Small-cap funds to beat the bear

Small-cap funds are generally considered to be more risky than those that invest in larger companies. But during the long bear market, some Canadian small cap funds actually beat their big brothers a wide margin, scoring impressive profits for investors.
In searching these out, I used Globefund to screen for two key factors: funds that generated double-digit annual gains for the three years to March 31 and were also profitable in the latest 12-month period. Seven Canadian small-cap funds passed the test. No U.S. small-cap funds did. Here are the small-cap bear-beaters I found, with my comments. The funds are listed in alphabetical order.

Bissett Microcap Fund. This has been a consistently strong performer. Unfortunately, it’s no longer open to new investors. The fund shows a five-year average annual rate of return to March 31 of just over 19 per cent. For the past three years, which covers the period of the bear market, the average annual gain was 11.8 per cent. Credit for the recent results goes to manager Garey Aitken, who took over portfolio responsibility from founding manager David Bissett in March 2000, right at the time the bear mart began.

Clarington Canadian Small Cap Fund. Leigh Pullen and the team at QVDG Investors are doing a good job for this fund, which can invest in companies with a market cap of up to $800 million. This fund got off to a slow start, losing 13.6 per cent in its first full year (1998). But it has been a powerhouse during the bear market, scoring gains of 26.7 per cent in 2001 and 25.7 per cent in 2002. Three-year average annual compound rate of return is 13.7 per cent. The risk profile is better than average for a fund of this type. 

Ethical Special Equity Fund. The folks at Ethical funds haven’t had much to cheer about recently, but this fund has been a bright spot for them. Its performance pattern is strikingly similar to that of the Clarington fund and there is a lot of portfolio overlap as well. That’s no coincidence because both funds have the same manager, Leigh Pullen of QVDG. The main difference is that in this case, screens are applied to ensure that only socially-responsible companies are included.

Front Street Capital Small Cap Canadian Fund. If you don’t recognize the name, it’s no surprise. For almost 20 years, this was known as the Multiple Opportunities Fund. For most of that time, this fund focused on junior resource issues traded on the now-defunct Vancouver Stock Exchange. But in 1999 it was acquired by a company that is now known as Front Street Capital and management responsibilities passed to Gary Selke and Norm Lamarche, the latter being one of the top managers from the glory days of Altamira. The name has now been changed to reflect all this. In its original form, this fund did very well for investors, but it was extremely volatile. It’s still doing well and it’s still volatile, but not to the same degree. In fact, since the Selke-Lamarche team took over, the fund has not experienced a single losing calendar year. The three-year average annual compound rate of return is 14.4 per cent and the fund gained 7.3 per cent, over the past 12 months. For many years, only B.C. residents could buy units but it is now sold across Canada. This fund would be a good choice for very aggressive investors.

Mawer New Canada Fund. This fund, which is run out of Calgary, zeros in on small-cap stocks with good growth potential, including start-up operations. The market cap limit is $500 million. The strategy of manager Martin Ferguson is to buy and hold for the long term to maximize growth potential. This paid off well during the bear market; the three-year average annual compound rate of return to the end of March was 16.5 per cent. The safety record is good for a fund of this type. We moved the rating on this fund up to the top $$$$ level in the 2003 Buyer’s Guide to Mutual Funds, and we continue to be impressed by it. You’ll need $5,000 for an initial investment.

Northwest Special Equity Fund. The history of this fund under manager Wayne Deans, who has been running it since ’94, shows some high volatility. But lately, Deans seems to have toned down his act quite a bit, to the benefit of investors. The fund has been performing well and the three-year risk rating, as calculated by Globefund, has actually improved to slightly better than average for the Canadian Small Capitalization category. Three-year average annual return to March 31 was 17 per cent, one of the best in the category. The one-year advance was 9.8 per cent. Deans has had his ups and downs over the years, but he has certainly thrived in this bear market.

Resolute Growth Fund. This fund is the personal baby of manager Tom Stanley. He’s a broker who started it back in late1993 and the fund has moved with him whenever he’s switched firms. He has consistently managed to achieve very impressive results. The three-year average annual return is an amazing 24.9 per cent and the fund gained more than 15 per cent in the past year alone. His secret is to ignore the crowd and pick stocks that are below everyone else’s radar scopes. Often this approach means buying microcaps—ultra-small companies with a market cap of $20 million or even less. But it’s worked so far. The big impediment is the expensive entry fee. If you don’t have at least $50,000 to invest, look elsewhere.