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Financial Post - On Lester's Search for Value leads money manager to strange places

David Berman writes for Inside the Market (, which offers up-to-the-minute analysis of stock trends and market-moving news throughout the trading day.

Some professional investors dazzle us with their brash egos, their multibillion dollar portfolios and their massive bets on mega-cap behemoths.

But Stephen Takacsy's appeal is different, and his low-key approach to investing is a snap for smaller investors to emulate.

From his base in Montreal, the soft-spoken chief investment officer at Lester Asset Management directs a relatively modest portfolio of just $270-million in segregated accounts, plus another $35-million in the Lester Canadian Equity Fund.

Okay, that's probably more than you and I have. But by professional standards, it's a small portfolio - and in this case, small is beautiful.

Mr. Takacsy can make nimble moves, invest in an eclectic mix of stocks and deviate from the benchmark index in a way that most larger investors can only dream of. As a partner at a small firm, he is not restricted by in-house rules on sector exposure or liquidity that larger institutions face.

His returns have beaten the S&P/TSX composite index for five years in a row, with significantly less risk. Since mid-2006, a period that includes the financial crisis, he has delivered a cumulative return of about 142 per cent, or nearly 90 percentage points more than the index, after factoring in dividends.

The way he sees it, if you want a portfolio that resembles the index, with its heavy tilt toward big banks and resource producers, buy an index fund.

Instead, his search for undervalued stocks often takes him to some unusual places, and investments in stocks such as Boralex Inc., Vicwest Inc. and NeuLion Inc.

"It is a tough environment to find bargains," he said. "But there are always companies that are being unfairly sold because they are having temporary problems." How does he find them? First, he has to like the business and its management. Then, he has to like the stock price relative to the company's growth prospects. And finally, he usually needs to see some sort of catalyst that will trigger a rally in the stock.

As he puts it, "we tend to favour companies where something is going to happen."

It could be a strong hunch that the company will be taken over. That worked with his investment in Shoppers Drug Mart Corp., which jumped 24 per cent the day that Loblaw Cos. Ltd. announced its takeover deal.

The potential catalyst could also be the spinoff of a division, a spike in profits, a share buyback announcement or a dividend hike. For example, renewable power producer Boralex paid its first dividend in March, capping a 20-per-cent run in the share price since the start of the year.

Curiously, Mr. Takacsy is defensive-minded for a stock-picker who likes out-of-favour investments. He pays close attention to the global economic picture, and he doesn't like much of what he sees.

He rattled off the issues in an interview this week: China's economy is clearly slowing, which weighs on Canadian resources; Europe is mired in high unemployment, and faces an aging workforce and the threat of deflation; Japan is doing everything it can to stimulate its economy, but he's worried about the country's debt. As for the United States, the economic recovery is slow, the Federal Reserve is signalling that it will raise its key interest rate in the not-too-distant future and the stock market is generally overvalued. There could be problems ahead, so Mr. Takacsy is holding between 5 per cent and 10 per cent of his assets in cash to take advantage of any corrections. He is also keeping about 30 per cent of his portfolio in large-cap dividend-paying stocks.

Yes, dividend-payers are vulnerable to rising interest rates. But he prefers names such as BCE Inc., Telus Corp. and TransCanada Corp., which can offset the risk by increasing their earnings and payouts.