One question to bounce off any stock broker is: "What are you buying for your own RRSP?"
It's a terrific test of character: Do you really want to deal with folks who advise prudent, conservative picks, but throw their personal savings at Internet gambling stocks or ostrich-burger franchises?
The vast majority of brokers do eat their own cooking -- if they recommend a stock or fund, they quite likely own it. But by asking about personal holdings, inquiring investors might get in on up-and-coming plays that other clients are only just starting to hear about.
For example, if you query brokers at RBC Dominion Securities Inc., the country's largest dealer, on what they are doing with their own savings, you might hear David Picton's name.
Mr. Picton runs what's known as the Canadian Momentum Class Fund at Synergy Mutual Funds. It's a relatively new fund, launched in December, 1997, and relatively small, with $33.7-million in assets, and it comes from a Toronto-based company that's only been around for two years.
That combination of factors means Mr. Picton's fund is just starting to appear on the recommended lists of funds that investment dealers prepare for their clients. That's a sin of omission, because Mr. Picton's performance out of the gate has been staggering.
In a year when the Toronto Stock Exchange 300-stock composite index fell 1.6 per cent and the average Canadian equity fund dropped 2.9 per cent, the Synergy Momentum fund was up 20.2 per cent, making Mr. Picton the top performer among 300 rivals.
Brokers at RBC Dominion know Mr. Picton, and pay him the ultimate compliment by sending him their own and clients' money, because over the past decade they watched him develop a computer-heavy approach to stock picking known as quantitative analysis.
Mr. Picton was a top-ranked RBC Dominion analyst from 1990 through 1997. Prior to that, he learned stock picking in the University of British Columbia's unique portfolio management program, which sees students run a real multimillion-dollar fund.
To build portfolios, Mr. Picton runs 400 companies through a screening process that he's developed, searching for stocks with fundamentals that are improving more rapidly than those of the overall market. There are four key criteria used to winnow out about 30 picks, which any investor can apply:
Find stocks with earnings estimates that are revised upward.
Look for companies posting positive earnings surprises compared with analysts' estimates.
Search for increasing earnings momentum.
Favour companies growing faster than their peers and the market.
Momentum investing isn't common in Canada; there are only four funds devoted to this style. There's a school of thought that says investors can cut their risks if they split their money among managers with different styles -- such as growth or value funds.
The fact that Mr. Picton shot the lights out last year, while other styles were less successful, seems to back this diversification theory. It's another reason why Synergy is starting to get brokers' attention.
Along with generating hot numbers, Mr. Picton and colleagues at Synergy are also winning fans because they are religious about sticking to the stock-picking styles they advertise. That faith contrasts with a great many fund managers these days who indulge in a gutless practice known as "closet indexing."
Working from the logic that underperforming the market leads to unemployment, closet indexers reap substantial fees from investors by simply buying the major components of an index such as the TSE 300, then make a few small bets on specific stocks to add a touch of spice. The approach virtually guarantees an investor will pay dearly for performance that mirrors the market.
Closet indexing can't happen at Synergy. On Monday mornings, the firm's five portfolio managers gather for what they call "the gauntlet meeting." Mr. Picton and partners must prove to peers that stocks they want to buy, or are holding, fit their fund's style. This is a discipline not found at every Canadian money manager, and it is winning fans.