DJ CANADA TIP SHEET: Michael Samples Sweet-Tasting Pudding
By Stuart Weinberg
Of DOW JONES NEWSWIRES

TORONTO (Dow Jones)--One way for portfolio managers to gain credibility with investors is to put their money where their mouths are. Another is to establish a long track record of high returns. Irwin Michael, portfolio manager of the ABC Fundamental Value Fund, has done both.

Michael's registered retirement savings plan (RRSP), his wife's RRSP and those of his four children are entirely invested in the fund. "I have to sample
my own pudding," Michael said.

At July 31, the fund's one-year return was 31.25%, compared to 16.13% for its peers and 18.57% for the comparable index, according to Globe Fund. When stretched over three, five, or 15 years, the fund's return is more than double its peers and the comparable index. That's some pudding.

Michael describes himself as a deep-value investor who "likes to buy a twoonie for a loonie." He seeks stocks that fall within the parameters of his 10 commandments of value investing. The commandments, which he follows religiously, require him to seek stocks with low multiples for cash flow and price-to-earnings which trade at a discount to book value, among other things.  The manager also looks for companies with high-quality management teams and hidden assets.

On balance, Michael said he likes to buy stocks trading at 10-times earnings with cash-flow multiples under five times. He typically holds stocks for 12-18 months and looks for a 50% rate of return.

One area where Michael has found value is the paper and forest-products sector. The fund's weighting in this sector, at 20%, is well above the S&P/TSX Composite Index's 2% weighting.

Michael said plywood, lumber and oriented strand board (OSB) prices remain relatively strong. OSB is a rectangular-shaped wood panel widely used in residential construction. Michael said he doesn't see interest rates "going through the roof," nor does he anticipate a sharp rise in inflation. The upshot  is he believes the housing market will remain strong, to the benefit of the forestry sector.

Michael said he also believes the sector will benefit from a favorable resolution of the softwood-lumber dispute with the U.S.

Paper and forestry holdings in the portfolio include Canfor Corp. (CFP.T), Norbord Inc. (NBD.T), Fraser Papers Inc. (FPS.T), Riverside Forest
Products Ltd. (RFP.T) and TimberWest Forest Corp. (TWF.UN.T).

TimberWest is the only trust in the C$375 million fund, Michael said.  The stock trades slightly below its net-asset value, while providing an 8.6%
yield, he said. In addition, the company could be a takeover candidate, he said.

Michael doesn't dabble much in income or royalty trusts because these companies don't offer the deep value he looks for in a stock. TimberWest
is an exception and it's not a typical trust, Michael said. That's because it's a stapled unit, meaning it includes common shares, preferred shares and debentures. he said.

One paper and forestry product stock that didn't work out as well as hoped was Norske Skog Canada Ltd. (NS.T). While he made money on the stock, buying it at C$3.75 about a year ago and selling it recently at $4.30-C$4.50, the company recently reported its 11th straight quarterly loss, Michael said. Tired of waiting for a turnaround, he decided to throw in the towel, saying he has more confidence in lumber and fine paper companies as opposed to newsprint producers like Norske Skog Canada and Abitibi-Consolidated Inc. (ABY).

In addition to the paper and forestry sector, Michael has also found value in the mining and retail sectors. Portfolio holdings in these sectors include LionOre Mining International Ltd. (LIM.T), EuroZinc Mining Corp. (EZM.T), Danier Leather Inc. (DL.T) and Sears Canada Inc. (SCC.T).

Regarding Sears Canada, Michael said it has a low book value, good business model and offers a 24-Canadian-cent dividend while investors wait for a turnaround. In addition, it could be a takeover possibility for Sears Roebuck & Co. (S), he said.

Michael has cast his gaze to the U.S. in search of value. U.S. holdings make up 20% of the portfolio and Michael said he's prepared to increase that to
the 30% maximum allowed if he continues to find inexpensive U.S. stocks. The portfolio's U.S. holdings include: ShopKo Stores Inc. (SKO), a discount
retailer based in Green Bay, Wisc., American National Insurance Co. (ANAT), a diversified insurance company that relies on door-to-door sales for a big part of its business, and General Motors Corp. (GM), the big automobile manufacturer.

Company Web Site: http://www.abcfunds.com/

Stuart Weinberg, Dow Jones Newswires; 416-306-2026;
stuart.weinberg@dowjones.com
 

(END) Dow Jones Newswires
08-12-04 1200ET