| Fund Company | Chou Associates Management Inc. |
| Fund Type | Canadian Focused Small / Mid Cap Equity |
| Rating | B |
| Style | Value |
| Risk Level | High |
| Load Status | Front End |
| RRSP/RRIF Suitability | Good |
| TFSA Suitability | Good |
| Manager | Francis Chou since October 1986 |
| MER | 1.87% |
| Code | CHO 102 – Front End Units |
| Minimum Investment | $5,000 |
Analysis: Portfolio manager Francis Chou follows a well articulated, value focused approach in the management of this Canadian small cap fund. He looks for profitable, well managed companies that have strong balance sheets and strong cash flow generation, that are well positioned in their respective industry. Being a value manager, Mr. Chou pays particular attention to the price paid for a stock and is basically looking to buy $1 for $0.50.
Mr. Chou’s portfolios tend to be fairly concentrated. At December 31, the fund was fully invested, holding 16 equity positions and a very modest 0.9% cash balance. Given that the fund is built on a stock by stock basis, the sector mix will be dramatically different than the index. It has nearly 71% invested in consumer services, 21% in materials, 5% in financials and 2.1% in technology. This can often result in a portfolio that is not only more volatile than the index, but it will go through periods where it will either significantly outperform or underperform its benchmark.
For example, between May 2007 and March 2009 the fund dropped by more than 55%, a loss from which the fund has just recently recovered. In 2009 and 2010, it rebounded sharply, gaining nearly 88%. It again struggled in 2011, losing nearly 21% during the year only to bounce back by more than 34% in 2012.
Long term performance has been strong, gaining 7.7% for the five years ending April 30, handily outpacing the 0.4% loss posted by the BMO Small Cap Index during the same period. Still, it is our view that this is a fund that is only suited to those that have a fairly high tolerance for risk.
In addition to being volatile, we have other concerns including key person risk. While we believe that Mr. Chou is a skilled manager over the long term, we do have some concerns surrounding his role with this fund. The largest is one of key person risk. Chou Associates is basically a one man show. If something was to happen to Mr. Chou and he was unable to continue managing this fund, investors would be negatively impacted.
We do not recommend this fund as a core holding within a portfolio, but rather as a small cap fund within a well diversified portfolio.