Chou chooses the best of the bargain bin

Francis Chou's bottom-fishing puts him among top stock and bond investors. He is one of Canada's most successful mutual fund managers and also one of the most modest. At the age of 51, Francis Chou is in charge of $1.2-billion of other people's money. He is both a top stock picker and a record-setting bond manager.

Success and a tidy personal fortune have come to Mr. Chou through a remarkable odyssey. Born in India, he immigrated to Canada in 1976, got a job as a telephone repair man for Bell Canada and worked for seven years, during which time he discovered the legendary Ben Graham, co-author, with David Dodd, of Security Analysis, the book that established value investing as a discipline.

Mr. Chou, who had only his Grade 12 under his belt, and half a dozen co-workers chipped into a pool that totalled $51,000 and created the fund that became Chou Associates. Each dollar invested at the start in July, 1981, has become $38, Mr. Chou said. The original investment club was converted to a mutual fund in 1986 and, over the next 20 years, the fund has produced an average annual compound gain of 14.09 per cent, making it one of the top four mutual funds among the 216 with 20-year records.

Mr. Chou, who works alone, does not believe in market fashions. "I do not invest in commodities," he explained. "I also avoid high-tech stocks -- I call them 'high wrecks.' I do not like real estate in general and, frankly, I do not even like the bond and stock markets."

Mr. Chou's antipathy to capital markets shows up in his high cash level, currently 42 per cent in his global balanced fund and 53 per cent in the Chou Bond Fund, a portfolio that includes distressed corporate bonds.

"When I started in 1981, I was 95 per cent invested. At that time, the Dow was priced at six times earnings and it had a 20-per-cent discount to book value. Now it is priced in excess of 20 times earnings and at a 3.6 times book value."

As a bargain-seeking investor, Mr. Chou's biggest coups lie in the returns he has achieved in his bond fund. For example, in 2002, bonds from long-distance cable provider WorldCom Inc. were cheap. The company was insolvent and its debt was on the market at 10 cents (U.S.) on the dollar, Mr. Chou recalls.

"The bonds were not a disaster at that discount," he recalls. "In the restructuring, 10 cents on the bond was worth $8 on the stock. I sold the shares of WorldCom, which had taken the name of MCI, for $25."