In considering potential investments for CIBC Canadian Small-Cap, manager Jennifer Law starts by meeting management of the companies. "It's always about the people and the business plan," she says, estimating that she meets with more than 200 companies a year.
"When I sit across from them, I want to see that there is reasonable disclosure," says Law, who is vice-president, Canadian equities, at CIBC Global Asset Management Inc. She says she needs to be able to trust management's ability to deploy its cash flow to expand its business.
CIBC Canadian Small-Cap, which Law has managed since May 2003, characteristically holds from 60 to 80 stocks. About 80% of the assets are in small-cap names. Companies with market capitalizations of less than $250 million play a significant role, though their share of the overall portfolio is usually 20% to 25%. Up to 30% of the portfolio may be held in mid-sized companies with market capitalizations of between $2 billion and $6 billion.
During Law's tenure, the fund has an annualized five-year return of 4.7%, compared with the median 3.4% in the Canadian Small/Mid Cap Equity category, as of Aug. 31.
To mitigate the volatility of small-cap stocks, Law employs four main risk-management strategies. The first is stock-specific. This entails evaluating the potential for capital appreciation versus the downside risk, and then weighting the stock in the portfolio appropriately.
Secondly, Law manages the industry-sector risk. She seeks to identify the best names and best ideas in most of the sectors, and then considers what would be the most prudent weightings.
Thirdly, Law will vary her cash weighting, depending on market conditions. The fund, which can hold up to 20% in cash, recently held 13%. According to Law, holding above-average cash reserves has helped in terms of capital preservation and also increases the opportunity to buy stocks at more attractive levels.
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The fourth consideration is the mix of small-caps and mid-caps. "There is a preference for liquidity and quality right now," says Law, "so we'll respond to that by moving into some of the names above $2-billion market cap, some that are carrying yield."
Law, who employs a growth-at-a-reasonable-price (GARP) discipline, runs quantitative models to assess valuations and calculate expected rates of returns over the next two- to three-year investment horizon.
Other key considerations include the competitive advantage of the business, the nature of the customers, and timing in the economic cycle. In researching potential picks, Law draws on a team of eight industry-sector analysts.
A top, long-standing holding in CIBC Canadian Small-Cap is Glentel Inc. GLN, a Burnaby, B.C.-based telecommunications provider. Through its retail kiosks, Glentel sells wireless products and mobile phones.
"We start with the qualitative side," says Law, noting that the CEO and his family own about 50% of Glentel stock. "So they have skin in the game, the incentives are there." As well, the industry dynamics still makes a lot of sense to Law, since wireless penetration in Canada is still growing with room to grow. "On a valuation side, we don't see it as expensive, given their growth rates, and the stock yields quite nicely," she adds.
Law, a native of Chansha, China, moved to Vancouver at age 11 and has specialized in small companies during most of her investment career. After graduating from the University of British Columbia in 1993, with a bachelor of commerce degree, she landed a job as a corporate-finance associate at a family-owned venture capital firm called Unimet Capital Corp. The position introduced her to the resources sector, and to the basics of putting together a business plan, finding investors and working with underwriters.
In 1997, Law moved to Toronto and joined Montrusco Bolton Investments Inc. as an analyst on the small-cap equity team. Two years later, she joined Empire Financial Group, where she was hired as manager of Empire Small Cap Equity. She obtained the CFA designation in 2001.
In May 2003, Law joined TAL Global Asset Management, now named CIBC Global Asset Management Inc., and in July of that year, she assumed the small-cap mandate.
In any market environment, "we always say everyone needs 5% to 10% small-cap equities," says Law. "We know that over the long term, small-caps basically give better absolute returns and typically outperform coming out of a recession. It gives more diversification to your portfolio but you need to have a buy and hold strategy. It is volatile."
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