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Canada's oldest fund still has spunk

Over the past decade, CGI has produced an average annual return of 14.5 per cent

Special to The Globe and Mail

Call the performance of Canadian General Investments Ltd. peerless and you'd be right. The claim seems outlandish but, technically, it is true, for there are no other publicly available Canadian investment funds that can match its age of 76.

Created in 1930, it is traded on the Toronto Stock Exchange with the symbol CGI. It's run by Morgan Meighen & Associates, a firm with its own pedigree and managed by Michael Smedley, who took over the portfolio in 1989.

The $850-million fund is alive and well in spite of its age. For calendar 2006, CGI produced a 29.8-per-cent return on its net asset value, topping the 17.3-per-cent return of the S&P/TSX total return index. In the last decade, the fund has produced an average annual return of 14.5 per cent, outpacing the 10.8-per-cent return of the benchmark.

CGI was established by a group of British and Canadian investors, including Arthur Meighen, Canada's prime minister for two periods in the 1920s. Today, the fund holds 130 stocks assembled for reasons that include getting in on what is currently hot, getting strong and rising dividends, and making long-term commitments of patient money.

Mr. Smedley calls the style blend "agnostic."

"It is part value investing in stocks that seem underpriced, part growth investing in stocks that appear to generate high earnings gains, and part getting into good things," he says.

A journalist before he became a money manager, Mr. Smedley worked at several newspapers in the Commonwealth, including this one, before deciding to do what he was writing about. He took the Canadian Securities Course, and in 1987, joined Morgan Meighen, which had been run by Arthur's son, the late Max Meighen. In 2008, in a bit of financial déjà vu, Morgan Meighen will move to 10 Toronto St., the Greek revival building that housed a succession of Canadian businesses including Argus Corp. and, more recently, Hollinger Inc. The move will be a kind of return to its roots, for Max Meighen was a director of Argus. CGI has survived them all.

The fund is almost purely Canadian. That asset base has allowed it to carve out a distinct niche in global markets, according to Max King, a fund manger at Investec Asset Management in Britain. "We see CGI as a proxy on Canada and Canadian stocks," he explained. "We bought in at a discount of 20 per cent off of net asset value. That discount was not the main reason, but getting a good portfolio at a discount was a plus."

Currently, among the top 10 holdings of the fund is zinc-miner HudBay Minerals Inc. (HBM-TSX). "One could see that world zinc demand and the company's mine and its processing plant gave it excellent potential," Mr. Smedley said. "This was a company being revived after a former owner abandoned it."Canadian Western Bank (CWB-TSX) is also in the fund. The chartered bank is building its loan book rapidly in the midst of the Alberta oil boom. "CWB is a growth story," Mr. Smedley explained. "Very few new banks have been chartered in several decades. This is a rare animal, and has good prospects and has an excellent territory."

Canadian Utilities Ltd. (CU-TSX) is a an electric power company. "One should never regard boring utilities as boring. This one has rising share prices and rising dividends," Mr. Smedley said.

The fund's returns are also affected by the relation of the share price to net asset value. Last year, CGI shares varied from a 17-per-cent discount to NAV to a 2.6-per-cent premium. On Dec. 29, the last trading day of 2006, it traded at a 12.7-per-cent discount to NAV. The size of the discount or premium affects the fund's returns, but the share price, like that of other companies listed on stock exchanges, is subject to the market's whims.

"Regardless of its market price, CGI isn't going to change its ways," Mr. Smedley said. "We are bottom-up investors with a focus on individual companies. We have holdings in all major sectors. Each sector is vulnerable to swings, so we remain ready to shift weights."

Given the age of the fund, adapting style to markets appears to be working. "The fund is usually heavily weighted with what is in favour in the market," explains Dan Hallett, a mutual fund analyst who heads Dan Hallett & Associates Inc. in Windsor, Ont. "In a way, that's a survival strategy."

© 2007 The Globe and Mail. All rights reserved.

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