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Under-40s on the way up

Special to The Globe and Mail

00:00 EDT Monday, May 19, 2008

Geoff MacDonald, EdgePoint Capital

The potato fields and sandy beaches of Prince Edward Island are far from the concrete towers of Bay Street, but the smallest province has provided Canada with one of its rising stars. A former manager for AIM Funds Management, Geoff MacDonald is now chief investment officer at Toronto-based EdgePoint Capital Partners, a new fund management company.

If Mr. MacDonald, 37, were to call someone his investment hero, it would be Robert Krembil. He is a former chief investment officer and co-founder of AIM Funds and now a shareholder, along with Mr. MacDonald and two other former AIM employees, in EdgePoint's parent company, Cymbria Capital Corp.

"Bob taught me that successful investing over the long term is about having a proprietary idea when investing in a company. A proprietary idea is simply having a view of a company that is not widely shared," Mr. MacDonald says. "What do I know about the business that others don't? If the answer is nothing, then there is no advantage and thus there should be no investment made."

This approach can be hard to follow for several reasons. One is that "too many portfolio managers are being forced to stay close to a benchmark due to pressures from the sales department or senior management - 'just stay average and our distribution will take care of everything else,' they say."

Tim Hortons Inc. is Mr. MacDonald's stock selection based on his investment hero's philosophy. The fast-food restaurant chain is generally perceived by the market "as a mature business with limited growth opportunities in Canada and a failing strategy in the U.S." But digging into the data, "one realizes that they have only about half the store penetration in Western Canada and Quebec compared to Ontario, an average customer purchase size that is tiny and continues to grow as they build out their menu, and below-market prices with above-market quality." In addition, the U.S. opportunity is not discounted in the stock price.

Max Lemieux, Fidelity Canada

It could be argued that Max Lemieux, 34, is already an investing star. A manager of two Fidelity Canada equity funds in Canada and the Fidelity Canada Fund in the U.S., he beat out more than 2,300 other equity fund managers to win U.S.-based's Mutual Fund Manager of the Year award for 2007.

His investing hero is Peter Lynch, the legendary manager who previously worked for the same organization Mr. Lemieux now works for.

"I read Peter Lynch's book, One Up on Wall Street, at the end of high school and later, another of his books, Learn to Earn," declares Mr. Lemieux, a Quebec City native.

"They inspired me although then I would never have thought I would be working for the same company as the author."

"I met Peter Lynch a few times as an associate between 1996 and 1998, when I first started working for Fidelity," Mr. Lemieux continues.

"We were all mesmerized by him and it was an honour for all of us to sit with him and be asked for our best ideas."

When he was managing money for Fidelity, Mr. Lynch was a growth-orientated investor who liked to invest in sound firms with increasing revenues and rising margins.

A company in the Peter Lynch mould, according to Mr. Lemieux, is SNC-Lavalin Group Inc. "It has been a consistent grower over the past few years on the back of strong demand for infrastructure projects. The earnings growth (excluding the 407 concession) has been more than stellar except for a bad power contract that tarnished the trajectory temporarily. The last quarter was huge and the Street has finally woken up. The backlog is strong and the mix is changing for the better."

Noah Blackstein, Dynamic Funds

When Noah Blackstein, 38, isn't buying and selling stocks he can be found playing his guitar in a band called the Dynamic Range at charity events. But stardom looks more likely on the mutual fund stage: His Dynamic Power American Growth Fund won the U.S. Equity Fund award at the 2007 Canadian Investment Awards.

The fund has achieved a five-year annualized return of 13.3 per cent even though it wasn't currency-hedged during a period of significant depreciation in the U.S. dollar. His Canadian peers averaged 2.7 per cent annually (as of April 30), according to tables.

Inspiration comes from Philip Fisher, "the father of growth investing."

He was author of Common Stocks and Uncommon Profits, a book Mr. Blackstein says "should be read every year."

Although Mr. Blackstein "doesn't follow Fisher lavishly," his own copy of the investment classic is nevertheless well-worn, and he "was quite happy to find an audio version, which I can listen to while on the airplane."

"Fisher's book laid out questions that growth investors need to ask themselves," Mr. Blackstein notes.

"For example, does this company have products and services that can generate growth? Does it invest in research and development, and develop new products?"

One company that fits the description, in his opinion, is Apple Inc. Apple's iPod reflects a shift in the way music is consumed. And its iPhone product has enormous potential to grow in the "smartphone" space, which Mr. Blackstein is bullish on.

Some may see the iPhone as too expensive, but in his view, it's "an amazing and cheap laptop" that provides not only phone calls but also Internet browsing, e-mail, music, and movies.

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