An unsung Canadian investment portfolio has quietly outperformed the market for more than a decade.
It’s the model portfolio at Odlum Brown , the Vancouver-based boutique brokerage. A $250,000 grubstake at its inception in December, 1994, has grown to more than $2.5-million today, more than double the return on the S&P/TSX index, including dividends, over the same period.
The Odlum portfolio isn’t well known, but it should be. The performance is even better than the headline number suggests because the portfolio hasn’t been overweight in Canada’s hot commodity sector and holds substantial amounts of U.S. stock, whose converted value would have fallen because of the soaring loonie.
The portfolio is the brainchild of Murray Leith, Odlum’s director of research, who in the mid-1990s noticed that most mutual funds were unable to beat the market. So he set about trying to select a basket of stocks that would.
His formula for success has two parts: buying large, high-quality companies with good growth prospects when they trade at reasonable prices, and then avoiding big losses during the inevitable bear markets. It sounds easy, but it’s an approach many investors, all too often chasing the latest hot trend, haven’t mastered.
“Investors tend to get carried away and overpay for growth, and it’s valuation at the end of the day that drives future returns,” Mr. Leith says.
It’s the general philosophy that investment maestro Warren Buffett pioneered, although Odlum Brown’s performance has one up on the man often lionized as the world’s best investor.
Odlum Brown’s basket of stocks has risen in value by 15.4 per cent compounded since inception (excluding commissions), leaving in the dust the 11.3-per-cent compounded return for Mr. Buffett’s Berkshire Hathaway over the same period, according to Bloomberg calculations.
Currently, the five biggest holdings in the portfolio are all high-quality, good prospects, in descending order of their dollar value: Toronto-Dominion Bank , Brookfield Asset Management , Royal Dutch Shell , Onex Corp. and Stryker Corp. (For a list of recent holdings, go here) .
Stryker may be unfamiliar in Canada, but it’s a leading U.S. health care firm, pointing to another factor explaining the outperformance of the portfolio.
Mr. Leith recommends diversification among the various business sectors, which is hard to do in Canada where about 80 per cent of the market is composed of commodity and financial stocks. That imbalance leaves out health care, technology, and consumer products, for which investors must go abroad.
Buying good companies on the cheap enabled the portfolio to sidestep such investment blunders as former tech darling Nortel. During the tech mania, Mr. Leith noticed that what is now Alcatel-Lucent was trading at half of Nortel’s multiple, but had similar growth prospects, presenting an obvious choice.
Alcatel was later sold at “a pretty high multiple,” with Mr. Leith attributing the timely trade to luck more than anything else.
In early June, the portfolio dumped Research In Motion Ltd. , avoiding a large portion of the recent carnage in the stock. Mr. Leith plowed the money from the sale into BCE , Apple and Google .
Mr. Leith says plenty of large U.S. multinationals fit his idea of a good investment: stocks trading for 13 or 14 times earnings and capable, over the long term, of earning 20-per-cent to 25-per-cent returns on equity. Buying these kinds of companies “is a formula for making money over the long term,” he says.
Although Odlum has a team of researchers, who all contribute ideas, the final call the portfolio makes remains with Mr. Leith.
He said some of the firm’s clients have tried to duplicate the portfolio, while others use its various selections as a smorgasbord from which to select ideas.