Thursday, December 23, 2010

What Ottawa can learn from portfolio managers

There's a lot that city-builders can learn from portfolio managers.  Portfolio managers, or investment managers, decide in what securities (i.e. shares, bonds) and assets (i.e. real estate) they should invest on behalf their clients.  From this discipline we can learn some lessons about how to make our cities grow faster.

Now before I begin, let me admit that I'm not a professional investor.  But lately my wife and I have been on a journey of learning more about wealth and these lessons on city-building leaped out at me.  Let's begin.

There are certain things that portfolio managers can do to stimulate small, medium or aggressive growth in a portfolio that have related levels of risk.  There is more risk in aggressive growth than in a smaller amounts of growth.  Within their portfolios investors typically use stocks to create growth and bonds to create stability.  Even within stocks there are some that are more stable than others.  "Blue chip" companies are those who show high levels of reliability and profitability during good and bad times.  Examples are CIBC, Johnson & Johnson, McDonald's, and Hewlett Packard.  Investors and portfolio managers will also use Blue Chip stocks to stabilize their portfolio.

On the other hand, investors and portfolio managers will invest in start-ups, or new ventures, to drive growth.  There's more risk in investing in these companies but they provide the highest return.

So how does this relate to cities?

Cities are made up of the private sector (stocks) and the public sector (bonds).  Similar to bonds, the public sector provides a city with much stability, especially in employment, in good times and in bad.  Through the recent recession Ottawa was one of the most stable cities in Canada due to the presence of the Federal Government, but in good times it doesn't grow as quickly as other cities.  Unfortunately, similar to investing in bonds, the thing that provides cities with stability in bad times can hinder its growth in good times; and similar to stocks, the thing that provides cities with growth in good times can hinder its stability in bad times.

A city's mix of private and public sector presence is similar to a portfolio's mix of stocks and bonds.  Some cities have a heavy government presence and small private sector presence.  In financial terms you would say their portfolio is 30% stock and 70% bonds which means it will be very stable but not very aggressive in growth.  There are other cities that have a very large private sector presence and small government presence which means their portfolio would be 70% stock and 30% bonds, and would be aggressive in growth but not very stable.  An example of the prior is Ottawa and an example of the latter is Vancouver.

As I said earlier, within stocks there are some that are more stable than others.  Blue Chip companies are more stable, have less risk, but provide lower returns; and start-ups are less stable, have more risk, but provide the greatest return.  Within the private sector of cities there are established industries that are like Blue Chip stocks; they stabilize the local economy, are less risky, but don't provide much growth to the city. 

There are also emerging industries that are like start-ups; they aren't very stable to the local economy, are very risky, but provide cities with great growth potential.  A city can have a portfolio that has a 30% to 70% mix of private and public sector, but even within the private sector there's an even smaller percentage of industries that can provide aggressive growth. 

So where does Ottawa stand?  Well, now we know why cities like Ottawa don't grow as fast as cities like Toronto, Montreal and Vancouver.  Just like an investor who invests more in stocks, especially start-ups, than in bonds has a greater growth potential, other cities have a greater growth potential than Ottawa.  If Ottawa were an investor you'd say that we were conservative and valued stability. 

A few years ago during the dot com craze the technology sector alone almost eclipsed the Federal Government as the largest employer in Ottawa.  Considering other industries, at that time you would say that the city was at a 60% to 40% mix in its private to public presence.  Since then the dot com bubble pooped and Nortel went down and we have lost our anchor, or blue chip stock- the telecom industry.  Now the numbers would be more like 30%-70% or 40%-60% in favour of the public sector.

Where do we grow from here?  I believe capital cities like Ottawa need to build as if the Federal Government isn't there; use our bonds as a stable foundation on which to grow, not a source of complacency.  Cities like Vancouver, Montreal and New York who don't have a large Federal Government presence have to find creative ways to attract talent, new residents, and visitors.  We have to decide as a city whether our priority is stablity or growth.  Can we have both?  It's possible, but the enemy  of "great" is "good" and a stable city anchored by the Federal Government is good, but is it great?

There's a time in a company's life when thy transition from start-up to Blue Chip.  Similarly in cities there are times when emerging industries become established industries, and they provide stability to their local economy, but no longer provide their city with the growth potential they used to.  I sometimes wonder if technology is a Blue Chip stock in Ottawa's portfolio; something that once boomed at its Initial Public Offering but has since levelled off, limited in its growth potential.

I believe a key to Ottawa's future growth is in emerging industries.  Mark Sutcliffe of the Ottawa Citizen shared this opinion in his article, "Nine steps to making Ottawa a better place to do business".  Step five says, "Build one sustainable new industry."  He goes on to say, "It's easy to point out that diversity is key to economic prosperity.  But how do we actually build new industries that will thrive and create jobs? The city has traditionally tried a shotgun approach by giving small amounts of resources to everything from film and television to life sciences. We need to prioritize our efforts around one industry that plays to our strengths and has the highest chance of succeeding. Focus on growing one new cluster of companies and making it sustainable and then move on to the next one."

On the Reinventing Ottawa blog I've included a few emerging industries in our city.  I believe that as a city we need to identify and introduce a new rural industry and a new urban industry into our local economy.  Our portfolio and economic growth depends on it.  After doing some research and visiting a local winery, I believe wine-making and animation are great candidates.

Cities like Quebec City are beginning to shed their image as government towns and are emerging as entrepreneurial cities.  Ottawa can do the same.  Like a skilled portfolio manager, this will require leaders with the vision to identify opportunities, the backbone to handle risk, and the wisdom to manage growth.  Let's hope and pray that our new council is up to the task.


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