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Spring small-cap meltdown obscures strong performers

Energy issues took the brunt of the hit during the slide in the second quarter


Canadian small-capitalization stocks took a drubbing in the second quarter, but fund manager Robert Tattersall says the slump isn't as bad as it appears.

"When we look just at the second quarter, the gloomy headlines on the small-caps environment are in aggregate correct, but if you dig a little deeper though, it turns out that it is not all gloom in the small-cap sector; most, if not all, of . . . the difference between the small-cap indices and the S&P/TSX composite centred on the energy stocks," said the executive vice-president of Howson Tattersall Investment Counsel Ltd.

Energy issues were the biggest single factor behind the 7.9-per-cent slide in the BMO Nesbitt Burns Small Cap Index in that period. Health care issues, mainly biotechs, also weakened.

Many small-cap energy issues are natural gas plays and gas prices have dropped about 60 per cent since early December, he noted. Also, many of the small-cap energy firms lack the access to scarce drilling rigs and other service equipment that the larger players have.

Mr. Tattersall manages a number of funds, including the CIBC Canadian Emerging Company Fund, which he has run since October, 1998. The $49-million small-cap fund is up 5.89 per cent year to date. It gained 16.1 per cent in the 12 months ended June 30, 21.37 per cent annualized over three years and 11.63 per cent over five years.

Despite the slide in the latest quarter, the small caps are still outshining the broader Canadian market. The S&P/TSX composite is up 1.7 per cent year-to-date while the BMO Nesbitt Burns small-cap index has gained 4.2 per cent.

Mr. Tattersall said frequent trading is detrimental to a portfolio's success and "almost always leads to underperformance," hence his stock picks are unchanged from last year's Best Bets.

Circa Enterprises Inc. (CTO-TSX) is a Calgary-based company that supplies technical products such as surge protectors and utility pole hardware to the telecom industry. Mr. Tattersall said that revenue is growing strongly despite the fact that most sales go to the United States and so are affected by the high-flying Canadian dollar. Circa had revenue of just under $30-million last year, up from $22-million in 2004. Book value also rose to $1.12 a share from 98 cents. At $1.43, Circa shares are trading at 0.47 times sales and 1.3 times book value.

Dynetek Industries Ltd. (DNK-TSX), which makes fuel storage cylinders and systems for compressed natural gas and hydrogen, passed up some sales last year because of its inability to pass through higher raw material costs, Mr. Tattersall said. But there has been "a good recovery" in the first quarter of this year. The $9-million in revenue from that quarter together with the $16-million backlog for delivery this year "means that revenues are already ahead of 2005," he said. Dynetek shares are currently trading at $1.90, which is 1.05 times book value.

Saskatoon-based International Road Dynamics Inc. (IRD-TSX), which provides highway-traffic management technology including vehicle weighing devices, has seen its revenue slow because of the strong dollar and delays in implementing infrastructure spending in the U.S., Mr. Tattersall said. But its backlog is building with $11.1-million in orders received in the second quarter that ended in May, he noted. The shares closed yesterday at $1.24, which is 1.2 times book value and 0.04 times sales.

Spectra Premium Industries Inc. (SPD-TSX) was hit by the strong dollar and a weak automotive market, but despite that its sales climbed to $266-million in 2005 from $254-million in 2004. Boucherville-Que.-based Spectra sells mainly to the aftermarket, but is expanding its business in the original equipment manufacturers market, Mr. Tattersall noted. The shares closed yesterday at $2.11.

Slow churn

Small-cap fund manager Robert Tattersall at Howson Tattersall Investment Counsel Ltd. says frequent trading - even with small stocks - is detrimental to long-term performance.

CIBC Canadian Emerging Company

CategoryCanadian small capitalization
Total assets$48.54-million
Fund typeOpen-ended
Management expense ratio2.13%
Sales fee typeNo load
Globefund 5-star rating system****
Inception dateAugust, 1997

Returns to June 30, 2006

1-month simple rate of return- 4.85%
3-month compound annual- 6.26
6-month compound annual6.13
1-year simple rate of return16.1
3-year compound annual21.37
5-year compound annual11.63

Top 10 holdings As of June 30, 2006

2.Aur Resources3.37
3.Charming Shoppes3.3
4.Breakwater Resources3.27
5.Forzani Group3.15
6.NQL Energy Services3.15
7.Martinrea International3.11
8.CCL Industries2.77
9.Oppenheimer Holdings2.42
10.High River Gold Mines2.21


© 2007 The Globe and Mail. All rights reserved.

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