Keep it Simple

How Harvest Portfolios Group's investment approach has garnered it $300 million in just three and a half years

Michael Kovacs knows investing. Since 1991, he has held senior management positions with four investment-management firms: ING Funds, AIC Funds, Guardian Capital Group, and Sentry Investments Inc. When he founded Harvest Portfolios Group in October 2009, he wanted to stick to fundamentals by buying solid companies at reasonable prices.
Michael Kovacs knows investing. Since 1991, he has held senior management positions with four investment-management firms: ING Funds, AIC Funds, Guardian Capital Group, and Sentry Investments Inc. When he founded Harvest Portfolios Group in October 2009, he wanted to stick to fundamentals by buying solid companies at reasonable prices.

When Michael Kovacs founded Oakville, Ontario-based Harvest Portfolios Group in October 2009 with the launch of the Harvest Banks and Buildings Income Fund, he wanted to do something different from other investment managers—something more secure and reliable.

“The markets had been beaten up pretty bad by the financial crisis, and we thought it would be a good opportunity to invest in many great companies that had been oversold, but we wanted to do so discriminately,” says Kovacs, a 30-year veteran of the investment-management business. “One of the key things I’ve learned over my career is that investment fads come and go, and stock markets rise and fall, but over the long term, sticking to fundamentals will pay off.”

To that end, Kovacs focused on a value-based approach to investing, picking solid companies with stable cash flows and compelling dividends that just happened to be “on sale” in the short term. “If, over time, those companies were to continue increasing in value and paying dividends, we knew investors would do well,” Kovacs says.

The risk in 2009 was high. “People had to feel comfortable with your company and your product, and when you’re a brand-new company with a new product, that’s difficult, but that is when the opportunities exist,” Kovacs says.

By the Numbers

1
Harvest funds at inception

8
Total current funds

$27 million  
Gain in assets under management (AUM) in 2009

$70 million
Gain in AUM in 2010

$300 million
Total AUM in 2012

$400 million
Estimated AUM by 2013’s end

Still, Harvest did well. Harvest Banks and Buildings Income Fund raised $27 million in assets in its first year, and Harvest launched two more funds in 2010, garnering an additional $70 million in assets. It launched three more in 2011, one in 2012, and one as of press time in 2013 (with plans to launch another one or two before the year’s end). “Since inception,” Kovacs says, “we’ve gained around $100 million per year and are expecting to break $400 million in total assets under management in 2013.”

That success, he explains, is due in part to the simplicity of the firm’s investment philosophy. Kovacs got away from gold, for example, before the precious metal hit $1,200 on the way up, and he sees it as little more than a place to park capital as an inflationary hedge, given that it doesn’t have any business value and thus has no way to generate earnings. Instead, he has focused on Canada, which he says has been a great place to invest over the past decade but may be getting “a little tired,” and the United States, whose economics he believes are looking better than people think.

“As we expanded, we looked at other areas of the market and launched some funds focusing on most Canadian market sectors—although, to date, Harvest has shied away from gold and materials, which has served us well—as well as some US and global funds, but our philosophy is always the same,” Kovacs says. “We look for good companies.”

With this approach, Harvest’s first two funds, Harvest Banks and Buildings Income Fund and Harvest Canadian Income and Growth Fund, which have the longest track records, have beat their respective benchmarks in every calendar year since inception.

Of course, Harvest isn’t the only investment-management firm that looks for companies with solid performance, so Kovacs further attributes his firm’s success to a strategy he pioneered earlier in his career. It goes like this: All of Harvest’s funds are closed-end at launch, meaning they issue a set number of shares and trade on an exchange, much like a stock. Funds that have significant growth potential, however, are later converted to mutual funds, which have no set number of shares and do not trade on exchanges. “That gives [unit holders] an opportunity to add to their positions and also attract new investors,” Kovacs says.

The most important thing about Harvest, according to Kovacs, is that it develops products that are simple to understand, that are transparent, that generate income, and that will grow over time. “If we can compound at seven percent annual growth, investors double their money every 10 years—something people lose sight of when markets get strong and they get aggressive and take on too much risk,” he says. “Then, when the markets roll back like they did in 2001 and 2008, investors get clobbered and wish they’d kept the money in a bank account, and some sell. In fact, most investors sell at the absolute worst time. So, what we’re trying to do at Harvest is develop products that make investment sense over the long term.”