Monday, February 20, 2006
Page: B1   Section: Your Business     By: Don Macdonald

Value investor sees bargains in U.S.

Law enacted in fallout from Enron and WorldCom scandals offers opportunities

Money manager Irwin Michael believes the U.S. stock market is the best place in the world to find buying opportunities right now.

But Michael, a Montreal native who runs Toronto's ABC Funds, is used to going against the grain.

He is, after all, an accomplished deep value  investor and that means he makes money by taking contrarian stands.

Irwin says he's seeing five attractively priced stocks in the U.S. for every one in Canada.

One big reason for the cheap prices is the pernicious effect of a law enacted to protect investors from the kind of fraud that sank Enron and WorldCom.

The Sarbanes-Oxley law imposes onerous financial reporting  requirements on public companies - so onerous that the profits of many smaller companies are suffering.

They'd rather go private or sell out to another company than continue putting up with the costs and headaches of compliance, says Michael, who was in Montreal this week to pitch investors on a new value fund he's bringing out in April.

"We've had eight takeovers since June," Michael said of his U.S. picks.

"Our challenge is to find the companies that are dirt cheap and tuck them in our funds. Then hopefully in due course they are either bought out or taken out."

Michael's new fund is called, appropriately enough, the ABC Dirt-Cheap Stock Fund.

Notwithstanding his current enthusiasm for the U.S. market, the fund will be open to stocks from around the world.

It's the sister fund to ABC North American Deep-Value Fund, which has returned 30.8 per cent since its inception in November 2004.

Both are what's known as closed-end funds.

They behave more like stocks than the more familiar open-ended mutual funds.

A number of units of a closed-ended fund are issued to the public, and after that they are bought and sold among investors like a stock, without an obligation for the fund company to issue new shares or redeem outstanding shares.

Typically, closed-end funds trade on a stock exchange. But the ABC offerings trade on the company's own "virtual exchange" at the net asset value of the fund.

Irwin says the closed-end format allows him to take a patient approach to managing value stocks because he doesn't have the "gun to his head" of redemptions, which can force a manager of an open-ended fund to liquidate stocks.

He downplays the potential for investors in his closed-end funds being caught in a liquidity squeeze in the event, for example, of a market meltdown.

There are currently 80 investors waiting to purchase units in the $170-million North American Deep Value Fund, he says.

The Dirt-Cheap fund will bring the ABC stable to five, including the open-ended Fundamental Value Fund, a Canadian equity offering that has produced an annual return of 19.3 per cent over the last 15 years.

All this will be moot to most investors because ABC Funds are aimed at well-heeled investors and require a minimum ante of $150,000 to get in.

Still, Michael's rigorous approach to investing should be of interest to even those of the most modest means.

He resists comparisons to Benjamin Graham, but his approach brings to mind the great pioneer of value investing. It relies on financial analysis to unearth stocks that are trading below their intrinsic worth.

A value investor such as Michael looks for stocks trading at low price-to-earning ratios or at a discount to a company's book value, among other yardsticks. They might also try to unearth hidden assets that will create value when they're discovered by the market as a whole.

Value investing has proved to be the most profitable approach to stock-picking over the long run. But it's harder than it looks, given human nature and the fact it involves, by definition, buying what others are shunning.

Consider, for example, one of Michael's recent big scores - Laurentian Bank of Canada.

He was buying when it was looking grim for the bank - falling profits, a dividend in danger and stock price in the tank.

When things began to turn around last year under CEO Raymond McManus, the stock shot up 50 per cent and Michael sold his position.

Besides a corporate site at www.abcfunds.com , Michael maintains an interesting investing site at www.valueinvestigator.com  with discussions of many of his picks.

It's as good a place as any to begin to learn the abc's of value investing.

dmacdonald@thegazette.canwest.com