Larry Sarbit, the lead manager of the $986-million IA Clarington Sarbit U.S. Equity, is living up to his long-standing reputation as a patient value investor. He's holding more than 35% in cash and only 10 stocks.
"We end up with cash because we're looking for extraordinary businesses, not because we have a negative opinion on the stock market." says Sarbit. "If we can't find one, or a few, for a period of time, then in our view it's better to do nothing than make a mistake or do something risky or stupid."
Sarbit is the founder and chief investment officer of Winnipeg-based Sarbit Advisory Services Inc. He has been the sub-advisor and lead manager of IA Clarington Sarbit U.S. Equity since June 2009.
On March 27, he was handed a second mandate, IA Clarington Sarbit Activist Opportunities Class. As its name indicates, this fund specializes in companies that have been targeted by activist investors.
Holding a concentrated portfolio and a significant cash position is nothing new for Sarbit. During 2001-2002, in what he describes as "an extreme period in terms of valuations," his fund held more than 90% cash at one point. But that doesn't happen very often, he adds.
As an "extremely conservative" value investor, Sarbit seeks companies that are trading at cheap prices, have sustainably high returns on invested capital and sustainable barriers to entry.
He also favours companies with excess capital that doesn't have to be reinvested. "We're looking for people who run the business while carrying a lot of cash," says Sarbit, "and then leverage that capital to (obtain) the best returns that they can get for shareholders."
Diversification across sectors is not a concern for Sarbit, a pure bottom-up stock picker. "I don't think that way," he says. "If I end up with a big overweight in a particular sector, so be it."
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Sarbit's top holding, at a recent 10% of fund assets, is Iconix Brand Group, Inc. ICON. The New York-based company licenses and markets a growing portfolio of consumer brands such as Joe Boxer, London Fog and Fieldcrest, among many others, to leading retailers. "Neil Cole, the younger brother of (designer) Kenneth Cole, changed the operating structure of the apparel industry with this brilliant business model," says Sarbit.
Essentially, Cole outsourced manufacturing and distribution, where margins get squeezed, while providing franchise opportunities to revitalize the brands. "One stat that shows how extraordinary this business is: free-cash-flow margins are about 50%," says Sarbit. He still considers the stock to be cheap. "We've made a lot of money on this, and we still think it could double from here."
Sarbit, 61, draws on extensive experience in U.S. equity investing. He holds a bachelor of arts degree from the University of Winnipeg and an MA from York University in geography. In 1979, after a short period of university teaching, he joined the then named Richardson Securities as an analyst. In 1987, he moved to I.G. Investment Management Ltd. and managed a U.S. large-cap value fund for 10 years.
In 1998, he left I.G. Investment to join an affiliate of AIC Ltd., where he managed the Aderes brand of funds. In August 2000, these funds were merged into AIC mutual funds and Sarbit became the manager of AIC American Focused. Then in March 2005, he left to start his own firm.
Sarbit's relationship with IA Clarington Investments Inc. began in October 2008, when he sold his mutual-fund company, Sarbit Asset Management Inc., to IA Clarington's parent, Industrial Alliance Insurance and Financial Services Inc.
Subsequently, IA Clarington decided to swallow up the small Sarbit fund operation, while retaining Larry Sarbit's portfolio-management services. In June 2009, the track record of the former Sarbit U.S. Equity came to an end when it was merged with two other funds into a third fund formerly managed by Nevada-based Louis Navellier. The surviving fund, renamed IA Clarington Sarbit U.S. Equity, was handed to Sarbit.
Under Sarbit's tenure, IA Clarington Sarbit U.S. Equity has an annualized three-year return of 15.9%, compared to the median 17.8% return, as of Aug. 31, in the U.S. Small/Mid Cap Equity category.
Sarbit's team includes a full-time analyst, one part-time analyst and Sarbit's brother-in-law, Harvey Berkal, a former litigation lawyer and investigative journalist. The in-house research includes meetings with the management of companies, connecting with contacts in the U.S., and quantitative screening. Sarbit currently has assets under management of about $1.1 billion.
"I'm sitting on cash, but that won't be forever," says Sarbit. He cites the famed value investor Warren Buffett, who counsels patience and stresses the importance of capital preservation. "It's Buffett's two rules of investing: Rule number one is don't lose money. Rule number two is, don't forget rule number one. We have to be reminded of those little gems."
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