For Terry Wong, free cash flow is king. Sure, the U.S. equity manager at Investors Group Inc. looks at other criteria when evaluating potential holdings, such as company management, market share and barriers to entry. But nothing is more important than being free-cash-flow positive.
"As companies produce a lot of free cash flow, they have the option of increasing shareholder value by increasing dividends or buying back shares," says Wong, who managesInvestors U.S. Large Cap Value andInvestors U.S. Opportunities. "You know you're getting something back from the company, that's paramount." In determining the value of a company, Wong says he uses a margin of safety with his numbers. "Our hope is that our valuation of the company is very conservative and we're actually buying it at a discount to what it's worth," he says.
Wong avoids making big bets on any one industry. At the end of November, the $2.4-billion Investors U.S. Large Cap Value's heaviest exposure was to financial services (28.4%), followed by consumer products (26.8%), communications and media (12.9%) and merchandising (11.5%).
Wong recently held 30 names in the fund, with his largest single weighting in pharmaceuticals giant Merck & Co. Inc. ( MRK/NYSE). He has also diversified by investing a small portion in non-U.S. foreign companies, which held a 14% weighting at the end of November.
In the $359-million Investors U.S. Opportunities, which has a mid-cap bias, Wong is more inclined to spread his stock-picking risks around, holding more companies and lessening his exposure to any one. As of the end of November, the largest of his 38 holdings made up slightly less than 4% of the fund's assets.
Wong, who took over the two portfolios several months after the departure of Larry Sarbit in early 1998, is a more active trader than his predecessor. But his annual turnover has nonetheless been moderate, ranging around 40%.
One of the latest in a long line of home-grown talent that Winnipeg-based Investors Group has developed, Wong joined the company in 1991 after graduating with a bachelor of commerce degree from the University of Manitoba. He began his career in the accounting department.
Moving to the investment floor three years later, he quickly progressed up the ladder from a trader to analyst. In June 1998, he was promoted to portfolio manager of Investors U.S. Large Cap Value and Investors U.S. Opportunities. Along the way, he attained his Certified Management Accounting designation in 1995 and seven years later, he received his Chartered Financial Analyst designation.
Under Wong, Investors U.S. Large Cap Value has been a far better performer in bear markets than in rising ones. In 1999, when he sat out the boom in the high-tech sector, his fund was a fourth-quartile performer, losing 10.2% in a year when the median U.S. equity fund gained 12.2%.
Wong says the only pressure he has felt in recent years was to jump into the white-hot tech market in the late 1990s, and he's glad that he didn't. So are his unit-holders.
After his inauspicious start, Wong has made a strong comeback at Investors U.S. Large Cap Value with back-to-back top-quartile performance in both 2000 and 2001. Similarly, through the end of November of this year, the fund's modest 6.1% loss ranked 16th among 430 funds over that period. The fund currently holds Morningstar's top five-star rating.
With Investors U.S. Opportunities, Wong had a similar pattern of lagging badly in 1999, and outperforming thereafter. While the four-star rated fund has lost 10.1% in the first 11 months of this year, that was the second-best result in the U.S. Small and Mid Cap Equity category.
Wong says market cycles have not altered his investment strategy. "It doesn't matter what kind of market that we're experiencing, we're evaluating these companies based on their fundamentals," he says.
