The Globe and Mail, Report on Business
Published May 31, 2008

I grumbled as I read Rob Carrick's profile on Francis Chou in the latest issue of Globe Investor magazine. He beat me to it. I had visited Francis a couple of weeks before and wanted to write about it. Occasional columnists always need material.

But my friends tell me I'm a shameless copier, so why not live up to their expectations. I can write about Francis too.

Chou Funds is the leanest $1.2-billion asset manager I've ever seen. That was reinforced in spades when Francis, one of Canada's most successful money managers, drove me to lunch in his Dodge Caravan and insisted on paying with his 'Costco-branded' credit card. He knows the value of a dollar and lives his life, runs his business and manages his funds that way.

As Rob noted, Francis spends nothing on marketing. He lets his investment record do the talking and when clients or advisers contact him, he directs them to his semi-annual reports, which are always worth a read.

My favourite line from a Chou Funds report was in July, 2006, when he was launching his bond fund. In describing the fund, Francis said, "Be aware of the risks involved, including that of the manager who does not have a long history of investing heavily in that area. Caveat emptor!" Of course, he understated his broad investment experience working with Prem Watsa and the team at Fairfax. He was involved with Fairfax from the beginning, and until recently, his senior role there was his day job.

It was timely to get together with Francis because this is his type of market. People often talk about how the great investors step up to buy when uncertainty is at a peak. But that's easy to say and hard to do. I wanted to know what the manager who is chronically bearish and typically runs with large cash reserves was doing in these uncertain times.

From his year-end report, I knew that Francis was starting to find value in four sectors of the stock market - retail, media, telecommunications and cable, and pharmaceuticals. But when we got together he was most aggressively buying bonds, specifically distressed debt.

At lunch Francis lamented that "I've become a bond trader." He finds it is very time-consuming because "there is a lot of haggling that goes on." His days are now filled with calls from bond dealers who know that Francis is an interested buyer. He is on everyone's speed dial.

In the 2002 Chou Fund report, Francis said "distressed securities involve companies that have one or more serious deficiencies including weak economics, stretched balance sheets, liquidity problems, incompetent management, accounting frauds, potentially mutant cockroaches - you name it."

Obviously, these bond purchases are far from a sure thing. The naysayers will point out that we are in the early days of a recession and the credit crunch has a long way to go. There is a wave of corporate defaults coming at us.

In Francis's favour, however, he is often buying from parties who are selling for non-economic reasons - regulation, margin calls, and client pressure or withdrawals - and not because of valuation or fundamental concerns. It's a situation professional investors are always looking for.

I had an illustration of this while I was in his offices. As we were heading out to lunch, we were delayed by a phone call. He bought a block of bonds he had been bidding on for more than a month. Francis was at $70 while the hedge fund on the other side was stuck at $80. On this day, the seller hit a wall and had to sell. Francis got his bonds at his price. As Rob noted, he is a good haggler.

Talking bonds over lunch reminded me of Francis's stunning performance in 2001 and 2002, when his Associates Fund was up 21 per cent and 30 per cent respectively. He was carrying lots of cash at the time, which was a good thing, but T-bills don't earn those kinds of returns. A few years back I asked him how he did it. He smiled and quietly said "junk bonds."

Francis didn't have a bond fund back then, but he does now, although it is not typical of its category. Like his other funds, the Chou Bond Fund is closer to a hedge fund in its freedom to range widely in pursuit of large returns. Indeed, if his bonds become less distressed when the credit markets settle down, the fund has the potential for a 20-to-30 or 40-per-cent year. Suffice it to say, it's not an alternative to guaranteed investment certificates.

Whether his call on distressed debt is right or not, there are a lot of reasons to jump on board the Chou train. You know Francis is the one running the fund and he's doing it the way he wants his money managed. He is 100-per-cent investor and 0-per-cent marketer. His record shows that he has made his clients a ton of money for over 20 years. And he buys lunch, although he refuses to overpay.