Alex Sasso oversees Lipper winner Norrep Income Growth Class, which invests in small- to mid-cap stocks and bonds and has posted an annualized 13.21-per-cent return for the three years ending July 31.JENNIFER ROBERTS/The Globe and Mail
Alex Sasso will dine with his family at Jack Astor's Bar & Grill on occasion, but he isn't necessarily looking for a tasty meal. The outing gives the portfolio manager an opportunity to do some homework on this eatery, because it is among the restaurant brands belonging to an income trust held by the mutual fund he manages.
"They [Jack Astor's] are more innovative when it comes to their menus than most similar restaurants," says the chief executive officer of Toronto-based Hesperian Capital Management Ltd. "But you also want to look around, and make sure the booths are filled. … We like SIR Royalty Income Fund because it pays a royalty off the top line from its chain of restaurants."
Mr. Sasso oversees Norrep Income Growth Class, a recent winner of a Lipper Fund Award for three-year performance. The fund, which invests in small- to mid-cap stocks and bonds, has posted an annualized 13.21-per-cent return for the three years ending July 31. It's the second consecutive year this fund has received the honour in the Canadian equity balanced category.
Launched in 2006 as an income trust equity offering, the fund later changed its mandate because of Ottawa's decision to tax trusts like corporations in 2011. That move caused the market for income trusts to shrink as most switched to become dividend-paying, common-stock companies.
"But the spirit of this fund hasn't changed," said the 47-year-old fund manager. "We are still seeking companies that can grow and retain cash flow in order to fund their existing operations, but still pay a meaningful distribution." Norrep Income Growth has a monthly payout of 6 cents per fund unit, or 72 cents a year.
A native of Windsor, Ont., Mr. Sasso earned a commerce degree from the University of Windsor before joining Altamira Investment Management Ltd., where he developed an expertise in smaller-company stocks. In 2004, he moved to Hesperian Capital, where he still oversees the flagship Norrep and Norrep II funds. Both are Canadian small-cap equity offerings with similar holdings.
About a dozen companies in the Norrep funds also live in Norrep Income Growth. Before doing any fundamental homework on any name, his team will screen a database of stocks to find those that meet certain criteria.
"We are looking for companies that are growing faster than the market and industry peers in terms of revenue, EBITDA [earnings before interest, taxes, depreciation and amortization], net income and cash flow, but also trade at a discount to their peers and to the market," he said.
While most of Norrep Income Growth's 28 equity holdings are former income trusts, some, such as SIR Royalty Income Fund and Chemtrade Logistics Income Fund, have remained trusts. Over the past three years, the fund's best performers have included Black Diamond Group Ltd., which operates work-force accommodation for the energy industry, Boyd Group Inc., a consolidator of auto repair shops, and K-Bro Linen Systems Inc., a provider of laundry and linen services to hospitals and hotels.
Gamehost Inc., a hotel and gaming company, has also been a "pretty good winner," he added. "They have three casinos in Alberta, and we visited their Deerfoot casino before we purchased the stock. … We like it because it pays a meaningful distribution, is debt-free and is well managed."
TorStar Corp., owner of the Toronto Star and other newspapers, however, was one stock that he sold at a loss. "As frequent readers of the paper, we thought that the cyclical ad market would recover from the 2008-2009 recession," he said. "However, ad spending did not come back. We ended up selling the stock as we realized that downturn was secular and cyclical."
The highest sector weighting in the fund is industrials, at about 32 per cent, followed by energy at 17 per cent. With oil prices falling sharply recently, Mr. Sasso has rejigged his energy holdings to be a bit more conservative. He increased his weighting in Parkland Fuel Corp., a major Canadian fuel distributor, and reduced his shares in energy producers such as Baytex Energy Corp.
About 5 per cent of the fund's holdings are U.S.-listed stocks. Among them are Manning & Napier Inc., an asset management firm, and Brinker International Inc., owner of the restaurant chains Chili's Grill & Bar and Maggiano's Little Italy. While the fund can hold as much as 40 per cent in bonds, it sits at just 12 per cent because Mr. Sasso is still upbeat on stocks despite the recent pullback.
"We are still bullish on the equity market in general," he said. "We think [the economy] is in mid-cycle slowdown.
"What happens in mid-cycle is that you slow down a bit, equity markets get all worried, and you tend to have a correction. Then, you have the second leg of the cycle, or late-cycle re-acceleration. We think that is what we are going to be seeing in 2015."