Coulter Wright, manager of the $677-million AGF Canadian Growth Equity Class, pursues an all-cap investing strategy in which up and coming companies play a key role. "I think it's the aspect of the core holdings, supported by these early-stage growth companies, that's really the unique aspect of this fund," he says.
Wright, a vice-president and portfolio manager at AGF Investments Inc., joined veteran manager Bob Farquharson on the fund in February 2008. The transition was "seamless" since Wright had contributed to the portfolio for a number of years as an energy analyst.
Although Farquharson no longer makes decisions on the fund, Wright continues to share ideas with him and taps into his extensive network. Farquharson was the long-time manager since the fund's inception in April 1965.
Investing in companies with an "entrepreneurial spirit" for above-average growth potential, the fund holds about a third each in small-, medium- and large-cap names. Its self-defined market benchmark is a hybrid, consisting of 60% BMO Small Cap Total Return Index and 40% S&P/TSX Composite Total Return Index.
Three key investment criteria drive AGF's investment process. Number one is a strong management team, including the incentive of having ownership in the business. The second is above-average growth, including revenue, earnings, cash flow and competitive advantage. Thirdly, the AGF managers evaluate the financial strength of a company.
The early-stage "incubator" companies are defined as having less than $750 million in market capitalization, and mid-cap ranges from $750 million to $5 billion. The average market cap of the fund's holdings generally varies from about $6 billion to $8 billion.
Among the 200 holdings, the core list of roughly 50 names represent about two-thirds of the fund's assets, and about 150 companies represent the remainder. "Because of the inherent risk in incubator companies, we'll hold a large number of them," says Wright.
For incubator companies that may not have any earnings or are generating cash, their ability to access capital in order to grow is considered paramount. Valuations are also important considerations in evaluating the risks versus the rewards of potential picks.
Ecosynthetic Inc. ECO, a Burlington-based renewable chemical company, represents a recent addition of an incubator business to the fund. The company has come up with a starch-based alternative to the petroleum binder used in making paper for more than 100 years.
"It's got environment benefits, it's a corn-based binder versus petroleum, and they can produce it at a much lower price," says Wright. "If they were really able to get this thing going, it can be a fantastically profitable company."
The fund's historically low portfolio turnover of "20% or below" reflects the long-term philosophy of the overall mandate. The strategy with incubator businesses is to partner with the companies and help them grow for three to five years or more.
In terms of sector exposure, the fund's largest weighting currently is materials, at 34%. More than half of that weighting -- or 18% of the overall portfolio -- is in gold-mining stocks. Energy stocks make up 27% of the fund's holdings.
Wright's heavy exposure to resources stocks hasn't paid off for him, at least not yet. Under his tenure, AGF Canadian Growth Equity Class has an annualized three-year return of 1.1% as of July 31, versus the median 7.4% in the Canadian Small/Mid Cap Equity category.
The fact that well over half the portfolio is in materials and energy stocks reflects the manager's belief that growth is coming out of the emerging markets and will benefit resources producers. "I think Canada is in a really good position to take advantage of that over the next five to 10-plus years," says Wright, "and not just in resources."
A top core holding is Open Text Corp. OTC. The Canadian company "has been our horse in the technology sector," says Wright. Open Text is in the content-management space, helping businesses manage e-mails and data coming in.
"I'm a numbers person," says Wright, "and this company has a lot of strong partners as well that sell and resell their product." The stock, which the fund has held for 15 years, has grown very steadily over the years and continues to meet all of AGF's stock-picking criteria.
Wright is a graduate of the University of New Mexico, receiving a bachelor of business administration in 1994. After travelling for a while after graduation, he worked for three years in the commercial printing business, then two years at an environmental charitable organization before returning to school.
In 2002, he received an MBA in finance from the Rotterdam School of Management (Netherlands) and joined AGF right after graduation. In 2005, he received the CFA designation.
As to the future, Wright expects more market challenges. "During tough times like this you're going through your names," he says, "and, assuming if things were to get worse, which companies will still be around, are they in good shape to withstand a downturn. If the market has volatility, the stocks that we invest in tend to have volatility along with it."
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