Chou RRSP Fund

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 holding between 25 and 35 stocks. However, as of August 31, the fund held only 18 positions with 4.3% invested in cash. While this approach will amplify gains, it will also amplify losses. No more was this prevalent than in the period between May 2007 and March 2009 where the fund dropped more than 55% in value, a decline from which the fund has yet to recover. Another by-product of this portfolio is volatility. Since early 2010, the volatility of the Chou RRSP Fund has become much higher than that of the broader equity market.

The fund is managed by Francis Chou. 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.

Performance has been weak, dropping 11.6% for the year ending September 30 and is down more than 22% so far in 2011.

Based on the total risks and outlook for the fund, we are cutting its rating from $$$ to $$. Further, 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.