Mutual Fund News

Small cap funds emerging as winners

SHIRLEY WON

Saturday, October 17, 2009

swon@globeandmail.com

WHAT ARE WE LOOKING FOR?

Canadian smaller company funds rising to the top of the performance heap this year.

Smaller-capitalization stocks can do well in the early stages of an economic recovery when interest rates are low and companies can get access to money to invest in their growth. Investors have also been more open to riskier stocks lately.

TODAY'S SEARCH

We screened for the best performers among all Canadian small-to-mid cap stock funds this year until this past Thursday. We excluded U.S. dollar, duplicate and pooled funds, as well as those not priced daily.

WHAT DID WE FIND?

The top 30 have delivered eye-popping numbers compared with last year's miserable returns, in most cases. Investors gutsy enough to plow cash into the losers have been rewarded.

Most funds were those investing in Canada as opposed to the "focused" small-to-mid cap funds that can invest up to 50 per cent in foreign stocks.

Front Street Growth, run by manager Normand Lamarche, is the leader with a 114-per-cent gain. His uses a thematic approach to ferret companies with strong growth potential in his go-anywhere fund.

His Front Street Small Cap fund, which is run similarly but has a corporate class structure enabling investors to switch into sibling funds without triggering tax consequences, is neck and neck with Raymond James Canadian Focus Picks for second spot. Both are up 97 per cent this year.

Front Street Growth [formerly known as Front Street Small Cap Canadian fund until mid-2008] is more than 70-per-cent invested in resource stocks, and that has helped to boost returns this year.

A big theme driving the Front Street funds is the industrialization of emerging nations like China, India, and South Korea "that is creating a massive need for commodities," he says.

About 50 per cent of the resource stocks are in oil companies. "We like oil because the world has had difficulty finding more, and replacing it over time," says Mr. Lamarche.

Big movers have been companies like Bankers Petroleum Ltd., which has a heavy oil field in Albania, and Pacific Rubiales Energy Corp., which has a big oil field in Columbia. The opportunity is the potential improvement in oil recovery rates, Mr. Normand adds.

The holdings of Front Street Growth have undergone a major change from last December. It had moved into large-company names like Suncor, Petro-Canada, Barrick Gold, BHP Billiton, Rio Tinto and Freeport McMoran after last fall's market crash and ensuing credit crisis. "As the visibility of the economy has been improving ... I started moving out of those senior companies," he says. "I don't own any of those companies now."

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