Money Manager Spotlight: Irwin Michael
ANNUAL RETURNS (ABC Fundamental-Value Fund)
Prompted to describe the worst moment in his career, Irwin Michael doesn't have to think long. It was the fall of 2000, and, as he puts it, "I was puking my guts out."
Over the 10 years ending March 31, 2003, his ABC Fundamental-Value Fund has compounded at an annual rate of 16.4%, twice the return of the Toronto Stock Exchange's S&P/TSX Total Return Index and tops among Canadian equity fund managers. But he's trailed his rivals some years, including 1999 and 2000. The big indexes, led by overvalued technology and media stocks, were leaving him in the dust. Clients wanted to bail out of his Canadian and U.S. equity funds. The doubters included three pension plans representing $100 million, or a third of the Fundamental-Value Fund at that time.
This posed a serious problem. Michael had been gladly relieving investors of their old-economy holdings--including Canada Bread, Masonite and La Senza--at good prices as the herd stampeded into tech. But even after he'd buy the shares, they'd fall in value as the tech bubble inflated to unimaginable volume. In late 2000, just when his greatest buying opportunities were at hand, it looked like he would be forced to sell much of his holdings at a loss. Worse, his ABC American-Value Fund owned smaller, less liquid stocks, selling them would cost the fund dearly. "The market is priced by the marginal supplier of stock," says Michael with a sigh. He was going to be the desperate seller driving the market price lower; hence the nausea.
So Michael did what only a manager who owns his shop and invests all his money in his fund would do: He negotiated with the pension clients for time to pay them back. He also borrowed and scraped up as much as he could and invested in the U.S. fund to ease the blow. "I didn't even tell my wife," he says. The bold move paid off. The following year, 2001, was ABC's best ever overall. The Fundamental-Value Fund returned 26.1%, and the U.S. fund 39.5%.
The ABC approach is pretty basic value investing. Michael starts by looking for stocks with low price-to-earnings and price-to-book ratios. But, unlike strict buy-and-hold value investors, he will sell a stock if the bid is considerably higher than what he thinks it's worth. "If a stock becomes expensive, it's our responsibility to sell it," he says.
Although Michael practically starts sweating when he recalls the tech bubble, he hasn't changed his style. "There are two things that irritate me: a lack of patience and a lack of discipline." He now politely turns down new institutional clients. Like some retail clients, supposedly sophisticated institutions often chase performance. Short-term returns will always fluctuate, but as Michael says, "a good manager doesn't suddenly become stupid."
© 2007 The Globe and Mail. All rights reserved.
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