A good call

Earnings call transcripts are an easy way for me to catch up on conference calls I’ve missed out on during the week.

Often the exercise that delivers the most interesting tidbits is scrolling through to the last few minutes of the call, the question-and-answer period (where industry analysts and portfolio managers are invited to ask questions).

Here’s an example of a recent call with an electric utility based in the southern U.S., about half their electric production facilities are in Texas. When asked why 2008 and 2009 were slow, but why the results for the last quarter were picking up, the CFO made these observations: “We believe the primary reason for the retrenchment in 2008 and 2009 industrial demand was driven by the nature of manufacturing activity in the state, which is concentrated primarily in petrochemicals and chemical manufacturing.

These industries are some of the most price-elastic in terms of their ability to adjust output to changing economic conditions. These are the very industries we see returning and driving back some of the expansion trends over the last few months.”

So we don’t have to wait for the earnings reports from these petrochemical and chemical plants to show up. We have already heard from their supplier of electricity that they are using more, that the activity is picking up in the sector. That’s important to know – it’s a leading indicator that is vital to industries such as construction, motor vehicles, paper, electronics, transportation, agriculture, and pharmaceuticals, chemicals are an essential component of manufacturing.

Although some chemical manufacturers produce and sell consumer products such as soap, bleach, and cosmetics, most chemical products are used as intermediate products for other goods.

This is definitely a worthy exercise, and it’s as simple as a Google for “earnings transcripts” to get access to a list of companies that have provided their calls to a written format.

One perk of being inside the securities industry is invitations to conference calls with portfolio managers from Canada, and for that matter, from around the world. This past week I sat in on a call with one of Canada’s top bond fund managers. Let’s share some of the highlights and important remarks from that call.

Government of Canada bonds are very sensitive to an uptick in interest rates. If next year at this time, the five-year interest rate was to move up by 80 basis points, or 0.8 per cent, the five-year bond price, which is to say a four-year bond a year from now, would fall by about 2.7 per cent in price. In effect rewarding an investor in that space with a zero per cent return overall.

Why? He would have earned 2.7 per cent interest and lost 2.7 per cent in capital. But in the same scenario, corporate bond yields might only move up from six per cent to 6.4 per cent, the combination of a smaller move in rates, and more cash flow from the interest, would still give that same corporate bond holder a positive rate of return in the four per cent range.

We know the risks of investing in this space, but I would caution investors, we will not be able to earn 10 per cent over a cycle. From where we are starting today, with Libor rates at 0.4 per cent, with long government rates at three per cent, investors who invest across the mid-range of the corporate bond sector should probably anticipate six per cent returns.

In another call with a global hedge fund manager, he made the point of articulating that risk management and risk offsets have a cost. You will earn less overall in a bull market because these risk offset techniques are like paying insurance premiums.

Last year, when the market went down 40 per cent, we declined eight per cent. The offset is we are only up 26 per cent this year, as our risk mitigation strategies were more expensive at the beginning of the year. We would rather have the guardrails installed.

Dave Ellis is a certified financial planner and a fellow of the Canadian Securities Institute. He is a vice president at RBC Dominion Securities in Vernon.

+More Business Headlines
<Back to Mobile Edition