Steadyhand Small Cap Equity Fund

Analysis: This small cap offering from Steadyhand is definitely worth taking a serious look at. It is a concentrated portfolio of 15 to 20 names that is managed by Wil Wutherich. Mr. Wutherich pays no attention to the benchmark, and looks to find only those companies that meet his strict valuation criteria.

Using his bottom up process, he looks for companies that have promising prospects and are expected to deliver high relative earnings growth, but are trading at a reasonable valuation. All of the companies in the portfolio are showing some level of fundamental growth, be it revenues, earnings, or cash flows. A typical company in the fund will be a simple, repeatable business that is easy to understand. It will have an experienced management team that has significant ownership interests in the business and a strong balance sheet.

Because the portfolio is built on a stock by stock basis, the sector mix and geographic allocation are driven by the available investment opportunities. At the end of June, he held 63% in Canadian equities, 18% in U.S. equities and held nearly 19% in cash. Mr. Wutherich is disciplined, and as a result is unafraid to hold significant cash balances if he is unable to find suitable investment opportunities. Given the current levels of equity valuations, suitable opportunities are scarce. This high cash balanced can be a positive, protecting capital if we see a market selloff. It can also act as “dry powder” allowing him to take advantage of opportunities as they arise. The downside is that it can also act as a drag on performance if there is a significant market rally.

He takes a three to five year time horizon when evaluating a company, which results in modest levels of portfolio turnover. For the most recent four years, it has averaged just under 40%.

Performance, particularly the longer term numbers are impressive. On an annualized basis, it has gained 19.1% for the past five years, handily outpacing the index and competition. Shorter term, things don’t look as good, with a more modest 5.67% in the first eight months of the year. This underperformance is to be expected with his positioning, which is underweight materials, energy and financials, which have largely been the markets drivers.

With a concentrated portfolio, it is not uncommon to see periods where there is a significant disconnect with the index. Longer term, the fund has been able to outperform with a much lower level of volatility, and excellent capital protection.

There are two big risks with this fund. First is the concentrated portfolio. You need to understand that it will often behave nothing like its benchmark. The second is key person risk. It is largely Mr. Wutherich who runs this fund and if he were unable to continue, there would be a significant effect to investors.

On balance, for those who can stomach the potential risks, this is a great small cap offering and can be a part of an otherwise well diversified portfolio.