https://www.cwbwealth.com/en/news-and-stories/insights/grow-together-june-2024
In this issue: Message from the CEO | High flyer | By design, not demand | How to solve when you must evolve – dealing with unexpected change
Message from the CEO
Matt Evans, CFA
SVP Enterprise Strategy, CWB Financial Group & CEO, CWB Wealth
Our theme for this issue is Evolution by chance or by choice. We look at the pivotal moments where individuals and companies face change. Either to proactively pursue better versions of themselves, or in response to factors outside of their control.
When I think about what successful evolution can look like in a company, I’m reminded of an interview I recently listened to with Satya Nadella, the current Chairman and CEO of Microsoft. Nadella talked about Microsoft’s transformation during his time in leadership to revive the company’s culture while navigating a rapidly changing competitive landscape.
One of the more surprising themes in Nadella’s story is the importance of unique human qualities like empathy. It’s not what you would expect from a company with Microsoft’s reputation. But Nadella believes that empathy is increasingly crucial in a world rapidly integrating new technologies. Nadella’s strategic focus on the cloud and AI was grounded in Microsoft’s ambition to better understand their users and build for them. This was a game changer for Microsoft as the company recentered on its mission to create powerful technology with the potential to improve lives.
In a similar way, we continue to build our firm around our clients’ changing needs. We constantly seek feedback through formal and informal channels, including our biennial Voice of the Client survey. We circulated our most recent survey this Spring, and we’ve spent the past couple of months sharing the results with our teams across our organization. There was a lot of reassuring positive feedback, as well as candid insights about opportunities to further strengthen our services.
We’re grateful for all of it, and we take it to heart. Your feedback is the feedstock for our continuing intentional evolution.
We also continue to be inspired by the experiences our clients share with their advisors, and in other stories of business reinvention uncovered by our investment team. On the personal side, in this issue Jason Kinnear interviews two long-time clients who evolved their second-act-of-life careers. Their stories show how transitioning from a primary career path to a new pursuit can result in something more akin to “rewiring” than “retiring”. Russ MacKay and Gary Leung share how they show up for clients facing unexpected or sudden changes outside of their control that challenge them to adapt and evolve to changing financial circumstances.
On the business side, Jimmy Desai introduces us to AerCap, an aviation leasing company undertaking a strategic pivot with the potential to set the company on a new path. Corporate reinventions like this can create compelling opportunities for investors, but like most forms of evolution, the outcome is not guaranteed.
Perhaps as you enjoy this issue, you’re contemplating the next phases or changes in your own life. We hope you’ll find insight and inspiration in these pages. As always, we’re grateful for the time you will spend with us here.
High flyer
Jimmy Desai, CFA, MBA
Associate Portfolio Manager, International Equities
One of the main drivers of our investment approach is to take advantage of market inefficiencies and invest in mispriced quality companies. In other words, we look for good companies, with a competitive edge and a potential catalyst, that we believe are being undervalued by the market.
Reasons investors may overlook a company include:
- The market doesn’t understand or appreciate the business
- The company is undergoing hardship that the market doesn’t have faith they will overcome, or;
- The company is in the midst of evolving (making steady improvements over time) or completely reinventing themselves (making calculated, risk-minded complete changes) to drive long-term growth and sustainability – something that the market may not have the patience or stomach to withstand
These factors often drive volatility in the stock price, which our team tries to take advantage of. It’s simple in theory, but difficult in practice as it requires patience. When a company goes through reinvention or evolution, it’s generally most advantageous as an investor to be there before it’s complete. To demonstrate a company that hits on all the above points, we’ll walk through the story of AerCap.
AerCap started as a smaller aircraft lessor and is now the world’s largest owner of commercial aircraft, with a fleet worth over $60B USD. This company provides airlines with long-term access to passenger and cargo aircraft, engines, and helicopters. What did this once-small company have to do to evolve into becoming #1 in the world? We’ll go through that in the rest of this article.
Why lease?
Lessors fulfill an important role in the aviation industry. New, small and large airlines all utilize leases for some or all of their fleet. Manufacturers tend to only deal with well established airlines. Due to low capital requirements and a relatively short launch time (buying new has wait times of over 7 years), startups like Flair Airlines begin their operations with mostly leased fleets.
To characterize leasing as being attractive only for small or upstart airlines is not completely accurate. Even large airlines will operate some leased aircraft. Managing their fleet this way lets them optimize their capital efficiency, while also being able to downsize by not renewing fleet leases in the event of a downturn. Leasing attractiveness is evident by the fact that leased aircrafts have grown to over 50% now from 30% in the early 2000s.
Why AerCap?
In addition to having a disciplined management team, AerCap’s size and scale give it tremendous advantage. The industry is highly technical, requires access to deep pockets, and information flow is opaque – so being the largest means they have the best information and knowledge.
This informational advantage translates to things like knowledge about the best configuration of aircraft to own or having access to maintenance slots on short notice. AerCap’s purchasing power also means they can negotiate the best rates for new aircraft, engines, and for services. The cumulative advantage of these various activities translates to better operations and higher profitability.
The bulk of AerCap’s customers are typically mid to small-scale airlines. This means its customer base is diversified by company and geography, limiting the impact of bankruptcy from any one customer.
When we first looked at AerCap in 2015, the prospects seemed promising but things were far from assured. AerCap had just completed a transformative acquisition the year prior, buying the International Lease Finance Corporation (ILFC) from global insurance conglomerate American International Group (AIG). ILFC was much larger than AerCap and the company had to manage the incoming fleet of aircraft, their associated contracts, and pay down the large debt they’d accumulated from the purchase.
AerCap's 2014 acquisition of ILFC set it on the path to evolving from a small player to eventually being the industry leader. Prior to the acquisition, AerCap's fleet was valued at $8.1 billion. After the acquisition closed, their fleet size grew to $32 billion.
Historically, investors have shied away from airlines. Warren Buffett once called them “a deathtrap for investors”. However, leasing an aircraft isn’t the same as running an airline and in this acquisition, we saw a potential opportunity many investors wouldn’t even consider due to not understanding the different business model, how the assets depreciate, and the high level of leverage.
Many investors saw AerCap as an industrial company. Indeed, that’s how it’s classified in market indices. We saw a lender, and lenders are operated with leverage. In thinking about the company in that context, we were able to get our head around the company’s debt levels and focus on what we saw as an excellent management team, a favourable industry structure and an attractive valuation. We made our first purchase that year.
Still flying
Over subsequent years, management’s execution has been clinical. With their guiding mantra of maximizing the book value per share (BVPS), management has allocated capital between M&A, purchasing new planes, selling old ones, and buying back stock at a discount.
They achieved this despite having been through COVID, when the entire airline industry was shuttered, and through the Russian confiscation of aircraft in response to sanctions from the Ukraine war. Despite going through these two nightmarish scenarios in quick succession, the company never had to raise extra capital to fund their operations. An amazing accomplishment.
During these crises, they even continued with their growth-driven evolution and acquired General Electric’s aircraft leasing business, GE Capital Aviation Services (GECAS), at a big discount. Now that the aviation industry has resumed its normal operations, management’s focus is on maintaining a good balance sheet, further optimizing its fleet, and seeking out new areas of growth.
Despite our glowing assessment of the company, ironically, its shares have been quite volatile (Figure 1). We believe the market still doesn’t fully appreciate the quality of the company and its management, or the resilience of the business and AerCap’s positioning.
Figure 1: AerCap price since 2014
Data as of June 6, 2024
Source: Bloomberg
Keeping an eye on their evolving story
We continue to be cognizant of risks to the business. The main factors being exogenous such as a shutdown of global air travel (due to disease or airplane safety/quality issues), mass seizure of airplanes/bankruptcy in a specific geography in the event of a war/financial crisis, or a big economic depression that reduces global air travel demand for several years.
Although air travel can be a volatile business for reasons mentioned above, we’ve often utilized AerCap’s share price volatility to our advantage by buying additional shares. Our average cost base for our position is $34.77 USD, while the shares trade currently at roughly $93 USD, making this close to a 3x return over our holding period.
AerCap’s 2014 acquisition was a carefully thought-out, strategic step, evolving it from a small player to the top of the leasing business. The company continues to take steps towards evolution, sustaining it as one of the highest quality businesses we know. In fact, management just introduced a dividend, which shows their confidence in future cash flows stability and opens up the firm’s shares for investment by a whole new group of investors.
We look forward to watching (and being part of) AerCap’s continued evolution story.
Figure 2: AerCap fleet size in comparison to top nine competitors
Fleet sizes as at January 25, 2024
Sources: AerCap, KMPG
By design, not demand
Jason Kinnear, CPA, CA, CBV
Manager, Family Offices Services
“At some point in your life, if you’re lucky, you get to design the way in which things evolve.”For generations, we’ve walked families through various stages of life, from building on thriving careers to then transitioning into their golden years. Retirement (or more newly called, “rewirement”) no longer just consists of the stereotypical notion of slowing down.
Daniel Day-Lewis
There’s a trend we’re seeing these days where people choose to continue developing skillsets after retiring from their primary careers – this time, with more freedom to choose the work they wish to do, and how they want to do it. In this next chapter of life, they’re contemplating who they want to be and what lasting impact they’d like to have. And they’re doing it on their own terms.
Our core earning years can be filled with obligations and compromises. So, retirement is an opportune time to either reinvent yourself completely or evolve and share your expertise with the world in new ways. Maybe you’re nearing retirement, or are newly retired, and have been thinking about this yourself. Two clients share their story on how they’ve chosen to design their second act of life.
Greg keeps a retirement promise
The evolution
In my early 50s, I made the decision to move from an executive role with a large Canadian financial institution with worldwide operations to the role of President & CEO of a much smaller local non-profit organization.
Why the change?
Although I was well paid, my life was consumed by a demanding corporate position which included considerable international travel, and endless executive management and board meetings, leading to a constant "daily grind". It was affecting my health and I had little personal time for family and other interests. After taking some time off to reflect, I accepted the role as President & CEO of a much smaller company – one badly in need of rebuilding – but that offered many interesting challenges in a less stressful environment with little business travel.
What did or didn’t work?
I was able to deploy skills that I had developed over the years in a new setting, and recruit several excellent former colleagues to assist me with the challenges of rebuilding this organization. This led to a much more satisfying conclusion to my career as I approached retirement. The one unanticipated downside was that the new company also had a large board of directors with many competing policy interests, which slowed our progress. But some years later, the rebuilding process was completed and became a significant success story.
Lessons learned
On the personal side, there were many things going on at this stage of my life that had important long-term financial implications. Much earlier in life, I had made a marriage commitment that I would retire at age 60, and we would live with whatever we had at that time. In retrospect, it was one of the best life decisions I made! But financially, there were a lot of moving parts to address.
In terms of assets, we had a modest investment portfolio managed by CWB Wealth and owned three properties in addition to our family home. As empty nesters, our goal was to have just two properties. Having four came with a lot of operating costs, including building costs for one of the properties. We also had considerable expenses for three kids in university (one in medical school and two at U.S. colleges). And at one point, our two girls both announced wedding plans within a two-year time frame!
The important lesson I learned here was that if you have several financial goals in mind as you approach retirement, you need to have detailed financial plans. And most importantly, once the plans are developed you need to stick to the plan without unnecessary deviations.
Blueprint for success
We learned the importance of not just having a financial plan for investments, but also in our circumstances, having a detailed multi-year Capital Plan and Cash Flow Plan. With the help of Samuel Chinniah, our CWB Wealth Private Wealth Advisor, we created a plan that addressed which assets we needed to sell and when, what capital amounts we could afford, and the tax implications of our decisions. Sam also guided us on things like whether to borrow for a bridge loan or use our investment funds, and advised us on important decisions related to a defined benefit pension plan.
I am happy to report that our kids all graduated, our building projects turned out very well, and we achieved our family and financial goals – I retired as planned by age 60! It was a challenging time in our life, but careful planning proved to be the key to our success.
Yves still believes in business owners – even in his retirement
Yves Laliberte and Helen Saunders
The evolution
After a successful career in the business world, I sought to leverage my experience to help other business professionals grow their enterprises and achieve their goals. This led to the founding of Nuvo Leadership, a consultancy focused on providing coaching and strategic advice to business leaders.
Why the change?
Upon reflection, I realized that full retirement wasn't for me. My success in developing strategic growth plans and the mentorship I received along the way inspired me to share my knowledge and expertise.
My goal is to help others succeed and to emphasize that business success isn't just about generating profits. Truly successful businesses can benefit all stakeholders, including shareholders, employees, clients, partners, and the community. In that regard, the move to Nuvo Leadership perfectly aligned with my belief that every successful business is built on a foundation of strong leadership, clear vision, meticulous planning, and hard work.
What did or didn’t work?
I initially aimed to work with multiple entrepreneurs, helping them develop strategic plans for business growth – a passion of mine. My networking efforts connected me with the founder of Komutel, a leading developer of communication solutions. After several discussions, he was impressed with my ideas and persuaded me to invest in the company and help lead its growth. This wasn't part of my original plan for my consulting practice as it required a significant commitment to daily operations, limiting the number of clients I could take on. Being open to a new opportunity that presented – even though it deviated from my initial plan – led me to an unexpected and rewarding experience.
Lessons learned
To achieve anything, you must first believe in it and visualize it, then create a plan to make it a reality. This principle applies across all areas of life – including how you approach financial and personal goals. A strong vision helps overcome the inevitable obstacles, and it's crucial to enjoy the journey along the way.
Blueprint for success
My wife and I have worked closely with Samuel Chinniah for over two decades. From the beginning, he took the time to understand our family and give tailored recommendations that went beyond sound, practical financial planning. They also addressed life's challenges – both unexpected and planned – and aligned with our vision for the future.
Sam and his team were instrumental in setting up the financial aspects of my consulting practice, enabling me to run Nuvo Leadership and contribute to Komutel's growth. Their support helped me achieve a successful and tax-efficient exit strategy. This included referring me to an external accountant, setting up an investment account for the business which considered payroll, dividends, retained earnings, cash flow, income tax strategies, and helping with the creation and long-term planning for The Laliberte Family Trust. We’re grateful for the excellent service and support from Sam and the CWB Wealth team.
We hope you found inspiration in these stories. We certainly did. And if it’s made you start thinking about designing your own next-phase-of-life vision, we’re happy to have a conversation with you.
How to solve when you must evolve – dealing with unexpected change
Gary Leung, CFP®, PFP®, TEP
Senior Planner
Russ MacKay, CIM, MFA-PTM
Private Wealth Advisor, Portfolio Manager, CWB Wealth Partners
As other articles discuss in this issue of Grow Together, there are times when a company or person get to choose their change. But what happens when factors outside of your control force change upon you?
Unknown life events like a sudden change in your job situation, health issues, divorce, or death of a family member can be stressful and mark an important time to have a team of Financial Planners and Private Wealth Advisors in your corner to help.
When our clients face unexpected change, no two scenarios are alike. So, it takes several conversations with them, looking at various situation simulations to build a resilient wealth strategy.
But there are some general considerations that can help position most people for better outcomes when changes occur. Here are a few key ones:
- Emergency funds. While a good rule of thumb is to have 3-6 months of living expenses set aside, you may require more than this. Review what your anticipated needs are going to be through various scenarios to determine if a larger reserve is needed.
- Take stock of your assets. You’ll need a fresh consolidated look at your financial situation and should update your (and if applicable, your household’s) asset inventory. This means updating your financial net worth statement to ensure you have clarity on all your financial accounts. These may include chequing/savings accounts, mortgages, lines of credits, investments, group RRSPs, employee share purchase places, stock options, and restricted/deferred share units. In building our clients’ financial plans, we take stock of all their assets.
- With departures, if you were working at a public company you might reassess any stocks/options you hold as it may represent a large portion of your net worth. Chances are you’re no longer considered an insider, which offers more flexibility on how you manage the position going forward. You can explore different strategies with your advisor.
- Insurance. A sudden life change can require you to reassess your insurance coverage, such as term, permanent, critical illness, or disability. Reviewing your future-looking insurance needs might entail getting new coverage or modifying the coverage you already have. If the sudden change triggered an insurance payout, consider how the amount and timing will impact your overall situation.
- Ripple effects. Sudden changes can create a ripple effect on other financial issues that you may overlook, such as how to deal with an employer-based pension plan, group RRSP, company savings programs, and stock or option programs. Personal benefits like healthcare may be affected or need to be replaced. If you’ve been given a severance package, the amount and timing of it will have tax implications and possibly other planning issues to consider. Additionally, automated payments linked to work may no longer be needed, like parking and gym memberships, which may be changed or cancelled.
- Financial plan. In collaborating with our Certified Financial Planners®, who use AI-powered financial planning software, we build plans that show our clients how the various pieces of their financial lives can be integrated into one cohesive picture. By creating multi-scenario forecasts, these financial plans not only help reassure our clients that they’re on the right track for years to come, but also let them see how prepared they are for the unexpected. Factoring in sudden changes like departures, death, divorce, unexpected illnesses and more lets us simulate impacts to a client’s wealth portfolio, and show them how we can adapt their plan to ensure they’ll be okay.
- External resources. You may be in a situation where external help is needed. Perhaps you have a severance negotiation to deal with and require legal advice, or you’re starting a new business that requires help with setting up a loan. The change could involve real estate, or amending your will/estate plans or beneficiaries. Your advisor can help you uncover areas where you may need extra support and resources. Our team has a longstanding network of professionals who we can bring into our collaborations with you.
Whatever unknown changes may show up in your life, we hope that what you do know is that you’re not alone when they happen.
Using proactive projections and adapting your plan quickly when the need arises are some of the crucial ways our teams help you solve when your wealth plan must evolve. Talk to your Private Wealth Advisor for peace of mind.
Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. CWB Wealth uses third parties to provide certain data used to produce this report. We believe the data to be accurate, however, cannot guarantee its accuracy. Visit cwbwealth.com/disclosures for our full disclaimer.