How Jeannine LiChong became the “Queen of Cash Flow”

Gluskin Sheff portfolio manager Jeannine LiChong on why it sometimes makes sense to pay more

Gluskin Sheff + Associates managing director and portfolio manager Jeannine LiChong

Gluskin Sheff + Associates managing director and portfolio manager Jeannine LiChong. (Portrait by Justin Poulsen)

Jeannine LiChong became a fund manager literally overnight. For two de­cades, she’d worked alongside Canadian investing legend Ira Gluskin as his chief analyst, so when he decided he wanted to quit managing his Premium Income fund, he asked her if she would take over. She wasn’t sure. “I wanted to think about it,” she says.

That was June 30, 2006. The next day, Gluskin walked into the office and told LiChong he was out and the portfolio was hers to manage, whether she wanted it or not. “We never talked about it ever again,” she says. “It was a shock.”

Clearly Gluskin, the co-founder of Toronto-based Gluskin Sheff + Associates, had confidence in her. “I don’t have a third of his capabilities,” LiChong says modestly, “but I learned a lot from him.” Part of what LiChong, an accountant by training, gleaned from her boss was that managers need to get out of the office if they are to make sound investing decisions. He encouraged her to visit management teams in their offices and at trade shows. She could research the firms any way she wanted. “There was a lot of freedom and a lot of creativity,” she says.

He’d also ask tough questions, something she makes sure to do today. “He always thought outside of the box,” she says of Gluskin. “A lot of people ask the same things at investment meetings, but everyone knew that if they came to a meeting with Ira, he’d go at things from a different angle.”

She was still allowed to develop her own investing style, which gravitated to cash flow because it was the metric she felt most comfortable with. She thinks a company’s worth is its net present value of future cash flows. “What do people value?” she asks. “It’s the money in their jeans.” She wants to see companies that are generating strong cash flows, have a good capital structure and are not burdened with debt.

Dividends are appealing—and a lot of high cash flow–generating companies pay them—but not a requirement. She likes when companies reinvest their cash flows back into the business, as long as they invest right and out-earn their cost of capital. “That goes to future cash-flow growth, which increases the value of the company,” she says.

She’s also not afraid to buy companies at higher multiples. “I would argue that the good companies that trade at expensive multiples are better quality companies and deserve a higher multiple,” she says, pointing to the example of retailer Dollarama Inc. (TSX: DOL), which trades at 28.8 times current-year earnings—seemingly rich even for its sector—with an enterprise value-to-EBITDA ratio of 19.8. “I do pay attention to valuation, obviously, but I would say I’m comfortable paying higher prices.”

She also manages Canadian equities exclusively. While she does think American stocks will enjoy faster growth going forward—Canada had its moment coming out of the recession, she says—she’s still finding opportunities in this country. She thinks it’s actually a good thing that just a few players dominate many of our industries. “There’s less competition, and that’s good for cash flows and good for margins.”

Today, LiChong is keen on industrials. They tend to do well when the economy is growing, and many Canadian operations have exposure to the U.S. recovery. She also likes life insurance companies, despite rate cuts and post-2008 regulatory changes. “If you listen to [management] talk, they’re excited about their business and they’re now focused on how they want to grow,” she says.