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Canada Francis Chou is a portfolio manager and CEO of Chou funds in Toronto, Ontario on February 13, 2007. (Jim Ross for The Globe and Mail)
Canada Francis Chou is a portfolio manager and CEO of Chou funds in Toronto, Ontario on February 13, 2007. (Jim Ross for The Globe and Mail)

A fund manager who refunds fees? Meet Francis Chou Add to ...

Norman Rothery is the value investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

I recently met legendary value investor Francis Chou at his office in North York and my trip to get there was an interesting one.

He works at a great distance from the financial centre of Toronto in a neighbourhood that’s in transition.

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To get to his office, I passed by modest brick bungalows on one side of the street that housed a smattering of small businesses, including a solicitor, a spa and a psychic.

Mr. Chou is on the other side of the street and works in one of several mid-sized office towers that are in need of a few more tenants.

His choice of office space is indicative of his thrifty nature, which doesn’t stop at real estate. He runs a lean business and manages the better part of $1-billion in assets with a staff of two – including himself.

Mr. Chou’s ability to spot a bargain helped him achieve a stellar long-term record in the stock market. His flagship Chou Associates fund was founded way back in the summer of 1981 as an investment club. After a few years, it became a regular mutual fund and by the end of 2013, it sported average annual returns of 13 per cent. That’s 2.1 percentage points more that the S&P 500, which gained 10.9 per cent per year over the same period including reinvested dividends.

Mr. Chou did it via the steady application of value investing principles that would have made Benjamin Graham proud. Even more remarkably, those returns were had without the use of leverage. On the contrary, he often holds large amounts of cash in his funds. For instance, the Associates fund had roughly 33 per cent of its assets in cash in mid-March. The outsized returns came despite the large cash holdings.

Mr. Chou’s climb to the top required a passion for investing and more than a little ambition. He first arrived in Canada as a young man and, inspired by rags to riches stories, forged his own path in a business that wasn’t particularly kind to immigrants.

That’s why I was brought up short when he said he wasn’t really interested in money. I had a hard time fathoming that paradoxical statement. After all, Mr. Chou has spent several decades accumulating the stuff and intends to do so for many more.

But money genuinely doesn’t seem to motivate him much these days. Instead, he relishes the simple joys of compounding over the long term and wants to build a formidable track record the right way. Following in the footsteps of Warren Buffett, he intends to give his fortune to charity after growing it a bit more.

Words are one thing, but Mr. Chou’s actions are telling.

He’s the only mutual fund manager I know of who refunds fees when his performance hasn’t been up to scratch.

The Chou Europe fund is a case in point. It got clobbered in the collapse of 2008, which prompted a series of refunds and fee waivers. As a result, the fund’s management expense ratio (MER) was minus 2.88 per cent in 2008. In addition, the fund’s usual annual fee was reduced to an average of 17 basis points over the last three calendar years. But, after the fund generated returns well north of 20 per cent a year over the last couple years and hit a new all-time high, its MER will return to normal levels near 1.8 per cent in 2014.

Hedge-fund managers are known to charge investors a fixed annual fee and then layer a big performance fee on top. Mr. Chou has effectively been doing the opposite. He has charged a fee ceiling that is itself less than the average for active equity funds in Canada, and he has lowered it when he thought he hadn’t earned the money. Remarkable.

It’s a pity more money managers don’t follow Mr. Chou’s example. But investors would be wise to follow him.

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