SPRUCEGROVE INVESTMENT MANAGEMENT LIMITED
|
On a summer day in August 1993, John Watson, Ian Fyfe and Peter Clark found themselves in Ian Fyfe’s backyard on Toronto’s Ward’s Island, shaking hands and toasting the founding of their new investment management company, “because we wanted to continue doing what we loved to do,” says John. They named the company Sprucegrove Investment Management Ltd., picking up on the name of the old Watson family farm in the village of Fairbank. The boys, as John fondly calls them, did not want their personal names in the name of the firm. They jumped at John’s suggestion of Sprucegrove. If you think about it, there is simplicity and beauty in the name – a grove of spruce trees standing tall, growing straight, vividly green in colour and with a distinct environmentally friendly pleasant fragrance.
As it happened, “My father was integrally involved in the inception of Sprucegrove because we needed capital. I was able to put up $125,000 and he put up $125,000, so we started with $250,000,” says John. |
Founded with a toast and a handshake, Sprucegrove Investment Management Ltd. was forged in friendship based on mutual trust. Left to right: John Watson, Peter Clark and Ian Fyfe.
|
“From a regulatory standpoint, at that time we only needed $25,000, but we wanted much more than that to start. It came under the heading of one of the great business principles, building in a margin of safety in everything that you undertake.
“I remember presenting the business case to my father and I knew that he would come through, but I also knew that he would not make it easy,” says John. “At the meeting were my Aunt Margaret (my dad’s sister) and my sister, Mary. After the presentation had been completed and my father appeared to be dragging his feet, my Aunt Margaret piped up that she would do the financing. Without a further word, my father said, ‘Mary, bring me my checkbook’ and the rest is history, as they say. I thanked my Aunt Margaret profusely and promised that she would be called upon if further financing was required. The financing was done by way of six percent redeemable preferred shares and one of the highlights of my business career was the fact that the business was able to redeem my father’s shares in June of 1994. I knew that dad would view this as an indication of early success,” he adds.
All Sprucegrove needed now were some clients and a license from the Ontario Securities Commission (OSC). “Without a license, we were not allowed to charge a fee, so if we wanted revenue, we needed one. It was critical,” says John. “We filled out all of the paperwork and submitted it and we were told by others in our industry that we would have to wait for about six months.”
Some of the greatest lessons are those passed down to children from their parents. Remember Gordon Watson sitting on a farmer’s doorstep until the farmer sold him the land at 1900 Steeles Avenue West. Channeling his father’s determination, John started calling the OSC office on a regular basis, and Sprucegrove had its license in two and a half months. The OSC license was dated Nov. 15, 1993, John’s 50th birthday.
The key to Sprucegrove’s early success was the landing of the first three clients: the Ontario Teachers’ Pension Plan Board (OTPPB) from Toronto, CP Forest and Air Canada from Montreal. The first presentation was to be made to an investment committee of four people on the OTPPB: Heather Hunter, the lead investor whom they had worked with at Confederation Life, Claude Lamoreaux (Chairman of the OTPPB), Gerald Bouey (former Governor of the Bank of Canada), and Ted Medland (former Chairman and CEO of Wood Gundy). “Once we had secured these three clients, I knew that we would have a successful business, subject, as always, to following our carefully thought-out investment process (quality businesses at attractive valuations),” says John.
For their first presentation, they had no office and no secretary. But, remember KPMG? Just as Gordon liked to do business with people he knew, so does John Watson. “We have had a relationship with KPMG extending right back to those early days of the last century,” says John. “One of the partners, Bill Morgan, handled Fairbank Lumber for decades. He was a great mentor to me, and he passed that role on to a younger man by the name of Scott Wetmore, who became a good friend and trusted advisor.”
And that’s whom John called when they needed help pulling together the presentation. Scott asked his secretary, Susan Black, to prepare the presentation for them. In fact, she typed all three presentations. The OTPPB invested $300 million, Air Canada invested $50 million and CP Forest between $50 and $100 million. Several years later, John said to Susan, “You are the only person that I know who had a perfect score on presentations. You prepared three for us, and we were successful on all three, that’s a 100 percent success ratio.” In the business, 1 out of 3 or 1 out of 4 is exceptional.
Sprucegrove still needed a home: office space, which they rented at 181 University Ave., from the Oxford Group. John’s relationship with the Oxford Group goes back to the ’70s, when Confederation Life was a significant shareholder in Oxford. “I got to know Don Love of the Oxford Group and his son, John, very well and they owned the building. It is always a win-win when you do business with people whom you admire. It was also a time when there was an oversupply of office space in downtown Toronto. We were able to obtain a fantastic rental deal. Our net effective rental rate was zero,” says John. “All we had to do was pay for common area maintenance.” Five years later when Sprucegrove was able to afford it, they were delighted to sign a new lease agreement with the Oxford Group with the net effective rent being fair to them also. “We were happy to pay it then,” he adds. And that is how Sprucegrove began.
In fact, John says that in the early days they thought that Confederation Life might institute legal proceedings against Sprucegrove, but in the end, they decided to do business with Sprucegrove instead and became their largest client. “Shortly after we secured the three initial clients in September of 1993, I received a phone call from Confederation Life,” says John. “They called because they wanted to negotiate a business arrangement.” As it turned out, Sprucegrove agreed to develop the separate fund business on their own and manage the Confederation Life international pool on a sub-advisory basis. In turn, Sprucegrove obtained the financial, research and trading personnel, who had worked with them on the international side at Confed Investment Counselling Ltd., the investment system, the research files and the track record.
As unbelievable as it might seem, only one client was lost in this radical transformation. “This feat was entirely due to the relationships established with clients by Ian Fyfe, Peter Clark and the international team. No one should ever underestimate the importance of the record,” says John. The regulators allowed the transfer of the investment performance record to Sprucegrove on the basis that the people, the investment philosophy and process, and the systems had not changed. “The investment world was on the cusp of going global and, with the team, the sound approach to investing and the track record, we were able to ride this tidal wave of globalization to great success,” says John. “In fact, we were one of the few firms in Canada specializing in global equities in the early 1990s.”
Sprucegrove handled this unique mandate of managing global equities for institutional clients in North America with a tried-and-true approach that they had learned at Confederation Life. “We developed our business with a value investing approach, which focused on quality businesses at attractive valuations. We would look around the world for quality businesses, and then be disciplined in how much we paid for them,” says John.
“On Aug. 11, 1994, our alma mater and my long-time employer, Confederation Life, filed for bankruptcy. At that time, Confederation Life was our largest client,” says John. “It was a momentous and frightening and sad event all at the same time. It was very emotional for those of us who had spent our entire careers there.” This would not have put Sprucegrove out of business but it could have represented a serious setback. Once again, KPMG entered the picture, as they had been selected by the regulators to oversee the liquidation of Confederation Life Insurance Company (Confed) in Canada.
“There was a Fort Knox mentality surrounding the affairs of Confed, and you could not connect with a decision maker,” says John. “Fortunately we had chosen KPMG to be the auditor of Sprucegrove and through our senior contact, Scott Wetmore, we were able to arrange a meeting with the representative of the liquidator on Aug. 16, 1994.” The name of that individual was Joe Leeder and after a couple of meetings with him, they had a deal. “We would establish a Sprucegrove international pooled fund and pay 20 basis points per annum for two years for every client in the Confed International Pooled Fund that moved over to the Sprucegrove pool and stayed for the two years,” says John. It was a good deal for both parties.
“The final material event to which I will refer in this piece was the deal that we made in 1995 with Ed Caffrey and Mark Shevitz of Fair Haven Partners, who had just established their own third-party marketing firm in the United States,” says John. Although Sprucegrove was a global equity investment manager, they were totally dependent on the whims of the Canadian government. Pension funds were their largest customers but in those days, there was a “foreign content rule,” which dictated by government decree that pension funds must invest 90 percent of the book value of their assets in Canada.
Although this rule had been changed in 1989 to allow 20 percent (instead of the previous 10 percent) of a pension fund’s investments to be outside of Canada, the move to greater flexibility did not entirely satisfy those who had lived through the more restrictive regime. “We knew that with a stroke of the pen the government could severely cripple our business, as there remained a political faction who believed that Canadian pension funds should invest 100 percent of their money in Canada,” says John. Although hard to believe today, it was very much the scene just 20 years ago.
“As a result of that unique concern, we decided to diversify our risk by developing a similar business in the United States, a formidable task, as our business in the United States at that time was miniscule and our connections with the consulting community were limited,” says John. “After some careful scrutiny of another third-party marketing firm, we were introduced to Fair Haven Partners by one of the few consultants that we knew in the United States. I knew immediately that Ed and Mark were the right fit with Sprucegrove, as they had received their training and cut their teeth at one of the great value investing managers in the United States, Sanford C. Bernstein.”
“I remember presenting the business case to my father and I knew that he would come through, but I also knew that he would not make it easy,” says John. “At the meeting were my Aunt Margaret (my dad’s sister) and my sister, Mary. After the presentation had been completed and my father appeared to be dragging his feet, my Aunt Margaret piped up that she would do the financing. Without a further word, my father said, ‘Mary, bring me my checkbook’ and the rest is history, as they say. I thanked my Aunt Margaret profusely and promised that she would be called upon if further financing was required. The financing was done by way of six percent redeemable preferred shares and one of the highlights of my business career was the fact that the business was able to redeem my father’s shares in June of 1994. I knew that dad would view this as an indication of early success,” he adds.
All Sprucegrove needed now were some clients and a license from the Ontario Securities Commission (OSC). “Without a license, we were not allowed to charge a fee, so if we wanted revenue, we needed one. It was critical,” says John. “We filled out all of the paperwork and submitted it and we were told by others in our industry that we would have to wait for about six months.”
Some of the greatest lessons are those passed down to children from their parents. Remember Gordon Watson sitting on a farmer’s doorstep until the farmer sold him the land at 1900 Steeles Avenue West. Channeling his father’s determination, John started calling the OSC office on a regular basis, and Sprucegrove had its license in two and a half months. The OSC license was dated Nov. 15, 1993, John’s 50th birthday.
The key to Sprucegrove’s early success was the landing of the first three clients: the Ontario Teachers’ Pension Plan Board (OTPPB) from Toronto, CP Forest and Air Canada from Montreal. The first presentation was to be made to an investment committee of four people on the OTPPB: Heather Hunter, the lead investor whom they had worked with at Confederation Life, Claude Lamoreaux (Chairman of the OTPPB), Gerald Bouey (former Governor of the Bank of Canada), and Ted Medland (former Chairman and CEO of Wood Gundy). “Once we had secured these three clients, I knew that we would have a successful business, subject, as always, to following our carefully thought-out investment process (quality businesses at attractive valuations),” says John.
For their first presentation, they had no office and no secretary. But, remember KPMG? Just as Gordon liked to do business with people he knew, so does John Watson. “We have had a relationship with KPMG extending right back to those early days of the last century,” says John. “One of the partners, Bill Morgan, handled Fairbank Lumber for decades. He was a great mentor to me, and he passed that role on to a younger man by the name of Scott Wetmore, who became a good friend and trusted advisor.”
And that’s whom John called when they needed help pulling together the presentation. Scott asked his secretary, Susan Black, to prepare the presentation for them. In fact, she typed all three presentations. The OTPPB invested $300 million, Air Canada invested $50 million and CP Forest between $50 and $100 million. Several years later, John said to Susan, “You are the only person that I know who had a perfect score on presentations. You prepared three for us, and we were successful on all three, that’s a 100 percent success ratio.” In the business, 1 out of 3 or 1 out of 4 is exceptional.
Sprucegrove still needed a home: office space, which they rented at 181 University Ave., from the Oxford Group. John’s relationship with the Oxford Group goes back to the ’70s, when Confederation Life was a significant shareholder in Oxford. “I got to know Don Love of the Oxford Group and his son, John, very well and they owned the building. It is always a win-win when you do business with people whom you admire. It was also a time when there was an oversupply of office space in downtown Toronto. We were able to obtain a fantastic rental deal. Our net effective rental rate was zero,” says John. “All we had to do was pay for common area maintenance.” Five years later when Sprucegrove was able to afford it, they were delighted to sign a new lease agreement with the Oxford Group with the net effective rent being fair to them also. “We were happy to pay it then,” he adds. And that is how Sprucegrove began.
In fact, John says that in the early days they thought that Confederation Life might institute legal proceedings against Sprucegrove, but in the end, they decided to do business with Sprucegrove instead and became their largest client. “Shortly after we secured the three initial clients in September of 1993, I received a phone call from Confederation Life,” says John. “They called because they wanted to negotiate a business arrangement.” As it turned out, Sprucegrove agreed to develop the separate fund business on their own and manage the Confederation Life international pool on a sub-advisory basis. In turn, Sprucegrove obtained the financial, research and trading personnel, who had worked with them on the international side at Confed Investment Counselling Ltd., the investment system, the research files and the track record.
As unbelievable as it might seem, only one client was lost in this radical transformation. “This feat was entirely due to the relationships established with clients by Ian Fyfe, Peter Clark and the international team. No one should ever underestimate the importance of the record,” says John. The regulators allowed the transfer of the investment performance record to Sprucegrove on the basis that the people, the investment philosophy and process, and the systems had not changed. “The investment world was on the cusp of going global and, with the team, the sound approach to investing and the track record, we were able to ride this tidal wave of globalization to great success,” says John. “In fact, we were one of the few firms in Canada specializing in global equities in the early 1990s.”
Sprucegrove handled this unique mandate of managing global equities for institutional clients in North America with a tried-and-true approach that they had learned at Confederation Life. “We developed our business with a value investing approach, which focused on quality businesses at attractive valuations. We would look around the world for quality businesses, and then be disciplined in how much we paid for them,” says John.
“On Aug. 11, 1994, our alma mater and my long-time employer, Confederation Life, filed for bankruptcy. At that time, Confederation Life was our largest client,” says John. “It was a momentous and frightening and sad event all at the same time. It was very emotional for those of us who had spent our entire careers there.” This would not have put Sprucegrove out of business but it could have represented a serious setback. Once again, KPMG entered the picture, as they had been selected by the regulators to oversee the liquidation of Confederation Life Insurance Company (Confed) in Canada.
“There was a Fort Knox mentality surrounding the affairs of Confed, and you could not connect with a decision maker,” says John. “Fortunately we had chosen KPMG to be the auditor of Sprucegrove and through our senior contact, Scott Wetmore, we were able to arrange a meeting with the representative of the liquidator on Aug. 16, 1994.” The name of that individual was Joe Leeder and after a couple of meetings with him, they had a deal. “We would establish a Sprucegrove international pooled fund and pay 20 basis points per annum for two years for every client in the Confed International Pooled Fund that moved over to the Sprucegrove pool and stayed for the two years,” says John. It was a good deal for both parties.
“The final material event to which I will refer in this piece was the deal that we made in 1995 with Ed Caffrey and Mark Shevitz of Fair Haven Partners, who had just established their own third-party marketing firm in the United States,” says John. Although Sprucegrove was a global equity investment manager, they were totally dependent on the whims of the Canadian government. Pension funds were their largest customers but in those days, there was a “foreign content rule,” which dictated by government decree that pension funds must invest 90 percent of the book value of their assets in Canada.
Although this rule had been changed in 1989 to allow 20 percent (instead of the previous 10 percent) of a pension fund’s investments to be outside of Canada, the move to greater flexibility did not entirely satisfy those who had lived through the more restrictive regime. “We knew that with a stroke of the pen the government could severely cripple our business, as there remained a political faction who believed that Canadian pension funds should invest 100 percent of their money in Canada,” says John. Although hard to believe today, it was very much the scene just 20 years ago.
“As a result of that unique concern, we decided to diversify our risk by developing a similar business in the United States, a formidable task, as our business in the United States at that time was miniscule and our connections with the consulting community were limited,” says John. “After some careful scrutiny of another third-party marketing firm, we were introduced to Fair Haven Partners by one of the few consultants that we knew in the United States. I knew immediately that Ed and Mark were the right fit with Sprucegrove, as they had received their training and cut their teeth at one of the great value investing managers in the United States, Sanford C. Bernstein.”
|
The deal was simple: Sprucegrove would not pay them for a client brought to the firm, but they would pay for retention of the client. In this way, the Fair Haven Partners had incentive to help Sprucegrove develop and maintain the business. “In my view, it turned out to be one of our most successful strategic decisions,” says John. “At the time of my retirement, the business from the United States accounted for approximately half of Sprucegrove’s annual revenue.”
Presently, the three founding partners have retired from Sprucegrove, which is managed by a new team, most of them developed from within the firm, with an employee base of about 35 people. And today, John estimates that Sprucegrove has assets under management (AUM) of close to $30 billion. “It’s a great success story,” says John. |
An artist’s view of the original house on Sprucegrove Farm.
|