Nicolas Chevalier, one of nine portfolio managers who manage the equity component of the $60-million GBC Growth and Income, looks for opportunities among small and mid-cap stocks.
"It's a bit different than your average Canadian balanced fund," says Chevalier, a partner, portfolio manager and the chief risk officer at Pembroke Private Wealth Management in Montreal.
Throughout its 45-year history, Pembroke has specialized in small- to mid-cap equities. Its $2.5 billion in total assets under management serve institutional and retail clients, of which the latter include holders of the GBC family of mutual funds. Every employee at Pembroke is a unitholder of the funds under management, and all portfolio managers hold most of their personal net worth in the funds.
Similarly, in making its stock picks, the Pembroke team favours companies that have an entrepreneurial mindset, and whose top executives are also owners. "Typically the CEOs running these companies have a significant stake invested in these companies," says Chevalier, "so there's a big alignment of interest."
Among the 35 to 40 equity holdings, Chevalier and his colleagues favour companies that pay attractive dividends that can be increased over time, and that have sustainable competitive advantages in the products or services that they offer.
"We don't use a black-box quant model," says Chevalier, "It truly is ideas that come from management interviews and meetings. It's a people business." Evaluating these firms requires intensive research, says Chevalier, noting that "you meet them and they're always pitching their firm to you."
One of the examples Chevalier cites to illustrate Pembroke's process is Constellation Software Inc. CSU. The company has been active in acquiring small software firms that serve various businesses.
Mark Leonard, Constellation's founder and entrepreneur, "has got skin in the game," says Chevalier. "He owns about $200 million worth of stock right now, so he's got great alignment with us and with our clients." As well, the company meets the team's dividend-growth criteria.
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The portfolio turnover among the equities sits at about "30 to 35% a year," says Chevalier. In some of the firm's older funds, there are stocks that have been held for more than 10 years, including some for 20 years.
As long as the company's business plan is still valid and the managers think there is money to be made, they will remain shareholders, says Chevalier. He adds that there may be some trimming around core positions, depending on valuations.
Pembroke focuses on North American companies whose market capitalizations are between $100 million and $4 billion. However, GBC Growth and Income's equity holdings are currently almost exclusively in Canadian companies.
Overall, the asset mix of the fund consists of a 60% weight in equities and 40% in fixed income. Chevalier describes this as a "portfolio for all seasons." Management of the bond component is outsourced to Toronto-based Canso Investment Counsel Ltd., which invests in high-quality government and corporate issues.
Chevalier, 42, is a graduate of the HEC business school at the University of Montreal, where he received a bachelor of business administration degree in 1992. He then earned an MBA from the University of Illinois in 1994. From 1994 to 1997, he worked for the Caisse de dépot et placement du Quebec as a research analyst. He joined Pembroke in February 1997 and also received the CFA designation that year.
GBC Growth and Income is among the best performers in the Canadian Equity Balanced category, with a 5-star Morningstar Rating for its past risk-adjusted returns. "I think what's important is that this is a long game," says Chevalier. "If you can beat the indices a little bit every year, through the power of compounding, you can create a lot of wealth for your clients, and we're trying to keep up that track record."
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