When it comes to investing in mutual funds, small can be beautiful.
Tiny Canadian equity funds -- those with assets of less than $10-million -- can have a big advantage over billion-dollar funds like Trimark Canadian and Altamira Equity in that they are able to take substantial positions in stocks, significantly bolstering performance.
That potential advantage has propelled Resolute Growth -- a relatively obscure $4.7-million Canadian small- to mid-capitalization fund -- to the top 10 charts recently. With a 54.5-per-cent return for the year ended July 31, it was the seventh-best-performing mutual fund in all categories.
But small funds can also be risky, warns Peter Brewster, editor of the Canadian Mutual Fund Adviser newsletter.
"Because funds of that size typically have a relatively small number of positions, one bad stock could have a large impact on the portfolio," he said. "It's an aggressive way to invest and one should have a long-term outlook."
Investors should keep tabs on the size of a tiny fund in case it suddenly mushrooms to become a $100-million fund, he added. If so, the manager may run into difficulty maintaining his or her winning investment style.
"I suggest a tiny fund be no more than 10 per cent -- and more like 5 per cent -- of your total portfolio," he said.
Here is a look at the investment styles and favourite stocks of the managers of three tiny small-cap Canadian equity funds. All have posted better than the 17.7-per-cent average return of their peers in the year to July 31.
Resolute Growth Fund, which requires a minimum $20,000 investment, is sold only in Ontario, but will be available soon in British Columbia and Alberta.
Manager Tom Stanley, 41, started it in December, 1993, when he owned a small brokerage firm. "I've always had a dream to launch a fund," he said. Since February, he has continued to run the fund as an employee-shareholder of Toronto brokerage firm Deacon Capital Corp.
Mr. Stanley buys growth stocks at reasonable prices and searches for overlooked companies that are not followed widely. His fund is fully invested and holds nine stocks.
Instead of trying to time the market, he tries to buy good businesses. "I don't have a clue as to when there is going to be a correction, a bull or bear market," he said.
Scintrex Ltd., a scientific instrument maker in Concord, Ont., is one of his favourite stocks. It makes up 32 per cent of the fund. He bought shares for $3.81 and they closed yesterday at $25.15 on the Toronto Stock Exchange.
"The company makes a very good portable bomber sniffer and it has just developed a portable narcotics sniffer," he said. "It currently trades at about 15 times earnings and I think there is a lot more potential."
Mr. Stanley also likes pharmaceutical company Cangene Corp. of Mississauga, which is 87 per cent owned by generic drug maker Apotex Inc. of Toronto.
And he is keen on pharmaceutical company Dimethaid Research Inc. of Markham, Ont., which is developing a prescription arthritis pain reliever and another drug to stimulate the immune system of AIDS patients. Not listed on the major exchanges, it trades on the Canadian Dealing Network.
Millennium Next Generation Fund, sold only in Ontario, has been managed by Les Williams of Morrison Williams Investment Management Ltd. since December, 1993. The $8.1-million fund posted a 41.1-per-cent return for the year ended July 31.
Mr. Williams, 49, who described his investing style as a blend of value and growth, looks for companies with strong management and balance sheets. He typically holds 30 to 35 stocks when fully invested, but has been sitting on the sidelines with 67 per cent in cash.
"We think there is going to be trouble in this marketplace over the next six to nine months, but we see a lower-risk opportunity some time in early 1997," he said.
One stock he likes is mutual fund company AGF Management Ltd. of Toronto, which recently lost star manager Veronika Hirsch to rival fund company Fidelity Investments. "The stock is cheap and in the long term the company is operating in a nice growth area," he said.
He, too, is bullish on Scintrex. And he likes Western Star Trucks Holdings Ltd. of Kelowna, B.C., which "has been able to pull off a strategy of acquiring assets at very low prices and turning them around."
Lotus Canadian Equity Fund is managed by Greg Bay, 38, of Vancouver's M. K. Wong Associates Ltd. The $5.2-million fund gained 23 per cent for the year ended July 31. It is available across Canada, except in Quebec.
A growth manager, Mr. Bay said he holds about 60 stocks in the fund and is fully invested. He is guardedly optimistic about equity markets in the next six months because he expects interest rates to remain stable, but has become more defensive.
"We have rotated out of some of the more aggressive sectors like the junior mining area and moved into more conventional or traditional valuation areas like industrial products," he said.
Mr. Bay said he likes junior diamond play Aber Resources Ltd. of Vancouver, which he bought for the fund at about $13 a share. It closed yesterday at $22.20 on the TSE. "We think there is very good value there," he said.
He also likes Cinram Ltd. of Toronto, a maker of recorded multimedia products, including compact discs, and Western Star Trucks.
Resolute Growth
Category: Small- to mid-cap.
Manager: Tom Stanley of Deacon Capital Corp., since December, 1993.
Load status: Front-end.
Total assets: $4.7-million
Management-expense ratio: 2%
Returns to July 31, 1996
1-year simple: 54.5%
2-year compound annual: 25.0%
Phone: 1-416-350-3232
Top three holdings
1. Scintrex..32.0%
2. Cangene...14.7%
3. Cambec Corp. 9.9%
Millennium
Category: Small- to mid-cap.
Manager: Les William of Morrison Williams Investment Management, since December, 1993
Load status: No sales fees.
Total assets: $8.1- million.
Management-expense ratio: 2%
Returns to July 31, 1996
1-year simple: 41.1%
2-year compound annual: 31.4%.
Phone:1-416-777-2922
Top three holdings
1. Canada Treasury Bills..54.7%
2. U.S. Treasury Bills..12.0%
3. Scintrex..3.8%
Lotus Canadian
Category: Small-to mid-cap.
Manager: Greg Bay of M.K. Wong Associates Ltd., since August, 1993
Load status: No sales fees.
Total assets: $5.2-million
Management-expense ratio: 2.1%
Returns to July 31, 1996
1-year simple: 23.0%
2-year compound annual: 8.1%
Phone: 1-800-665-9360
Top three holdings
1. Aber Resources..5.7%
2. Bre-X minerals..4.3%
3. Fairfax Financial Holdings..3.8%
Source: Data provided by Globe Information Services using Globe HySales and company
© 2007 The Globe and Mail. All rights reserved.
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