By Tom Bradley

It’s always great to visit Montreal, but last Thursday was particularly timely for reasons beyond the sunny, warm weather. It is the home turf for Wil Wutherich, the manager of our Small-Cap Fund, a fund that has just turned three years old (along with the rest of our lineup).

To the end of February, the fund has gained 0.5% per year in an environment where small cap stocks dropped (-2.1% per year) and were considerably more volatile than the overall market. The fund had a great year in 2007, weathered the storm reasonably well in 2008 and had a poor 2009 when it lagged far behind a soaring small-cap market.

My meeting with Wil reinforced why the fund performed so differently compared to the overall market. As background, he looks for small companies that have a profitable history of growth and market share gains. His universe of potential holdings ranges from ‘micro-cap’ companies (small and undiscovered) to ‘mid-caps’. He closely follows a select number of stocks (45-50) and builds a concentrated portfolio from that list. The research list and Steadyhand fund represent a diverse mix of stocks, but in no way reflect the market indices, which are heavily weighted towards resources and financial services.

Three years is a short time in which to assess the performance of any portfolio, but Wil and I talked extensively about the missed opportunity in 2009. While it was clear that this fund would never have kept up with a market driven by beaten-up resource stocks, the shortfall was nonetheless substantial.

The 2009 performance was reflective of two things primarily. The first is the fact that Wil’s universe held up better in 2008, and as a result, gave the fund less recovery potential in 2009. Because he was comfortable with the companies’ fundamental positions and the stock prices were down substantially, he didn’t see the need to make significant changes. In hindsight, there proved to be better opportunities elsewhere. It should be noted, that while most of the fund’s holdings experienced earnings declines, none were forced to raise emergency capital, as has been common in the small-cap arena.

The second and more important factor relating to 2009 was resources. The fund didn’t own enough of them. In the past, Wil has generated excellent returns for his clients in the resource sector, which resulted from buying stocks when commodity prices were at rock bottom levels. He missed most of the move this time, however, because as he says, “$60-70 oil just didn’t look that cheap to me.”

As significant unitholders in the fund, our team felt the performance shortfall in 2009 along with our clients. Of more importance to investors, however, is how the fund performs longer term. So far, we have not achieved our goal of generating attractive ‘absolute’ returns, but we think a more positive investing environment will give Wil the opportunity to do that going forward.

Currently, the portfolio holds 15 stocks. The largest positions (in order of size) are Stantec, Canadian Helicopters Income Fund, Total Energy Services, MacDonald Dettwiler and Vecima Networks. With some good moves in a number of the fund’s holdings, Wil has been making some adjustments. He eliminated Hanfeng Evergreen recently and has increased the MacDonald Dettwiler and Evertz Technologies positions.

The Small-Cap Fund fits well into the Steadyhand lineup. Wil’s concentrated, non-benchmark approach has the potential to generate out-sized returns, as it has for his clients in the past, and the fund’s low correlation to the overall market serves to dampen down the volatility of our clients’ overall portfolios.