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Small-cap funds soar in early stages of recovery

WHAT ARE WE LOOKING FOR?

Index beaters among smaller-company Canadian stock funds over the past decade. (Last week, we focused on larger-company Canadian stock funds.)

Smaller-capitalization funds have posted robust returns recently because their stocks tend to do well in the early stages of an economic recovery. Now, let's see which ones have been able to outdo the BMO Nesbitt Canadian Small Cap Index, a popular benchmark.

TODAY'S SEARCH

We screened funds in the Canadian small- or mid-cap and Canadian focused small- to mid-cap categories for the 10 years ended Feb. 28. We listed the top 30 performers, but they include those which did and didn't outpace the benchmark. We excluded U.S.-dollar, segregated, pooled and duplicate versions of the funds. As well, we only looked at those requiring an investment of $10,000 or under.

WHAT DID WE FIND?

Seventeen funds managed to outpace the small-cap index over the longer haul.

Front Street Growth, which is managed by Normand Lamarche of Front Street Capital Corp., rose to the top of the heap with an average annual return of 18.7 per cent. That's more than double the compounded annual gain of 7.7 per cent by BMO's index, and impressive since it has a hefty management expense ratio (MER) of 2.73 per cent. The track record has been helped by recent triple-digit returns, including a 131-per-cent gain for the year ended Feb. 28.

Mr. Lamarche takes a thematic approach, and looks for companies with strong growth potential in this go-anywhere fund. Formerly known as Front Street Small Cap Canadian fund until mid-2008, the fund has been heavily focused on resource stocks, and that has helped its return over the past year.

Mawer New Canada, which is run by Martin Ferguson of Mawer Investment Management Ltd., has posted an average annual gain of 14.8 per cent over a decade. In this case, a much lower MER of 1.42 per cent has undoubtedly helped his long-term record.

Mr. Ferguson said he looks for companies that "create wealth," or those with a high return on invested capital, and that trade at reasonable valuations. "So they can actually be value, growth or momentum companies," he said. "We are not trying to emulate any index."

His fund is fully invested at all times with cash at 5 per cent or less, and tends to hold companies for a long period of time so there is low turnover. Some companies that he has held in the fund for 10 years include names like Stantec Inc., Home Capital Group Inc. and Canadian Western Bank.

Index beaters among 30 best performing Canadian small-cap funds over 10 years
(As of Feb. 28)Latest% returns (as of Feb. 28, 2010)
Fund nameAsset Class (Assets ($-mil)MER10-yr5-yr3-yr1-yr
Front Street Growth-BCdn. Small or Mid Cap Equity134.852.7318.710.52.3131.1
Mawer New CanadaCdn. Small or Mid Cap Equity141.861.4214.86.92.372.3
Northwest Specialty EquityCdn. Small or Mid Cap Equity177.012.5714.64.7-1.269.2
Sceptre Equity Growth-ACdn. Small or Mid Cap Equity374.851.5812.45.6-7.269.0
Beutel Goodman Small CapCdn. Small or Mid Cap Equity332.851.4112.18.54.673.6
Ethical Special EquityCdn. Small or Mid Cap Equity254.062.7311.94.2-2.643.3
IA Clarington Canadian Small CapCdn. Small or Mid Cap Equity263.372.8011.74.2-2.445.0
Bissett Microcap-FCdn. Small or Mid Cap Equity46.182.4211.03.4-4.379.0
Renaissance Canadian Small-CapCdn. Small or Mid Cap Equity207.422.5110.88.41.069.0
Trimark Canadian Small CompaniesCdn. Focused Small/Mid Cap Equity159.462.5510.63.6-2.864.8
Manulife Growth Opportunities FundCdn. Small or Mid Cap Equity655.562.6110.04.2-0.773.3
National Bank Small CapitalizationCdn. Focused Small/Mid Cap Equity585.682.359.96.22.581.0
Mavrix Dividend & IncomeCdn. Focused Small/Mid Cap Equity79.753.259.0-3.7-8.458.6
Altamira Quebec GrowthCdn. Small or Mid Cap Equity16.252.358.85.30.159.0
Bissett Small Cap-FCdn. Small or Mid Cap Equity45.931.738.82.6-3.692.4
Chou RRSPCdn. Focused Small/Mid Cap Equity123.771.748.3-2.1-10.854.0
Mackenzie Saxon Small Cap-SICdn. Small or Mid Cap Equity137.572.058.01.4-6.096.0
Northwest Specialty GrowthCdn. Small or Mid Cap Equity92.042.336.56.12.258.2
BMO GDN Enterprise MutualCdn. Small or Mid Cap Equity136.892.756.45.61.271.6
BMO Special EquityCdn. Small or Mid Cap Equity320.852.386.27.1-0.965.2
Goodwood Capital FundCdn. Focused Small/Mid Cap Equity38.412.775.90.9-9.569.4
Renaissance Millennium Next GenCdn. Small or Mid Cap Equity74.462.575.72.5-5.324.5
Dynamic Small BusinessCdn. Small or Mid Cap Equity158.202.695.713.410.054.6
Standard Life Cdn Small Cap-ACdn. Small or Mid Cap Equity156.602.545.62.7-5.058.1
Dynamic Power Small CapCdn. Focused Small/Mid Cap Equity265.232.725.45.0-1.966.0
CI Alpine Growth EquityCdn. Small or Mid Cap Equity59.892.314.24.5-0.676.6
CI Can-Am Small Cap Corporate ClassCdn. Small or Mid Cap Equity106.162.343.83.6-0.737.9
HSBC Small Cap Growth-ICdn. Small or Mid Cap Equity45.092.313.73.6-2.972.0
TD Cdn Small-Cap EquityCdn. Small or Mid Cap Equity448.482.423.73.40.272.8
CIBC Canadian Small-CapCdn. Small or Mid Cap Equity347.642.523.25.6-1.169.3
CI Canadian Small/Mid CapCdn. Small or Mid Cap Equity515.742.312.81.2-3.151.5
AGF Canadian Growth EquityCdn. Small or Mid Cap Equity698.292.922.32.5-6.653.0
Desjardins Canadian Small Cap EquCdn. Small or Mid Cap Equity242.802.191.90.6-8.864.4
BMO Nesbitt Burns Cdn Small Cap Index7.75.0-2.187.6
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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