For mutual fund manager David Taylor, the past 12 months have been very good indeed. His Dynamic Canadian Value Class Fund turned in a 37.8-per-cent return for the period to Nov. 30, putting it in the top 1 per cent of all Canadian equity portfolios. What's more, its 29-per-cent average annual compound return for the three years ended Nov. 30, also put it into the top 1 per cent of the 663 mutual funds in the Canadian equity sector.
Mr. Taylor, who took over the fund in January, 2003, made major changes.
He extended its foreign-content mandate. Today, though the fund has 36-per-cent foreign content, it can hold up to 49 per cent of total assets.
He lowered the average capitalization to let it roam among small and mid-cap stocks. Results began to show.
For 2003, the fund gained 40.3 per cent, in 2004 it gained 22.9 per cent and in 2005 it rose 28.3 per cent. Now the kudos are coming. On Nov. 30, he won the award for the top Canadian Equity Fund of the year at the Canadian Investment Awards.
How does he do it? He buys stuff that other investors shun.
"I buy when others sell," he said. "If I can be reasonably confident that a company will revive, I will buy its stock even if it's being sold by others who are panicking. The world does not move in straight lines. That is just group think. Once other investors have played on their emotions, I am there to pick up money they have left on the table."
Fund analysts like what they see in Mr. Taylor's flavour of value management.
Dan Hallett, who heads Dan Hallett & Associates Inc. a Windsor, Ont.-based mutual fund research company, said: "Mr. Taylor's fund is not a one-trick pony. He looks for companies that are drowning in bad news. That might scare some people, but it is appealing to me because that is where you find great value."
Mr. Taylor, whose success has pulled $250-million into a fund that had $2-million when he took over, figures that there are plenty of new fields to conquer. "I continue to think that we can find stocks that are out of favour and that need to be bought. These are the corporate casualties that will bounce back when fear and capitulation subside and the market recognizes their intrinsic value."
At the age of 43, Mr. Taylor wears success lightly. He dresses in what he calls casual, which at the Dynamic shop means black dress shoes, a striped shirt and slacks from Harry Rosen. "The better my fund does, the more casual I get. If I ever show up in a tux, it's time to redeem," he joked. His unitholders can relax, for Mr. Taylor said that he does not own one.
He figures that success confirms his method. The fund, which has a relatively small body count of 35 companies, holds 52-per-cent Canadian stocks, 36-per-cent foreign companies (27-per-cent U.S., 3-per-cent Israel, 4-per-cent Indonesia and 2-per-cent Australia) and 12-per-cent cash. He remains a bargain shopper. "We have found that in any year the losers among the 300 largest Canadian companies in any given year appreciate by 40 per cent in the next year." Among his current picks are the following:
Rally Energy Corp. (RAL-TSX) is a Calgary-based company drilling for oil in Egypt and natural gas in Pakistan. Shares purchased last summer at an average cost of $1.80, down from an earlier high of $2.75, have recently traded at $3.32. Rally owns a significant reserve and is using advanced techniques to get the oil out. Analysts have been skeptical, but new management with a strong record could push shares to $8.50 by late 2007, Mr. Taylor said.
Pfizer Inc. (PFE-NYSE), a New York-based drug maker, went into the portfolio at $24.50 (U.S.) and has recently traded at $25.56, where it is priced at 11.5 times forward earnings, the cheapest it has ever been. It's also the cheapest big drug company on the New York Stock Exchange. He bought early this month after it fell from $28 when a new drug to replace cholesterol control product Lipitor failed tests. "The company could screw up on another drug, but it has many replacements in its pipeline and has $30-billion in cash to buy their way out of their present predicament," Mr. Taylor noted. While he waits for gains, Pfizer's pays a dividend that yields about 4.4 per cent. Within a year, Pfizer could get to $33.50, he added.
Petro-Canada (PCA - TSX), based in Calgary, is an integrated oil company that drills around the world and sells from coast to coast in Canada. Shares purchased at an average cost of $45.50 (Canadian) this fall have recently traded at $51.64 with a 52-cent annual dividend equal to a 1.1-per-cent yield. This is the cheapest major integrated oil company in North America and trades at half the valuation of Imperial Oil. The company keeps on disappointing analysts, but it can increase production 15 per cent to 20 per cent per year for the next three years. By the end of 2009, the shares should hit $80, he said.
Can Mr. Taylor keep up his winning streak? "We have never promised anybody that we'll be the winner in every year. But I can guarantee that I will not change my style and I can also guarantee that value investing will not go out of style," he explained. "When you are a value investor and you buy stocks that are already beaten up, there is more room for the shares to rise to than to fall. We're investing in a relatively safe style and there is some comfort in that."
That message appeals to financial advisers.
Derek Moran, who heads Smarter Financial Planning Ltd. in Kelowna, B.C., said "the fund is large enough to be a representative portfolio; it's not just a tiny fund that can cherry pick a few tiny stocks that larger funds have to ignore. What's more, the manager has earned his pay. The challenge will be to invest the new money his celebrity has brought in as well as he has invested in the past."
Dynamic Canadian Value
Leading positions (as of Nov. 30, 2006)
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SOURCE: DYNAMIC FUNDS
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