There’s more to investing in Canada than trying to pick which of the Big Six bank stocks are going to win in any given year.
But with financials and resources dominating so much of the Canadian market, it can be difficult for a domestic-focused fund manager to differentiate oneself.
The BMO Canadian Stock Selection Fund tries to stand out by adding smaller names with high-growth potential to what is otherwise a familiar large-cap fund.
“With certain small-cap names, you're getting much higher growth than what the market can provide you, but in more of a risk-averse way,” said Tyler Hewlett, lead manager of the fund.
“Take a name like Parkland Fuel. It is much safer than your average Canadian E&P.” The average Canadian exploration and production company, for example, declined by 41 per cent over the three years up the end of July – a period of time in which Parkland Fuel Corp. rose by nearly 90 per cent.
That bet helped fuel best-in-class returns for the BMO fund over those three years, for which Mr. Hewlett is being recognized with a Lipper Fund Award.
U.S. fund-research firm Lipper Inc., owned by Refinitiv, this week handed out awards to Canadian mutual funds and exchange-traded funds for superior returns in a broad set of categories. (Thomson Reuters - majority-owned by Woodbridge Co. Ltd., which also owns The Globe and Mail - has a stake in Refinitiv.)
The Lipper Fund Awards recognized more than 80 Canadian mutual funds and ETFs, including the BMO Canadian Stock Selection Fund, which beat all its Canadian-equity peers in returns over the past three years, up to the end of July.
The fund posted an average annual return of 9.6 per cent over that time, compared with an average return of 5.1 per cent among comparable Canadian equity funds.
The fund’s top-10 list is a fairly standard cross-section of the large companies that sit atop the Canadian market: three big banks (Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia), a railway (Canadian Pacific Railway Ltd.), a telecom (Rogers Communications Inc.), and Brookfield Asset Management Inc.
But deeper down in the portfolio is where the value is added, Mr. Hewlett said.
A small- and mid-cap investor at heart, Mr. Hewlett tries to tap into growth stories outside the confines of the TSX 60 Index.
In addition to Parkland Fuel, Boyd Group Income Fund is one of the top drivers to the fund’s performance in recent years.
Boyd is the single-best performing stock in the S&P/TSX Composite Index over the past decade, having generated average returns of roughly 50 per cent a year over that time. This year is no exception, as Boyd shares have gained 69 per cent so far.
“It doesn’t have to crack the top 10 to have an outsized contribution,” Mr. Hewlett said.
In the technology sector, a holding in Descartes Systems Group Inc. has more than carried its weight in the fund, as shares in the Waterloo, Ont.-based logistics and supply chain software company have increased threefold over the past five years.
In the real estate space, FirstService Corp. has been a stellar performer since spinning off Colliers International Group Inc. in 2015.
However, FirstService shares were punished mightily after a big earnings miss in late October. “We don't really care whether a company meets or misses guidance, as long as we think the company's strategy is still on track,” Mr. Hewlett said. “So we added to our position on the pullback.”
Among the fund’s longer-term laggards, on the other hand, is a holding in Arc Resources Ltd., which has suffered alongside the rest of the Canadian oil patch. “Eventually, the takeaway issues will get solved one way or another. And Arc is a company that can really benefit from that,” Mr. Hewlett said.
By adding top small and mid-cap picks to a large-cap mandate, the fund can achieve growth and stability in a concentrated portfolio of about 35 names, Mr. Hewlett said.
“Some competing funds hold hundreds of names. As an investor, I wouldn’t want someone’s 60th best idea, let alone their 200th.”
Click here for the top Canadian funds and ETFs for 2019 as chosen by Lipper
Click here for the top fund and ETF groups for 2019.
Tim Shufelt