Larry Sarbit recently celebrated the first anniversary of his Winnipeg-based firm, Sarbit Asset Management Inc. And it's clear that things have changed for investors in his deep-value expertise since his days as a high-profile portfolio manager for AIC Ltd.
As manager ofAIC American Focused for more than five years until March 2005, Sarbit drew more attention for his whopping cash reserves -- often making up more than 80% out of $2 billion in assets -- than for his stock selection. Now, his $65-millionSarbit U.S. Equity Trust is much smaller and, by comparison with his previous AIC mandate, also much more invested in U.S. stocks. At the end of September, 60% of the fund was held in 13 U.S. companies.
Sarbit admits this is unusual, considering his propensity for cash over the last five years. By way of explanation, he points to "huge" advantages in being small.
"It allows you to invest in smaller companies," he says. "Some of these companies are unknown, unrecognized by the market and not covered by Wall Street, but they can be spectacular businesses."
At the fund's current size, adds Sarbit, he can invest in a company that has only US$100 million to US$200 million in market capitalization. "I can put a large percentage of the fund into an idea like that," he says. "I'm dealing with a whole layer of companies I haven't been able to look at or invest in for years. You can't buy a $100-million company if you're managing billions of dollars."
Sarbit notes his turnover rate has been low historically, in the neighbourhood of 10%. But it will be higher with Sarbit U.S. Equity because he's adding regularly to the portfolio. "At AIC, I didn't trade a lot. I found a few good businesses and was sitting on a lot of cash for a long period of time. You don't get a lot of turnover that way," he says.
Sarbit's investment discipline is to be a patient holder of excellent businesses acquired at fundamentally cheap prices. "The perfect business generates a lot of cash but has little need for reinvestment into the business. That's a great business and all of our businesses have those characteristics," he says.
One of his picks is Collectors Universe Inc. ( CLCT/NASDAQ), a $100-million market-cap company that authenticates rare coins, stamps, autographs and diamonds. Sarbit says the company generates a "tonne" of cash and is the dominant firm in its niche.
Sarbit, 54, holds a bachelor of arts from the University of Winnipeg and an MA from York University. Between 1987 and 1998, while at I.G. Investment Management Ltd., he managed what is now Investors U.S. Large Cap Value C (3656).
He left the firm in 1998 to join Michael Lee-Chin's Berkshire Group of companies, where he created and managed the Aderes group of proprietary funds. In August 2000, these funds were merged into AIC American Focused, and Sarbit joined AIC as the fund's manager.
Last year, shortly after launching his company, Sarbit faced adversity from a former employer. Berkshire Group and Lee-Chin -- who as owner of AIC was Sarbit's boss -- banned Sarbit U.S. Equity from being sold by the roughly 900 Berkshire advisors.
Berkshire said the Sarbit fund didn't meet its minimum thresholds, implemented in the wake of the scandal at Portus Alternative Asset Management Inc., an unrelated hedge fund firm for which Berkshire advisors were among the distributors. Berkshire's policy stipulates that any fund on its product shelf must be sponsored by a company that is at least five years old and has at least $200 million under management.
Despite this distribution setback, Sarbit says his fund is on the platforms of 112 other brokers and dealers, including the major bank-owned brokerages. "[The Berkshire situation] is a blip for the company. Ultimately, it's not going to matter," he says.
Indeed, Sarbit's firm has been in expansion mode. In mid-September, it launched a pair of bond funds -- Sarbit Canadian Bond Trust and Sarbit Real Return Bond Trust -- along with Sarbit Money Market Trust.
The portfolio manager is Nestor Theodorou, who joined the firm in July from I.G. Investment Management. "I think there's a need for bond funds, a growing need over time as people age," says Sarbit. "That's a product line that [in the] longer term will be in demand."
Although Sarbit says his U.S. equity fund is beating the S&P 500 Index "quite handily" since its inception, he has never been one to brag about or lament one-year returns. "They're random and don't reflect a long-term investment strategy," he says.
"With our investment strategy, which is buying companies that are cheap and ones people don't want, we don't know when investors will want them again," adds Sarbit. "It could be years before investors come back and get excited about them again."
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