The Globe and Mail, Report on Business
Published September 6, 2008

I recently had the occasion to hear marketing pitches from two leading investment firms: Burgundy Asset Management and Sprott Asset Management.

Both have built wealth for their clients and grown to be substantial firms. I happen to like them because they aren't afraid to act on their convictions and they don't worry about managing to a benchmark. They expect to generate above-index returns, so their portfolios don't look anything like the index. As active managers should, they "do what they gotta do" to make money for their clients.

While literally situated across Bay Street from each other, they are worlds apart in their personality and investment approach.

Burgundy has grown to manage $8-billion under the strong hand of chief executive officer Tony Arrell. The firm serves both individual and institutional (pension funds, endowments) clients. It is a conservative value manager, and its presentation emphasized "preservation of capital" and "margin of safety" and made a clear link to Ben Graham, the father of value investing.

Sprott is a reflection of founder Eric Sprott. He casts a huge shadow, although like Burgundy, the firm has used its success to build a strong and diverse team. Sprott is unique in that it is swinging for the fences every minute of every day. The firm is looking for stocks that have the chance of going up 10 times over. Potential for a 25-per-cent gain is of no interest.

What made the meetings particularly interesting was that at the time (mid-August), Sprott was riding high on the top of its performance cycle while Burgundy was at the bottom.

It's well known that Sprott has done well with its prescient call on energy and commodities. Lesser-known Burgundy was riding just as high three years ago after making all the right moves following the tech bubble. But its clients have had little or no exposure to energy in recent years, so returns have been poor and its long-term record has come down to earth.

Asset managers go through periods of good and bad performance. Even the icons with sterling long-term records underperform, sometimes for years at a time. The successful firms are those that have more good than bad, and/or their good is really good while their bad is just "below average."

There are a number of reasons why the performance cycle exists. Even the best get it wrong sometimes; capital markets are too complex for a manager to always be right. Stock pickers who are right 60 per cent of the time can write their own ticket. When a string of decisions fit into the other 40 per cent, however, short-term performance suffers.

Portfolios run out of gas. Stretches of good performance are fuelled by big stock moves. After they have gone up a lot, stocks sometimes need to pause to let the fundamentals catch up (earnings growth, production increases, new facilities started up). Portfolio managers can certainly sell or reduce a holding after it has risen, but it is hard to completely refuel a top-performing fund.

Strengths and biases fit some markets better than others. Burgundy and Sprott are examples of this. The post-tech period was made for Burgundy's value style, just as the long-trending commodity boom is right in Sprott's sweet spot.

Better to be lucky. Nobody talks about it, but luck or randomness is a huge factor in putting a hot - or cold - streak together. You know how it goes. Stubbed your toe on the way to the shower, just missed the train, cappuccino machine at Starbucks is down and you arrive at the office to find that your largest holding just lost a key contract. When you're cold, you can't buy a break.

So what do I take away from these two meetings, besides the fact that the art was better at Sprott and the tea was hotter at Burgundy?

First of all, chart toppers aren't as smart as they look and bottom dwellers aren't as dumb. We've all experienced it. When performance is good, everything we say reinforces how smart we are. When it's bad, clients wonder how we made it through college. Burgundy looked dumb in 1998 and 1999. They got smart quickly in 2000 and moved to genius status by 2005. Now? Well, they're kind of dumb.

Second, non-benchmark-oriented managers don't run with the crowd. If firms like Burgundy and Sprott are doing what they're paid to do, they will have a different pattern of returns than the overall market.

Third, bad periods set up good periods and vice versa. When a manager's style is out of favour, their stocks just keep getting cheaper. If they stick to their discipline, however, they can sow the seeds for the next up period.

And finally, don't get caught up in it. It would be easy for investors to load up on firms at the top of their game like Sprott and give a pass to others like Burgundy that are struggling. Conversely, contrarians like me would be inclined to go the other way. But neither approach is good. The "hot versus not" measure shouldn't be a key determinant of who you hire. Manager selection should be based on people, investment approach and business philosophy, and whether the combination of those ingredients has made clients money over time.

While I'm stingy with my guarantees, I will offer this one - whoever you choose to manage your money will at some point over the next five years look both better and worse than they do right now.