In the world of Canadian finance, Francis Chou is the proverbial "little guy". He's not well known and maintains a low profile. But there are three things about him that are remarkable. First, he makes money for his investors – a lot of it. Second, when he does make a rare public pronouncement, he calls it like it is. And third, he sometimes does things that are unheard of in the world of money, like returning fees to his investors when he feels his performance has been sub-par. When did you ever hear of anyone doing that?
I first noticed Mr. Chou about 15 years ago when I was writing my annual guides to mutual funds. His small funds kept popping up among the top performers, year after year. Since he spent no money on marketing, few people had ever heard of them. But to my mind the performance results spoke for themselves and I gave his funds (only two at the time) top ratings.
Flash forward to today. Mr. Chou, who is a deep value investor, continues to make handsome profits for his clients. His Chou RRSP Fund, which was launched in 1986, shows an average annual compound rate of return of 10.24 per cent since inception. His Chou Associates Fund, which began at the same time, has averaged 11.55 per cent annually over that period. Those are remarkable long-term returns by any standard.
Among his newer entries, the Chou Bond Fund has generated a five-year average annual compound rate of return of 14.47 per cent but it's not for sissies. As he'd be the first to admit, Mr. Chou takes an unorthodox approach to running this fund, including holding some stocks and making big bets (sometimes more than 15 per cent of total assets) on a single position. The Chou Europe Fund has been very strong recently with a three-year average annual return of almost 26 per cent. The only disappointment is the Chou Asia Fund, which is running well below average for its category.
Every year, Mr. Chou sends out a meaty letter to his investors in which he pulls no punches about the performance of his funds and the state of world markets. This year's missive was no exception. For starters, he warned readers not to expect big gains from stocks over the next several years.
"We believe that the market is currently fairly valued and we sincerely doubt the overall returns from equities in general over the next five to 10 years will be compelling," he wrote. "On the contrary, we believe the returns may be far more modest than those hoped for by investors. Not only are the p/e ratios and price-to-book values still high and dividend yields low relative to historic valuations, but the number of companies that are underpriced is at an all-time low. In light of this scenario, and with its obvious lack of bargains, we would not hesitate to sell our investments and be 100 per cent or 50 per cent cash – or whatever the number may be."
Moving from the general to the specific, he slams Russia as being the worst place in the world to invest. "To paraphrase Jim Rogers, a noted investor: You put money in Russia and they will tax it away from you, take it away from you some other way, shoot you in the head, or put you in jail," he said.
"The problems in Russia are real and even though some stocks are really cheap, the chances of expropriation, embezzlement, and frauds are real. As an example of cheapness, the price of the proven reserves of some of the big Russian oil companies like Gazprom are one-tenth that of ExxonMobil, which by itself is not selling at an inflated price…When you invest in any country with no adequate protection for investors, you are always wondering how you can lose money in some nefarious way, and you wonder even more if you can make money even after taking account of some frauds. We should have an index like 'Fraud Adjusted Return'."
He also warns investors against putting money in low-rated high-yield bonds (or junk bonds if you prefer) at this stage. "Non-investment grade debt securities are fully priced and in general, I would stay clear of them," he says in his letter. "Some prices for non-investment grade bonds do not reflect the risks inherent in these securities. A company can float 10-year non-investment grade bonds with a coupon of 5.5 per cent and investors will buy them at 100 cents on the dollar. Just a few years ago, a similar bond would be trading for 60 cents or less… "At current prices, we believe that there is a good chance that these non-investment debt securities may now be overvalued, and that the possibility of a large, permanent loss of capital is extremely high."
Mr. Chou's bottom line is that if he can't find good values then he would rather keep everything in cash. "There are some who may disagree with that move and so be it. Like we have said before, we prefer to lose 50 per cent of our investors rather than 50 per cent of your capital."
As of March 31, 21.63 per cent of the assets of the Chou RRSP Fund were in cash. Chou Associates had a 32.49 per cent cash position, Chou Bond 36.3 per cent, Chou Asia 36.55 per cent, and Chou Europe 48.16 per cent. Clearly, this is one fund manager who does not like the look and feel of the red-hot markets we've experienced. His track record says that he's been right more often than not.