A Bay Street sign, a symbol of Canada's economic markets and where main financial institutions are located, is seen in Toronto, May 1, 2013.Mark Blinch/Reuters
The manager of Canada's top-performing hedge fund says ETFs have made it difficult to make money in small-cap stocks, so he's shifting his focus to private equity instead.
Toronto-based Goodwood Inc., with about $100-million under management, was a double winner at Canada's main hedge fund awards this month. Its SPValue Fund won Alternative IQ's award for best one-year return in the equity category, with an 88-per-cent gain, and its Milford Fund won for best five-year return in the credit category, with an annual 9.8-per-cent gain.
Such wins would normally be good for any fund manager, but Chief Investment Officer Peter Puccetti said the equity win was "a bit of a joke." His SPValue Fund holds just one stock, Polaris Infrastructure Inc., which operates a geothermal plant in Nicaragua. Goodwood helped recapitalize Polaris's debt in 2015 and now holds just over 10 percent of the company's shares, a stake worth more than $25-million at current prices, plus three of five seats on its board.
"That sort of thing we could do all day long but deals like that don't come along very often," Mr. Puccetti said in an interview at Goodwood's Toronto offices. It's the kind of value that's difficult to find in small-caps, his previous focus, as more money flows into exchange-traded funds and the big companies they track, he said.
"The mutual funds, the active funds, the stuff that we have done historically -- that is a tough, tough business and I don't see it getting better anytime soon," according to Mr. Puccetti.
This is why he's turning his attention to deals similar to the Polaris investment but with private companies. He said he has one potential deal in the works and recently lost out on another one to a U.S. private-equity firm.
"You can dictate the game if you're private equity, you can control the tempo, you can pick your spots," he said. "You execute, make sure you've got good management, repay the debt, look for good acquisition opportunities to make it bigger and stronger, and you wait for the right moment."