Account Login

Forms & Documents

Contact Us

• Overview
• Manager
• Performance
• Holdings
• Commentary

January 2010

The BMO Nesbitt Burns Small Cap Index continued to surge in the fourth quarter, rising 13.4%. As has been the story all year, commodity-related stocks drove returns in the quarter. Over the year, the index gained a whopping 75%. Yet, testament to its underlying volatility, the index still hasn’t recovered its losses from 2008, when it dropped close to 50%.

The Small-Cap Fund advanced 12.2% in the quarter and was up 14.6% for the year.

Whereas the manager, Wutherich & Company, preserved more capital in the downturn, they’ve struggled to keep pace in this year’s upswing. It’s no mystery why the fund has been a laggard over the past few quarters – it has had only modest exposure to resource stocks.

But while many of these stocks have provided stellar returns of late, they are levered to highly unpredictable variables (commodity prices) and have very erratic earnings. The manager prefers companies that have solid histories of profitability and that sell products/services that generate more predictable revenue streams.

Investors can take some comfort in the fact that these types of higher quality businesses haven’t rebounded as much as their more speculative counterparts, and should have greater legs when the commodity craze cools.

Although patience has been required with some holdings, there were positive signs in the quarter that it is starting to pay off. Canadian Helicopters Income Fund and Badger Income Fund gained solid ground after treading water for much of the year, and Hibbett Sports and Stantec saw good gains. And where the fund has direct exposure to commodities (Gran Tierra Energy, Total Energy Services, and Hanfeng Evergreen), its holdings gained 20-40%. The greatest detractors from performance over the year included Vecima Networks, Easyhome, and Evertz Technologies. Though none of these stocks dropped more than 15%, they held the fund back in a surging market.

As Wil Wutherich emphasizes, none of these businesses are broken. Vecima continues to generate positive cash flow, has a very competitive product (last-mile telecom equipment), and a credible management team that owns a big chunk of the company. Easyhome has had a tougher time than expected, but has a clean balance sheet, is growing in the U.S. and is paying shareholders a good dividend to wait until the economy recovers. Evertz is operating in a challenging broadcasting market but continues to generate free cash flow, is winning a good share of deals, and is becoming the dominant supplier for the big TV networks.

Trading was minimal in the quarter, but the manager did make a few transactions of note. MacDonald Detwiller was added to the fund (see Stock Snapshot on following page), and Hanfeng Evergreen’s position was increased. Gran Tierra Energy, on the other hand, was trimmed following a substantial run-up in its share price over the past nine months.

In a normal year, a return of 15% would be cheered by investors, but there was nothing normal about 2009. The fund was trumped by the red hot small-cap market. Yet, looking forward, the portfolio is invested in companies and sectors that have a lower degree of risk and, arguably, greater prospects than the abundance of rocks and oil that make up the market. And importantly, the manager has not strayed from the philosophy and investment process that has brought them much success in the past. Perhaps Coldplay said it best, “just because I’m losing, doesn’t mean I’m lost.”