Reflecting on the first four decades of his career, John Carswell, CFA, entertains with stories of investment decisions at opportune times. Examples include well-known companies like Hertz, Bell Canada, and Manulife that had some trouble and needed a lender. Sometimes, Canso was the only bidder. 

Carswell is the Founder, CEO, and CIO of Canso Investment Counsel. He is one of the longest-tenured CFA charterholders still active in the business: number 11,148. 

These days, Carswell continues to enjoy his work. He finds the most rewarding aspect to be developing the next generation of bond investors. This includes taking a chance on someone who might not fit the mould but thrives under apprenticeship-type training, with the right mix of attitude, smarts, and discipline. His appreciation for developing the investors of tomorrow is understandable. Afterall, serendipity played a role in Carswell’s career; his family’s business was the military. 

Why did you pursue a career in investment management? 

I really didn’t know what a portfolio manager was before entering the industry. I had a commerce degree from Royal Military College and completed an MBA at Queen’s after serving as a Royal Canadian Air Force Air Navigator. I took all the courses in finance that Queen’s offered and won the Finance Award, but I also took marketing courses. Mutual Life hired me in Private Placements, and then I switched to Investment Management Services after three years. I never decided between marketing and investments and always straddled the two. I became a portfolio manager at TAL, now CIBC Asset Management, and started looking at public bond credit. 

How has the knowledge gained in the CFA Program and the Charter helped your career? 

I completed the CFA Program while I was at Mutual Life. Everyone in the investment area took it. It was much more practical than the “efficient markets” finance I learned during my MBA. The equity analysis section was very useful to what I did and still do for our credit investments. At the time, most bond managers just used credit ratings. It became clear that the real individual company analysis was being done on the equity side of things. As a private lender, I looked at the fundamentals of companies to understand their cash flows, which put me in a position to be hired into the portfolio management industry. 

After working at a few firms and reaching senior leadership positions in fixed income at TAL Investment Counsel and at Foyston, Gordon & Payne, why did you decide to strike out on your own to found Canso? 

It seems a bit obvious now, given the proliferation of so-called “credit funds” and private credit, but in 1997, the times were different. It was unusual to say that I did my own credit work and wanted to differentiate between individual corporate bonds. At the time, most balanced-fund managers said they took their risk on equities and kept their risk low by investing in government bonds. John Braive, my boss at TAL, was Canada’s first specialty bond manager. Working with John, I learned a lot about how bonds traded and the amount of money I could make by buying when people were selling in fear and selling into strength in a hot market. 

Then I went to Foyston Gordon (now Foyston, Gordon & Payne) and bought Don Foyston’s stake when he retired. I took over their fixed income strategies, managing bonds on a value basis. But duration still dictated success for a bond manager, since most clients limited their managers to A and higher in their investment policy statements. It seems strange now, in these days of credit fund mania, but when I pitched starting a pure corporate bond credit mandate to my partners, they didn’t think our clients would want it. I started Canso in 1997 to do just that, since I believed so much in credit as a specialty area. I think I won the argument, as Canso is now worth CA$45 billion assets under management (AUM). 

What do you think makes your investment process successful? 

The basis of modern high-yield investment was Michael Milken’s research on out-of-favour and “fallen angel” (former investment-grade) bonds. There weren’t any new-issue high-yield bonds before Milken. That’s why they were called “junk bonds.” Investment grade managers had to sell, and there was nobody to buy, so therefore they were very cheaply valued. This is something many investors don’t often consider. 

Our analysis tells us what those bonds are worth before we buy, even in a restructuring. This gives us the confidence to invest in things others think are risky. We don’t silo our portfolios; instead we invest across the spectrum in AAA to D (Defaulted) issues. That means we cross the asset class boundaries from investment grade to high yield and distressed debt. We have been a large investor in private bond issues for many years, but only when they’re cheap compared to public equivalents or offer us protections that we can’t get in public issues. 

You are very attuned to the credit markets and write about your observations in the quarterly Canso Market Observer. Pre-2007, you were concerned about unrecognized risks in the sub-prime mortgage markets. In 2011, you cautioned investors of the inflationary risks that came with negative real interest rates. What worries you today? 

My investment blessing, which is also a burden, is that I think differently than the consensus. Central banks expanded money supply incredibly to deal with the COVID-19 pandemic. They had come to believe that whatever they did with money supply, there would be no inflationary consequences, and we disagreed. That’s 180 degrees off from what the Monetarist school under Milton Friedman believed: “Only money matters.” 

Most investors currently believe that central banks “command and control” the economy and financial markets. The recent forecasting record of central banks should give them pause and certainly concerns us. There was “only transitory inflation” that soon became the highest inflation in 50 years. As we’ve said in our newsletters, there’s been about a 50 percent pass though so far of expansion in money supply into inflation. With the money multiplier in banking, we think there’s more money out there than people understand. Wage settlements and the risk on financial markets certainly don’t suggest a lack of money. There could be higher inflation than the 2 percent the bond market expects. 

What books have most influenced your work and outlook? 

We read a lot of books with our staff for education, so I’ve read many. I personally read a lot of military history books, but on the investment side of things, I would recommend The Hour Between Dog and Wolf by John Coates. He’s a Canadian with a PhD in economics and a former derivatives trader. He studies the effects of hormones on financial markets. He tests the blood of traders, and, at a time like the present, investors and traders are literally drunk on their financial success as testosterone courses through their bodies and makes them do very risky things. Coates found the opposite is true in a downturn, when cortisol makes the market literally depressed. That’s how I’ve always thought the financial markets work, so now I’ve got medical research to support that view. 

Another great book is Rampaging Bulls: Outfox Promoters at Their Own Game on Any Penny Stock by Alexander Tadich. It recounts the types of stock promoters in penny and story stocks. It’s out of print since the late 1990s, but it’s one of the best in detailing how very smart and un-scrupulous people remove money from the unsuspecting. Even though high-end bankers dress very well, they still use the same techniques. It should really be a whole section of the CFA Program as a caution to young and inexperienced investors. 

This article has been edited for length and clarity.