Investment world dominated by short-term thinking

November 13, 2012

Institutional investors need to be more focused on well-managed companies, intrinsic value, stable cash flows and risk-adjusted returns over time

Legendary investor Warren Buffet once said, “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.” [1]

These words could have come from the Leon Frazer playbook.

Is a long-term view important to institutional investors? Is taking a long-term view a structural advantage to an investment counselling firm?

In a recent speech former Canada Pension Plan Investment Board president David Denison described the professional investment world as being dominated by “short-termism.”

“We are sorely in need of people making decisions based upon time frames of 10, 20 years or longer to address the issues we face today,” says Denison.[2]

He went on to say that institutional investors need to be less concerned with liquidity or short-term changes in asset prices, and more focused on well-managed companies, intrinsic value, stable cash flows, and risk-adjusted returns over the long term.

“If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes” — Warren Buffet

Is Leon Frazer a long-term investor?

According to Leon Frazer portfolio manager Ryan Bushell, “Our job is to find companies that can grow their dividends over time. As long-term investors we don’t care about quarterly results  — provided the company is on track.

“Dividends generally are not cut on one quarter of disappointing earnings or  because there is a change in management. New management may totally restructure the company and whack earnings, but the board is not going to cut the dividend. There is a stable aspect to dividends that is very comforting.”

Bushell  concludes by saying, “You can maintain a long-term view by watching the dividend instead of watching the stock price.”

Dividend investing as a pension fund strategy

The Leon Frazer portfolio management team achieves its’ clients goals by investing in a diversified mix of companies that have strong balance sheets and pay increasing dividends. Typically, the portfolio will have a maximum exposure of 20% in any one industry and 5% in any one company. There are four questions that have to be satisfied before a company is considered for the portfolio:

  1. Is the company well managed?
  2. Is the company profitable?
  3. Are earnings increasing?
  4. Is the product good?

The sell discipline is equally simple. A stock is replaced only if a better alternative can be found.

“If something gets over-valued we will trim it,” says Managing Director and Chief Investment Officer Douglas Kee. “ But we won’t sell it all – that’s part of the discipline. If the stock rises to 6% [of the portfolio] we will trim it back to 5%.  We will take the money and put in a stock that is undervalued. We usually stick to the same stocks. Our turnover is low; typically  less than 10% a year.

“We believe in time in the market not marketing timing. Our maximum for cash is typically 20% but the highest we have gone recently is 15%.”

For well over half a century this approach has worked well for Leon Frazer’s private wealth clients. Since 1950, the Leon Frazer Composite has returned 11.03% per annum.[3]

Which begs a few questions. After such an illustrious history of serving mainly private wealth clients is Leon Frazer entering the pension fund arena? Will the Leon Frazer process meet the needs of Canadian pension funds?

“The firm is evolving,” says Mark Arthur, Leon Frazer’s CEO.  “We have transitioned the management team, and our focus is on growing the company by expanding our business activities. This is a logical step given our expertise, the aging of the population and what is going on in the markets.”

[1] Wikiquote

[2] Speech to the Canada‐United Kingdom Chamber of Commerce By David Denison President & CEO, CPP Investment Board, London, May 15, 2012

[3] Since 1950, as of Sept. 30, 2012