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Winners, losers plot 2002

Strategies to stay on top, escape cellar: CAROLINE ALPHONSO checks out some of 2001's best, worst funds LEADERS

Last year was value managers' turn to pop the champagne corks.

As tech crashed, the economy shuddered and markets continued their tailspin, managers who follow the stodgier approach to investing went along swimmingly while those who adhere to growth struggled to surface from deep water.

There was more. Winning managers also stuck with sectors they liked. And it was a stock-picker's market, with top performers finding individual players that brought the rewards.

How will they fare this year? Here's a look at three of last year's winning funds and how managers are plotting to keep them on top:
Sprott Canadian
Equity Fund

For Eric Sprott, manager of the $72-million Sprott Canadian Equity Fund, being a winner meant betting big on gold.

It was the glitter of this precious metal that put the first-place shine on this fund in the Canadian small-capitalization group.

For the year ended Dec. 31, Mr. Sprott's fund gained a whopping 43.7 per cent versus 3.4 per cent for the benchmark Nesbitt Burns Canadian small-cap index and 1.9 per cent for the average fund in the category.

Mr. Sprott, who looks for growth stocks at a reasonable price, foresaw the technology bust early on -- back in March, 2000. So he stocked up on defensive issues, such as food, medical software and environmental issues.

But it was a hefty 25-per-cent weighting in gold -- with names such as Goldcorp Inc. -- and an almost equal proportion in cash that kept him out of the carnage.

The Toronto Stock Exchange's gold and precious metals index jumped 16.9 per cent over last year.

"Normally, gold does well in a bear market," Mr. Sprott says.

By the end of last year, Mr. Sprott had 28 per cent of the fund in metals and minerals, 19 per cent in consumer products, and 18 per cent in oil and gas, among others. He also had 21 per cent of the fund in cash.

While market watchers forecast a rebound soon, Mr. Sprott isn't a believer. "We haven't bought into an economy recovering," he says. Rather, he says recent movements are merely sharp upticks in a continuing bear market.

Because of this, he plans to stick with his strong position in gold. He thinks the metal will shine again this year -- it's typically one of the leaders in a bear market, he says.

Furthermore, gold is an alternative to paper investments, Mr. Sprott says. "It's the international currency, if you will. It's the one thing that will be properly valued in any currency."

The bear-market believer is also keeping his fairly high cash content. "We're trying not to lose money," he says.

For 2002, he is also looking at buying some silver stocks, because of a shortage of the precious metal, he says. Mr. Sprott has begun accumulating Toronto-based Corner Bay Silver Inc., an exploration and mining firm.

"Someday this is going to play out," he says. "I think precious-metal prices are just about set to have a very large move here."
Fidelity Small-Cap
America-A Fund

Pudginess.

That, in a word, was one of the peculiarly named themes that worked for James Harmon's $313-million Fidelity Small-Cap America-A fund, which grabbed top honours in the U.S. small- to-mid-cap equity category for 2001.

The fund rose 29.8 per cent for the year ended Dec. 31, compared with a group average decline of 7.2 per cent and an increase of 8.9 per cent for the benchmark Russell 2000 index.

This was the first full year that Mr. Harmon, who assumed control in July, 2000, ran the fund.

"I'm really excited about the performance. I have been working very hard for the last year and a half," he says.

The once-laggard fund staged a comeback last year, thanks in part to Mr. Harmon's old-fashioned approach. He is a bottom-up investor who picks stock by stock, interviewing suppliers and competitors and developing themes.

With the pudginess theme, he is referring to the growing number of overweight people and the consequences of that trend.

He looks for companies that benefit. Among them are candy maker Tootsie Roll Industries Corp. and Christopher & Banks Corp., a retailer of women's specialty apparel.

Pudginess isn't the fund's only theme. Another centres on bankruptcy and growing business failures in the recession.

To catch that wave, he's focused on FTI Consulting Inc., a top holding, which helps firms deal with issues such as bankruptcy, litigation and regulatory investigations.

Going forward, Mr. Harmon is not sure if a rally could be short-lived. But it doesn't really matter for he is sticking with his strategy of looking for broad secular trends in the economy.

While many technology companies have slowed down, Mr. Harmon looks for those with developments that can stimulate growth.

He's a fan of Nintendo Co. Ltd. and Microsoft Corp.; Nintendo's recent launch of its GameCube console, and Microsoft's Xbox console will benefit them, he says.

At year-end, he had an overweight 29 per cent in health care, 20.7 per cent in information technology and 11.6 per cent in consumer discretionary items.

Mr. Harmon says his strategy will continue to be finding companies "misunderstood" or "underappreciated" by Wall Street.
Trimark Canadian Small
Companies Fund

Last year, the $122-million Trimark Canadian Small Companies Fund snared the best Canadian small-cap fund honour at the Canadian Mutual Fund Awards gala.

It was a nice pat on the back, but fund manager Keith Graham also knows the awards are jokingly referred to as "the curse" -- past winners have found their fund's performance later declines.

"On the forefront of my mind is to not let this honour be a curse on the fund," Mr. Graham laughs.

The value-driven fund breezed through the market slump last year, ranking second in the Canadian small-cap group, with a 37.7-per-cent return.

Mr. Graham ignored the hype of shooting stocks, sticking to his approach. "We are bottom-up, long-term, fundamental value investors," he says.

He doesn't plan to change that strategy this year. He says he takes an "ownership stake in a business," as opposed to just buying a stock.

Noting there isn't much "Street research" on the companies he buys, he says he has an edge over the competition.

He spends plenty of time on a company's valuations. "I believe that if you paid a bad price for a good company, you've made a bad investment," he says.

"I think our investment process over the last three to four years has helped us target and acquire strong businesses that were not well recognized."

As of Dec. 31, Mr. Graham's major weightings included 22.4 per cent in industrial products, 14.7 per cent in consumer products and services, and 12.5 per cent in metals and minerals.

A major consumer-services holdings is Toronto-based FirstService Corp. In mines and minerals, the fund has major holdings in Aur Resources Inc. and Goldcorp Inc.

Mr. Graham believes investors should look well beyond one year at small-cap fund performance. "It's easier for a small company to grow than a large company."

© 2007 The Globe and Mail. All rights reserved.

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