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Financial Post - On Lester Asset's "anti-index" fund

Manager: Stephen Takacsy, Lester Asset Management
Fund: Lester Canadian Equity Fund
Description: All-cap fund focused on under-represented sectors
Firm’s AUM $:170-million
Performance 1 year: +4.5%; 3 years: +111.9%; Since July, 2006: +71.4% (composite return of segregated accounts, as of Dec. 31, 2011)
MER: 1.5%

Lester Asset Management has created what its chief investment officer Stephen Takacsy calls an “anti-index” fund by targeting companies and sectors that are either under-represented in Canadian indices or not in them at all.

“By buying ETFs or hugging the index, you’re really not getting the proper diversification since over 75% is in financials, energy and materials,” said Mr. Takacsy.

“An index is generally a pretty overbought – and therefore overvalued – space.”

The Lester Canadian Equity Fund, launched on Jan. 3, 2012, skews toward Canadian pipeline, power and telecom companies that, while represented in the TSX composite, make up only a small portion of the benchmark index, which is heavily focused on financials and commodities.

The fund is designed for smaller clients, third parties such as brokers and advisors, as well as institutions. The firm previously only offered this strategy – which aims to generate strong returns with lower volatility than the S&P/TSX composite index – through segregated accounts with a minimum investment of $500,000.

Between the larger stocks in under-represented sectors, and the small/mid-cap names that don’t get much attention, Mr. Takacsy has plenty to choose from for the fund’s portfolio of 40 to 50 companies.

Both the small and large names Mr. Takacsy targets also tend to be dividend payers.

“People shouldn’t assume small and mid-caps don’t pay dividends,” he said. “A lot of those companies have growing dividends.”



The position: Recent addition.

Why do you like it? While looking for cheap and defensive growth stocks in the consumer staples sector, Mr. Takacsy noticed that a large shareholder of High Liner was selling, which was keeping a lid on the stock. He helped “clean up” the overhang in October by negotiating a block of shares at $13.75, a significant discount to market. High Liner is also now a leader in the U.S. food service segment after acquiring Icelandic Group’s U.S. operations in December. “When we picked up the block, High Liner was trading at a very reasonable valuation of eight times 2011 earnings and had just increased its dividend,” Takacsy said. “Acquiring Icelandic was a nice bonus and will boost revenues and profits by over 40%.”

Biggest risk: If rising seafood costs cannot be passed on to the consumer.



The position: Recently added to existing positions.

Why do you like them? Takacsy likes the occasional contrarian bet and has been buying select print media stocks such as Glacier Media and FP Newspapers, which own community newspapers in Western and Central Canada. Glacier recently acquired Postmedia Network Canada Corp.’s newspapers in British Columbia, a deal Takacsy expects will increase revenues and EBITDA by 50%. The company in 2011 started paying a dividend, which should rise as it pays down debt, and it has also been buying back shares. Former income trust FP Newspapers yields 15%. “These companies have stable businesses, low capex and huge free cash flow yields, a valuable asset in this low interest rate environment,” Takacsy says.

Biggest risk: Declining local advertising and print readership.


The position: Long-term holding.

Why do you like it? After trimming exposure early in 2011 when the stock was above $10, Mr. Takacsy is again buying Neo. Earnings at the processor of rare earths and magnetic powders surged to more than $1.60 per share in 2011 from 46¢ in 2010 because of a shortage of rare earths due to strict Chinese export quotas and the resulting high prices. “Earnings are expected to decline in 2012 as prices ease, but will still be well above historical levels,” Mr. Takacsy says. By the end of 2014, he expects Neo will have $4 per share in net cash and sustainable EPS above $1.

Biggest risk: Change in Chinese export quotas and new competitors.



The position: Avoiding exposure.

Why don’t you like them? Mr. Takacsy and his partners have avoided the financial sector for nearly two years and will continue to do so. Life insurers will suffer from a prolonged low interest rate environment and volatile equity markets, while banks are facing slowing loan growth, thin margins, volatile capital market profits, increasing regulatory and capital requirements, and systemic global financial risks due to the European sovereign debt crisis. “The glory days of banks are over,” he said.

Potential positive: A quick resolution of the European debt crisis, including proper recapitalization of banks there.

The original story can be found here.