By Scott Ronalds

The mining sector has been ravaged over the past two years. Commodity prices have softened, financing has dried up and sentiment has tanked. It’s been a minefield for investors.

Nowhere has the pain been more severe than the Canadian small cap market. Stocks in the Materials sector (which includes metals & minerals, gold, and paper & forest companies) comprise nearly 30% of the BMO Small Cap Index. The sector has declined 45% over the last two years (ending May 31st). Energy stocks make up a further 20% of the index (the sector is down 28%), bringing the combined weighting of resource-focused stocks to 50%.

There have been areas of strength, including technology, industrial, financial and consumer stocks, but because of the market’s tilt towards rocks and oil, the index has fallen 15% since the spring of 2011. The average Canadian small/mid cap equity fund fared better, but still declined 5% over the period (source: globefund.com).

The Steadyhand Small-Cap Equity Fund has avoided much of the carnage. In fact, it’s gained over 25%. This has much to do with the fact that the manager, Wil Wutherich, has largely steered clear of the mining sector (the fund only has one direct holding, Primero Mining).

Wil’s investment approach leads him to focus on established companies that generate steady profits and are well-financed, such that they can self-fund their operations and growth. And of course, they have to trade at reasonable valuations. These types of companies are typically not found in the mining sector.

An outcome of Wil’s approach – and all our managers for that matter – is that the fund will often produce returns that are out-of-synch with the market, as illustrated above. They won’t always be on the good side, though. In 2009, for example, the small cap index was up 75% while the fund only gained 14.6%. If the mining sector has a resurgence, the fund will likely lag behind. Since the fund’s inception in 2007, however, Wil’s approach has added considerable value versus the index (with considerably less volatility).

A final note on resources: The manager doesn’t avoid resource stocks altogether. If a company meets his investment criteria, he’ll give it careful consideration. In fact, Wil has a successful record of investing in energy companies and has increased the fund’s exposure to oil & gas producers over the last few quarters (to the point where they make up roughly one-quarter of the fund). As for mining stocks, he’s been kicking around the rocks but still isn’t finding any gems.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The annualized rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.