Old school, and proud of it

SPOTLIGHT ALLAN JACOBS

For an accountant and old-school money manager, Allan Jacobs seems remarkably restless--jumpy, even. He often speaks in bursts, and you have to follow the Street lingo and the rapid-fire leaps in logic.

Take this relatively simple fragment on women's clothing retailer Reitmans (Canada): "It was trading at unbelievably low multiples three years ago, like less than two times enterprise value-to-EBITDA," he recalls. "Now they've had great earnings growth for three or four years and the P/E multiple is still, like, 15 times trailing." Still, during 16 years of managing small- and medium-cap stocks through unnerving ups and downs in the markets, Jacobs has stuck to a remarkably disciplined investing style.

Now 46, Jacobs grew up in Cape Town, South Africa, during the turmoil over apartheid in the 1960s and 1970s. After qualifying as a CA in 1984, he joined Old Mutual, the nation's largest insurer. Inflation was running at about 15% a year, and there were strict foreign exchange controls. Bonds were steadily losing value, so South African institutions had to rely heavily on stocks.

In 1988, Jacobs was put in charge of the $5-billion equity portion of Old Mutual's main fund, the biggest in the country. "It was almost like an investment policy that had a life insurance cover attached to it," he says.

The following year, Jacobs and his wife, Tanya, emigrated to Canada, and Jacobs joined Canada Life Investment Management. In 1993, he moved to Sceptre Investment Counsel, where he became manager of the Sceptre Equity Growth mutual fund and the small-cap portions of the firm's institutional portfolios. All told, he now oversees more than $750 million.

From the beginning, Jacobs kept to conservative fundamentals. He looked for companies with solid balance sheets, strong earnings growth and low price-to-earnings ratios relative to that growth regardless of the sector, not always a popular strategy.

In 1998, when markets were hammered by economic crises in Asia and Russia, the Equity Growth Fund plunged by 17.6%, and Jacobs was a tad rattled. During the next two years, rival funds loaded with tech stocks left him in the dust. Those stocks shot up to 40, 50, even 200 times their earnings per share, he recalls, while "all the boring companies that made food, clothing and furniture" were ignored by the market.

Jacobs stuck to his conservative bottom-up approach, but he and the firm raised the small- and medium-cap target size limits, the maximum now being companies with a stock market value of $1.5 billion. Jacobs also slashed the number of stocks in his fund to about 50 from more than 80.

It worked. The fund has beat indexes and rival funds handily over the past three years. The fund's average annual return during his first five years was 26.6%. Much of the rebound has come from companies that were overlooked at first by analysts and competing managers. Recent big winners include Reitmans (Canada), convenience-store operator Alimentation Couche-Tard, and oil and gas stars Peyto Energy Trust and PetroKazakhstan.

Lest you think all Jacobs looks at is numbers, he also meets with about 350 companies a year, either privately or at industry events. He'll listen to pitches from brokers as well. "You get exposure to all sorts of unknown companies," he says.

Lately, Jacobs hasn't seen many bargains. The fund's cash portion grew to 12% at the end of March--high by his standards. Still, while he may be a little jumpy in person, he'll stay true to form and won't be panicked into buying anything.

Sceptre Equity Growth Fund