Chou Europe Fund

Analysis: With worries over the European economic situation lessening, European equities have been on a pretty strong run of late, with the Chou Europe Fund leading the pack. It was the top performer over the five years ending October 31, gaining an average of 14.5% per year. For the past year alone, it gained a staggering 48%.

As impressive as these numbers have been, performance hasn’t always been as strong. It significantly lagged other European funds from 2006 to 2010, but has been on a tear since mid-2012. The reason for this divergence in performance can be attributed to manager Francis Chou and his disciplined, bottom up, deep value approach that he uses to pick stocks. He looks for well-managed, financially sound companies that have the ability to generate and grow cash flow and profitability over time. Further, before an investment is made, it must be trading at a level that is well below what Mr. Chou believes it to be worth.

The tiny portfolio is heavily concentrated, holding between 25 and 35 stocks. He will invest in companies of any size and sector weightings will look dramatically different than those of the index. Currently he holds significant positions in healthcare and industrials, while having virtually no exposure to materials, technology, consumer staples or utilities.

Mr. Chou is a very patient investor, taking a very long term outlook of around five years. Portfolio turnover has averaged well below 20% per year since inception. He is also not afraid to hold significant cash balances if he cannot find suitable investment candidates. On June 30, he held nearly a third of the fund in cash.

There is no question in my mind that this is a great European equity fund. However, I don’t think that it is appropriate for all investors. Given the style and approach taken by Mr. Chou in managing the fund, it is likely that it will experience periods where it will be more volatile than both the index and other funds. That, combined with its all cap mandate lead me to believe that this is best suited to those who can handle a higher level of risk.

Over the long term I believe that this fund can deliver above average returns with above average risk. Those with lower risk tolerances may want to consider the Trimark Europlus Fund which offers a concentrated, value focused portfolio, with a more conservative positioning.