr. Robert Howard, president and CEO of St. Michael’s Hospital in Toronto,
on tailoring feedback for colleagues with different agendas
58 FEBRUARY 2011 REPORT ON BUSINESS
Baby, it’s cold outside.
No wonder so many
Canucks are drawn by
the south’s idyllic
weather and irresistible
real estate deals.
In Consumer Republic: Using
Brands to Get What You Want,
Make Corporations Behave,
and Maybe Even Save the
World ($29.99, McClelland &
Stewart), brand strategist Bruce
Philp explains that consumers
have more power than they
realize. Philp’s clear-headed and
entertaining observations (savour
the chapter entitled “Bend it
like Buffett”) might save you from
the coming brandpocalypse.
Former hacker turned investigative
journalist Kevin Poulsen shows
in Kingpin: How One Hacker Took
Over the Billion-Dollar Cybercrime
Underground ($28.95, Crown)
that there are criminal networks
operating online that make the
Mafia look like stick-up kids.
Read this and sympathize
with the IT guys who lie awake
at night because the CEO’s
password is 1234.
Ex-CIA analyst Michael Scheuer
has penned the definitive
biography of Osama bin Laden
($21.95, Oxford University Press),
the man who turned scattered
anti-Western sentiment into
a global threat. Whether you’re
doing business in the Middle
East or just annoyed that airport
security agents insist on touching
your junk, you need to know
why, hiding or not, bin Laden
isn’t going away.
ILLUSTRATION ANTONy hARE; PhOTOgRAPh (LEFT) ROSA PARK, WhITE LIONESS MEdIA
ed for an additional 14 per cent, and Latin
Americans make up the balance of foreign
So where are they buying? The study says
the theme-park-oriented Orlando-Kissimmee
area is the most popular location among foreign buyers, with 19 per cent having purchased
a home in the area. Miami-Ft. Lauderdale
drew 17 per cent of foreign buyers, and
Bradenton-Sarasota accounted for 13 per cent.
Tampa, Cape Coral-Fort M yers and Naples
rounded out the top six areas favoured by for-
ers were responsible for an estimated 22 per
cent of Florida home purchases last year.
“Florida is a beautiful and desirable location
– and that’s everything. There are lovely beaches, vibrant cities and peaceful communities,
acclaimed golf courses, theme parks and other
attractions. It makes Florida a top destination
for buyers seeking a second home or investment property,” says Fitzgerald, who is also
president of the Florida Association of REALTORS.
The study says Florida REALTORS completed 90,000 transactions with international buyers in 2010, with one in four REALTORS
reporting having one international client who
purchased a property and 16 per cent reporting two transactions in the past 12 months.
The majority of foreigners (69 per cent) cite
Florida’s desirable location as the single most
important factor influencing their home purchase. Twenty-one per cent of foreign buyers
say they were motivated by Florida real estate’s
Not surprisingly, Canadians represent the
largest share of foreign buyers, accounting for
36 per cent of recent sales. UK citizens are the
second largest foreign buying group, with 15
per cent of sales. Western Europeans account-
eign buyers, says Fitzgerald.
“Canadians are shopping in various communities,” says Fitzgerald. “Most are coming
down to buy an upper-end second home or an
She says just over half of foreign buyers purchased a detached single-family home while 37
per cent purchased a condo and 11 per cent
bought a townhouse or similar p roperty.
Among other things revealed by the study, foreign buyers clearly have the means, and they
know how to spot a bargain.
The vast majority (81 per cent) of foreign
buyers paid cash last year. While last year’s
median home sale price was $180,000, Fitzgerald can show you a 3,500-square-foot home
with updated kitchens and baths, granite countertops and premium appliances in a Palm
Beach golf course community with multiple
PGA courses priced in the mid $500s.
At prices like those, who can resist?
“A gentlemen from Toronto recently bought
two properties in a lovely condo community in
West Palm Beach,” says Fitzgerald. “In 2006,
they sold for $165,000 and $180,000. He
picked them up for $60,000 each. He bought
them sight unseen. There is so much value out
A S P E C I A L I N F O R M AT I O N F E AT U R E
The 2010 National
Association of REALTORS
Profile of International
Home Buying in Florida
Vacation home for family
Rental property for
Vacation home and
ancy the notion of an
oceanfront home in
one of Florida’s toniest communities, but
don’t feel like spending tens of millions of
dollars to get one?
Reputed Florida developer the
Trump Group (no relation to Donald) is offering Boca Raton’s most
Trump Luxuria spokesperson
Ranging from 4,500 to 10,000
square feet, Luxuria’s residences are
fit for royalty: onyx bathrooms are
outfitted with $5,000 Neorest toilets and flat-screen TVs elegantly
hidden behind two-way mirrors.
Balconies include full Viking outdoor kitchens, a private hot tub and
A S P E C I A L I N F O R M AT I O N F E AT U R E
luxurious condominium tower ever
That alone says a lot. According
to Forbes, Boca Raton has some of
America’s most expensive gated
communities. Even in this opulent
company, Trump Luxuria – a 10storey, 26-unit, oceanfront tower
constructed largely of limestone – is
“You can easily spend $30 million or more for an oceanfront
home in Boca Raton. Or you can
live here for a fraction of that price
and have the security, comfort and
services of this area’s most privileged enclave on the ocean,” says
a cabana bath. Four of the building’s suites feature private full-size
swimming pools complete with hot
tubs and waterfalls. A private beach
club includes top-end amenities and
To ensure each residence is truly
unique, Luxuria’s design team handles everything from turnkey
designer interior décor and furniture
packages to any other finishing
Goldstein says the building’s
owners are cash buyers who typically add a residence at Luxuria to
their home collection. “As we say,
‘If you can, you will.’”
Tru mp Luxur ia, B oc a R aton >
wning a vacation
home is one
thing. Being part
of a club dedicated to quality living is something
For nearly 70 years, Ocean Reef
Club – a private, 2,500-acre retreat
on Key Largo in the Florida Keys –
fishing and more.
“This is not a pretentious place.
People come here to relax and
enjoy life. It is friendly and genuine,” says spokesperson Richard
Accessing Ocean Reef’s lifestyle
can be realized with ownership of a
dock or residence, or without a
property purchase as a ‘Social mem-
A good life
has fostered what the club calls “a
unique way of life.”
For members that lifestyle
includes being part of an exclusive
community with its own 175-slip
marina, lighted runway, schools,
restaurants, entertainment and
recreation facilities, including golf,
tennis, all manner of water sports,
ber’ with accommodation available
in Ocean Reef’s private inn or a rented residence.
Sounds intriguing? “Our membership department can invite guests
to experience the club.
“That is the only way to truly
understand what we offer,” says
Th i s re po r t wa s p ro d uce d by R a n d a l l Ant h o ny Co m mu n ic at i o n s I n c. ( w w w. ra n da l l a nth ony. co m ) for Th e G lob e an d M ail. R i c h ard D e acon , Nat io nal B us in e s s D e ve lo pm ent M anage r, rde aco [email protected] beandmai l. co m .
Lap of luxury for less
Go beyond convention.
Accessible. Inspirational. Exceptional. The very things you strive to be
for your organization are the very same things that make Scottsdale your
perfect meetings destination.
return each year
as the tides.
Now you too are invited
for a rare visit to our legendary
private club … through the pages
of Ocean Reef Club Living.
Visit our website to
request your copy or call our
to explore the possibilities
of a guest stay.
Any day of the week, strolling
Old Town Scottsdale’s covered
sidewalks and perusing artworks
in hundreds of art galleries and
on public display is dreamy.
Or spend an afternoon (or all
day) finding your centre at any
one of Scottsdale’s destination
Some half a million Canadians
resort spas: The Hyatt Regency
flock to Greater Phoenix and Scotts- Gainey Ranch’s Spa Avania, The
dale annually, drawn not only by
Fairmont Scottsdale Princess’s
ooking for more
from a sun holiday
than a week of
drinking at a cheap
find yourself in good
company in Scotts-
A S P E C I A L I N F O R M AT I O N F E AT U R E
A visit to Scottsdale dazzles.
Imagine a month or two?
blissful temperatures and blue skies,
but also by attractions that reward
the senses, mind, body and soul.
Imagine starting the day with a
guided morning hike or horseback
ride into the verdant Sonoran
Desert? Amid a forest of towering
Saguaro Cacti, Palo Verde and Ironwood trees, rangy Ocatilla and
other desert flora, you will come
across scores of fascinating birds
and maybe even shy wildlife like
gentle Javelina – furry, wild boarlike creatures often seen in packs.
On most Thursdays and Saturdays through April, head to downtown Scottsdale for lunch a nd catch
Native Trails, a lively free show by
the Fort McDowell Yavapai Nation.
Held at the Scottsdale Civic Center
Mall, this showcase of rich and varied Native American cultures
includes traditional foods, static art
displays and performances that span
inter-tribal powwow dances to energetic hoop dancing.
Willowstream Spa, The Golden
Door Spa at Boulders Resort, and
the Joya Spa at the InterContinental Montelucia Resort are just
a few among Scottsdale’s firstclass options.
Golf is another main event.
Beyond scores of public courses,
the area’s premier resorts are
affiliated with a host of PGA-calibre links, including the renowned
TPC Scottsdale, Grayhawk Golf
Club and the new We-Ko-Pa Golf
Club. Some, like Troon North
Golf Club, eschew the grandeur
of traditional fairways for
unique, target-style courses
etched from the desert.
At the end every day, choose
among a stunning array of
award-winning fine dining establishments or enjoy casual Southwest fare at a hip downtown
eatery like Cowboy Ciao or the
Mission, just two of the city’s
countless hot spots.
Appetite whetted? Explore more at www.experiencescottsdalecvb.com.
A home in the desert? Sweet.
In his recent market report, Scottsdale-based Re/Max Excalibur Realty salesman
John Sposato says he expects the buoyant Canadian dollar will mean “there are
some very happy investors gearing up to head south to purchase this fall/winter.”
Of 6,598 homes sold in Greater Phoenix in October 2010, Sposato says 41% sold
for under $100,000, and 48% sold in the $100,000 to 300,000 bracket. At the top
end, 54 homes sold for more than $1 million in October, with the highest sale valued at $3.6 million for a home in Scottsdale’s Paradise Valley community.
To learn more, visit www.ArizonaHomeGroup.com.
Photography by Evan Joseph
Stunning, spacious estate condominiums situated
directly on the Atlantic Ocean in Boca Raton.
There is an art to living life to the fullest while also experiencing the finest it has to offer. It takes an idyllic
location like Boca Raton where the breathtaking beach is balanced by fine dining, shopping and culture.
It also takes a home where everything has been thought of - from outdoor kitchens, onyx bathrooms and
spectacular oceanfront views to extensive services and amenities. And to raise all this to an epic level, the art
of fine living takes the right price. But availability is limited; only twenty-six families will call Luxuria home.
Starting in the high $3 millions | 4,500 to over 8,000 square feet
MODEL RESIDENCES NOW OPEN
2500 South Ocean Boulevard, Boca Raton, Florida 33432
Oral representations cannot be relied upon as correctly stating representations of the developer. For correct representations, make reference to this brochure and to the documents required by
section 718.503, Florida statutes, to be furnished by a developer to a buyer or lessee. Not an offer where prohibited by law. Prices and specifications are subject to change without notice.
At the end of the day, it was
a business matter, and we
understood the province’s
point of view. It was the act of
expropriation that was unique.
We’ve had to close lots of
mills in Canada and always
worked to find a solution
with the governments.
Most students graduate looking for an employer.
Some of ours graduate looking for employees.
So Newfoundland’s move was
We’re not just teaching business, we’re teaching
students how to start businesses. Entrepreneurship
programs at UBC provide mentors, funding and
networking to help more bright minds succeed.
We bring students from different academic disciplines
together to collaborate on ideas from concept and
design to marketable product. UBC students have
pitched ideas in Silicon Valley. They’ve secured
funding from the Dragon’s Den. And they’ve launched
Yes, it was. I learned a lot
about NAFTA after that one.
[The company launched
a NAFTA challenge, and
reached a $130-million
settlement with Ottawa.]
Do you have regrets?
Out of print
The last three years have been a hard education for David Paterson.
In 2007, the U.S. paper veteran became CEO of AbitibiBowater, the Montrealbased newsprint goliath formed from the merger of Canada’s AbitibiConsolidated and Paterson’s U.S. employer, Bowater. After the deal, the decline
of the newsprint market turned into a rout, and AbitibiBowater filed for
bankruptcy protection in April, 2009. Today, it’s out of protection, smaller
and leaner, but Paterson, at 56, won’t be part of it much longer. He passed
the torch on Jan. 1 to Richard Garneau, a veteran forestry executive,
but will serve as an adviser until summer.
We have emerged from
protection, so it is a new start.
I had been asked whether I
was committed to staying
and living in Montreal for the
long term. I thought about it
and said, “No, I don’t want to
finish my career in Canada.”
I’ve got five to 10 years left to
work and, mainly for personal
reasons, I didn’t want to be
away from the States that long.
My wife goes back and forth
[between homes in Atlanta and
Montreal], but my kids are in
the U.S., and some day I hope
to have grandkids there, too.
What’s next for you?
All my focus has been on
getting the company out of
bankruptcy, so I haven’t spent
64 FEBRuaRy 2011 REPORT ON BUSINESS
any time worrying about that
stuff. I’ve committed to help
in the transition, and to spend
time with my family. I’m going
to take it easy for a while.
What is your biggest piece of
advice for your successor?
You’ve got to keep changing
the product mix and changing
the performance of the
company. This is not the end
game. It is the beginning of the
new company, and you’ve been
given a fresh start. Standing
still isn’t going to work.
Did you find a different
business culture in Quebec?
If you look past the language
issue, business practices in
Quebec are pretty modern,
pretty standard. The big
difference is the Canadian
What was the darkest moment?
For me, it was the two months
leading up to the filing.
Funding the restructuring was
very challenging because of
the state of credit markets, and
we weren’t performing well.
federal system. In the U.S.,
We had lost 25% of our order
the federal government
book in newsprint in one year.
has so much authority over
For employees, the darkest
regulation and taxes. In
moment was right after we
Canada, provinces have a
filed. The reality hits you in the
much bigger say, especially
face—the psychology of going
around land management.
from a secure company to a
You clashed with
bankrupt-filed company. The
Newfoundland and Labrador
when the province expropriated shock is a punch in the nose to
your employees, and they get
assets of a mill you had closed.
Was it coincidence that you and highly distracted.
Danny Williams retired within
two weeks of each other?
How did it feel when you came
out of protection?
That wasn’t co-ordinated,
I guarantee you that.
Walking around the office
that day, I actually saw
people smiling. There is
a deep sense of relief that
you’ve got through it, and
in a way that you can feel
good about the future of the
Did you send him a note?
I haven’t really communicated
with Danny. I’ve met him,
but I worked mainly through
his staff. We had a pretty
open dialogue. We just
photograph hollis bennett
Why leave now?
When you are in a challenged
industry, you have to get your
fixed costs down as low as you
can. It took the restructuring
to get us super-serious about
doing that. It’s hard to do,
because, in most businesses,
fixed costs are people and
facilities. But the revenue
model didn’t support the cost
structure, and now we have
reduced our fixed costs by over
50%. We should have been
more aggressive from day one.
successful products like Clinicbook, an online system
that connects health clinics with patients; Energy
Aware’s PowerTab, a tool that gives homeowners
feedback on energy use; and Katal Innovations’ ski
and snowboard Landing Pad. We’re nurturing the
minds that will help lead Canada’s economy in the
future. And that’s just some of the thinking from here.
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11-01-07 3:19 PM