Bissett Fund Post Best Return on Takeover Bets
Calgary-based managers Garey Aitken and Tim Caulfield of Bissett Investment Management returned 14.4 percent in 2012, the most among 33 Canadian equity mutual funds overseeing C$1 billion ($1.01 billion) or more, according to data compiled by Bloomberg as of Dec. 18. The advance compares with a 6.1 percent increase for the Standard & Poor’s/Toronto Stock Exchange Composite Index, including dividends.
Aitken and Caulfield are finding winners in the world’s second-worst performing developed equity market by looking past industries to pinpoint companies trading for less than they are worth. The strategy steered them away from commodity producers, the year’s worst stocks. The S&P/TSX Energy (STENRS) and Materials indexes are the worst-performing industries this year, falling 3.9 percent and 9.7 percent respectively as of the market close on Dec. 20.
“Our approach is well-suited to take advantage of frequent mispricing of equities,” Caulfield said. “We are always looking to own businesses trading at a discount, and that may mean they then get acquired and the share price converges with the intrinsic value.”
Merger values increased in Canada this year, with 2,288 announced and completed transactions for a total of $207.44 billion as of Dec. 19, the highest since 2007. Flint has returned 96 percent for the Bissett fund, according to data compiled by Bloomberg as of Dec. 18. The Calgary-based oilfield services company was acquired by URS Corp. (URS) in a C$1.34 billion deal completed in May.
Caulfield and Aitken earned a 20 percent return from their investment in TMX Group. The operator of the Toronto Stock Exchange was acquired by a group of banks and financial services companies in a C$3.73 billion deal that closed in September.
Celtic Exploration Ltd., which has oil and gas properties in the Montney and Duvernay shale regions of Alberta, contributed a 14 percent return when it agreed to be sold to Exxon Mobil Corp., the world’s largest energy company, for C$2.9 billion.
Another holding that benefited from takeover speculation is Inmet Mining Corp. (IMN), owner of the second-biggest copper mine under construction. The Toronto-based company has surged 38 percent since Nov. 27, the day before it disclosed an unsolicited offer from First Quantum Minerals Ltd., a producer of copper in Africa, that is now valued at C$5.2 billion.
Inmet was trading at a discount of as much as 47 percent to the S&P/TSX Materials index in October, a month before the announced offer.
“Our performance this year has been about being in the right sectors, such as being overweight financials and underweight materials, specifically gold,” Caulfield said. “And M&A was a hot topic this year.”
Materials stocks accounted for 8.4 percent of the fund’s portfolio, compared with a weighting of about 18 percent for the benchmark S&P/TSX. About 23 percent of the fund is in energy stocks, underweight compared with the industry’s 24 percent position in the index.
Weaker growth in China, the world’s second-largest economy and one of the biggest consumers of raw materials, has restrained the Canadian equity market, which gets about 42 percent of its value from energy and commodity producers. The Chinese economy has slowed for seven straight quarters and dropped to a three-year low of 7.4 percent growth in the third quarter.
The fund has also had a longstanding bias against gold mining companies, Caulfield said.
“It’s not a top-down call on gold prices, but rather we’ve struggled historically to find businesses in the gold space with the required valuation to add them,” he said.
The S&P/TSX Composite Gold subindex has lost 18 percent this year, while its valuation is 14 percent higher than the S&P/TSX Composite, according to data compiled by Bloomberg.
The fund was also helped by shares of Dollarama Inc. (DOL) and Canadian Pacific Railway Ltd. (CP), both added this year. Dollarama has jumped 31 percent in 2012 to become North America’s top- performing mass-market retail stock, beating retailers from Wal- Mart Stores Inc. to Target Corp. by dominating the dollar-store segment in Canada, according to Bloomberg data.
CP surged 36 percent since Hunter Harrison took over as chief executive officer in June with help from activist investor Bill Ackman, founder of hedge fund Pershing Square Group LLC. In October, CP posted its best operating ratio, a measure of efficiency, in two years.
Caulfield is betting on more gains in 2013 from Gildan Activewear Inc. (GIL), a Montreal-based underwear and apparel maker that was the second-best performer for the fund this year, with a total return of 86 percent as of Dec. 18. The company will continue to expand its retail and wholesale businesses, Caulfield said.
“Gildan’s a quintessential Bissett-type investment, where over the years we have seen periods of weakness in many cases due to factors outside their control,” he said. “But they are very well-positioned competitively, a great Canadian success story, and we expect growth continuing.”
While the fund has existed since 1983, Aitken took over management in 2003 and Caulfield joined him in 2011. Bissett, based in Calgary, manages C$14 billion and is a division of Franklin Resources Inc. (BEN), a global investment firm and manager of the Franklin and Templeton mutual funds.
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