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Analysis: The management team of Oscar Belaiche and Jason Gibbs look to provide long term capital growth by investing in small cap stocks. The Fund used to focus on income trusts however, since the demise of the income trust sector, they tend to focus on high yielding small and mid cap stocks, business trusts, royalty trusts and REIT’s. In addition to the capital gain opportunity, the fund also pays investors a monthly distribution of $0.014 per month, which translates into an income yield of approximately 1.7% at current prices. The yield on the underlying portfolio is estimated at 6.6%, which indicates that the level of distribution is very likely sustainable going forward.
The managers employ a fundamentally driven, bottom up security selection process that seeks out “best in class” businesses for the portfolio. They are looking for “quality at a reasonable price” which typically involves companies that have strong balance sheets, dominant positions in their industry and a strong alignment of interests between management and shareholders.
As of October 31, the fund is invested 66% in common stocks, 20% cash and 11% in REIT’s. The focus of the fund is in Canada, with nearly all of the fund’s holdings invested domestically. The portfolio is fairly diversified, holding approximately 60 names, with the top 10 holdings making up 35% of the fund.
Despite struggling in 2009, recent performance has remained strong, posting a one year return of 2.86%, handily outpacing both the BMO Nesbitt Burns Small Cap Index and the broader Canadian Small Cap category, posting returns in the first or second quartile in all time periods. Volatility has been lower than the broader market indices and the small cap category average.
Given the current volatile environment, we believe that this is a good pick for investors looking for small cap exposure for a number of reasons. The managers seek quality small and medium sized businesses with higher than market yields. Further, the managers employ an active style which will help them to better navigate the turbulent markets, helping preserve value and take advantage of capital gain opportunities. The biggest drawbacks to this fund are the costs, with a 2.77% MER and the key person risk associated with the manager.