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Mutual Fund News

Small caps provide power for long-term gains

ABC follows the basics for consistent returns


Mutual funds are sold with the proviso that past performance is no indication of future returns. But data suggest that small-cap Canadian equity funds were the place to be last year -- and way back in 1991, too.

"The thing that we pride ourselves in and the thing we attempt to do is have consistent long-term performance. We may not be No. 1 over 12 or 18 months but we are consistently up there," said Irwin Michael, president of I.A. Michael Investment Counsel Ltd. of Toronto.

The deep-value manager's ABC Fundamental Value Fund is one of the country's best long-term Canadian equity performers, returning 19.3 per cent over 15 years ended Jan. 31. Over the past five years, the $717.2-million fund has returned the same benchmark: 19.3 per cent.

The ABC fund has lots of company -- the bulk of the best 15-year funds have a small-capitalization mandate. Managers in the sector are able to snap up little-known firms with great prospects for share price growth. In recent years, hefty weightings in the resource and energy sector have powered strong returns.

"You are taking on greater opportunities for the inherent risk," said Normand Lamarche, managing partner at Front Street Capital and manager of the Front Street Small Cap Canadian Fund, the country's best performer over 15 years.

Mr. Lamarche and his team find companies that fit broad investing themes and are not afraid to make big sector bets. As of Dec. 30, the $166.6-million fund held 92 per cent of assets under management in two sectors: materials and energy. The fund likes base metals and the gold sector and is buying up a mix of promising juniors and cash-rich producers to mitigate risk.

And the balance of small-cap managers are long-serving veterans that adhere to a strict value-investing style. Troubled, neglected and underappreciated firms are small-cap managers' stock in trade.

"We have not wavered," said Scott Carscallen, co-manager of Saxon Funds Management Ltd.'s Saxon Small Cap Fund. "We are buying stocks with low-valuation statistics. That's the basis on everything we do," he said, noting that the $277.6-million fund has never owned tech high-fliers including Nortel Networks Corp., JDS Uniphase Corp. or Research In Motion Ltd.

But small-cap funds are not for everyone. For example, two of the top 10 long-term funds -- the ABC fund and the Montrusco Bolton Enterprise Fund -- require a minimum investment of $150,000.

Dan Hallett, an independent fund analyst based in Windsor, Ont., says there is some truth in the caution "past performance is no indication of future returns." Small-cap stocks were deeply undervalued at the height of the tech bubble and in recent years, have enjoyed stellar gains. Short-term performance has skewed long-term data and future growth may be limited, he said.

"The easy money is long gone," Mr. Hallett said. "It's really, really tough to find value in Canada."

Managers do not disagree and are looking far and wide for value plays. For the first time, the Saxon fund is weighing opportunities in the income trust sector. And on April 1, Mr. Michael will launch the ABC Dirt Cheap Fund, a deep-value fund that is expected to invest heavily in the undervalued U.S. market.

Small caps, big returns

Small-capitalization mutual funds like the ABC Fundamental Value Fund have some of the best 15-year returns in the industry.

Fund Name1-year return3-year return5-year return10-year return15-year returnNet assets ('000) MER
Front Street Small Cap Canadian62.21%47.08%34.15%20.59%25.44%$166,596 2.67%
Northwest Specialty Equity28.08%31.89%30.41%13.01%20.58%238,9892.68%
Northwest Specialty Growth26.73%24.01%11.47%17.49%19.89%115,8232.30%
ABC Fundamental Value24.21%23.08%19.31%15.31%19.26%717,1552.00%
Mawer New Canada17.93%24.90%25.63%17.09%17.16%186,6941.50%
Dynamic Power Canadian Growth44.40%32.47%13.59%13.29%17.04%1,435,7722.87%
Montrusco Bolton Enterprise28.53%30.64%18.50%12.96%16.33%n/a0.15%
Sceptre Equity Growth - A32.77%40.28%25.27%15.62%16.15%433,8461.67%
Saxon Small Cap Fund19.62%25.04%19.03%16.99%16.01%277,5641.87%
GBC Canadian Growth20.37%20.94%9.97%13.53%15.72%468,0471.98%

Selected Categories: Canadian Balanced, Canadian Equity, Canadian Income Trusts, Canadian Tactical Asset Allocation, Canadian Dividend, Canadian Income Balanced, Canadian Equity (Pure), Canadian Small Capitalization

© 2007 The Globe and Mail. All rights reserved.

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