We all hate mutual funds, right?

GRRRRRRRRRRRRRR. Blog genies, can we put a picture of a ferocious tiger or something here, maybe RIPPING THE FLESH off a dead gazelle?



Not sure that’s what we were going for, but it’s the internet. We can’t take it off.

Anyway, we all hate mutual funds as much as that cat hates that bear. The reasons have been repeated at least a couple times, but let’s review them again. The fees are too high. Fund managers say they can beat the market, when in reality most fail, partly due to the large fees. The big mutual funds have hundreds of different investments, which make them pretty close proxies to the index. And since fund managers don’t want to trail the index by a whole bunch (because then they’d maybe get axed), they tend to be heavily influenced by it, even subconsciously.

It’s little wonder why the experts recommend most investors go with ETFs. You know you’ll at least match the market, and generally pay a fraction in fees. It’s a good strategy, and is something that most investors without time or knowledge to research individual stocks should probably do.

But just because most mutual funds are bad ideas, doesn’t mean there aren’t a few that fall through the cracks. In fact, I found one family of funds that are really interesting. Let’s take a boo.

Enter Francis Chou

His name is Francis Chou, and he runs the Chou family of funds, which have approximately $1 billion invested across 5 different funds.



Back in 1986, Francis Chou started two mutual funds – The Chou RRSP Fund (which invested in Canadian stocks) and the Chou Associates Fund, which looked at opportunities around the world, with a focus on the United States. He has since added three more funds — The Bond Fund, The Asia Fund, and The Europe Fund. Total assets under management are less than $1 billion.

Chou is a breath of fresh air in the fund world. He works in a somewhat ran down office building in a Toronto suburb. He has a staff of two, including himself. He intentionally keeps a low profile, barely spending a dime on marketing. And when his Europe Fund did poorly just after launch (like most every fund did in 2008-09), he refunded investor management fees for a full 3 years until the fund recovered to initial prices.

Recently, from a piece in theĀ Globe and Mail (subscription required), Chou said he didn’t see a lot of upside in equities, predicting subdued returns for the next 5 to 10 years. He also said he was prepared to go to 50 or 100% cash if he can’t find anything to buy.

When was the last time you heard a fund manager say something like that?

Chou’s RRSP fund has performed well over the years. After fees, investors who put in $10,000 with Chou on launch day back in 1986 would have a little more than $150,000. If they would have put the same amount in the TSX Composite and reinvested the dividends, they’d be sitting on a little more than $117,000. Over the last 20 years, Chou’s RRSP fund has returned 11.98% annualized.

Results for the Associates Fund are equally as impressive. Since inception, it’s returned 11.52% annually. Over the last 20 years, returns are 12.06% a year, trouncing the comparable index, which only returned 8.05% annualized. If you would have stuck $10,000 in this fund on it’s opening day, you’d be sitting on more than $200,000. If you would have stuck your money in the S&P 500, you’d be sitting on a little over $150,000.

Over the long term, Francis Chou is trouncing the market.

How does he do it? Chou is a deep value investor, who focuses on companies that are trading at huge discounts to their net asset value. He’s doing pretty much when I do here, just probably a better job of it. He also takes large positions in each stock that he buys. The RRSP Fund currently has just 16 holdings, with a cash position of more than 20% of total assets.

And that’s it. It’s really not that complicated.

Of course, I’m going a disservice to Chou’s fantastic work. It’s not quite that easy, but it just goes to show how deep value investing can deliver some spectacular results if you average out the peaks and valleys.

His funds each charge a 1.5% MER, and he still trounces the market. And they’re still relatively small, meaning he can still take concentrated positions in smaller companies. The style isn’t about to be forced to change, like what happened to Warren Buffett in the 1980s. As long as Chou continues to work, he should be able to beat the market.

I’m not sure there’s a mutual fund in the country that I’d recommend you put money into, with one exception — Francis Chou’s. If you’re too lazy to do this deep value stuff yourself (or copy me , which is not recommended. Do your own research and whatnot), investing in any of Chou’s funds is a decent enough substitute. You’ll pay much higher fees than ETFs, but you actually get something for your money.

If you want more information on Francis Chou, his funds, or if you want to read his annual letters to investors (highly recommended), check out the Chou Funds website. It’s basic, as you can imagine, but there’s lots of good stuff there.

Tell everyone, yo!