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Manager hunts big value in small caps


Portfolio manager Irwin Michael has been finding opportunities in small and micro-cap stocks, and also in other countries such as Australia and Singapore.

Mr. Michael manages a number of funds, including the long-established ABC Fundamental Value Fund and the much newer Dirt-Cheap Stock Fund. The latter fund, which started in April, has already attracted $90-million. The $749-million Fundamental Value Fund has gained 12.25 per cent so far this year, continuing a strong performance that has seen the fund show a return of 27.24 per cent in the 12 months ended April 30, 28.17 per cent annualized over three years, 14.72 per cent in 10 years and 18.03 per cent since inception in March, 1989.

"When you lose in the Canadian market a Dofasco, a Placer Dome, a Sears Canada, a Hudson's Bay Co. and a Fairmont Hotels, you are losing significant market cap in the Canadian market . . . [so] there is less and less to buy in Canada," said the president of I.A. Michael Investment Counsel Ltd. In light of that situation, his company, which manages about $1.3-billion in assets through three open-ended funds and two closed-end funds, has come up with several strategies, one of which is to invest outside of Canada. The Dirt-Cheap fund can invest anywhere in the world. It currently holds 14 Canadian stocks, eight U.S. issues, two Australian, one Hong Kong and two from Singapore.

Another strategy is to go bargain hunting among small and micro-caps. "The small and micro-cap area [is] where we are finding the greatest amount of anomalies and the greatest imperfections in the marketplace," he said. Many of the small and micro-cap companies are not followed by analysts and are not on people's radar screens, he said, noting that 45 per cent of U.S. public companies don't have any analytical coverage at all.

The funds are run using a contrarian approach and it is for that reason that Mr. Michael prefers natural gas issues to oil stocks, particularly the small-cap ones.

Another sector he likes is the lodging sector.

Small-cap Huntingdon Real Estate Investment Trust (HNT.UN-VEN-TSX) has a "geographically diverse" portfolio of quality commercial and industrial real estate properties in Canada. The REIT currently has about 40 properties with a cost of about $260-million (Canadian). "It is one of the fastest growing REITs in Canada," he said. Huntingdon, which buys quality properties usually in less than the top-ranked areas, earns a double-digit return on equity. Mr. Michael thinks that the net asset value is at least $3 and may even be $3.50. The stock is trading at 2.20. The units also carry a 11.91-per-cent dividend yield, paying 2.33 cents per unit per month, he noted. The distributions are higher than the profit, but Mr. Michael expects profit will catch up to dividends.

Mr. Michael's preference for natural gas stocks over oil factored into his pick of Choice Resources Corp. (CZE-VEN-TSX) as it is a small-cap natural gas play. Its operations are in south-central Alberta and its average working interest is 85 per cent. Choice is currently producing about 1,700 barrels of oil equivalent a day and has a good reserve base, he said. "We believe the reserves discounted at 10 per cent gives us a net asset value of around $1.40" a share, he added. The shares are trading at 89 cents. "We think they are on the right track, plus it is 100-per-cent natural gas," he added.

Scorpio Mining Corp. (SPM-VEN-TSX) explores and develops precious and base metal properties in Canada and Mexico, primarily the latter. In Mexico, Scorpio own 100 per cent of four continuous deposits in the Cosala mining district, a region that has been mined since 1650, Mr. Michael said. Between 1954 and 1965, Ascarco Inc. produced silver, zinc, lead and copper from the properties. It will take Scorpio a little more than a year to assemble and commission the 2,000-ton-a-day mill it purchased, which means production will likely start in late 2007 or early 2008, he said. The properties are well situated relative to transportation, he added. Scorpio is a silver play with the other metals that will be produced reducing the cost of mining the silver, he said. The shares are changing hands at $1.31.


'When you lose in the Canadian market a Dofasco, a Placer Dome, a Sears Canada, a Hudson's Bay Co. and A Fairmont Hotels, you are losing significant market cap in the Canadian market....(so) there is less and less to buy in Canada.'




ABC fund manager Irwin Michael searches for value around the world. His contrarian approach has led him to believe there are opportunities in small and micro-cap natural gas stocks.

Top 10 holdings

As of March 31, 2006

Nexen Inc.

EuroZinc Mining Corp.

Hudbay Minerals Inc.

Talisman Energy Inc.

Canam Manac Group Inc.

Legacy Hotels Real Estate Inv. Trust

Avenir Diversified Income Trust

E-L Financial Corp. Ltd.

Morguard Corp.

Seaspan Corporation

ABC Fundamental Value

Inception date: March, 1989

Total assets: $749-million

Fund type: Open-ended

Minimum investment: $150,000

5-star rating system: *****

Management expense ratio: 200%

Returns (as of April 30, 2006)

1-year: 27.24%

3-year: 28.17%

5-year: 17.89%

10-year: 14.72%


© 2007 The Globe and Mail. All rights reserved.

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