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Leith Wheeler Canadian Equity
The Leith Wheeler Canadian Equity fund has been a strong performer since inception. Over the past ten years it outperformed the S&P/TSX Composite Total Return index by an average of 3% annually. Since we first reviewed the fund in the Q2 2002 issue of Frugal Funds it has gained an average of 22% each year. But, despite such impressive absolute returns the fund lagged the index by 4.7% in 2005, which was a banner year for Canadian equity markets. Managed by a team of four portfolio managers the fund follows a value-based investment style, which means that the fund invests in companies that are undervalued or have been overlooked by the market. Emphasizing accountability to its investors, Leith Wheeler conducts most of its investment research inhouse. Taking a bottom-up approach the managers evaluate each prospective stock by considering its underlying business. Is the company in a good competitive position, is it well-managed, how strong is its balance sheet, and is it generating free cash flow? The managers then assess the stock by comparing its price to the price they would be willing to pay for the entire business. Once a stock is purchased, barring any undue deterioration of the company's underlying business or of its risk-return characteristics, it is held for the long term. The fund managers' aim is to keep the portfolio's annual turnover rate below 30%. Indeed, it has averaged 28% over the last five years, which is a testament to the firm's lowturnover commitment. Considered in aggregate, the fund's portfolio at the end of December reflected its value style. It had a 6.7% earnings yield and a price-toearnings ratio of 14.8, which is quite favorable given the S&P/TSX Composite index's average price-to-earnings ratio of 22.7. The fund's priceto- book-value ratio of 2.5 was also competitive with the index's average of 2.7. On the other hand, the fund's dividend yield was slightly lower than that of the index. At the end of the year the fund held about thirty stocks and 2.1% of its assets were in cash. It's top three sectors were Financials, Industrials, and Energy stocks. These three sectors represented three-quarters of the fund's assets with Financial stocks accounting for the lion's share at 44%. The top three stocks in the portfolio were Nexen, TD Bank, and Manulife Financial, which together made up one quarter of assets. During 2005 the fund pared its portfolio down from thirty-six stocks. The increase in concentration was particularly evident in the energy sector even though the fraction of the fund's assets invested in energy stocks actually increased slightly. Some notable names removed from the portfolio during the year include MDS and Quebecor World. On the other hand, Rogers Communications, Canwest Global, and National Bank of Canada were added. During 2005 the fund also sold two longtime holdings that had done very well. The first, Terasen, was purchased by the fund in 1995 at $6.78 per share (adjusted for splits) based on a determination that the company was undervalued and overlooked by the market. The fund sold Terasen to U.S.-based Kinder-Morgan's takeover bid in the fourth quarter for $35.91 per share. The fund was also a long-time holder of Petrokazakhstan but sold its position during the first half of the year well before the company was purchased by the China National Petroleum Company. With much of the stock market's recent performance being fueled by high oil prices, the fund's portfolio managers have adopted a stance with respect to oil that is contrary to the 'consensus' view. They believe that oil prices are more likely to fall than to rise from their recent highs in the coming years. Simply put, it is the team's view that many oil stocks are now overvalued, and the fund has been positioning itself accordingly. With an enviable track record, the Leith Wheeler Canadian Equity fund is available to investors who can manage the rather hefty initial investment of $25,000. However it is not currently available east of Ontario, nor is it open to investors in the Yukon, Northwest Territories, or Nunavut. A low MER and solid value-investing credentials make the Leith Wheeler Canadian Equity fund a good choice for conservative investors with comparatively large accounts. FF: Q4 2005 |
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