Bissett Microcap Fund

Analysis: This has been one of the best performing small cap funds available in Canada since 2009, gaining an annualized 22.5% for the past five years. As impressive as that has been, it has really struggled so far this year, losing 7% on a year to date basis, after dropping 13.5% since September 1.

There are a couple of reasons for this big drop. First, the fund focuses solely on very small companies with market caps of less than $350 million. When markets get volatile, investors tend to flee small, more illiquid names in favour of higher quality companies.

Second, it had more than 35% invested in energy at the end of June. With increasing supply from the Middle East, and worries over global demand, the price of oil has been in a tailspin, bringing this fund with it for the ride.

Despite the recent troubles, I believe that this can be a great small cap fund for those with an above average risk tolerance. Make no mistake about it, this is a very risky fund. It invests in companies with a market capitalization of less than $350 million. To put this in perspective, the average Canadian small cap fund has an average market cap of around $2 billion. This fund is at roughly $250 million. The result is a fund that tends to be more volatile than both the benchmark and the category.

The portfolio is relatively concentrated, holding approximately 50 names. The managers use a bottom up, growth at a reasonable price process that looks for companies that have strong balance sheets, low valuation risk, and a profitability profile that is better than the index. Their approach is fairly patient, with portfolio turnover averaging 25% for the past five years. They can also be somewhat opportunistic with the fund, using periods of market weakness, like we are experiencing now, as an opportunity to strengthen the portfolio.

In addition to this being a risky fund, it is also quite pricey. The MER is listed at 3.78%, which is more than 120 basis points higher than the category average. While returns have made up for this above average cost, in a period of more modest returns, it can be quite the headwind for the managers.

With its emphasis on microcap companies, this really is a rather unique offering. That said, I believe it is best suited for investors who have a very high risk tolerance that are looking for above average gains over the long term. Given the high levels of volatility, portfolio exposure should be limited for most investors.