Allan Jacobs

Food and clothing are his bread and butter.

Diana Cawfield 27 January, 2006 | 2:00PM
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, considers his lifelong passion for stock picking a key advantage.

"After specializing in small caps for 17 years, you get to know the market," says Jacobs. "I'm fairly sure about this. The winners are the people that sell food and clothing and mundane products that people buy every day, are well managed, are very strong players in their businesses, and have gained market share."

Jacobs is managing director of Sceptre Investment Counsel Ltd. and heads the Canadian small-cap team in Toronto. He has managed the Morningstar five-star rated Sceptre Equity Growth since May 1993, and is responsible for approximately $900 million in total assets under management.

Jacobs's universe of stocks consists of small and mid-cap companies that cover a market capitalization range from approximately $150 million at the bottom end to roughly $2 billion. His average weighted market cap, though above the current ceiling for Canadian Small Cap Equity funds, is at the low end in the Canadian Equity category.

Jacobs's key valuation criteria for stock picking are above-average earnings growth and generally below-average price-earnings ratios. Along with high quality, "management is the most important criteria, especially in the smaller companies," he says.

The Sceptre team scouts out companies that have strong profitability and clean balance sheets. Many of Jacobs's favoured companies, such as Rona Inc. ( RON/TSX) and Reitman's (Canada) Ltd. ( RET/TSX), generally employ debt only to fund acquisitions.

Refining his discipline over the years, Jacobs learned lessons from periods of adversity such as 1999. That year, Sceptre Equity Growth returned a mediocre 3.9%, compared with 21% for the median Canadian Equity mutual fund.

Jacobs responded by adopting a more disciplined stock-picking approach. Today, the fund no longer invests in micro caps, holds fewer names and has "definitely raised the quality bar."

The stock-ranking system employed by Jacobs evaluates 100 stocks every month, dividing them evenly into four groups: Twenty-five stocks receive his top ranking for best expected performance, 25 stocks are grouped in each of the next two tiers, and the remaining 25 are ranked as having the worst expected performance.

Along with above-average earnings growth and reasonable or low price/earnings valuations, the rankings also favour companies with above-average profitability, low debt-equity ratios and strong free cash flows. The screening process seeks to identify secular winners that will do well irrespective of the macroeconomic environment.

Jacobs, 46, brings an international background to fund management. In 1980, he received a bachelor of commerce degree from the University of Cape Town. He obtained his designation as a chartered accountant in South Africa in 1984.

That year, Jacobs joined the South African Mutual Life Assurance Society (now named Old Mutual Investment) as an equity research analyst. Before moving to Canada in 1989, he was managing the largest equity fund in South Africa, with assets of $5 billion.

From March 1989 to April 1993, he managed small-cap equities for Canada Life Investment Management Ltd. Then in May 1993 he joined Sceptre.

Jacobs works with one other hands-on manager and draws on Sceptre's large-cap team and global analysts. The in-house research uses 30 to 40 brokers to gain insights into a myriad of companies. The small-cap team sees between 350 and 500 companies and their management each year.

Sceptre Equity Growth's sector weightings are driven by opportunities and by finding good value, says Jacobs. The portfolio holds 50 to 60 stocks, down from about 80 stocks five years ago. The average stock position is between 2% and 3%. Cash is usually kept at about 5% as a buying reserve.

Although Jacobs thinks of himself a buy-and-hold investor, his annual portfolio turnover "is about 40% on average." He adds that many of the small companies, about 10% of the portfolio, get taken over.

Jabobs' sell discipline is triggered by bad news or if the growth stalls in a growth company. As well, if he keeps finding new names to buy, he will sell his weakest holdings.

During Jacobs's tenure, the fund has an annualized 10-year return of 15.1%, compared with the median of 10.3%. That performance helped earn the $406.7-million fund the analysts' nod for Canadian Equity Fund of the Year at the 2005 Canadian Investment Awards.

Though it's getting harder, Jacobs continues to find stock picks that meet his criteria. "Companies in Canada are very competitive and there's a lot of good entrepreneurial things happening, not just in oil patches," he says. "They're not dirt cheap like they were four years ago, but we're still finding good value."

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About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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