Jonathan Wellum manages concentrated portfolios of about two dozen companies, focusing on firms that generate significant cash flows. "Free cash flow is a key attribute that we look for," says Wellum, 44, lead manager of the $2.6-billionAIC Diversified Canada.
"If we like companies that are fairly predictable, and in industries that are not overly cyclical, ultimately the value will be in the excess cash they can give to shareholders," says Wellum, chief investment officer at AIC Investment Services Inc., a subsidiary of Burlington, Ont.-based AIC Ltd. "But we're not looking at beaten-up companies. We're looking for cash flow machines." There are exceptions, including long-time holding Loblaw Cos. Ltd. ( L/TSX), which is not returning excess cash to shareholders because it is investing heavily for future expansion.
"If they can get high returns on capital in a short period of time, that's a good use of their money," says Wellum. "And their return on equity is approaching 19%. For a food retailer, that's very good." His patience has been rewarded. Loblaw now trades at about $74, up almost seven-fold since he took a position in 1996.
It's not always a smooth ride for Wellum. He bought Toronto-Dominion Bank ( TD/TSX) primarily because of its strong retail orientation, and then watched the bank's shares tumble in 2001 and 2002 due to heavy losses from loans to telecommunications companies.
But he held on, after lengthy talks with TD management. "You have to be careful that your emotions don't prompt a worse decision," Wellum says, recalling how the stock slumped to $26 but has since risen to $50. "It's not been an easy time to stay disciplined."
Wellum arrived at that discipline in a roundabout way. He graduated in 1984 from McMaster University, where he obtained a bachelor of commerce. He then studied science, and in 1986 graduated with a bachelor of science from University of Waterloo. That year, he also earned an MBA from McMaster.
After spending a year and a half at Deloitte & Touche in Hamilton, and concluding that accountancy was not for him, Wellum took an altogether different route. He wanted to pursue his interests in theology and philosophy at University of Chicago. To do this he had to take make-up courses at McMaster.
At the same time, he worked for about a year in the accounting and budget departments at Burlington, Ont.-based CUMIS Group Ltd., (Credit Union Members Insurance Society).
"Being an inquisitive person, I like to look at ultimate issues," says Wellum. "The investigation of the three core areas of life -- metaphysics, epistemology and ethics -- is intriguing to me."
But after earning a master of arts degree in political philosophy in Chicago in 1990, and briefly studying at the London School of Economics, Wellum decided to join the working world.
On his return to Hamilton he bumped into Michael Lee-Chin, a long-time acquaintance and founder of AIC Ltd., and joined the then-fledgling firm. They shared the same philosophy of investing in a select group of companies and taking a long-term view.
In January 1995, Wellum became manager of AIC Diversified Canada, and generated strong performance numbers over the next few years. In October 1997 he also assumed responsibility for the $183.9-millionAIC American Advantage, which focuses on U.S.-based financial services providers. It, too, did well at the start.
Since then, performance has slumped. Wellum says AIC Canadian Diversified was hurt by his refusal to buy into the technology bubble, and then by its exposure to economically sensitive stocks in 2002. More recently, it lagged because of exposure to U.S.-dollar-denominated stocks and the absence of high-flying resources companies, which do not meet his criteria.
The fund's turnover has been low at 31% in 2003 and 12% in 2002. Turnover in the one-star Morningstar rated AIC American Advantage has been even lower, at 4% in both 2002 and 2003.
Wellum left AIC in 1999 to set up Georgian Capital Partners Inc., for which AIC was the largest client and part owner. AIC bought out Wellum in 2002, absorbing Georgian into AIC.
After selling Georgian, Wellum returned to AIC in May 2002 to work more closely with its team, and took over managing the $428.2-millionAIC Value. Over the past three years, he has devoted much energy to coordinating the efforts of the now 28-person investment group, and instituting a proprietary score card to evaluate companies.
While he acknowledges that AIC's house style has lagged in recent years, Wellum is confident that it will reap rewards over the long term. "We're trying to buy companies that will make more money this year than last year and have a high probability of doing the same thing next year. Over time, that will be rewarding if we buy companies at good prices."
:quality(80)/cloudfront-us-east-1.images.arcpublishing.com/morningstar/EAAEIIRVVNE7HNVXBSGTD3WPSI.jpg)
