James Cole is uneasy about the Canadian equity market rebound since early October. So much so, that he is reluctant to invest some of the nearly 50% cash in the $87-million AIC Canadian Focused that he has managed since its inception in August 2000. "I've been having trouble finding investments that meet my criteria," says Cole, a senior vice-president at Burlington, Ont.-based AIC Ltd.
Companies must meet five criteria to merit inclusion in the fund. They must be in a growth industry that is increasing its share of gross domestic product. They must have a history of superior profitability, a strong financial position, and be available at an attractive price that offers 15% annual returns over a five-year or longer holding period. Finally, they must have limited downside risk. Cole's high cash holdings have contributed to the fund's top-quartile return over the past two years in a declining market. "There is a lot of pickiness involved, which has made things difficult," he admits, adding that the cash level has been 50-70% since April 2001.
Cole, 41, is no stranger to equity investing. He's the grandson of Herbert Cole, who founded a Toronto brokerage firm, and son of James F. Cole, a former money manager at Guardian Capital Group. The younger Cole landed his first industry job in 1983, when investment dealers were hiring during a market upswing. After graduating with a bachelor of arts from Trent University he was able to turn down an accountancy position and accept an analyst's job at McCarthy Securities, an institutional broker.
Cole spent five years at McCarthy on the sell side. Then, from 1988 to 1992, he worked at BBN James Capel Inc., where he became known as a top-ranked communications and media analyst.
Switching to the buy side in 1992, Cole joined the pension-fund equity team at Beutel Goodman & Co. In September 1995 he was appointed the manager ofBeutel Goodman Small Cap, and its Investors Group Inc. counterpartIG Beutel Goodman Canadian Small Cap. In early 1997, he moved to Gluskin Sheff + Associates Inc., where he was lead manager of Canadian equities for institutional clients.
In February 2000, he departed for AIC, where he had a closer affinity for its focus on running highly concentrated, low-turnover portfolios. He displayed this interest at Gluskin Sheff, where he reduced the number of companies in one fund to 40 from 120.
"I like to do very intensive due diligence on every company I consider owning. There is a limit to the number of companies that I can cover," he says, noting that he spends many hours studying a company's suppliers and competitors.
Cole, who plays a supporting role in theAIC Advantage andAIC Advantage II funds managed by company founder and chairman Michael Lee-Chin, says AIC is following a proven formula for wealth creation. "If you look at the world's wealthiest people, how did they get there?" he asks, citing Galen Weston and Ken Thomson as billionaires who focused on a few, exceptionally managed businesses.
This concentrated approach is evident in the mere 14 companies held inAIC Canadian Focused. Cole reduces risk, however, by limiting sector weights to 30% of the fund. His annual portfolio turnover has been around 20%.
Although he would like to add to existing positions, some prices are still too expensive. "I only need a handful of good businesses that are available at attractive prices," he says. "Given the size of the fund, I can commit capital very quickly."
Meanwhile, Cole faces a challenge in turning around the poorly performingAIC Canadian Balanced, which he began managing in September of this year. Cole acknowledges that the $158-million fund, which has Morningstar's lowest rating of one star, suffered from an onerous 75% equity weighting that was aggravated during the bear market by a heavy exposure to battered financial-services firms.
Cole has since then made significant changes. He raised cash by reducing the equity weight to 30%, although he kept firms such as Knight Trading Group ( NITE/NASDAQ). With 40% in cash, and the original 30% bond weighting, the asset mix is much more balanced. "I have a lot of dry powder to seize opportunities as they arise. With patience I will find those opportunities," he says.
