Richard Fogler, manager ofNorthwest Canadian Equity andNorthwest Balanced, likes to invest close to home. He finds it's easier to look beyond what company executives are saying when he can see things for himself and tap into his network of street contacts.
"I like to be able to walk in and see if a business is doing well," says Fogler, managing director and chief investment officer at Toronto-based Kingwest and Co. "We depend on internal research, and knowing a company well reduces risk. We like to hear local scuttlebutt, to learn things we otherwise might not." Fogler has managed the $206.1-million Northwest Canadian Equity and the Canadian portion of the $72.5-million Northwest Balanced, both of which have Morningstar four-star ratings, since November 1997. He describes his approach as "value", although it goes beyond the classic measurement sticks like price-earnings and price-to-book ratios. He also looks at "economic value-added," which he defines as return on capital invested.
"We link the income statement to the balance sheet and compare the return on capital to what you might obtain elsewhere," he says. "Profitability is not enough on its own. It's possible for profits to be rising, yet the return on capital may not be high enough to justify investment."
Once Fogler determines the worth of a company, he tries to buy when the shares are trading at a 40% discount and when he expects that full value will be reached within two years. "Companies are dynamic, and things can change for the business as well as the political and economic environment," he says. "Companies will be held as long as they continue to create value for shareholders."
Some investments, including Kingsway Financial Services Inc. ( KFS/TSX) and Sobeys Inc. ( SBY/TSX), have evolved into long-term holdings. Fogler aims for a turnover rate of about 30% a year, but says turnover may be influenced by takeovers within the portfolio or strategic tax-loss selling to offset realized capital gains.
Northwest Canadian Equity is currently taking full advantage of its 30% foreign content allowance, but Fogler prefers to stick to U.S. companies because of their proximity. He views his portfolio as two separate entities: Canadian and U.S.
Within the Canadian portion, he aims to hold 30 to 35 companies of equal weighting (about 3.5% of the Canadian assets). In the U.S. portion, he aims for 20 to 25 companies, each amounting to no more than a 5% weighting in its category. Although there is no formal rule on selling, anything accounting for more than 7% of assets in its category is watched carefully.
Diversification is a tricky issue, says Fogler. "Sometimes companies don't appear to be in the same business, but a printing company may be a supplier to the financial industry, and therefore affected by the financial industry's fortunes."
He does a lot of work on how businesses are tied together and how they react to changing variables such as interest rates, economic growth, corporate profits and industrial production.
"We get an idea of influences and sensitivities, and diversify on this basis," he says. "For example, interest-rate sensitive companies include the obvious sectors like housing, autos and financial services, but they also encompass most growth companies and any company with a lot of debt."
Fogler, who spent his high school years in Toronto, graduated from the University of Pennsylvania's Wharton School in 1967 with a bachelor's degree in economics. He pursued post-graduate work in economics and finance at the Collège de France in Paris, and later worked as a teaching assistant at the Sorbonne University in Paris. In 1973, he decided to return to Canada after meeting his future wife on a visit to Toronto.
He "wandered through various brokerage firms" including N. L. Sandler & Co. and Yorkton Securities Inc., working in positions in sales and research. He also did a stint researching econometrics (analysis of statistical trends in economic and financial data) at Canavest House Inc., his last job before he and a partner bought Kingwest in 1982 from Bank of Nova Scotia.
"I wanted my own firm, and equity investing had always been a keen interest," Fogler recalls. "It's a great business," he says, since he can invest in companies that are run by smart, hard-working people who "do all the hard work, while I sit and think."
Fogler will soon be passing on some of his experience in financial analysis and investment management to a younger generation. Starting this fall, he will be teaching a course in security analysis at the University of Toronto's Rotman School of Management.
