WHAT ARE WE LOOKING FOR? Index beaters among smaller-company Canadian stock funds over the past decade. (Last week, we focused on larger-company Canadian stock funds.)
Smaller-capitalization funds have posted robust returns recently because their stocks tend to do well in the early stages of an economic recovery. Now, let's see which ones have been able to outdo the BMO Nesbitt Canadian Small Cap Index, a popular benchmark.
TODAY'S SEARCH
We screened funds in the Canadian small- or mid-cap and Canadian focused small- to mid-cap categories for the 10 years ended Feb. 28. We listed the top 30 performers, but they include those which did and didn't outpace the benchmark. We excluded U.S.-dollar, segregated, pooled and duplicate versions of the funds. As well, we only looked at those requiring an investment of $10,000 or under.
WHAT DID WE FIND?
Seventeen funds managed to outpace the small-cap index over the longer haul.
Front Street Growth, which is managed by Normand Lamarche of Front Street Capital Corp., rose to the top of the heap with an average annual return of 18.7 per cent. That's more than double the compounded annual gain of 7.7 per cent by BMO's index, and impressive since it has a hefty management expense ratio (MER) of 2.73 per cent. The track record has been helped by recent triple-digit returns, including a 131-per-cent gain for the year ended Feb. 28.
Mr. Lamarche takes a thematic approach, and looks for companies with strong growth potential in this go-anywhere fund. Formerly known as Front Street Small Cap Canadian fund until mid-2008, the fund has been heavily focused on resource stocks, and that has helped its return over the past year.
Mawer New Canada, which is run by Martin Ferguson of Mawer Investment Management Ltd., has posted an average annual gain of 14.8 per cent over a decade. In this case, a much lower MER of 1.42 per cent has undoubtedly helped his long-term record.
Mr. Ferguson said he looks for companies that "create wealth," or those with a high return on invested capital, and that trade at reasonable valuations. "So they can actually be value, growth or momentum companies," he said. "We are not trying to emulate any index."
His fund is fully invested at all times with cash at 5 per cent or less, and tends to hold companies for a long period of time so there is low turnover. Some companies that he has held in the fund for 10 years include names like Stantec Inc., Home Capital Group Inc. and Canadian Western Bank. "I have added value by identifying good stocks to hold over the long term, and by emphasizing and de-emphasizing them at the right points in time," he said.
For instance, he was adding to Stantec at $21.95 a share in March, 2009, but trimming his weight in that stock at $28 last July.
The trouble with looking at funds with a 10-year track record is that managers can and do change as had been the case with NorthWest Specialty Equity and Sceptre Equity Growth, which respectively posted average annual returns of 14.6 per cent and 12.4 per cent over 10 years. Northwest Specialty Equity was run by manager Wayne Deans before he began co-managing it with Montrusco Bolton Investments Inc. in recent years. Since late 2009, Christian Godin of Montrusco has become lead manager of the fund. With Sceptre Equity Growth, Allan Jacobs ran it until he left Sceptre Investment Counsel Ltd. in mid-2007. Timothy Hylton is currently lead manager.