MICHAEL A. SMEDLEY - CANADIAN GENERAL INVESTMENTS - (CGI.TO)
CEO Interview - published 08/21/00

DOCUMENT # KAQ600

MICHAEL A. SMEDLEY, Executive Vice President and CEO of Toronto-based MMA Investment Managers Limited since 1987, is President of Canadian General Investments, Limited, Third Canadian General Investment Trust Limited and Canadian World Fund Limited, three closed-end funds with total portfolio assets equivalent to US $500 million. Canadian General Investments, Limited is wholly invested in Canadian equities, is listed in London, England and Toronto, and is the flagship of the group, which started in 1928. His investment career started in 1969 in Canada and he has worked with Canadian and US investment firms in Canada, Hong Kong and London, UK. He also worked for 18 years in journalism and public relations in the United Kingdom, South Africa, Zambia, Kenya, Tanzania, Canada, Malaysia and Singapore. He is the Chief Investment Officer of a three-person investment team and is results-oriented as a bottom-up opportunist in all markets. The team also manages the Capstone mutual funds and is extremely active in private wealth management. Mr. Smedley is also Vice President of the Kansas City-based Closed-end Funds Association (CEFA), the North American trade association representing the closed-end fund industry in Canada and the United States.

Sector: Specialty Finance

TWST: Would you provide a background summary on Canadian General Investments, including a short history, a bit about development, markets, your own involvement with the company, and finally, your description of the future potential of this firm?

Mr. Smedley: I’ve been working with MMA Investment Managers Limited since 1987. The flagship fund is Canadian General Investments, Limited, which is a closed-end fund listed on the Toronto Stock Exchange and the London Stock Exchange, and owned primarily by private investors and institutions in Canada, the US and the UK. CGI is a Canadian equities growth and income fund, which has the disadvantage or advantage of trading in the market at a discount, which currently is not much below 40%. This is one of the deepest of the extraordinary wide discounts that are available throughout the world of closed-end funds at this time. Yet our NAV performance is outrunning more than half of our peers’ funds in the comparable and much larger mutual fund sector in Canada. If you were to make a comparison of CGI with the TSE 300 Index, which is the traditional benchmark, you would find that we fall way behind because of the giant participation of Nortel in the Index, representing about 35%. We are restricted to 10% at cost and Nortel is about 15% in our fund because of market value growth. Taking Nortel from the Index, we have been running ahead recently with a 12% gain for the year to date against a 10% gain for the Index. But of course, we can’t do that. We have to include the enormous NT weighting. Our Nortel weighting is about par with the other funds. In decades gone by we have seen mines and metals, such as Inco and Alcan, represent about 30% of the Index. Presumably, all this corrects in due course, and our job is to try to stay on top. Our objective is long-term outperformance.

TWST: What’s the client universe look like today, and how do you see that universe changing or evolving?

Mr. Smedley: I think the client universe for a closed-end fund is too mixed to be explained. Some like participating in a fund that is itself listed on the stock market, rather than being layered over the top as a mutual fund. There are brokers who specialize at the retail level in closed-end funds, just a few here and there, who are sometimes extremely big holders on behalf of their clients. And then you’ve got income buyers, people who are disposed toward getting a regular income dividend and capital gains distributions which may be substantial in years of growth. They would note this year that we have net-realized gains running at the $20 million level. Toward the end of the year, as with other closed-end funds in North America, there is a payout prospect, dependent upon a Directors’ decision, and that depends on performance, market conditions and other factors. Buyers outside Canada include those who want a stake in the currently top-performing Canadian market, just as simple as that, I think; or institutions that want the same without speculating on only two or three Canadian stocks. I think that’s the client universe.

TWST: Give us an assessment of your top management team. At this point, do you feel you have the bench strength and skill sets on board to accomplish the goals that you’ve set out for this organization?

Mr. Smedley: One should never be satisfied, but we do have a broadly equipped team of three Portfolio Managers. It is headed by me. I am a generalist and a stock picker and opportunist. Paul Devlin is a generalist with special interest in the oil and gas sector. Greg Eckel is a generalist with strong knowledge in the technologies sector. My role is to coordinate. We might be unusual in that we act as a team, or individually. We cover the ground extremely well and may use any type of strategy. We are not labeling ourselves, and never have, value investors or growth investors. The long-term object is clearly growth with an attempt to outperform the market, which has generally been achieved. We are really quite eclectic. We are used to being much overweight in sectors. We use momentum plays. We look for take-out plays. In other words, we look for value in absolutely every way possible. And presently we are technology-oriented, with close to 40% weighting if you include engineering, fuel cell and bioscience companies. We believe these fit under the broad technology label.

TWST: Specifically, what is on an annual agenda? As you look ahead over the next year, what accomplishments would make that time frame a success?

Mr. Smedley: I think our goal ahead has to be success dealing in a continuum of high volatility, a higher level of individual investor trading, in particular because of the new online facility and because of the huge change in the content of the market, and indeed our lives, through all the new communications technologies. It is our duty to try to stay ahead, and to accept that while there will be major corrections, our best course is to try to gain growth, gain ground as much as possible in preparation for the downturns. We are not and never have been fund managers who believe that they can actually sit on cash on behalf of other investors. So we basically are fully invested, picking sectors and stocks. We are primarily a bottom-up organization, and we will continue to try to be early into situations.

TWST: At this point, how could the investment community better understand your company? What misperceptions do you think there might be?

Mr. Smedley: I think the main problem investors have is the discount factor. Because we are priced in the market by supply and demand, which is always out of balance, the discount — or sometimes a premium — moves around. We need to persuade investors that as CGI’s value grows so should its stock price. In the end, it is the stock price only that is meaningful, not the discount.

TWST: What would be a summary statement for the investment audience that convinces or compels them to buy in?

Mr. Smedley: We have to get the message out on the attraction of Canada as an investment destination. I believe much of disinterest in country funds at the present time, as evidenced by low trading and underpricing regardless of net asset performance, is because of unease with foreign country conditions. Investors don’t like the uncertainties about establishing and understanding new currency environments, unknown adventurers locking up their governments for weeks on end, droughts, famine, floods and rebel armies ravaging the countryside. Some research has been published this year on depressed funds being indicators of country interest. This seems to be supported by the fact that big, well-known US domestic funds have great shareholder loyalty, trade and are priced more efficiently in the market. We have to get the message out that Canada and one of its biggest funds deserves to be given the same premium quality labeling. After all, we are leading the US markets this year, and the economic backdrop is good and is helped by a quite stable currency. I should point out here that CGI and our other closed-end funds are founder members of the Closed-end Funds Association, set up in North America a couple of years ago and known as Cefa (www.cefa.com). This is gradually building membership and supporting us by fostering understanding about closed-end funds. It is timely for us to say that CGI provides one of very few opportunities, certainly for investors outside our country, to buy into a Canadian equities growth fund when Canada is and continues to look like a world outperformer. Our market has a great technologies sector and probably the most significant oil and gas sector in the world, to name a couple of sector attractions. We have a lower currency, inflation and interest rates with potential for further improvement. Finally, we expect the US economy to hold together and as each other’s major trading partner, we both stand to win. Our flagship fund, Canadian General Investments, which is around $430 million in portfolio assets in Canadian dollars, provides an opportunity to participate in what is a premier ranking market in the world these days. The Toronto Stock Exchange 300 Composite Index, albeit very much boosted by the performance of Nortel, is ahead about 50% over 12 months, equaled only by Sweden. Year-to-date it is running at about 24% (as of August 3). Toronto continues to be a major attraction. It has technologies dominance, companies like Ballard Power Systems Inc., which is the senior play in fuel cell development, Nortel and JDS Uniphase, dominant optical networks equipment firms and Bombardier, the top civil aircraft manufacturer behind Boeing and Airbus. I guess we always are the world’s leading oil-and-gas development market. Really, Canada comes out tops. And we have a reasonable valuation on a price/earnings multiple basis of 18 times the market, if you ignore the technology sector, which takes it up to about 112 times. Traditionally, because of the manner in which gold and other mining stocks have high multiples, Canada’s high total market multiples are not unusual. So for those who want performance Canada is probably worth more than its minor 3% or so in the world stock market weightings. And the biggest number of all is the huge 32% trading discount of CGI’s shares compared with net asset value, after taking into account potential dilution by the outstanding warrants.

TWST: Thank you. (DA)

MICHAEL A. SMEDLEY
 President
 Canadian General Investments, Ltd.
 110 Yonge Street
 Suite 1601
 Toronto, Ontario
 Canada M5C 1T4
 (416) 366-2931
 (416) 366-2729 - FAX
 www.mma-investmgr.com
 e-mail: cgifund@mma-investmgr.com

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