The Canadian Investor - Top 5 Canadian ETF by Inflows and Dealing with Questionable Management

Episode Date: June 24, 2024

In this episode, we dive into the latest ETF flow data for May 2024. We explore the strong net inflows in Canada, the notable trends in equities and the significant outflows of Canadian listed spot Bitcoin ETFs. We also tackle the issue of dealing with questionable management. Using Autodesk as a case study, we discuss the challenges faced by shareholders when facing questionable management decisions. We review the company's transition to SaaS, its recent controversies, and the involvement of activist investor Starboard Value.  Tickers of Stocks & ETF discussed: XIC.TO, CIAI.TO, VFV.TO, DMEU.TO, ZAG.TO, XIU.TO, CSAV.TO, HULC.TO, XSP.TO, HXT.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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You and I sure have our skepticism around how cyclical this industry may be, even if their backlog is through the roof. But you know, hey, time will tell, as you said it, time will tell. Let's play a game to start today's show. Let's call this or that. There are two stocks here that I have that have both risen nearly 2000% since the first quarter of 2020. One of them is Nvidia and the other one is not a tech company. It is in the apparel space. Do you have a guess on what it may be? The stock is up 1900%.

Nearly, yeah, so it's a 20X since then. I think it may be a company that was big back in the day when I was... Correct. Yeah, I can't remember what the name is. It just shows that I didn't... Is it American Apparel or something like that? It is Abercrombie & Fitch, which owns that brand and Hollister.

That's right. The company has had a bit of a turnaround from its days of glory and the market has rewarded it very much so. This is why investing in fashion is so, so difficult. Or you just take whatever was in like 20 years before and then it just kind of loops around back again if the company's still alive. That's right. Yes. What's old is new again with fashion as always. All right. next up this or that we have the blue line is nvidia of course up 20x since then the orange line is a stock up 4200 well over a 40 bagger

during that time it is a beverage company do you know what the stock is? Is that like the Celsius thing? Yeah. Bing, bing, bing. We have a winner. Celsius stock is up huge.

You know, it's, it's, and it's, it's growth has been very legit. It's, it's distribution has been wild. It's now in all,

a lot of the major retailers. It's in every convenience store. I see that every time I walk by a Circle K, the Kushtar asset, it is like they advertise that they sell Celsius there. That's how I always recognize for the hot new thing is the convenience stores are saying, we sell this here. Come get that here. And Celsius has sure made a name for itself. And honestly, I think I look at these energy drink companies that have gained so much traction, their competitor seems to actually be coffee. People are replacing coffee in the morning with these drinks. I don't know. I don't have any knowledge on that health-wise, but I see people drinking many of these per day.

It's got to be a ton of caffeine. Yeah, yeah, they do. I mean, I almost bought one the other day because I used to, back in my poker days, drink a lot of these, and my younger days, I mean, Red Bull vodka. Yes, Red Bull was the predecessor to Celsius for those of younger listeners

that are not familiar with the brand. But I used to do like that, which apparently was not good because it gives you a little bit of, you know, kind of upper and downer at the same time. But I used to drink those. I switched like four, three, four years ago, just a straight coffee, just because I think it's more natural. You know, there's the one ingredient like these drinks. I find there's a whole lot of different ingredients. And I just saw it for me, even like pre-workouts that I used to drink a whole lot. I just figured, you know what,

I'll just have a coffee or an espresso and that's it. From all of my research, black coffee in moderation is very good for you. From all of my research, black coffee in moderation is very good for you. From all of my research. Keyword moderation. In moderation. In June 2021, Celsius did 65 million in sales for the quarter. And their most recent quarter, they did 356 million in the quarter. So they're on a trailing 12- months sales run rate of 1.4 billion,

which has grown by a compound annual growth rate of 63% since they have their filings available. That is some pretty remarkable growth. In 2021 and 2022, this drink took off at a meteoric pace and the stock price has been rewarded ever since. It looks like they went public in this day exactly in 2019, recording this on June 18th. June 18th, 2019 is the first quote I have of when their stock started trading. I don't know if this is split adjusted or whatnot, but $1.36 on today's price and is now trading for $62.73, which by the way, is on a 34% drawdown. So maybe time to look at the name here. Yeah, it still looks like it's pretty, trading at pretty high multiples, but who knows what's high

in terms of multiples anymore with this market. So maybe it's just a value stock at this point. Just strictly off vibes. That's the market's moving off of momentum is at its serious peak. I see the technology sector of the MSCI is trading at its highest price to sales ratio, which had a huge drawdown in 2022. It is now at all-time highs again in terms of multiples on sales. So let's kick off the episode here today. You're going to talk about ETF

inflows. Give us a quick update. I'm curious to see how persistent ETF flows have been. And then we're going to talk about how to deal with questionable management and an exact situation that I am in personally. So I'm going to walk you through how I am thinking about a company I own and some potential turmoil the company's been through and how you can think about dealing with that companies that you own in your portfolio. So take us away. Yeah. Yeah. Well, first of all, I mean, for those who've been listening for a little bit, you'll remember we used to do this a bit more once a month. So National Bank actually has ETF flows that come out for each month. It gives a

year to date and the month information. do it for Canadian ETFs but also US ETFs and I just happened I had a few topics in mind for today's recording and I happened to check that and I noticed they were still doing it because for a while they stopped doing them and I don't know exactly when they started again which I was pretty excited I decided just to do that because I think it provides a really good look of where the markets are going, especially in Canada, some of the divergences that we'll see with the US. So like I said, it provides, I'll talk about the monthly inflows, but also the year today, just to show that the trends that they're kind of showing here. It also provides

ETF flows for a bunch of different asset classes, including equities, bonds, money market funds, crypto, even all-in-one or multi-assets ETF. So it provides all of that. And here are some key takeaways for Canada. So there's been some consistently strong net inflows for Canada since the start of the year. The weakest month was January, but just shy of $4 billion in terms of inflow. And the strongest month was February with almost $6 billion. Of course, I think you would agree that makes sense because a lot of people make contributions before the RRSP deadline, trying to get some money in. And clearly, there's going to be a lot of money from those contributions that will go into ETFs. So that was not a surprise to me.

The second year takeaway that I have is year to date, the most inflows were in order of importance. So it was U.S. equities, not a big surprise. And it's funny because that was $9.1 billion. Because that was $9.1 billion. And I was talking to Dan Kent. And he was saying that they're getting at StockTrades.ca more and more people looking to invest in U.S. index ETFs that were more interested in Canadian equities before that. So I think that kind of aligns with that there. I mean, look, let's not kid ourselves. The TSX has been a dog.

The TSX has been an absolute dog compared to owning U.S. equities you and I have been doing this podcast since 2019 telling people hey look there's great assets in Canada but you're you're doing yourself a disservice by not looking at the large economy south of the border here and owning pieces of some of the greatest enterprises on earth. And it's so easy to do. There's not a lot of friction beyond currencies. And there's easier ways and more efficient ways to deal with that nowadays. So I am not surprised that the tide is turning. I mean, there's just not much sectorial diversification in the TSX. You're super concentrated in the big banks.

A lot of names with negative amortization all over them. Limited tech options. And frankly, just poo performance, right? Like that's the accumulation of those over time. People are going to be looking more and more to the U.S. market or internationally beyond that as well. Yeah, exactly. And international is the one that comes in second at $6.5 billion inflows compared to the U.S. at $9.1 billion. Fixed income, not surprising with rates being as high as they are, 5.5 billion. So

it is quite attractive when you can get especially short term treasuries. I've been a big proponent of that. You don't have the duration risk. So it's short term, you're still getting if you invest in Canada 5%, if you invest for US treasuries above 5%. So that's very attractive in my view, especially if people are looking to get some, a little bit less risk in their portfolio. Canadian equities came in fifth behind multi-assets and they had 1.2 billion in net inflows. So at least it was net inflows.

The notable outlier, and this will not come as a surprise if you've been listening to the show, was crypto assets in Canada, ETFs that saw negative flows in May as well as year-to-date now this is not surprising because we had the US that did the spot Bitcoin ETF early in January and the fees are literally five times more for the Canadian Bitcoin ETFs compared to the US. And I think honestly, I think even if you factor in the currency conversion to USD to buy it, I think if you have a somewhat medium to long term time horizon, I think personally, it's just a mistake

to not own the US one at this point. You're looking at, yeah, like zero point, about 20 basis points or so for most of them versus Canadian ones that are 1% plus. Yeah, look, I mean, these financial products and the companies that distribute them and manage them are being forced to be more and more competitive when it comes to management expense ratios. And it's kind of like get with the times or get blown out of the water in terms of fund flow. So I'm not entirely surprised to see that. When I look at this, I am surprised at how much higher international equities are than domestic equities. That number is much different than I was expecting. I was expecting to get US, then domestic, then international. And I couldn't be more off with my guess here because international equities

is almost six times higher. I mean, look, the reality is the TSX, if you've owned the TSX composite, we'll use the TSX 60 over the last five years, you've made 30%. You've collected probably a 2% ish dividend along the way as well. Or you could have owned VFV, for instance, I'll just use the well-known Vanguard S&P 500 index. And you've made 93% during the same timeframe. You've collected a similar, maybe slightly lower dividend yield that actually has growth i mean the results have been speaking for themselves yeah no exactly and i mean the it'll be interesting at least for the crypto assets because at some point they'll have to lower them those fees because they've lost 14 of their aum since the start of the year

so i think the calculation we've seen with the grayscale Bitcoin ETF, because they converted from being a closed trust or an ETF when they got approved by the SEC. And they, I believe they've reduced their fees a little bit. But their reasoning was that people would, a lot of people would still stay because of tax reasons. And I'm assuming they have the similar kind of reasoning. But at some point, something will have to give. And if they want to attract some funds, because at the end of the day, these Canadian ETFs were the only name in the game, at least in North America. You could get some elsewhere. I think in Europe, there was a couple of jurisdictions.

But as you get more competition, especially from the behemoth down south with lower fees, if they don't lower their fees, they're going to essentially lose out on a whole lot of assets on the management here. Yeah, there is an advantage to scale economies when you're an asset manager that distributes ETFs in terms of the funds fee structure that you're able to supply. So there is scale economy advantages and competitive advantages that the BlackRock's, the Vanguard's, and maybe some of the other Invesco type names have over these smaller asset managers here. Yeah, exactly. Because they can attract so much funds, right? So they can definitely lower the fees. It's like a Costco

of Walmart. So they have slimmer margins, but they make it on volume. And it's the same kind of reasoning here. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call

or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questtrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation, and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you

make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see, because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand

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disclaimers and more information. I think enough about the crypto ETFs. So the top five ETFs in terms of inflows for May. And this is really interesting. So the reason I'm saying this, for those watching, you'll see. So the top five in terms of inflows and top five in terms of outflows are very interesting if you ask me because the top inflow was 502 million for the XICDI shares,

a Quarison PTXX capped composite ETF. But then you look at the outflows and there's two that are TSX that follow essentially the TSX, TSX60 here. That in the top five outflows, which almost like kind of negates the number one here. So it's really interesting. That's one that stood to kind of when I looked at this. I think it may be people just switching potentially for lower fees. I don't know by heart the fees of the two, but what's your kind of first glance when you look at these? It looks like they're just swapping names between one BlackRock fund to the other,

names between one BlackRock fund to the other, just based on, I believe XIC and XIU are both BlackRock. And then there's the GlobalX names that cover the same index. So different asset managers, same product. No, exactly. And then obviously, so you have in the top inflows, so you have on number two here, the CI Global Artificial Intelligence ETF. That one was 554 million. Vanguard S&P 500 VFV. So the one you talked about, 526. Desjardins American Equity Index ETF, 373.

And you had the BMO Aggregate Bond Index ETF. So ZAG at 291 and in the outflows obviously I mentioned the two there so number two and two three and four so two you have CI high interest savings ETF not surprising because you have some treasury bill ETFs that offer higher yield now compared to those high interest savings ETF you You had the Global XUS Large Cap Index Corporate Class ETF, not very familiar. I know it's obviously an equity fund. I'm assuming people are probably switching for the index here. And then you had the XSP, which is the iShares Core S&P 500 Index ETF. This one is Canadian hedge. So maybe people have been listening to the podcast

and ditching those Canadian hedge ETFs. I'm interested in the second one here, the AI ETF. That's getting some serious fund flows there. I'm looking at the portfolio holdings here on my other monitor. Okay. Do you want to share it? They are in order from highest to lowest nvidia meta microsoft alphabet amazon apple broadcom amd service now taiwan semi crowdstrike adobe data dog so a rebranded qqq QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ okay, we're going to take QQQ and remove Starbucks and Lululemon and Disney, and then we're good. That's basically what these are. And I just don't see the purpose of these instruments other than it makes the asset managers a lot of money. the purpose of these instruments other than it makes the asset managers a lot of money.

But it always amazes me the talent and skill of the marketing and what investors and maybe the RIAs of their clients put them in to make a few bucks. It's the old same song and dance that we've lived through forever, basically. Yeah, and I think it just goes to an importance, and we've been hammering on that over the last probably month, but I think even before that for the podcast, is just when you look at ETFs, make sure you actually look at the holdings, obviously the fees involved, because sometimes the name of the ETF, you start looking into it.

Remember when we looked at that vegan ETF, it just does not make sense. It's a lot of it. The name is just marketing. So you have to make sure you look at those holdings. It's not very difficult to do. It's available for everyone to do it. It's just taking, you know, 10, 15 minutes, just looking at it and making sure it makes sense for you. Because sometimes it'll just be very- Here's how I did it in 10 to 15 seconds, not minutes. I typed in the ticker. I typed in ETF. Here's the administer CI global asset manager. Here's the page.

It says the quote. It says the fee. And then there's two links for the fund ETF facts. And there's one that says positions. It opens up a little PDF. I have the whole list in front of me. That took seven seconds to accomplish. And I can look at it and go,

hmm, let me compare that to just the S&P or the QQQ. And is there any actual real niche differentiation here? Yeah, probably just the fees. But yeah, so and then the US ones, I wanted to focus more on the Canadian inflows, but the US one's still interesting. One thing that I pulled out was the equity ETF flows by sector and themes. And this one is quite something, not surprising per se, but essentially, if you remove out

the technology inflows, there would be negative flows, basically. That's what it shows. So yeah, technology has $10.3 billion. This is just year to date, May 2024. So $10.3 billion in net inflows and $3.2 for industrials. And then the rest is literally flat or negative inflows, which is kind of crazy. What's your general feeling on the Canadian consumer these days? Have you noticed any data points, any anecdotal stuff on the Canadian consumer these days? I know that I've seen some

graphs around in the US that the household savings leftover money from pandemic has basically gone down to zero. And consumers have two things available to them, right? Cash, savings, or liquid assets, what I'll call, and credit, right? And so I'm curious if you have any thoughts on that data point for the Canadian consumer today? Well, most of my data points would be anecdotal, but also company earnings. So companies that are definitely more based in Canada, I'm thinking Canadian Taller, Dollarama, can even talk about Loblaws, Costco, some companies that will have more operations in Canada. And for the most part, it's pretty consistent, is consumers are shifting from non-essential to essential spending.

So they're tightening up the budget. They're spending on things that they must buy, that they need to buy. Unfortunately, in terms of aggregate data, we just don't have as much in Canada compared to the U.S. Like you have the New York Fed, for example. They come out every quarter with the consumer indebtedness, household indebtedness, which shows a very clear picture of the credit card debt and the progression.

So the U.S. consumer is definitely purchasing a lot on credit. I suspect that it's similar to Canada as well, just because people are shifting over to essentials. Buy now, pay later is another option. The problem is the data, whether it's Canada or US with that. It's very hard to get some accurate data and some aggregate data, but people are definitely going towards buy now, pay later. But I'm seeing it with restaurants around me in Ottawa. I don't know if it's the same in Toronto. And I've seen some reports as well that restaurant

traffic is down. And I've noticed that it's typically the either the higher end restaurants that have a really good reputation, the ones that offer really good value, or the one that are maybe a little higher price, but offer something really special, but it's still reasonably priced. But if you don't offer anything special, and you're not value, I've seen those at least from what I've seen, seem to be struggling. Canadian Tire has negative year-over-year top-line sales growth, four out of the last five quarters I just pulled up. And the one that was not negative year-over-year was flat at 0.5% year over year. So essentially zero. So that's the data points we have to work off of. But yeah, there are more that tell a fairly bearish story. Yeah. And I mean, people are pulling back a little bit. So I mean, it's understandable. But yeah, that's kind

of my general sense here. And then just to finish on the ETF, obviously, in the US, most of the flows in terms of assets under management are definitely the big ETF. So you're talking about here the VO, Vanguard, S&P 500, IVV, iShares, S&P 500. The number three is actually interesting year to date is the iShares Bitcoin Trust, which is not surprising to me to some extent, but for it to be that high, that is quite surprising. You have QQQ and then Vanguard total stock market. So essentially the Bitcoin ETFs is the outlier in the top five here. Yeah. Yeah. Like VOO, VTI, QQQ, those are staples. Those are at the top of this list regardless, basically. Yeah. Well, one, two, and five are essentially the same, right? The total market is almost the same as S&P 500 and then QQQ is a bit more tech. But then if you look at the total outflows,

it's interesting that SPY saw the most outflow. So I don't know if that's a fee thing. People are rotating into the lower fee one. Yeah, that could be it. And then obviously small caps have been battered. So you have the IWM, iShares Russell 2000 down 9 billion in flows overall this year. And then you have iShares Russell 2000 down $9 billion in flows overall this year. And then you have iShare MSCI USA Min Vol Factor.

So I'm not too familiar with that. USMV minus $4 billion. TFLO iShare Treasury Floating Rate Bond. So minus $3.4 billion. And then JP Morgan Allerian Index. $4.4 billion. And then JP Morgan, Alerian Index, I believe this one must have been wound down because it's 100% down in asset under management. So I would suspect that they just closed the fund. Yeah. Small cap investors continue to bang the drum on how big of a disparity there is in valuation spreads between large cap and small cap names. And small caps

continue to, that gap just continues to increase over time. And it's been years and years and years that gap continues to widen and small cap investors continue to bang the drum. And I've been pretty vocal about this in the past. I'm all for looking at small cap names. I think that that's what a good portion of opportunity is for self-directed investors who are not constrained by capital liquidity requirements, or they've been told arbitrarily that they have to buy things that are above this in market cap, because these things exist for professional managers 100%. At the same time, you have these bigger companies continuing to just grow and grow at accelerated rates. We've seen all three major cloud providers of Azure, Google Cloud Platform,

and Amazon Web Services actually grow at an accelerated pace from their previous three quarters in the most recent one. And so it just becomes really, really difficult to sell a story when you have these companies that are just accumulating more and more wealth with more and more data advantages and the market saying, hey, look, the next 10 years, the previous 10 years were dominated by big tech and the market saying, hey, it looks to me like the next 10 years, the previous 10 years were dominated by big tech and the market saying, hey, it looks to me like the next 10 years will be dominated by those same players. That's how I'm reading the market right now in terms of price action and where funds are moving. Yeah. And there's also like you kind of touched on it, but the fear of getting fired right from

those fund managers, because you can't really get fired for owning Apple despite you know sales flatlining or declining despite them launching which I think was a really underwhelming product with their Apple Intelligent which are just using open AI to you know and I ranted on this a little bit with Dan too, but it just to me, it just baffles my mind that the market thought it was amazing because they think people will get new iPhones just because of that. I mean, if you're struggling to, you know, make ends meet, you're going to make your iPhone continue. Like you're not going to switch your iPhone to get this new AI intelligence on your phone. You're just going to keep it as is. Maybe there's going to be some people that might switch, but I know I'm not switching. I mean, I have, you know,

I have an open AI subscription. I'll use it on my laptop. Like I don't need it on my phone until, you know, a couple of years down the line where it's just too slow to make anything work on it. The real upgrade cycle for iPhones is battery life. Let's not get ourselves. Yeah. That's the real upgrade cycle. They know that. I know that. Everyone knows that. It's battery life upgrade cycle. That's what they've built. They've built phones that are too good and they've built fantastic product. They're like, guys, they're going to love AI. It's like what people actually love is when you get a two-factor authentication text and it auto-fills.

Like that's a feature I actually really like. Exactly. No, it's just a bit of a head-scratcher, but I guess you can get fired for owning Apple, right? So that's kind of, it's like the new IBM. But don't get me wrong, they generate tons of cash flow, but it's still, there are serious questions about where the growth is going to come from for Apple. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker

for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products.

I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now

common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world. investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business.

And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Let's talk about how to deal with questionable management teams. So I thought this was a timely topic because it's something I'm dealing with. And we have a little bit of podcast therapy as I work through this with myself here and Simone here on the line as well.

And hopefully you guys can learn from that. So I've been a shareholder of Autodesk, ticker ADSK for quite some time now. Simone, as long as you've known me, I've been a shareholder of this thing. I think at this point, I've talked about it time and time again. You've had it for a while. It's one of the oldest and most successful software companies of all time.

And I don't just mean that lightly. I mean, of all time. They are a huge player and dominate the category of architecture, engineering, and construction, aka AEC, with their immense category-leading software products, most notably flagship products like AutoCAD and Revit, which have been category leaders now for many decades, from the late 80s with AutoCAD and the early 2000s with Revit. They have been in the news for all the wrong reasons as of late, including questionable accounting of cash flows that there's a lawsuit about with the SEC, honestly silly stock-based compensation, subsequently not filing their 10K, their latest 10K with the SEC

on time. These are just not things you want. Andrew Agnos has been the CEO now, I think, since 2017. Quote, go for a business that any idiot can run because sooner or later, an idiot will probably run it, end quote. Peter Lynch in his book, One Up on Wall Street, a very, very similar quote from Warren Buffett in 2008 reads, I try to invest in businesses that are so wonderful that an idiot can run them because sooner or later one will. Essentially identical quotes from two very famous investors. And I believe the sentiment makes a lot of sense here. Andrew Agonos, the CEO, I really liked him when he joined. He seems smart, seems like a good leader, well-spoken. I liked him on the conference calls, especially when he came out

with very clear goals for their transition around software as a service from license-based to the modern tech stack and how they can produce billions of cash flow over the next few years. They didn't really hit any of those goals. They were close. I mean, it's not like they felt flat on their face, but they were underwhelming. Of course, you and I like to see

not only a track record of meeting expectations, but surpassing expectations. I think they've done the transition to SaaS well and bundled some of the products, most notably with Fusion 360 for the manufacturing sector. They've done that, but the management team decisions have been certainly very questionable. And as a result, the stock has traded flat since 2020, largely trading sideways, a lot of multiple compression. It got a bit frothy, but look, the market at some point, Simone says, I get it. You're running this business, but you have to value shareholders in some way.

And the way that they have been valuing shareholders just doesn't seem to be there, especially with how they're treating these filings with the SEC, but also with stock-based compensation. So during that time, revenues have grown nearly 15% per year. Total subscriptions have gone from 4.87 million to 7.5 million during that time in terms of total subscriptions. Most notably recently, Starboard Value, which is a $50 billion activist fund, has now invested half a billion dollars into Autodesk, their statements outlining a path to being more shareholder friendly. Because let's be honest, this company has not been shareholder friendly. Here this reads, it is impossible to believe that another company would immediately hire Ms. Clifford, who was the former CFO, to be now its chief strategy officer after she was fired from being the CFO. How is it possible that Autodesk needed to create this new position of chief strategy officer and needed to appoint Ms. Clifford into that position?

Now, the CFO was removed from the job because they couldn't do their job right. You know, questionable accounting, not getting stuff done, not doing their filings on time, not acceptable for a $40 billion public company. Is that fair to say? Not acceptable, right? For them to then throw, here, I'm going to make up some chief strategy officer and throw that, what do you think about that when you see that? Yeah, I mean, it's just trying to show like they're doing something, I would say. I think that's just for show more than anything. And what I'm showing right now, too, is basically the share based compensation. I don't follow this company much. As you were talking, I pulled it up. Like it's grown, it's grown more than revenues in terms of annual growth rate. It's grown at 16.88% since 2017 versus revenues that have grown at 15.14%.

So that is right there. That's pretty alarming to me. And I was looking a bit earlier at also their total shares outstanding. So they're spending a lot of money buying that back, which, you know, it's not great for shareholders because you're on the one hand you know giving sbc but then on the other hand you're taking cash flows to buy that back so it's just um i know the tech industry does it quite a bit but this seems to be um excessive definitely yeah it is excessive i have here a quote tweet from Ryan Henderson,

who actually works at FinChat. He made a little meme. He goes, Autodesk shareholders, we want lower SBC. Autodesk management team, how about a new chief trust officer? They appointed Sebastian Goodwin as chief trust officer. I just don't know what that position is. I don't know what that is either. Chief strategy officer. I just don't know what that position is. I don't know what that is either. Chief strategy officer, chief trust officer.

It's like, guys, we have made it very clear how to create value in this business. And shareholders are not getting anything what they want. And look, I believe that good companies are run by managing all stakeholders effectively. That's customers, employees, and shareholders. If you're a public company, you have to manage all three. If you only want to manage two, don't go public. That's the whole thing. And so I'll return to my don't go public, right? Like that's the whole thing, right? And so I'll return to my initial question here is, what am I going to do? And what can you do? What is a framework for having a company on the watch list or position you own, where you just scratch your head around management decisions, where you think to yourself, that's not what I would do. And I

have a 10,000 foot view out of the woods of this company. That's not the kind of feeling that I want. And so for me, you want to invest in brilliant management teams, but the context really, really matters. And I've broken this down into three key factors for my framework here. So here's what they are. So number one in the framework, what stage is the company at? Is it mature or is it a brand new company? In this example, Autodesk is a mature company with huge brand name, massive market share. It's not a startup where it relies on key founding team to execute the future. It's not a startup where it relies on key founding team to execute the future. And I caveat all my three frameworks with, of course, management matters.

And of course, you want perfect management teams. But I'm trying to balance that with, is it completely necessary for my investment thesis to work? And so what stage is the company at? Is it a brand new startup where the execution from the top management team has to be crisp? Or is it Coca-Cola where, you know, it kind of grows at global GDP regardless, no matter what. So those are where I'm thinking when it comes to what stage. Any thoughts there? No, no, I think that's a good overview.

Yeah, don't have too much to add there. No, no, I think that's a good overview. Yeah, don't have too much to add there. Number two, is the business's main business capital allocation? And what I mean by that is, are they Berkshire Hathaway or are they Pepsi? Berkshire Hathaway's business is the business of capital allocation. Their business is in the business of moving money from the mothership into acquisitions or allocating to certain things that they own inside of this massive conglomerate versus Pepsi, which is now a conglomerate, maybe not a bad example. But their business may be not entirely about the business of capital allocation. What this means is, is it a Berkshire Hathaway? Is it a Heiko? Or in Canada, is it a Constellation Software, a CouchTard, a TerraVest,

where their business relies on management being really sharp? Their whole business is built on the form of they need to acquire and astutely allocate the capital for shareholders to win. For Autodesk, it's kind of split. Their business is not M&A, but I think that's one of the complaints from Starboard Values. They should be looking to do more M&A. So for me, this one's a bit neutral in point number two for Autodesk. I don't have a hard opinion one way or another. Yeah. Yeah. I mean, I think, I don't know, like I said, I know the company more through you than anything, but I would think that's a fair assessment. Maybe they could be allocating capital a little better here. I think Starboard Value also has a pretty good track record overall,

not all wins, but I think they probably have a point. And I'm sure they've dug into this quite a bit too. Yeah. Number three, which leads to what you just said. Is there a catalyst for change? In this example, yes. Shareholders are drawing the line with the bad accounting, the big activist firms getting involved, lawsuits, poor performance on the stock. There is a catalyst right now.

In fact, the stock is up quite a bit this week on the news that Jeff Smith and Starboard Value is getting involved, given their track record with these types of situations. Unlike, okay, hey, look, you're a public company. You have to run with three-legged stool in mind. Shareholders need to get what they want. Customers need to get what they want. And employees need to get what they want. That's an enduring, beautiful business where all three of those win.

And if you're focused on just one or just two or not all three in mind, not everyone wins. We're looking for win-win-win situations here. And so in this example, there most certainly is a catalyst for change. And so it's a difficult situation to navigate. In summary, my framework is three points here. What stage is the company at? So is management relying on, like, are they key? And are they the founding team that's going to get them from zero to one? And number two, is the business in the business of capital allocation? Think of like Mark Leonard

and Constellation Software. And then three, is there a catalyst for change up top? And in this case, I think absolutely yes. So generally, how do you approach this? Do you have any examples in your portfolio where you've had to make some hard decisions around management? Yeah. I mean, I guess I'm trying to think here, probably the most recent one. I think there's been other ones I just can't remember. When you have a young kid, sometimes your memory, because you lose sleep a little bit, but- You get a dad brain? Yeah, dad brain. I mean, for me, it's not necessarily, I guess it's kind of mixed feeling, but I sold, as you get a dad brain. Yeah, that brain. I mean, for me, it's not necessarily, I guess it's kind of mixed feeling, but I sold, as you know, allied property read recently.

And there was a change in management last year at some point, not that I blame management all that too much, but it was just the messaging from management that could have been clearer instead of being a bit more evasive or almost kind of saying things will get better in a certain time frame and then kind of changing that time frame. And like I said with Dan, I mean, it's hard to blame management on one hand, but I think I would have liked more transparency in terms of, you know, we don't know where this is going. We're hoping this will get better by then, but we just don't know, which wasn't really the case. And I've listened to all the calls. But we talked about that too, with, for example, you know, Intel, I mean, we railed on Intel quite a bit, but you had like

management for saying on a conference call that the dividend would be like, stable would not change. And then I think within a month after that they cut the dividend things like that is where i would if that happened to a company i own i would sell the position because i just can't trust management yeah yeah i think that makes complete sense i sold i had a really if you remember this I had a really tough time with understanding the debt decisions, the debt financing decisions at Algonquin Power. Oh yeah, I remember that, yeah. And I owned the Canadian utility.

I owned shares at like 20 bucks, 21 bucks and sold because they were issuing debt. I used to work in the utility industry. They were financing the company at rates that I'm like, did you guys even shop this? And also there's this hack called green bonds. I didn't like how they were financing the debt structure. And so I sold the stock at like 19, 20 bucks. Their like next quarter, the stock went to $9 or less than $10. Dodged a bullet there. That's where it was like, I do not agree with what you guys are doing.

I have personal experience that I think you're doing something wrong. And that's like a kind of lesson around companies you know really, really well or industries that you know really, really well is industries that you know really, really well is a good place to live because you can have a differentiated opinion better than the market can. I think a lot of investors and self-directed investors have the idea of,

there's no way that I can know more than professionals. And it's just frankly not true. A lot of professionals are very generalist and you might have a lot of knowledge on specific sectors and industries far better than many professionals. And so my point to people listening is to have a lot of confidence in spaces that they understand really, really well and not have imposter syndrome. Because imposter syndrome can be rampant for investors of all kinds. And it's best to kind of fight against that instinct. Yeah. And I think to me, at the end of the day, that one of the best tools is just

listening to calls, not just the most recent calls, but going back in the past and as management actually, have they actually done what they said they would do? And I think that's the biggest red flag. Obviously, there are certain events, like if you had management that was there pre-COVID and then the pandemic hit and it's kind of a black swan event, I think you can give them a little bit of a pass there depending on what the situation is. But for the most part, you're able to go back and listen to what they say and whether they're full of it or they actually execute on what they're saying. And to me, that's a big, big red mark if they're

constantly promising something and falling short of it. It's not really a company that I would want to own. And if there is a company I own, there's a change in management. I will definitely follow it closely to make sure that this doesn't start happening with this new management team. Quick plug, for free, you can go on to FinChat, go by company, go in the investor relations tab, and you can listen to their earnings call with the transcript side by side on the same platform. So you can go on there and actually just listen to the call.

You don't have to go dig through investor relations on their website, go find the MP Theory file, none of that stuff. You can go right on there, view everything in one place. It'll come with the press release, the transcript, and slide decks that come associated with the earnings call. A little hack on that for people who want to save time, listen to it 1.25 or 1.5x the speed. And then if you have a section you want to listen a bit more closely, you just kind of go it back to 1x the speed. That's a little trick that I do when I listen to conference call because you can still catch everything they're saying. You might just have to pause and rewind if there's a certain section or you look at the transcript at the same time. But little trick if you want to save some time listening to earnings calls.

Yeah, I'm a 1.25 kind of guy. Yeah, that's a sweet spot. For almost everything. Unless like there's certain sections sometimes where I'm like, I really, you know, the actual financial results for the most part, I listen to what typically the CEO, right, will start and then the CEO will chime in. And it's usually like,

I've already seen what they're saying on the actual learnings. I don't need them to repeat what I just read myself. So usually I'll kind of either speed that one up or skip straight to the question period. Yeah, good call. I think, yeah, I think that will be it because I'm running.

I'll have to go pick up my little lady soon at the daycare. And so I'll keep my segment that I had prepared for next week uh it was uh it was still a fun episode yeah daycare just going absolutely wild in this heat wave right now is that uh you get there it's just pandemonium or what uh yeah I mean they're uh yeah they're inside and they see so everything's good I'll pick her up with the stroller I've got a little fan i've got a little spray bottle with some ice in it wow i have sunscreen and then we'll go straight to the splash pad to uh stay cool yeah you're gonna get in the

splash pad uh whether i like it or not i think i will have to remember the do they still have those things at the splash pad where it fills up with water and then dumps like a huge amount of cold water on you some do but there's most of them there's like several things right but there's like one main button and then it kind of alternates so the toddlers usually they're kind of discovering that so they'll put like their face right next to the one that's not doing anything and then all of a sudden it just like starts splashing in their face it's uh it's pretty funny the shock that happens did splash pads are like core memory as a kid that was good times oh yeah you know you're you know you're gonna have a good day yeah july heat splash pad oh that's core memory it It's 44. I think with humidity here, it's pretty crazy.

Okay. Well, you'll be, you'll be dad. All the dads will be in the splash pad as well. Then thanks for listening to the pod folks. We really appreciate you. You can support the show on just by listening.

That's all you've done. You've done a great job. You can support the show by subscribing to the podcast on your podcast player if you have not already. And we really appreciate you doing that. I appreciate giving us ratings on the player as well. It helps us grow the show, as well as our Patreon at joinTCI.com. You see our monthly portfolio updates, our graphs that we're sharing. You can see the graphs of Abercrombie and Celsius, the most innovative tech companies of all time outpacing good old NVIDIA here.

So, you know, it's not just NVIDIA that's going up. There's other stuff going up too. We'll see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be construed as investment or financial advice. up. There's other stuff going up too. We'll see you in a few days. Take care. Bye-bye.