Under-40 money managers on the way up

Their investing heroes and stock picks

By Larry MacDonald
Globe Investor Magazine Online, May 16, 2008

If you want to know which young mutual-fund managers have the potential to become the next investing stars in Canada, ask an old hand who knows the industry better than most: David O’Leary, manager of fund analysis at Morningstar Canada.

Three people he names in the under-40 category are Geoff MacDonald, Max Lemieux, and Noah Blackstein. One way to get to know these managers better is to find out who their investing heroes are and how they were influenced by them.

Geoff MacDonald (EdgePoint Capital)

The potato fields and sandy beaches of Prince Edward Island are far from the concrete towers of Bay Street, but the smallest province has provided Canada with one of its rising stars. A former manager for Aim Trimark Investments, Geoff MacDonald is now chief investment officer at Toronto-based EdgePoint Capital Partners, a new fund management company.

If Mr. MacDonald, 37, were to call someone his investment hero, it would be Robert Krembil. He is a former chief investment officer and co-founder of Aim Trimark and now a shareholder, along with Mr. MacDonald and two other former Aim Trimark employees, in EdgePoint’s parent company, Cymbria Capital Corp. “Bob taught me that successful investing over the long term is about having a proprietary idea when investing in a company. A proprietary idea is simply having a view of a company that is not widely shared,” Mr. MacDonald says. “What do I know about the business that others don’t? If the answer is nothing, then there is no advantage and thus there should be no investment made.”

This approach can be hard to follow for several reasons. One is that “too many portfolio managers are being forced to stay close to a benchmark due to pressures from the sales department or senior management --just stay average and our distribution will take care of everything else, they say.”

Tim Hortons Inc. is Mr. MacDonald’s stock selection based on his investment hero’s philosophy. The fast-food restaurant chain is generally perceived by the market “as a mature business with limited growth opportunities in Canada and a failing strategy in the U.S.”

But digging into the data, “one realizes that they have only about half the store penetration in Western Canada and Quebec compared to Ontario, an average customer purchase size that is tiny and continues to grow as they build out their menu, and below-market prices with above-market quality.” In addition, the U.S. opportunity is not discounted in the stock price.

Max Lemieux (Fidelity Canada)

It could be argued that Max Lemieux, 34, is already an investing star. A manager of two Fidelity Canada equity funds in Canada and the Fidelity Canada Fund in the United States, he beat out more than 2,300 other equity fund managers to win U.S.-based MarketWatch.com’s Mutual Fund Manager of the Year award for 2007. His investing hero is Peter Lynch, the legendary manager who previously worked for the same organization Mr. Lemieux now works for. “I read Peter Lynch’s book, One up on Wall Street, at the end of high school and later, another of his books, Learn to Earn,” declares Mr. Lemieux, a Quebec City native. “They inspired me although then I would never have thought I would be working for the same company as the author.” “I met Peter Lynch a few times as an associate between 1996 and 1998, when I first started working for Fidelity,” continues Mr. Lemieux. “We were all mesmerized by him and it was an honour for all of us to sit with him and be asked for our best ideas.”

When he was managing money for Fidelity, Mr. Lynch, was a growth-orientated investor who liked to invest in sound companies with increasing revenues and rising margins. A company in the Peter Lynch mould, according to Mr. Lemieux, is SNC-Lavalin Inc. “It has been a consistent grower over the past few years on the back of strong demand for infrastructure projects.”

“The earnings growth (excluding the 407 concession) has been more than stellar except for a bad power contract that tarnished the trajectory temporarily. The last quarter was huge and the Street has finally woken up. The backlog is strong and the mix is changing for the better.”

Noah Blackstein (Dynamic Funds)

When Noah Blackstein, 38, isn’t buying and selling stocks he can be found playing his guitar in a band called the Dynamic Range at charity events. But stardom looks more likely on the mutual fund stage: His Dynamic Power American Growth Fund won the U.S. Equity Fund award at the 2007 Canadian Investment Awards. The fund has achieved a five-year annualized return of 13.3 per cent even though it wasn’t currency-hedged during a period of significant depreciation in the U.S. dollar. His Canadian peers averaged 2.7 per cent annually (as of April 30), according to Globefund.com tables.

Inspiration comes from Philip Fisher, “the father of growth investing.” He was author of Common Stocks and Uncommon Profits, a book Mr. Blackstein says “should be read every year.” Although Mr. Blackstein “doesn’t follow Fisher lavishly,” his own copy of the investment classic is nevertheless well worn and he “was quite happy to find an audio version, which I can listen to while on the airplane.”

“Fisher’s book laid out questions that growth investors need to ask themselves,” notes Mr. Blackstein. “For example, does this company have products and services that can generate growth? Does it invest in research and development, and develop new products?” One company that fits the description, in his opinion, is Apple Inc.

Apple’s iPod reflects a shift in the way music is consumed. And its iPhone product has enormous potential to grow in the “smartphone” space, which Mr. Blackstein is bullish on. Some may see the iPhone as too expensive, but in Mr. Blackstein’s view, it’s “an amazing and cheap laptop” that provides not only phone calls but also Internet browsing, e-mail, music, and movies.