Near-term markets may test patience, analyst says
Fund manager foresees 'transitory pain to achieve longer-term investment gains'
Fund manager Irwin Michael likes the longer term outlook for the Canadian and U.S. stock markets; it is just the near term that he thinks could test investors' patience.
Mr. Michael started the ABC Fundamental Value Fund in March, 1989. The fund, with assets of a little over $550-million, is already up 6.48 per cent in 2005, continuing the strength that has been evident throughout its history. Its one-year return to March 31 was 17.21 per cent; its three-year 15.03 per cent annualized, five years 18.42 per cent, 10 years 14.86 per cent and 15 years 18.04 per cent.
Mr. Michael expects the markets will be very volatile over the short term. "Nonetheless, we are prepared to suffer what we call transitory pain to achieve longer-term investment gains," said the president of Toronto-based I.A. Michael Investment Counsel Ltd. "We think the markets will be higher at the end of the year than they are right now."
Mr. Michael says he currently is probably finding three or four attractive U.S. stocks for every one Canadian and that the choices tend to be concentrated in the mid-, small- and micro-cap areas. So not surprisingly, two of his three stock selections are U.S. issues.
Shares of Bassett, Va.-based Bassett Furniture Industries Inc. (BSET-Nasdaq), which manufactures and distributes home furnishings, have languished over the last year or two, possibly because investors are still worrying about the economy and "perhaps a housing bubble," Mr. Michael said. In his view, the stock is "fundamentally attractive." At Friday's close of $19.83 (U.S.) on the Nasdaq Stock Market, the shares are changing hands just above book value of about $19. The stock has a dividend yield of 4 per cent. Bassett is profitable, he noted. It earned 20 cents a share on sales of $81-million in the first quarter ended Feb. 26. Also, the company has very little debt and the stock is widely held. "The question is -- is it a takeover candidate?" he said.
Phoenix Cos. Inc. (PNX-NYSE) is another U.S. stock that caught Mr. Michael's eye. Book value of the Hartford, Conn.-based firm is around $21.30 a share, a figure that drops to maybe $13.50 when intangibles are subtracted. But the shares traded at $11.87 Friday in New York, well short of either estimate as well as the $17.50 at which the initial public offering was done five years ago. Shares of the holding company, which has interests in wealth management and investment counselling operations and also owns a life insurance firm, have a modest dividend yield of 1.30 per cent, "but basically, you are buying it for capital gain down the road," he said. Like Bassett Furniture, Phoenix has no controlling shareholder. Phoenix earned 86 cents a share last year.
Mr. Michael singled out Royal Host Real Estate Investment Trust (RYL.UN-TSX) as his Canadian selection.
"We are not big players in income and royalty trusts, but . . . we have been buying income trusts that have been beaten up," he said. Book value for Royal Host, whose shares closed Friday at $5.34 (Canadian) on the Toronto Stock Exchange, is conservatively estimated at $5 and net asset value is a minimum of $6.50, he said. Royal Host, which owns 38 hotels and manages 141, has been a "perennial underperformer," Mr. Michael said.
"We think it will be worth more once they are over the operational problems that they have had."
ABC Fundamental Value
Statistics
Category: Canadian equity
Manager: I.A. Michael Inv. Counsel
Local Status: Open-ended
Total Assets: $550 million
Management expense ratio: 2%
Globefund 5-star rating system: *****
Returns to March 31, 2005
1-year simple rate of return: 17.2%
3-year compound annual: 15.0
5-year compound annual: 18.4%
10-year compound annual: 14.9%
15-year compound annual: 18.0%
| Top 10 holdings to Dec. 31 | |
| 1. | Canfor |
| 2. | CanWest Global Communications |
| 3. | Decoma International of A. |
| 4. | Lionore Mining International |
| 5. | Morguard |
| 6. | Northbridge Financial |
| 7. | Sea Containers of A. |
| 8. | Sears Canada |
| 9. | Teck Cominco of B |
| 10. | Timberwest Forest |
SOURCE: WWW.GLOBEFUND.COM