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Saxon Fund Keeps it Simple
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Levi Folk
Levi Folk is President and Managing Editor of The Fund Library and is a regular contributor to the National Post newspaper.

By Levi Folk  | Tuesday, September 27, 2005

Levi Folk talks to Rick Howson of Saxon Balanced Fund

“It’s not a sexy thing to do that” says Rick Howson on the topic of his approach to asset allocation for Saxon Balanced fund. Indeed, “sexy” is not an adjective to describe this fund. Instead, simplicity plays trumps for Saxon balanced fund: simplicity in the form of low management expense ratio (MER), a disciplined investment style, and static asset allocation that equate to very favourable long-term returns.

The lower management fee—at 1.87 percent annually—equates to a lighter head wind pushing against the fund manager’s investment best efforts. The average MER for Canadian balanced funds is more than 50 basis points higher per year. “We have a low management expense ratio because were a no-load fund,” says Howson. No upfront fees for advisors, so more money in the market. Simple enough.

Howson believes his value-investment style has also contributed to his success. He emphasizes the adherence to his style—the fact that he applies it consistently—and points to his outright rejection of technology stocks for Saxon Balanced fund over the past five years as an example of that discipline leading to strong results over the long term.

“What’s important is to have a style and to be consistent in that style,” says Howson. “I see many firms that don’t seem to annunciate a specific style well, and that leads me to believe that what they are doing is whatever the manager at that time wants to do.”

Poor performance creates pressures on fund managers to abandon style discipline and chase returns, says Howson. “Managers have significant pressures on them when their funds are not performing well, so there is potential for them to have style drift.”

But pressures also arise from having too much success. Strong cash inflows to a fund require constant attention from the manager. Investing this money in short order can be a problem, especially for value managers such as Howson. “It [too many assets] hasn’t been a problem,” says Howson “partly because we are a no-load fund,” which means he labours in relative obscurity, and fund assets remain modest at $274 million.

Static allocation between stocks and bonds is not common practice in the balanced-fund category, but it has worked in favour of Saxon Balanced fund over the long term. “We feel that over the long term equities are likely to outperform fixed-income investments, and we do not feel that we can time the market,” says Howson, “so we don’t make major asset-mix shifts.” Equity allocation is pegged at 65 to 70 percent of fund assets; bonds, government and high-grade corporate varieties make up the balance.

The equity portion of Saxon Balanced fund closely resembles the portfolio of Saxon Stock fund, and the latter fund has proved less risky than the average Canadian equity fund over the past decade. So the manager was surprised to learn that Saxon Balanced fund is riskier than the average balanced fund. The most plausible explanation for this discrepancy is the higher than average equity weighting on the balanced fund. Nonetheless, the fund has rarely lost money in any one-year period, suggesting that risk is not a four-letter word.

The value-investment style applied by Howson is inherently less risky. He assesses corporate valuations relative both to the public and private markets and on an absolute basis. Prices are compared relative to a variety of balance-sheet metrics: most importantly cash flow, what Howson calls “the life blood of a company.” Earnings are less stable than cash flow and therefore less reliable, according to Howson, because “the numbers can change quickly over time if you include things like extraordinary items.”

Income trusts do make it into the portfolio, but not excessively so. “I think the oil and gas royalty trusts-- trading at 8 or 9 times cash flow --are very expensive, and investors are incorrectly valuing them,” says Howson. He finds much better value in regular oil companies trading 4 or 5 times cash flow. “It is not that royalty trusts are going to grow more quickly which would justify higher valuations. They are simply trading at higher prices. Why? In a yield-starved market, they are attractive investments.”

Consumer and industrial stocks have been the bread and butter of Saxon balanced fund over the past few years. Foreign diversification is added on the margin with exchange traded funds (ETFs). The portfolio of roughly 75 companies changes very rarely. Not very sexy—but then again, just what you might want in a balanced fund.

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