| Fund Company | Franklin Templeton Investments |
| Fund Type | Canadian Small / Mid Cap Equity |
| Rating | B |
| Style | Small Cap Value |
| Risk Level | High |
| Load Status | Optional |
| RRSP/RRIF Suitability | Fair |
| TFSA Suitability | Fair |
| Manager | Ralph Lindenblatt since September 2010 Richard Fortin since September 2010 |
| MER | 3.78% |
| Code | TML 207 – Front End Units TML 306 – DSC Units |
| Minimum Investment | $500 |
Analysis: Like the name suggests, this fund invests in those very small companies which have a market capitalization of less than $350 million. In reviewing potential investments for the portfolio, the management team uses 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 as an opportunity to strengthen the portfolio.
Previously capped, the fund was reopened in October 2012. Performance of the fund has been strong, gaining 25% in 2012. During this period, a portion of the gains the fund realized were the result of a number of the fund holdings being taken over by larger rivals. For the five years ending December 31, the fund gained 8.4%, outpacing much of its peer group.
Despite the strong longer term performance numbers, this fund is not for everybody. First, this fund has been volatile. It has a standard deviation that is nearly 1.5 times that of the broader S&P/TSX Composite Index. In 2008, it was hit hard, dropping nearly 50%. After that drop it rebounded in 2009 and 2010, gaining 55% and 54% respectively. Given the risk profile of the smaller cap funds it invests in, we don’t expect that volatility will decline substantially as we move forward.
Another drawback to the fund is that it is expensive. 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, should we hit a period of modest returns, it is a big hurdle for the managers to clear.
While we like this fund, it is our opinion that 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. Those with lower risk tolerances looking for small cap exposure should take a look at Sentry Small Mid Cap Income Fund, Beutel Goodman Small Cap or the BMO Guardian Enterprise Fund. All will offer small cap exposure at a lower cost and less volatility risk.