In an out-of-favour category, where the average fund lost 18.7 per cent in the 12 months ended March 31, one fund stood out for a performance that went the other way. The CIBC Canadian Small Companies Fund returned 8.9 per cent, topping the charts of the Canadian small- to- mid-cap group.
How did the fund do it? Manager Virginia Wai-Ping, a vice-president at TAL Global Asset Management Inc. of Toronto, credits a mixture of eclectic stock picks -- including a sprinkling of larger stocks permitted under the fund's mandate -- as well as a healthy dose of skepticism about individual companies and the whole sector itself, along with keeping a whole lot of cash in the fund's pocket and out of the fray.
Other factors also contributed. Size was one. With just $8.7-million in assets, the CIBC fund is much easier to manage than a bigger rival.
In addition, the fund, launched only in July, 1997, is still too new to have made large bets on sectors that have fallen into financial ruin, says Peter Brewster, editor of the Canadian Mutual Fund Adviser, a Toronto-based newsletter.
"In small-caps, having a small amount of fund assets is good. With the level of assets it has, this fund is more manoeuvrable than a very large small-cap fund," Mr. Brewster says. "And as a new fund, it avoided the large resource bets that older small-cap funds have made and that have dragged them down."
Still, running a small-cap fund in a market more enamoured of the surging earnings and ready liquidity of large-cap stocks is no easy thing, Ms. Wai-Ping acknowledges.
Her knack comes in knowing what she wants in a stock -- and doing the research to get it.
"What I try to do is identify risks so that I will not be caught off guard," Ms. Wai-Ping says. "What I want, in addition to good numbers for earnings growth and other characteristics, is a consistent story. What I want is not good presentation skills when a firm makes a pitch to analysts, but management that is credible. Above all, I want to buy firms for their fundamentals. This is, after all, a business in which a manager can get schmoozed to death."
Ms. Wai-Ping's cultivated cynicism has led her to make successful plays in truly tough subsectors, such as small-cap food processors. For instance, she bought Fletcher Fine Foods Ltd., a Vancouver-based pork packer with a $198-million market cap, in April of last year.
Ms. Wai-Ping says she liked it because, with hog prices down and bacon prices pretty stable, Fletcher's profit margin is expanding. As well, the firm is buying delicatessens that sell its products, adding to its returns.
And with no debt and a ratio of price to estimated earnings for 1999 of 14.8 times, "this is a bargain."
To date, the market agrees. She bought the stock at an average cost of $23.85 a share; it was recently trading at $26.20.
Other winners have included Sun Media Corp., bought for $13.22 after the firm's initial public offering in late December, 1997, and sold for $21 when it was purchased last March by Quebecor Inc.
More winning picks include computer firm CGI Group Inc., purchased for $4.58 and recently trading at $31, for a stunning gain of 576 per cent; TLC The Laser Centre, purchased for an average $8.72 and currently fetching about $57.45; and QLT Phototherapeutics Inc., purchased for $21.83 and recently trading at $68.30. Ms. Wai-Ping has taken some profits from all of these holdings.
Currently, Ms. Wai-Ping is shopping for resources. She bought Penn West Petroleum Ltd., a Calgary-based oil-exploration firm, for $15.33 in March; it's been up recently around $18.
Even so, she's very light on oils, having cut back to as little as 2.5 per cent at the end of last year from 15.2 per cent a year earlier. Oils currently make up 11.3 per cent of holdings.
Among sectors, her biggest weighting is in industrials, at 24.7 per cent. Holdings range from Montreal-based custom circuit-board-maker C-Mac Industries Inc. and Waterloo, Ont.-based software firm Open Text Corp. to Montreal-based Alcan Aluminium Ltd. and Noranda Inc. of Toronto -- stocks that fall within the 20-per-cent limit the fund sets on larger-cap holdings.
She also has 9.6 per cent in consumer-products firms including Fletcher and Toronto-based drug packager Patheon Inc.
Another 5.9 per cent is in utilities, including Montreal-based Telesystem International Wireless Inc.; 5.4 per cent is in merchandising companies such as Quebec grocer Métro-Richelieu Inc., and 0.9 per cent is in financial services, including Bissett & Associates Management Ltd.
But she also has a big position in cash, at 24.7 per cent of the fund. "Some of that money came in from recent fund sales; some came from profits. But mostly my cash level is a result of caution," Ms. Wai-Ping says. "I want to understand each firm before I invest. That takes time."
That is something the comparison shopper and bottom-up stock-picker is willing to devote to her selections. "This is a sector that calls out for absolutely pragmatic portfolio management," she says. "For any manager, it has problems of liquidity -- getting enough shares. The fact that the small-cap market is not in favour compounds that, for portfolio managers and other investors are just not willing to take risks and exposure to stocks with low liquidity.
"Add to that worries about Asian economies, interest rates and money inflows from mutual funds to the market. Total it up and you have a serious bias against small-caps."
Even so, Dan Hallett, senior analyst with fund-research firm FundMonitor.com, says that "the odds are that the fund can maintain a leading position in small- to mid-cap funds." He says Ms. Wai-Ping "has the diversification in many industries to avoid the single-industry traps into which other once-leading fund managers fell when those industries tanked."