In the investment world, Francis Chou is a breath of fresh air.
Chou manages close to $1 billion in assets, spread out over five different funds, using a deep value style. He intentionally keeps a low profile, choosing to run his business from a Toronto suburb. His marketing budget is nonexistent. He has a staff of two, including himself.
He’s also refunded fees to investors. In 2008, Chou’s Europe fund got hammered along with every other fund as we entered the Great Recession. Not only did Chou refund his management fee for the year, but he also lowered management fees for the next three calendar years to an average of just 17 basis points. How many other fund managers have done something like that?
His long-term performance is stellar. Since its launch in October 1986, his Chou Associates Fund — which invests in global stocks, with a focus on the United States — has had a total return of more than 11.5% annually. Since 1994, Chou has crushed the market, returning more than 12% annually, while the index barely cracked 8%. His RRSP fund, which focuses on Canadian stocks, has shown similar results.
Investors can learn a lot from somebody like Chou. Here are three of his top Canadian holdings.
It seems like many of Canada’s smartest investors are loading up on BlackBerry (TSX: BB)(NASDAQ: BBRY), which has pretty much been left for dead by the investing public.
Although Chou bought at a much lower price, just over $7 per share, many of his reasons for buying still apply today. The company has stabilized its revenue losses and it actually eked out a small operating profit in the latest quarter, much to the delight of the analyst community.
BlackBerry has a rock-solid balance sheet, too. It has more than $2.5 billion in cash, which works out to more than $5 per share. The company also has significant intangible assets, like a mountain of valuable patents and its investment in QNX, the software that runs in-dash entertainment systems for many different brands of vehicles. QNX has the potential to be a huge revenue driver for the company, especially as in-vehicle entertainment systems get more complex.
Much like Prem Watsa of Fairfax Financial, Chou has recently bought a small position in Reitmans (TSX: RET.A) for his fund, investing a little less than 1% of his assets in the company.
Reitmans is one of Canada’s leading women’s clothing retailers, operating more than 900 stores across the country under various banners. The company has suffered from poor results and weak sales, which led to it slashing its quarterly dividend 75% during 2013.
In the long term, though, the company has terrific assets. Its top management has been in place for decades, and they own a substantial chunk of shares. There’s plenty of cash in the bank, and the company currently trades right around book value. It has also spent millions to renovate stores.
One criticism of the company was that its products were a little stale, not appealing to younger buyers. This isn’t a problem that can be fixed overnight, but management is certainly aware of it. Reitmans has also revamped its website, which should lead to additional online sales.
3. Sears Canada
During the second quarter of 2013, Chou purchased almost 300,000 shares of Sears Canada (TSX: SCC) when they hit a low of nearly $10 per share. The holding represents a little more than 4% of his RRSP Fund. Why would Chou place such a large bet on a company with declining sales and a pretty miserable outlook?
Two words: real estate.
In 2013, the struggling retailer sold almost $1 billion worth of real estate, including its stake in one of its best locations, in Toronto’s Eaton Centre. Recently installed CEO Douglas Campbell told investors recently that the company is open to selling more of its real estate, including a development in Burnaby that has significant value.
The company has also essentially put itself up for sale, although a suitor coming in and snatching up the entire company is unlikely. There may be interest in some of the company’s most prime locations, which is exactly what Chou is betting on.