Small-Cap Equity Fund Commentary

Market Overview

The Canadian small-cap market produced a modest gain of 1.2% in the first quarter.
Gold and mining stocks, which comprise a sizeable portion of the market, were the weakest performers. The consumer-related, technology and industrial sectors were areas of strength.

Portfolio Specifics

The fund held 16 stocks at quarter-end, with market capitalizations ranging from $30 million to $2.5 billion. The weighted average market capitalization of the portfolio is roughly $1 billion.
The portfolio’s make-up remains significantly different than the small-cap market. Notably, the fund has an emphasis on profitable, cash-generating businesses and thus limited exposure to gold and mining-related stocks (Primero Mining is the lone gold miner).
One example of a company that has figured out how to grow despite the tough economy is MacDonald Dettwiler. The fund has owned the stock since late 2009, during which time it has doubled. While it hasn't been a straight line, the company has managed to quintuple earnings in the last decade while averaging 23% Return on Equity. In the process, it has become a leading satellite manufacturer and provider of related services.
An area of increasing exposure has been oil producers. The manager, Wutherich & Company, favours companies with strong production growth and an international focus: Coastal Energy (Thailand), TransGlobe Energy (Egypt), Eagle Energy (Texas). In Canada, Wutherich likes producers and service providers exploiting a unique opportunity or niche in the market.
Iridium Communications (a global satellite communications company) has been the weakest performer over the past year. The manager reiterates that it’s a business model and investment that will require patience.
The cash position currently sits at 10%.

Notable Transactions

Invicta Energy was sold. Invicta was a small position that quickly ran up in price to the point where it was trading at full value in the manager’s view.
TransGlobe Energy was purchased. The company produces oil in Egypt and has a management team that understands the lay of that challenging land.

Positioning

The fund continues to have a focus on profitable businesses with little or no debt. There have been few changes to the underlying holdings.
While emphasis remains on high-quality companies, the manager is looking at a few stocks with greater cyclicality in earnings which are trading at depressed prices.