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Analysis: This fund has been managed by Leigh Pullen and Joe Jugovic of Calgary based QV Investors since December 2005. Since taking the fund over, they have delivered an annual compound rate of return of 3.54% while the BMO Canadian Small Cap Index has returned 1.65%.
The team follows a relatively simple philosophy – find quality businesses trading at attractive valuations. To do this, they look for high quality companies with a demonstrated history of generating high returns on equity, and that have lower debt to equity and debt to cash flow ratios than the broader markets. The end result is a relatively concentrated portfolio holding less than 30 names. As of December 31, the top 10 stocks made up more than 62% of the portfolio.
Because the fund is a Canadian focused small and mid cap fund, the managers have the ability to invest up to 49% of the fund outside of Canada. The fund is currently 20% invested in U.S. stocks.
The manager feels that because debt levels are stubbornly high in the developed world that the overall risk levels have become quite elevated. This is expected to lead to slower economic growth and continued high levels of market volatility. To help protect against this, the fund has been defensively positioned in companies with stable business models and strong competitive positions. As such, the fund is dramatically underweight in energy and materials, while is overweight in utilities, consumer discretionary and technology.
Costs for the fund are reasonable for a small cap focused fund, with an MER of 2.40%.
We expect that given the positioning the fund will outperform in volatile and negative markets. However, we would expect that it will lag the broader markets should a big rally occur.