Where funds that focus on smaller companies found opportunity in the past year.
We screened three fund categories focused on smaller companies for the top 15 performers. This included the Canadian and Canadian-focused small- to mid-cap categories, as well at the U.S. small- to mid-cap category. We looked at the one year ended Feb. 28. U.S.-dollar, segregated, pooled, duplicate funds were excluded, as were those with minimum investments of more than $25,000.
What did we find?
Big-picture themes drove performance. The Mawer New Canada Class A fund was the top performer with gains of 47.5 per cent in the year to Feb. 28. The BMO Enterprise Fund, which is also managed by Mawer with a similar strategy, came second with an annualized gain of 46.4 per cent.
Part of the success for Mawer and BMO came from avoiding problematic areas of the market, said Martin Ferguson, who is the lead portfolio manager for both funds.
The concerns over the end of monetary stimulus in the United States caused reactions in the market, inducing a rise in interest rates, Mr. Ferguson said. That hurt the performance of utilities, real estate and other interest-rate-sensitive corners of the markets.
The second big theme was the plunge in gold prices, he said, noting that gold stocks in BMO Nesbitt Burns Canadian Small Cap Index fell by an average of 47 per cent, on a weighted basis, last year. “In a year where the industry got decimated, we did well by having no exposure to that.”
Higher-risk commodity stocks also struggled, so the fund steered clear of those too.
Instead, Mr. Ferguson focused on stock selection in other areas. One holding, a pharmaceutical company called Paladin Labs Inc., scored big when it was the subject of a takeover bid. In the fourth quarter of last year it gained more than 91 per cent.
While Mr. Ferguson’s products are closed to new investors, many funds in this category will invest around the same major themes. The threat of reduced stimulus and higher interest rates will persist.
Investors should also keep an eye on currency. “If there’s a further weakening in the Canadian dollar, that will, of course, make foreign investment look more attractive than Canadian,” he said.
But the currency change could create opportunities for companies that get a large portion of revenue from outside Canada. Mr. Ferguson said he has many holdings in his portfolio that would benefit from this exposure.
Energy service company ShawCor Ltd. for example, derives the majority of its revenue from outside of Canada, he said. Design and consulting firm Stantec Inc. gets just under 50 per cent of its revenue from the U.S., Mr. Ferguson said. “They would be helped by a weakening Canadian dollar.”
Top 15 small or mid cap equity funds
Note: “m” stands for “maximum” (it’s a new fund). Source: Lipper. Data compiled by: Wei Sun