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Energy stocks, kids’ entertainment power winning funds

Brandon Snow, portfolio manager with the Cambridge unit of CI Investments, is the lead manager of the award-winning funds Cambridge Pure Canadian Equity and Cambridge Canadian Growth Companies,

Peter Power/The Globe and Mail

When Brandon Snow watches cartoons on television with his three children, he's mixing business with pleasure. Favourites such as own Teletubbies, Yo Gabba Gabba!, Ella the Elephant, In the Night Garden and Madeline belong to the film library of DHX Media Ltd., a family entertainment company that he owns in two mutual funds that he oversees.

"I get to do daily due diligence," says the 35-year-old portfolio manager with the Cambridge unit of Toronto-based CI Investments Inc.

His levity belies the fact that DHX's library of programs has become serious business now that it is easily accessible via computers, tablets and mobile phones. Many investors may not have appreciated DHX's recurring and growing revenue stream, but they do now, he acknowledged. "We bought the stock first at around 75 to 80 cents a share, and now it's over $9."

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DHX has been a big winner for his two Canadian smaller-company mutual funds, which recently won Lipper Fund Awards for three-year performance. Cambridge Pure Canadian Equity and Cambridge Canadian Growth Companies have posted average annual returns of 31.52 per cent and 29.65 per cent, respectively, for the period ending July 31. Both own many of the same names, but the latter has a North American focus because it can invest up to 49 per cent outside Canada.

The robust returns also are thanks to Kelt Exploration Ltd., an oil and gas firm spun out from Celtic Exploration Ltd., and convenience-store giant Alimentation Couche-Tarde Inc. All three companies – DHX, Kelt and Couche-Tarde – have strong management teams that have created a lot of value for their investors, said Mr. Snow, who is the lead manager for the two funds.

"We want companies that have a competitive advantage and management that is aligned with shareholders," he said.

Born and raised in Waterloo, Ont., Mr. Snow began honing his stock-picking skills at Wilfrid Laurier University, where he earned a BA in economics and financial management. Greg Dean and Stephen Groff, who are co-managers on the two funds, are also Laurier alumni.

The three first got their feet wet, separately, by running money with the Laurier Student Investment Fund, and subsequently they were hired by Boston-based Fidelity Investments. They were lured to CI Investments in 2011 by Alan Radlo, a former veteran Fidelity manager who today is the co-chief investment officer for the Cambridge funds.

Mr. Snow, who recently began sharing the co-chief investment officer role, suggested that it is getting tougher to make money in the Canadian market. Resource stocks lack the tailwind of rising commodity prices, he said, while non-commodity stocks that are gaining more attention are becoming pricier. Cambridge Canadian Growth was closed to new investors earlier this year, but the team has launched Cambridge Growth Companies, a global small- to mid-cap fund run by Mr. Dean that will explore opportunities outside Canada.

Energy has the largest sector weighting in the two older small-company funds, at just over 20 per cent. But Mr. Snow does not anticipate big changes in his holdings despite the recent steep drop in oil prices.

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"We felt for a long time that the right price for oil was in the $70-to-$100 (U.S.) a barrel range, so $80 oil does not break any of the businesses we own," he said. Natural gas is also a big component in the funds, so any price spikes in that commodity can help those stocks, he added. During the recent selloff, the managers added to favourites such as Kelt and Tourmaline Oil Corp.

Not every energy name has worked out for the Cambridge team. "Probably the one that disappointed us the most and taught us a lesson about international investing was TAG Oil, which operates in New Zealand," he said. "It had a nice return, but gave it all back when management couldn't execute on their plan. … I don't think we appreciated the environmental laws there."

One fairly new top holding in Cambridge Pure Canadian Equity is CI Financial Ltd., parent of CI Investments. The team bought its stock earlier this year after its price began falling from above $35 (Canadian) a share when Bank of Nova Scotia telegraphed plans to divest a big chunk of its stake in the wealth management firm. The managers snapped up CI stock in the $31.60 range.

Given that CI Financial is his employer, Mr. Snow acknowledged it makes it easier to do his homework.

"We definitely get more access to management to understand the thought process, and how the business is run," he said. "We don't get any non-public information or anything like that, and we are restricted any time we want to trade the stock, and have to get compliance approval.

"Other people can get the same insight [on CI] with a lot of hard work, but we have a leg up."

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Special to The Globe and Mail

Editor's Note: An earlier version of this story said  DHX Media owns shows Babar and Toopie & Binoo. In fact the company does not own those shows. This version has been corrected

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