Cash is king at Chou Associates value-oriented foreign equity fund


With lots of cash, Chou Associates is well positioned for a correction, whenever it happens.

If you believe global stock markets are due for a correction anytime soon, you may find a sense of security in holding the units of Chou Associates Fund (CHO100(FE)). That’s because it holds nearly a third of its assets in cash.

The reason for this lies in the investment philosophy of the fund’s manager, Francis Chou. Mr. Chou’s approach to investing is value oriented. He’ll only buy a stock when it trades at a substantial discount to his calculation of its estimated intrinsic value. In other words, he pays far less than what the company is worth, measured by sustainable earnings power and/or hard assets that are not depreciating in value. By doing so, he achieves an adequate margin of safety, a concept, he says, that “distinguishes investment from speculation.”

Once he buys a bargain stock, Mr. Chou gives no thought to when the stock will rise. When and if it does, he sells the stock as it approaches its intrinsic value.

These days, Mr. Chou finds that “equities and fixed-income securities are in the range of being fairly valued and the number of bargains is getting scarcer all the time”. In light of this, he says, “we would not hesitate to sell our investments and be 100 per cent or 50 per in cash — or whatever the number may be”. For now that number is 32.6 per cent, which was the fund’s latest reported cash position in March.

Should markets correct, then Mr. Chou may find more bargains than there are now. And if so, he has plenty of cash to take advantage of them.

In the meantime, Chou Associates, which seeks long-term growth from securities in U.S. and foreign businesses, will likely underperform its peers, as it has done this past year. Over this time, the fund’s 13.9 per cent return ranks in the bottom quartile of the global equity group.

But a year’s performance is not enough time with which to judge a fund. Chou’s longer-term results show that the fund is a top-quartile performer these past 10 years, with a compound annual growth rate of 7.8 per cent. The fund is also a top-quartile performer in each of the past three- and five-year periods. But you’ll have to be patient, as the fund can be quite volatile.

Chou Associates is a long-term buy if you want a value-oriented, diversified foreign equity fund and you have a medium to high tolerance for risk.


Money Reporter, MPL Communications Inc.
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