Although the Dow Jones industrial average has been battered in recent weeks, it has performed admirably over the past several months. But not many Canadian investors would have noticed, as rising commodity prices and a skyrocketing Canadian dollar held their attention. Some fund managers are looking beyond this noise, however, and maintain there are many attractive opportunities across the border, currency movements notwithstanding.

Two smaller funds to consider are the $277-million CI American Equity Fund and the $448-million Chou Associates Fund, only one of which has actually made some money over the past five years.

The offering from Toronto-based Chou Associates Management Inc. has been an exceptional performer within the ranks of U.S. equity funds available in Canada. For the year ended April 30, it shot up to the first quartile among its peers, pushing up its three- and five-year returns to the first quartile as well, and eclipsing the benchmark Standard & Poor’s 500 composite index over all periods. For the five years ended April 30, it posted an average annual compound return of 15.3%, compared with a 3.6% loss for the index and peer average loss of 4.3%. Consequently, it receives a five-star risk-adjusted ranking from fund tracker Morningstar Canada.

Toronto-based CI Investments Inc.’s CI American Equity Fund has a strong four-star ranking, delivering decent relative performance against its peers with a bit more year-over-year volatility. However, it hasn’t fared nearly as well as the Chou Associates fund. Over the five-year period ended April 30, its average annual compound rate of return was -4.1%.

A self-taught portfolio manager who got his start managing an investment club at Bell Canada, Francis Chou has also worked for Toronto-based Fairfax Financial Corp. A deep-value investor who won’t buy a stock unless he can get it at a sharp discount to what he estimates its true worth to be, Chou looks for firms with sustainable long-term returns on equity, management control over the cost of goods and fixed assets, and low debt-equity ratios.

As a result, he is primarily interested in special situations, such as companies facing short-term problems that result in temporary mispricing. The result is an eclectic portfolio, packed with unfamiliar names and beaten-down companies that looks nothing like the index it is benchmarked against.

Chou has been remarkably consistent throughout good markets and bad. In fact, over the past 25 years, the fund has had only three losing years. As an acknowledgment of this outstanding record, Chou was named Morningstar Fund Manager of the Decade at the Canadian Investment Awards in 2004.

Robert Beckwitt, lead manager of the CI fund, is managing director at Trilogy Advisors LLC in New York and a Wall Street veteran with more than 18 years of investment industry experience. After 10 years with Fidelity Investments, he worked most recently at Goldman Sachs.

Beckwitt believes future earnings growth is the key determinant of equity returns. He is a growth investor who selects larger-cap stocks based on fundamental research, focusing on downside risk and looking to balance the risk/reward equation for each security.

In recent months, Trilogy analysts have steered away from commodity-related sectors, looking to large firms whose growth prospects seem more assured than those of more richly valued mid-sized competitors. The widely diversified fund has a 7.6% position in energy, underweighted relative to the S&P 500’s 9.9% weighting; a neutral 3.6% in materials; and 16.2% in health care, vs 12.2% in the index.

Although the majority of the Chou fund’s assets are spread across large-cap stocks, its mix of mid- and small-cap names means the average capitalization of this fund’s holdings is still in the bottom half of the category. The fund currently devotes about 38% of its assets to mid- or small-cap names.

The fund currently has no exposure to energy and materials while holding modest positions in technology and consumer staples. It is tilted toward financial and telecom stocks with the balance split fairly evenly across the remaining sectors.

As a rule, neither fund hedges its currency exposure. Although hedging offers protection, predicting the direction of currencies is difficult, says Beckwitt. Chou, however, recently hedged a small portion of the portfolio’s U.S.-dollar exposure — an unusual move for him.

With few common holdings, the level of position diversification between these two funds is quite different. Chou regularly plants more than 60% of his assets in the fund’s top-10 holdings, whereas Beckwitt will probably end up with half that. Right now, Chou’s biggest holding is a 25.9% cash position; Beckwitt’s fund is fully invested.

@page_break@Chou spreads his assets over just 19 stocks, compared with the 48 in the CI fund. Not all of those are in the U.S., however; 10.5% of the Chou fund is invested in Europe with a further 9.1% in Canada. In Beckwitt’s case, 89.9% is in the U.S., with the balance spread between Europe and Asia.

Beckwitt is probably more willing to make adjustments to sector selection, but both managers have adopted a fairly low turnover style, targeted at 70% in CI’s case and about half that in the case of Chou. This is reflected in their tax-efficiency rating — 100 for CI American and 94 for the Chou fund.

The CI fund has shown itself the more volatile of the two, particularly in recent years. With standard deviations of 13.9 (CI) and 12.2 (Chou) over the past five years, only the latter has registered less volatile results than the market. The funds’ respective Sharpe ratios also indicate Chou unitholders have been better rewarded over the five years.

The CI fund’s MER of 2.38% is in line with other U.S. equity funds, whereas the Chou fund’s MER, at 1.75%, is lower than over three-quarters of its peers. Although the mix of mid-cap stocks may concern those seeking a more typical U.S. equity offering, the results of Chou Associates are clearly evident.

This fund’s success, however, is dependent on a single manager. If Chou were no longer at the helm, investors could not expect the same performance from his replacement, Morningstar cautions. Therefore, a mix of the two funds may be the most prudent course. IE