Saxon Stock Fund
Between 1999 and 2001 the Saxon Stock fund
posted double-digit annual returns, but it met the
bear during the summer of 2002. The fund gained
only 0.3% in 2002, which is still much better than
the 12.4% loss posted by the S&P/TSX Total
Return index. Indeed, despite recent weakness, the
fund has added an average of 5.5% annually over
the last five years compared to the index's average
1.9% annual loss.
Managed by Rick Howson since 1989, the
fund takes a contrarian bottom-up value-based
approach to investing with an emphasis on
individual stock picking. Mr. Howson looks for
Canadian companies with strong balance sheets
that are, for whatever reason, trading at prices well
below their intrinsic value. Of the many possible
value indicators, Mr. Howson cites a company's
ability to generate cash as being the most important
for determining its intrinsic value.
Once purchased, a stock is typically held by
the fund for three to five years, or until it has risen
to its intrinsic value. The fund's low 16% turnover
is a testament to this long-term outlook. Should a
stock come to represent more than 6% of the
portfolio it is the fund's usual practice to sell.
Unlike many Canadian equity funds, the
Saxon Stock fund does not invest in derivatives.
Mr. Howson believes that derivatives are simply
not worth the cost and prefers to be fully exposed
to his chosen stocks.
Taken as an aggregate, the fund's portfolio is
well priced. The equity portion of the portfolio has
a 2.3% dividend yield, which is a bit greater than
the S&P/TSX Composite index's 1.9%. The
portfolio's 6.3% earnings yield translates to a P/E
ratio of 15.8, which compares well with the index's
P/E of about 29. Price-to-book comes in at 1.3,
while price-to-sales is a respectable 0.76. For
comparison, the index's median price-to-book was
1.8 at the end of the quarter. The fund's holdings
in the iShares MSCI European Monetary Union
and Japan ETFs were excluded from the preceding
analysis. Together they make up 5% of the fund
and provide diversification into foreign markets.
Mr. Howson believes that these markets continue
to be undervalued relative to the North American
markets. All in all, the portfolio represents good
At the end of the first quarter the fund held
fourty-eight securities. Cash represented 5.2% of
the portfolio, up 2.5% from the previous quarter.
The top three sectors were industrial products,
financial services, and materials. The fund's top
three stocks were CP Ships, Gennum, and Nu-Gro,
which together accounted for less than 10% of the
portfolio. During the first quarter, the fund was
uncharacteristically active, selling Goldcorp and
TransCanada Pipelines. The proceeds from these
sales were used to open new positions in Barrick
Gold and TransAlta, as well as to increase some
existing positions, notably in Cott Corporation and
Royal Group Technologies.
When asked to choose his best pick of the last
few years, Mr. Howson cited two moves as his
favorites. First, the fund purchased Manulife and
Industrial Alliance after their de-mutualisation.
Second, it deliberately avoided the high-tech and
telecom sectors during the late 1990s. His worst
pick was a now defunct Delicious Alternative
Desserts. Its story illustrates the business risk
associated with equities. Simply put, Delicious
went bankrupt before it was able to turn a profit.
Mr. Howson believes that the Canadian
market should yield single digit returns this year.
He also sees many buying opportunities for the
fund in the current bear market.
One point of concern is Saxon's recent rapid
growth as measured by assets under management.
Despite the steady redemptions reported by the
industry as a whole, the Saxon Stock fund has
grown from managing $15 million to over $94
million over the last two years. Large cash inflows
can be difficult to deploy effectively.
Nevertheless, the firm's two portfolio managers,
Rick Howson and Bob Tattersall, maintain that
their funds have not yet grown to the point of being
difficult to manage.
Over the past 15 years the Saxon Stock fund
has returned an average of 9.6% annually, which is
2.6% greater than the performance of the
S&P/TSX Total Return index. The fund's low
MER of 1.87% (including GST) is a bargain for
this kind of performance, and its low $5,000
minimum investment makes it accessible to most
investors. The Saxon Stock fund is appropriate for
conservative value-oriented investors who are
looking for low-cost long-term portfolio growth.
FF: Q1 2003