Michael Decter, President of Lawrence Decter Investment Counsel Inc. in Toronto and manager of Redwood Di-versified Income and Redwood Diversified Equity funds, is a value investor who buys companies when other investors are distracted elsewhere.

Because many in the market buy a stock after Decter considers it fully valued, he’ll often hang on longer than strict value allows.

“I used to exit a company as soon as it reached my target price,” he says. “Now, if a lot of momentum players are piling in, I’m likely to sell half of my position at the target price and get the other half out later. Not everyone is a value investor, which is fortunate, or it would be harder to make money.”

Nevertheless, Decter is disciplined about selling stocks, and is more likely to sell early than late — on the ascending price curve. He looks for buying opportunities in areas that are undervalued and overlooked, and applies his valuation yardsticks carefully.

He seeks low price/earnings ratios, a consistent record of profitability and likes companies that pay strong dividends. When buying undervalued companies, Decter doesn’t like to be too early and sit too long with deadwood on his hands. So, he looks for a catalyst that will trigger upward movement in the stock price. For example, forestry stocks offer good value but, he says, they still have some distance to fall. He’s waiting for the U.S. housing slump to hit bottom before venturing into that sector.

The two Redwood funds managed by Decter have relatively short track records, as they have been available only since 2004. The $35-million Redwood Diversified Equity Fund had an average annual compound return of 23.6% for the two years ended Aug, 31, easily beating its fund category’s median return of 6.8% and the S&P/TSX total returns composite index’s gain of 15.8%. The $23-million Redwood Diversified Income Fund has yielded a less spectacular two-year gain of 11.4% because of its emphasis on income trusts and the negative effect of Ottawa’s 2006 announcement of changes to the trusts’ tax treatment.

Decter says the federal move on income trusts made him shift Redwood Diversified Income’s portfolio closer in asset mix to that of Diversified Equity Fund, with fewer income trusts and more stocks. The funds may have 5%-20% of assets in fixed-income, 10%-20% in income trusts, which Decter considers “high-yielding equities,” and 70%-85% in common stocks. He can go short with both funds up to 20% of assets, but is essentially a long investor. He is cautious about the companies he shorts, saying they must have market caps of at least $300 million to ensure liquidity. He does not make market calls and will not short market indices.

A Harvard-educated economist, Decter worked for years as a partner at Peat Marwick KPMG in both Montreal and Winnipeg, consulting for companies in the mining and forestry industries. As a consultant, he led major assignments for Canadian hospitals, including mergers and strategic planning. In 1982, he was appointed cabinet secretary in Howard Pawley’s NDP government in Manitoba. About 10 years later, he was appointed deputy minister of health in Bob Rae’s NDP government in Ontario.

Decter is author of two books on health care and two business books, Million-Dollar Strategy (1998) and The DRIP Strategy: Building your wealth one share at a time with dividend reinvestment plans (2001). He later became involved in property development and private investing, and formed Lawrence Decter Investment in 1999 with Jack Lawrence, one-time president of Burns Fry Ltd. and later deputy chairman of Nesbitt Burns Inc. and president of BMO Investment Counsel.

Decter is a bottom-up stock-picker, but is guided by broad trends. For example, he likes Canadian companies that stand to benefit from growth in China and India. He is enthusiastic about metals and almost half of the assets in both funds are in energy and materials securities. His biggest position in both funds is HudBay Minerals Inc., a zinc and copper mining company for which he once did consulting work. He started buying when the stock was $3 a share. The stock recently traded at about $26 a share.

Decter likes to hold about 40 positions in each fund, and typically limits each position to 2.5%-5% of fund assets. He won’t go above 30% in any sector. The funds invest in all sizes of companies and can go anywhere, but are currently about 90% in Canada.

@page_break@The $150-million limit on Decter’s Redwood funds keeps him nimble. “We can get out in hours or minutes,” he says. “Some huge funds take six weeks. If there’s bad news, that can be crippling.” IE