With worries over the European economic situation lessening, European equities have been on a pretty strong run of late, with the Chou Europe Fund leading the European Equity mutual fund pack. It was one of the top performers over the five years ending June 30, gaining an average of 16.3% per year. For the past year alone, it gained an impressive 27%. The fund kept its Fundata FundGrade® A-Grade for June, and achieved the Fundata FundGrade A Rating™ in 2013.
As impressive as these numbers have been, performance hasn’t always been as strong. The fund significantly lagged other European funds from 2006 to 2010, but has been on a tear since mid-2012. The reason for this divergence in performance can be attributed to manager Francis Chou and his disciplined, bottom-up, deep-value approach that he uses to pick stocks. He looks for well-managed, financially sound companies that have the ability to generate and grow cash flow and profitability over time. Further, before an investment is made, it must be trading at a level that is well below what Mr. Chou believes it to be worth.
The tiny portfolio is heavily concentrated, holding between 25 and 35 stocks. Mr. Chou will invest in companies of any size, and sector weightings will look dramatically different than those of the index. Currently he holds significant positions in healthcare and consumer discretionary, while having virtually no exposure to materials or technology.
Francis Chou is a very patient investor, taking a very long term outlook of around five years. Portfolio turnover has averaged well below 20% per year since inception. He is also not afraid to hold significant cash balances if he cannot find suitable investment candidates. At the end of March, he held nearly half the fund in cash.
There is no question this has been a great performing European equity fund. However, I don’t think that it is appropriate for all investors. Given the style and approach taken by Mr. Chou in managing the fund, it is likely that it will experience periods where it will be more volatile than both the index and other funds. That, combined with its all-cap mandate lead me to believe that this is best suited to those who can handle a higher level of risk.
A-Grade Trimark Europlus more conservative
Over the long term I believe that this fund can deliver above-average returns with above-average risk. Those with lower risk tolerances may want to consider the Trimark Europlus Fund, which offers a concentrated, value focused portfolio, with a more conservative positioning. It’s also a Fundata FundGrade A+ winner for both 2012 and 2013, and currently carries a FundGrade A-Grade for June.
Fund company: Chou Associates Management
Fund type: European Equity
Fundata FundGrade® Rating: A; Fundata FundGrade A+ Rating 2013
Risk level: Medium
Load status: Front end
RRSP/RRIF suitability: Fair
TFSA suitability: Fair
Manager: Francis Chou since September 2003
Code: CHO 200 (front end)
Minimum investment: $5,000
See the Fundata FundCard™ for more details.
Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson's Top Funds Report and Mutual Fund and ETF Update, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.
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