Hmmmmphhh ... seems you're not the ONLY one after all ...
Jonathan Chevreau
Financial Post
Thursday, August 2
Those trying to fathom the next direction the U.S. stock market takes should take a close look at the AIC American Focused Fund.
Veteran manager Larry Sarbit is 80% in cash (as of yesterday), as he sticks to the strict value investing style of the investment guru the
AIC Group of Funds has emulated since it was founded: Warren Buffett.
Sarbit refuses to deviate from Buffett's strategy of buying great companies at bargain prices. One of the few positions the US$460-million
fund has is Buffett's Berkshire Hathaway Inc. [BRK.A], and even it was purchased at lower prices than it's trading at now. The biggest
sector weighting is financial services, through stocks like US Bancorp [USB] and Freddie Mac. The largest single security, apart from
cash, is Waste Management Inc. [WMI] at 9.2%.
That's a stock Sarbit says he'd own more of if regulations permitted it.
Sarbit's views today have changed little from a conference call on May 31 in which various industry players grilled him over his huge cash
holding.
That's roughly US$370-million in treasury bills waiting to be deployed. The fund was launched in November, 1999, months before the tech
bubble reached its most distended proportions.
Despite its cash levels, the fund returned 28% for the year ended June 30, 2001, compared to a group average loss of 13.8% and a loss
for the S&P500 index of 12.6%. In calendar 2000 it returned 33% with 50% cash. This is one case where a substantial Management
Expense Ratio (MER) of 2.68% seems to have more than justified itself.
In an interview yesterday, Sarbit admitted his large cash position is not typical of his industry peers. "Most portfolio managers feel it's their
mandate to be pretty close to fully invested. My mandate is to own equities but to do intelligently. "
Right now, he can't find many great companies selling at bargain prices. "I was on the phone with a good friend of mine in New York the
other day, crying the blues about not being able to find an idea."
Sarbit says he's more concerned about preserving capital than making a lot of money. He believes equity markets will continue to fall
toward or below their historic means, and that this process will take time.
He thinks investors are still paying too much for businesses. Fifty years ago, investors were paying just seven times earnings. By contrast,
the average price/earnings ratio for a company on the S&P 500 today is 25 times earnings, he said, "which is not a setup for great
long-term rates of return." That translates into a mere 4% annual return, he said, and the average dividend yield of 1.25% doesn't do
much to enhance the situation.
The excess returns in recent years were "speculative," he said, "which is a frightening thing."
Over the next decade, investors in average companies or even average mutual funds are going to be very disappointed, Sarbit said.
One of the questions he faced was about the demographic trend of Baby Boomers flocking to equities for their retirement funds.
"When markets are going up, everybody's a long-term investor," Sarbit replied. But historically, when markets start going down, "long-term
investors suddenly change their mind. There's no law in this country that says that people have to own equities."
He was also asked about the danger of being heavily in cash if the market suddenly gets perky again and goes up 30% or 50%.
"Then the prices of businesses will be totally outrageous, and if we go back to another bubble situation in the Nasdaq, that will provide
wonderful shorting opportunities which we would hope to be able to take advantage of." He'll do that through a new hedge fund he will
manage for affluent investors, the AIC American Focus Plus fund. It will be able to short stocks and concentrate holdings more than
regular mutual funds. "We'll be able to make money buying awful businesses at ridiculous prices [selling short]."
Sir John Templeton did just that, making US$87-million last year by shorting every dot-com IPO just before they left their lock-up periods
and insiders could sell.
Clearly, some financial advisors are shaken by the stance taken by the veteran Sarbit, who started in the industry in 1979. Aurora,
Ont.-based Stephen Gadsden says Sarbit is no run-of-the-mill fund manager. "He's a leading manager in the financial services industry"
who cut his teeth at Winnipeg-based Investors Group Inc.
The markets may improve short term as investors redeploy idle cash and ignore valuations despite collapsing earnings, Gadsden says.
"Investors still have visions of the easy money of the late 1990s and are buying into overvalued stocks. "
Not Sarbit, who's in no hurry to buy. He's patiently sitting on his stash, citing Buffett:
"It's a business where you don't have to swing at the ball every time there's a pitch," Sarbit says. "Most of the people in this business are
more influenced by the people in the stands who are yelling, 'Swing, you bum.' We're not. We're going to ignore the crowd, and just wait
for the right pitch."
|
